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2. Investing in a start-up is almost the new age lottery ticket, if the idea works, you will become an
overnight millionaire. But if the idea does not work, it will cause a massive loss. The lottery ticket
price in this case is not a mere Rs. 100, but can be in millions again. Despite having the perfect
unicorn start-up ingredient base sometimes – IIM/IIT graduates as founders, unique business ideas,
first mover advantage, funding from successful venture capitalists, etc. lapses in governance and
timely disclosures causes the start up to fail. Angel investors and venture capital investors keep an
approximate target that only two out of ten investments are going to give them returns, while the
others may fail. It keeps them prepared for the uncertain future they are used to living in. So should
you be scared and not invest in start-ups? It depends on many factors. We have come a long way in
corporate governance matters, and with just a little bit of precaution, the signs of a failing company
can be identified early.
3. (Before investing in a start-up, a shareholder agreement is executed laying down the understanding between
the entrepreneurs and the investor. Simple clauses can ensure that the management is working well and
you can be relatively sure of getting your investment back. Company profile – Before investing, check the
type of organisation of the start-up. Entrepreneurs in their fire for success often do not give importance to
this factor, but as an investor, it matters a lot. If the start-up is a private limited company or even a Limited
Liability Partnership, it is required to file audited financial statements with the Registrar of Companies.
That implies, a mandatory yearly check on the financial story of the company. Of course, this does not
imply the absence of fraud, but at least the company will think twice before making incorrect filings. In the
case of unregistered associations and sole proprietors, they may not even maintain financial statements,
making it impossible to authenticate financial transactions. Board representation – Having an investor-
appointed director on the Board of Directors of the company, who will report the meeting updates to the
investor is a plus point. In terms of Company law, such directors are called nominee directors. They are
invited to every board meeting and are aware of the prospects/challenges faced by the company.