Top Focus Areas for Indian Founders seeking Investment

As a founder, securing investment is a crucial step in scaling your business and realizing your vision. With capital comes legal complexity, and ensuring that the capital you receive is value accretive and not a proverbial 'sword over your neck' is critical. The decisions you make at this stage will have lasting implications for your company's future, your control over it, and your personal financial well-being. Here are some of the critical legal aspects you need to focus on when seeking investment:

Indemnity/ Risk Coverage

Indemnity clauses are common in investment agreements and serve to protect investors against potential losses arising from breaches of representations, warranties, or covenants by the company or its founders. Investors may seek broad indemnity coverage, which could leave you exposed to significant financial risks, including for matters that you may not be aware of/ be in a position to objectively assess. Remember that Investors want to back your business but need to protect their investment. Negotiating indemnities is a balancing act between risk and potential reward for investors and between risk and capital requirements for the founders/ company. To the extent possible, ensure that any indemnity obligations are capped, ideally at a level that does not jeopardize your personal financial security.

Good Leaver/Bad Leaver Implications

The terms under which a founder leaves the company are often categorized as "good leaver" or "bad leaver" scenarios. A "good leaver" might be someone who exits due to circumstances beyond their control, like health issues, while a "bad leaver" might leave due to misconduct or a breach of duties or a voluntary walk-away when the investor expect the founder's continued devotion to the business. These classifications will significantly impact the treatment of your equity—bad leavers often forfeit their shares or have to sell them at a discounted price. It's crucial to negotiate these terms carefully - for instance bad leaver scenarios have been known to include situations that are not entirely the founder's fault but the founder takes all the risk (such as the company failing to pay its dues, or company not obtaining a key business license).

Exit Guarantees

Investors typically seek exit strategies to ensure they can realize a return on their investment, often through clauses like drag-along rights, where minority shareholders can be forced to sell their shares if a majority shareholder wants to exit. While these guarantees can be necessary to attract investment, they can also limit your ability to control the future of your company. While a number of these rights are 'market' and founders tend to agree to a version of them, often investors also ask for exit guarantees through a 'put option' or option to sell back to the company/ founders. These are quite risky since they are effectively debt-like protections on an equity investment. It's important to balance these exit provisions to protect both your and your investors' interests, ensuring they do not trigger an exit at a time or in a manner detrimental to the company's or your long-term goals.

Exposure of Founders' Personal Assets

Personal liability is a significant concern for founders. Investors may seek guarantees that could extend beyond the company’s assets, potentially exposing your personal assets. It’s crucial to understand the extent of your personal exposure under any investment agreement and to seek ways to minimize this risk, such as through the use of corporate structures like limited liability companies or negotiating to limit personal guarantees.

Shackles on Decision-Making from Extensive Consent Rights for Investors

To protect their investment, investors often seek extensive consent rights, allowing them to block certain decisions, such as entering new business lines, raising additional capital, or selling the company. While these rights provide security to the investor, they can also significantly restrict your ability to run the company effectively. It's essential to negotiate these rights carefully, ensuring they are reasonable and do not unduly constrain your ability to operate and grow the business. Strike a balance where investor protection does not translate into operational paralysis.

Takeaways

Navigating these legal focus areas effectively requires a careful balance between protecting the interests of your company and meeting investor demands. It is advisable to work closely with legal advisors who understand the intricacies of start-up investment to ensure that the terms you agree to do not adversely affect your control over the company, your personal financial security, or the future success of your business.