Know more about Funding, Due Diligence, Term Sheet and Business Valuation
A business's guide to crack due diligence of investors, understanding the basics of business valuation. Consisting of brief explanation of term sheet terms and things to look out for before signing a term sheet.
A quick check on the steps to be taken before negotiating with investors.
2. Session Overview:
• Stages of Funding
• Understanding Term Sheet & SHA
• Getting Ready for Funding-What to Expect
3. Stages of Funding
• Term Sheet Negotiation which involves Business Valuation &
Business Plan
• Due Diligence
• Agreement Signing & Infusion of funds
• Issuance of funding instrument- Share Based / Debt Based Funding
• Corporate Law and RBI Compliances ( some compliances starts at
the initial stage )
4. Stages of Funding..
Term Sheet & SHA Negotiation
• Term Sheet is mostly Non-binding agreement which Sets forth basic
terms and conditions under which an investment will be made.
• Whereas SHA is a formalized binding agreement governing the
relationships among the shareholders and the company. It is the fine
print of term sheet after considering the results of due diligence in a
very detailed way.
• Things to Keep in Mind while signing Term Sheet & SHA?
5. Stages of Funding..
Business Valuation & Business Plan
• Process of determining the economic value of a business or
company
• Depends upon purpose of Valuation, Stage of Business, Past
Financials, Expected financial results, industry scenario and
various other allied factors
• Business Plan is the primary marker that is used by the
investors to make the key decision
6. Stages of Funding..
BUSINESS
VALUATION
Nature of
Business
Earning Capacity
of the Firm
Expected
Turnover
Goodwill
Asset Liability
Position
Forecasted
Growth
Promoter’s
Background
Relative
Valuation of
similar
businesses
Factors to be considered for Business Valuation
7. Stages of Funding..
Due Diligence
• “Due Diligence” is nothing but an investigation to assess risk.
Conducted to:
• Check the Internal Control Systems are in place or not
• To calculate the financial risk involved
• Judge the awareness of the business owners
• Assess the team structuring and Operational Processes in place
• Verify the claims of the pitchers
• Excavate undisclosed risks
8. Getting Ready For Funding
• Incorporate the big market risks and the means
of overcoming them.
• Avoid highly inflated impractical valuations
• Consideration of Unit Economics - Unit economics is
basically concept of economics of direct revenues and
costs associated with a particular business model
expressed on a per unit basis.
1) Business Plan & Financial Introspection
9. Getting Ready For Funding…
1) Business Plan & Financial Introspection
• Identify the purposes of funding / Examine the
financial needs of your business
• Understand and identify achievable milestones.
• Weigh up the probability of upside and downside
chances of occurrence.
• Accommodate shock absorbers in case of downside
occurrence
10. Getting Ready For Funding…
2) Raising it from someone who is right
for you ?
• Do your homework on the investor - Two people can be brilliant
individually but they may not be compatible together
• Are you reading the fine print? Have you understood every aspect
of the deal?
• Preferences of investors – some specialize in tech startups while
some in SAAS while others in real estate, Choose an investor who
identifies with your business
• Are you seeing the investor as a partner or someone external?
11. Getting Ready For Funding…
3) Hacking the Due Diligence Process
• Ownership of Intellectual Property should reside with
the Company and not the Director(s)/Shareholder (s)
• Internal Differences of Founders should be thrashed out
before pitching for investment
• Secretarial practices should be in place
• State Specific licenses and permits have been obtained
or not
12. Getting Ready For Funding…
3) Hacking the Due Diligence Process:
• Proper record of all the filings with the Government
department till date should be in records of the
Company
• Internal Agreements and contracts between
shareholders or directors should be reduced to writing
• Check the formulation, maintenance and renewal of
contracts with service providers and vendors
13. Getting Ready For Funding…
3) Hacking the Due Diligence Process:
• All structural changes in company should be duly
recorded with the RoC and should take place as per
standard guidelines of the Companies Act, 2013
• All the compliance related filings should be up to date.
• Litigation issues, if any should be properly recorded and
if possible sorted as early as possible.
• Best to appoint an inspector internally to set everything
in place before the due diligence check from the investor
is due
14. RBI & Corporate Compliances
Corporate Compliances:
• Issuance of Shares or Debt Capital
• Holding of Board and Extra-ordinary General Meetings
within stipulated time
• Filings to be made with the Registrar of Companies
• Issuance of Share Certificates/Debenture Warrants
• Updation of Secretarial Records
15. RBI & Corporate Compliances
RBI Compliances (when investor is foreign
national):
On receipt of funds:
• File “Advance Reporting Form” to the RBI
• Issue shares within 180 days
On issue of shares to foreign investors:
Report in specified form (FC-GPR) to the RBI, within 30 days
from the date of issue of shares along with prescribed
documents.
