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How should you deal with multiple investors?

As a company grows, it raises multiple rounds of growth capital – post the angel round, it may raise a Series A, a Series B (and may be one or two more venture capital rounds). Post that, there is typically a private equity infusion, until the company is able to undertake an IPO. For example, Flipkart has raised 6 rounds of financing, as explained in the table below:

Round Who Funded Date Amount
First Round Accel India 2009 USD 1 Million
Second Round Tiger Global 2010 USD 10 Million
Third Round Tiger Global June 2011 USD 20 Million
Fourth Round Naspers / ICONIQ Capital August 2012 USD 150 Million
Fifth Round Naspers, Accel Partners, Tiger Global, and ICONIQ Capital July 2013 USD 200 Million
Sixth Round Dragoneer Investment Group, Morgan Stanley Investment Management, Sofina and Vulcan Capital, Tiger Global Oct 2013 USD 160 Million

Source: http://trak.in/tags/business/2014/05/21/flipkart-buys-merger-myntra/

(Note: There can also be a strategic acquisition at any of the stages above – in which case the startup could be absorbed into a bigger company. Redbus’ acquisition by Naspers (which owns the ibibo group) is one such example.)

Several questions arise when a company has so many investors. These are listed below:

How does a company deal with multiple investors? How do the governance rights and exit provisions play out when there are so many investors?

How is investment documentation amended?

What is the role of the promoter in such situations?

Do outgoing shareholders receive an exit on the same valuation at which money is invested in the company?

Each time the company raises a fresh investment, it may give existing shareholders an opportunity to partially dilute their stake (in rare cases it could enable them to completely exit as well). In such cases, the incoming investor pays a portion of the investment to outgoing shareholders to acquire (a portion of) their shares and the rest is infused into the company. Of course, only the amount infused into the company can be used for the company’s activities.

The following considerations are at play when there are multiple investors:
  1. The amount received by shareholders who want to cash out may not be the same as the price the investor is investing – an investor may pay them a lower rate, since the money is not being used by the company. This can be used by the investor to lap up more control of the company, by acquiring shares at a cheaper cost.
  2. At the same time, the investor wants the money to be used for the activities of the company, so he does not want his entire investment to be used to buy out existing shareholders – he wants it to be directed into the company as well.
  3. As far as documentation is concerned, one of the investors typically takes the lead. It is usually the investor who holds the most amount of shares. Practically, this often happens to be most investor.
  1. When a company nears IPO, promoter shareholding becomes lesser and can fall significantly below majority. The investors together (or even a single investor in some cases) will end up holding a larger stake than the promoters. Although promoters do not hold a controlling stake, investors may be interested in having the promoters incentivised so that the company is able to grow further in valuation and near an IPO much faster, which can expedite the process of exit for investors.
Let’s hear from Suhas Baliga, Principal at Impact Law Ventures, who has been regularly advising startups, incubators and early stage venture capitalists with investment documentation (he has also advised the government and several clients on public private partnerships and power projects worked at Trilegal and Luthra on government):

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