3 Basics to Investing in a Start-Up

1. 3 Basics to Investing in a Start-Up

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.

4. Right of inspection – After investing in the capital of the start-up, every investor has the right to check the financial statements and certain other records maintained by the company. A large financial investor may even be in a position to hold a meeting with the board of directors to understand quarterly or annual financial statements. Investors must actively exercise such options as they are in the interest of not just the investors themselves, but the society at large. The uncertainty faced by a failing company’s employees, and suppliers is unthinkable today. A slight increase in vigilance could definitely save the start-up and all those related to it. Researched & Written by : CS Renucka Vaiddya & Kedar Nadgonde (Financial Analyst & Coach ) Tags: Startup India Read more at: https://taxguru.in/finance/3-basics-investing-start-up.html Copyright © Taxguru.in