1

India Startup Playbook

A Guide to Potential Strategic Partnership

Leading to Investments & M&A

Jan 2017

Disclaimer

This Playbook is focused on guiding entrepreneurs in fund-raising and M&A

conversations and sharing key learnings and directional insights about the

process.

This Playbook is not intended to be a comprehensive guide on running, funding

or selling a business or constitute any form of legal advice. Please consult a

lawyer for formal advice relevant to your specific situation while raising funds or

going through an acquisition

1. Structuring a Company

In case of conflict,

● Mediation

(mediator is a

known party and

an unknown 3rd

party)

● Recapitalization of

the cap table

Early on, have a CA /

secretary to keep track of all

docs

Ignorance of law is no

excuse for non-compliance

Keep house in

order

Compliance starts from day

1 of company’s

incorporation, so don’t

incorporate unless needed

Shutting down a company

extremely tough

Incorporate a Co.

only when necessary

Building & selling product

(core)

Fundraising

Building partnerships

(leads to M&A)

Run multiple aspects

of Co. in parallelTry various conflict

resolution methods

KEY DOCUMENTS

Minutes of board meetings

● Avoid backdating as

far as possible

● Instead have another

meeting where you

cover minutes of

previous meeting

Share certificates

● Refer to Co.

Standard

● Usually perforated

(Co. needs one copy

and owner keeps

one copy)

● Register of Members

/ Cap table imp when

raise family & friends

round

Key hard copies of all docs

● Compliances,

contracts, registers,

licenses

Key tipsFundamentals for running a business

Memorandum of

Association

● Provides the characteristics (name, division of shares etc) and

objects (activities) of the Company; the company cannot engage

in business that falls outside the scope of these objects

● Must be filed with the Registrar of Companies

Articles of

Association

● Provides for the manner in which the Company is managed

Register of

Members

● “Captable”

● Lists the current shareholders of the Company

Register of loans,

guarantee, security

● Shows the debt owed by a Company

Register of related

parties contracts

● List the contracts with related parties and entities in which

directors are interested

Register of

directors & key

managerial

personnel

● Provides a list of the persons in charge of the overall operation

of the company

Key documentsWill be examined for any transaction AMENDMENTS

MEMORANDUM requires

a prior approval from either

the Govt. or Company Law

Board depending upon

which clause requires

alteration

ARTICLES may be altered

by a special resolution

passed by the members of

the company

WATCHOUTStringent compliance

requirements particularly in

relation to registers, record

keeping and filings

including penal sanctions

for some non-compliances

Structuring a CompanyImpacts process of fund raising, customers, IP valuation etc

● Recommended - US Holding Company

(Delaware C Corp)

● IP and revenue are held in the US

● Indian entity can be a fully owned subsidiary

of the US company

OR

2 different cos. with same ownership

structure

● Optimizes for valuation and makes

acquisitions by US companies easier and

quicker

B2CB2B

● Recommended to register in

Singapore

● Optimizes for fund-raising, tax

purposes

TIP: Significant cost and time benefits if entity is a US (Delaware-C Corp) or Singaporean entity.

However, must be able to justify structure chosen

vs

US-India Holding Structure

US - INDIA HOLDING STRUCTURE

Founder

Stock

• Smells like, and walks like Google, Facebook, Apple, etc. from Day 1.

• IP: Owned by the U.S. Company so that it can get better traction from global customers

• OPERATIONS: It’s very easy to set up, manage and operate the Business; easier to scale globally

• INVESTMENTS: Much easier and faster to raise initial and subsequent financings, and at much higher valuations.

• M&A: In the event of an Exit, much easier to sell the Business to a U.S. technology company, and at much higher valuations. Most times, U.S based buyers will insist on buying shares of a U.S. Company.

• TAXATION: India – U.S. have a comprehensive tax treaty pursuant to which there should not be any “double taxation” if structured properly.

Global

Option

Plan

Advisors /

Employees

US Delaware ‘C’

Corporation

IP

India Pvt. Ltd

Customers

BENEFITS OF US HOLDING STRUCTURE

Investors

including India

employees

Via Service

Agreement,

IP assigned

to US Co.

Owns

100%

stock

Via Service

Agreement,

India Co.

gets paid

Employed by India

Pvt. Ltd; their IP

assigned to Pvt. Ltd.

India

Employees

StockPay-

ment

SETTING UP a company with US-India operations

Step 1: Incorporate Delaware “C” Corporation● File Certificate of Incorporation

○ Can hire law firms to incorporate, pay initial filing fees ~$340

● Elect Board and Officers

○ India based directors can be on the board; however, needs to be

structured carefully due to Indian tax regulation

○ India based individuals can be Officers; however, subject to personal

counseling due to immigration, other employment and Indian tax

regulatory issues

● Apply for an Employer Identification Number (EIN)

● Open a U.S. Company Bank Account (with Certificate of Incorporation & EIN)

● Discuss India regulations, Place Of Effective Management [POEM] (Need to

structure properly.)

Step 2: Issue Founder Stock● Assign all IP created by Founders to U.S. Co. as part of initial formation.● If Founders resident in India, then:

○ Need to structure founder stock purchase carefully around RBI restrictions and India’s FEMA

○ Need to assign IP to India Subsidiary○ Consider filing 83(b) tax elections

Step 3: Set Up Global Option/Incentive Plan● Issue options to employees, consultants and advisors, including to India

Employees, as part of Global Option Plan.● Indian residents need to be employees of the India Subsidiary in order to get

options in the U.S. parent company.

Step 1: Incorporate an India Pvt. Ltd Company● Incorporate as a direct Subsidiary of U.S. Company from Day 1; or● Incorporate the India entity with Indian residents and subsequently

transfer shares to the U.S. Company.

Step 2: 100% share ownership to be held by U.S. Parent 1 nominee share to be held by Indian resident to comply with Indian Companies Act requirement of having at least 2 shareholders

Step 3: Structure Transfer Pricing Agreement between U.S. & India Subsidiary

● U.S. and Indian Pvt. Ltd. to enter into a Service Agreement

whereby:

○ U.S. Company hires the Indian company to provide

services in exchange for service fees

○ Indian Pvt. Ltd. assigns all IP to the U.S. Company.

● Note: It is important to structure the Service Agreement and the

service fees properly in order to comply with the transfer pricing

regulations in India and the U.S.

Step 4: Enter into employment contractsEmployment contracts with India employees, including Founders

Step 5: Structure a license of IP from U.S. Company to India Subsidiary for sales in the India market (where needed)

SET UP US OPERATIONS SET UP INDIA

OPERATIONS

FLIPPING an Indian company to US structure

SET UP US OPERATIONS INDIA OPERATIONS

Step 1: Incorporate Delaware “C” Corporation

Step 2: Issue Founder Stock

Step 3: Set Up Global Option Plan

Step 4: Issue Seed Stock replicating current India capital structure

● Plan for nominal investment amount by Seed Investors

Step 5: Close Next Round of Financing directly in the U.S Company

● Highly recommended to flip your company at a financing round

Step 6: Incorporate new India Subsidiary● Form a Subsidiary Relationship with a Pvt. Ltd.

○ Option 1: Newly created Pvt. Ltd.

○ Option 2: Existing Pvt. Ltd.

● India employees to be employed

by the Pvt. Ltd. and assign their IP to the Pvt. Ltd.

● Set up Services Agreement

Step 7: New India Subsidiary● Transfer Employees to the New India Subsidiary.● Consider whether contracts need to be transferred over to the

New India entity; preferably, enter into new contracts directly with the U.S. Company

● Consider whether any pre-existing intangible assets like software, copyrights, trademarks, patents need to be assigned to the Business.

● Need to structure assignment of assets from Old India Company to the US Company or New India Subsidiary very carefully in order to comply with India regulations.

Similar to

Steps 1-3 in

setting up US

Operations

(prev. slide)

Explanation on

both options on

next slide

TIP: Sooner you flip, the less complicated the process are! Recommended to flip at a financing round.

Creating a subsidiary in India

OPTION 1: NEWLY CREATED PVT. LTD. OPTION 2: EXISTING INDIAN PVT. LTD.

Step 1: Company to approve creation of the Indian subsidiaryBoard of Directors of the Company will authorize the incorporation of a new Pvt. Ltd.

Co. in India, as a wholly owned subsidiary of the US Co.

The Company will work with a Chartered Accountant or legal counsel in India to

complete the formalities in India; name registration with the Registrar of

Companies and preparation of the incorporation documents for the Pvt. Ltd. as

per Indian regulations.

Under the Indian Companies Act, 2 shareholders are required. The Company

will be 1st shareholder and 2nd shareholder can be an affiliate of the

Company & hold nominal shares in the Indian subsid.

Step 2: Apostille Certification After completion of the name registration of the Pvt. Ltd., the Company will receive the

prepared incorporation documents from the Chartered Accountant or legal

counsel in India that are required to be notarized and then sent to the Secretary of

State for apostille certification

State to where the documents are sent for apostille certification vary

depending on where notarization takes place or type of document

Step 1: Obtain a Valuation CertificateThe Pvt. Ltd. company will work with an Chartered Accountant

in India to obtain a valuation certificate that will determine

the price per share for the purchase of the shares of the

India Pvt. Ltd. by the Company.

Step 2: India Subsidiary AcquisitionBoard of Directors of the Company will authorize the India Pvt.

Ltd. acquisition through purchase of stock equivalent to

not less than 99.99% of the capital stock of the Pvt. Ltd

and enter into a Stock Purchase Agreement with the Pvt.

Ltd.

Under the Indian Companies Act, 2 shareholders are

required. The Company will be the first

shareholder and the second shareholder can be

an affiliate of the Company and hold nominal

shares in the Indian subsidiary.

Step 3: Service Agreement● Should have “arms length” relationship between the Company and Indian subsidiary, including a cost-plus arrangement between the two entities.

● IP developed by Indian subsidiary should be properly assigned to the Company.

Step 4: License Agreement (if applicable)

● A License Agreement granting a license to the Pvt. Ltd. may be necessary where the Pvt. Ltd. is also selling the product or service in India and that product or

service is based on IP owned by the Company

2. Mechanics of Investments

Choosing your investorsBe strategic with your investors - taking money from one restricts capital from competitors

Stages of raising capital

Incu

bators

Angel &

Seed

Series A

Series B+

Investments upto $100K

Invest in ideas / biz plans

Investments $100k - $1M

Beta version of product

Mentorship, guidance

Investments $2-10M with

follow-on participation

Investments $15M+ with

follow-on participation

Most VCs are foreign investors (usually

incorporated in Mauritius)

Raising funds from FOREIGN vs. DOMESTIC entities

Foreign investors can’t ‘lend’ to Indian

companies i.e. debt funding is RBI regulated

(restrictions on interest rates, end use etc)**

Having a foreign investor AND Indian investor

complicates things; try and avoid that as much

as possible

** EQUITY: Anything compulsorily convertible to equity is equity, not a

loan; equity funding (FDI) ok; CCPS, CCDS, pure equity shares,

preferential shares

DEBT: Non-convertible preference shares, optionally convertible

preference shares, etc

TIP: Don’t get too many investors on your cap-table – work is multiplier effect. Instead, think about investing through a fund/LLC

2-3%

Friends & family, Angels

Understanding equity and dilution

Dilution of Stake*

WATCHOUT: Raising at too high a valuation in early stages may create funding issues in future rounds and may result in a

‘down-round’ (pre-money valuation in future funding round lower than previous round), a big red flag

Conversion Rights: Right to convert Preferred Stock into Common Stock

Pre-

seed

Seed

Series A

Series B+

ESOP Pool

12-20%

Angels, Funds

25-30%

VC/Strategic investors

20-25% (B)

VC/PE/Strategic investors

10%

15% (C+)

VC/PE/Hedge funds

*Directional only

Common stock, ESOPs

Owners, employeesUp until recently founders can’t dip into the ESOP pool, recent changes make it is possible.

Convertible notes

Angels, SeedLoan now, can convert to stock at slight discount to Series A valuation

● Inherently, no valuation of the company; just deferring valuation analysis to next round

● discount - at next liquidity event (eg Series A), will get a 15% discount on the valuation

● cap - beyond the cap, the discount doesn't apply; protection for the startup

Preferred Stock

Series A+Get priority over all other stock for payouts, Last in first out because most expensive valuation

Warrants

Debt equity

Venture financingMain items of a termsheet (1/2)

MANAGEMENT / CONTROLS

Voting / Board

Rights*:

Board gets to make

decisions for the Co.

VCs like nominee

director on board, but

don’t always use the

seat; can push for

observer seat (not

able to vote)

Protective

Provisions*:

Veto rights over

certain material

actions / events

Covenants

LIQUIDITY RIGHTS

Co-Sale/Right of First

Refusal*:

OK, but understand

how it works

Registration Rights &

Information Rights*:

Standard registration

rights OK, nothing to

fight over. Limit to

“Major Investors”.

Draft-Along Rights

Redemption Rights*:

Watch out, not a good

sign; right should be

at least 5 years out

PRICING / VALUATION

Percent of Company to be Sold: Pre and Post Money Valuation

Liquidation Prefs*:

● Terms to decide who gets paid first, and what amount

● ‘Liquidation’ – dissolution/winding up, M&A, IPO, strategic

sale, trade sale, buy back, ‘put’ option on promoters

● 1x non-participating is OK; anything else needs to be reviewed

carefully (eg. 1.5x → investor gets 1.5x money out before other

shareholders dip into the pool)

● If nothing written - first tax man, then salaries, then liq. prefs,

then remaining distributed EQUALLY among shareholders

Dividends*: Should be structured as non-cumulative

Anti-Dilution Protections*:

● Right to adjust price in event of a subsequent lower price

financing

● Full Ratchet is bad, Broad-based weighted average is

standard.

*Rights of Preferred Stock

Venture financingMain items of a termsheet (2/2)

TIME, PROCESS & EXPENSE

Time:

2-3 months from start to finish

Process:

IP diligence, Legal diligence,

Schedule of Exceptions;

Financing Documents

Expenses:

Legal fees (both sides), Investor

expenses

OTHER KEY TERMS

Double-dipping / Participatory preference:

Clause that allows investor to participate again in the remaining amount, after

liquidation preferences are exercised

In multiple funding rounds, explicitly state priority of liq. prefs. (eg. last in first out

or equally distributed in ratio of shares)

Lock-in provisions:

Lock in founder team until investor exits; if want to exit, right of first refusal to

investor etc

Founder Indemnification:

Very important issue. Need to be careful!

Right of First Offer:

Maintain their pro rata ownership, right to “gobble up”; limit to “Major Investors”

Board Observer Rights:

OK, but need to be careful as VCs don’t like the distraction of too many observers

LEGAL

Help in structuring fundraise, terms

of deals etc

Will point out red flags

ESCROW

If upfront deal, don’t need escrow; else

common at 15-20%

Good agents: HSBC, Deutsche Bank

(India)

ADVISORY (I-BANKS)

Highly recommended for large deals

(investments $10M+, M&A $50M+)

‘Interview’ iBankers to gauge quality● Tell me deals you have done in my

space in the past few years

● How many offers did you bring to the

table for each of the companies?

● Can I chat with your customers?

AUDIT/ACCOUNTING/TAX

Financial diligence and tax diligence

(withholding, assessments etc)

Good audit firms: PWC, E&Y, KPMG

Key transaction enablers and fees

TIP: Get all parties, including investors/acquirers to sign an NDA till the buy-out is complete

ESTIMATE: 0.5-1% of the deal value in transaction-enabler fees; can negotiate for buyer to pick up the

fees

2. Mechanics of M&A

Corp. Dev. team plans joint integration plan

BU/Product teams outline product integrations, value

creation

Corp. Dev. team goes through:

● Deal structuring & negotiations

● Due diligence

Corp. Dev. team conducts a discovery and selection process

from list of partners, suppliers, competitors

Business Unit (BU)/Product teams think through

● BU strategy

● Gap analysis / Competitive overview

● Make vs. Partner vs. Buy analysis

How the buy-side approaches M&A

KEEP BUSINESS ON TRACK

If the deal fall through at the last

minute, your business should not

have been put on hold, else raising

funds will be difficult!

Discovery

Implementation

Diligence

Analysis

PARTNERSHIPS ARE CRITICAL

Without a BU / Product sponsor,

M&A probability lower

● Salesforce has never

acquired a company not on

force.com (which takes 8

months to get onto)

● Whatspp - Facebook

relationship started in Feb

2012; eventual acquisition 2

years later

Tech Due

Diligence

Valuation/

Termsheet

Legal /

Financial DDSPA

1-8 Weeks

Tech & Talent deals

popular

Show M&A interest

Clearly state you are open

to M&A but also expect

strong growth, so open to

investments as well

1-2 Weeks

Common to have

45-60 days of

exclusivity/ no-show

in the termsheet

~2 months

Visible time benefits

when target is US

(Delaware C Corp) or

Singapore entity

Increasingly common

1-2 months

Indian law requires

ALL owners on the

cap-table to

physically sign the SPA

agreement

Common for team to

move to US on an L1

visa (company should

have been around for

min. 1 year)

1-2 Months

Team pedigree

important factor

Be cautious

about what docs

you share with

the potential

acquirer; have

NDA in place

Key stages in M&A process“Best time to sell is when you don’t need to”

Discovery

Discovery Deals for TECH and TALENT very popular; process well understood

Talent (Acqui-hire)

Relatively early-stage startups

with limited revenue traction

Acquired team is first integrated

into Indian arm of US company,

and moves to the US (if necessary)

at a later stage

Hot areas: iOS, Android, Machine

learning & Data Science

Market/Customer

Acquisition of the startup’s

customers

Interesting for companies

with sizeable market

penetration

Technology

Acquisition of the product and

code built; lot of open-source

code will be treated as a red

flag

UI/UX/design is important

Growing area of interest

Process for team to move to the

US on a visa is well

understood iSPIRT M&A Connect Program is a good resource to help with M&A

Engage with convos only with companies that are a cultural fit

The deal will implode if there's a misfire on cultural alignment

Bring your team on board before the deal

Keep communication lines open and honest with your team. Figure out early-on what kind of

contract terms, opportunities they’d like and keep that in mind while negotiating the terms

Understand the structure of the deal

Negotiate titles, reporting hierarchy, roles and responsibilities, decision-making hierarchy,

compensation/exit packages etc. upfront, for everyone, including employees included and not

included in the deal.

Ensure ROI for your early investors, advisors

It is your responsibility to return money you take (if you make money). Burning bridges with

your investors will make it much harder to raise money for your next venture

REMEMBER: It’s all a relationship game - with employees, with investors, with the acquirer.

Don’t be penny-wise pound-foolish.

Discovery Key TIPS while entering a deal

Tech Due Diligence

FLIGHT COSTS FOR INTERVIEWSSome acquirers request the startup to

buy tickets to fly out and reimburse

them later. This is a huge upfront

financial commitment that the startup

should be prepared to make.

SHARING INFORMATIONDOCUMENTS: High level docs ok

Make sure to have an NDA in place.

CUSTOMERS: Acquirers can’t talk to

your customers without your explicit

approval.

OTHER INFO: If a competitor shows

inbound interest, ask to speak to

someone higher up (to show actual

M&A interest vs. information phishing).

Be ready for the deal to fall through if

you don’t want to share the

information.

Initial formal gauge on M&A

interest; Corp Dev officially gets

involved

Initial screen via phone/telecon

Many deals die at Tech DD:

● too much open-source code

● teams not strong enough

IN-PERSON INTERVIEWSOVERVIEW

Be prepared to fly out / be

physically present on short notice

TECH INTERVIEW

Code should be well documented

Be prepared to discuss it in detail

with acquiring tech team

Prepare for coding interview ques

CORP DEV INTERVIEW

Acknowledge upfront that there is

competition in your space BUT

articulate local differentiation very

clearly

REMEMBER: Have clear

conversations about job titles and

hierarchy/relevance in the new company.

ValuationMultiple components to valuing the acquisitionStructure the deal to ensure entrepreneur, investor, acquirer interests are optimized (cash vs equity)

Cash

Investor payout + Founder Payout +

Employee bonus

[Paid out on Day 0]

Retention Pkg (cash & stock)

Usually vested over 3-4 years

Same as regular options/RSUs but not

based on Cap Table

Often structured with an empharsis

here to retain employees

Salary

Stock

Usually mirrors vesting schedule in Silicon

Valley companies

Industry Startup

Entry level $10K $6-8K

Experienced $20-30K $12-15K

I. Acquisition II. Employee Salary &

Stock

Payouts when team hits milestones

Common in larger rev./customer

acquisitions

Earnouts (optional)

ValuationValuing your company

EARLY STAGE COMPANIES

● Comps/multiples - recent investments/acquisitions on similar

deals in industry; valuation +/- 40% (buy vs. sell side)

● User Traction - Customers, MAUs, DAUs etc

LATE STAGE COMPANIES

● Market Comparables / Multiples: Multiples of

Revenues/Sales, Earnings

● Revenue Traction

Triangulate based on multiple criteria

ALL COMPANIES

● Negotiating power - no. of buyers on the table; getting multiple

term-sheets drives up value

● Other factors - Pedigree of team, Market size, Patent strategy,

Competition, Company status (distress vs. growth) etc

DON’T ANCHOR ON A

VALUATION TOO EARLY

When acquirer asks 'What

number do you have in

mind?", don’t give an answer

immediately; ask for time;

when you give an answer,

give a range

ENSURE ALL

STAKEHOLDERS

SATISFIED Bring

shareholders, investors into

discussion; make sure they

are comfortable with the

valuation proposed

Termsheet ● Roadmap to transaction ahead; also called non-binding letter of intent, MoU, letter of

intent: provisions

● Must always have a valuation amount and timeline for payout

● In case of an acquihire, important to have team member names in the Termsheet

Share

Purchase

Agreements

● Can be stock purchase (entire buyout) or asset purchase (shell company remains)

● Traditional asset purchase difficult, because it is hard to shutdown a company in

India

Holdbacks,

Escrows,

Indemnity

● Acquirer can hold 15-20% of valuation for 2 years as indemnity against the company’s

potential liabilities

● Amount and duration is negotiable; usually higher for companies with contracts

Representatio

ns and

Warranties

● Usual for Investors/Acquirers to seek extensive representations and warranties from

the target co. and promoters

● Breach of representations and warranties can be treated as a ground for rescission of

contract

ESOPs

(Employee

stock option

scheme)

● ESOPs must be approved by shareholders by passing a special resolution (i.e.

<75% consent)

● ESOPs are not transferable and must have a min. vesting period of 1 year.

Unvested ESOPs must compulsorily vest upon death or permanent incapacitation of

employee.

● Prohibited Recipients: (i) promoters (ii) independent directors (iii) directors with more

than 10% shareholding

TermsheetKey provisions

Key pieces to negotiate

FINANCIAL TERMS

● Payout + retention

(& duration)

● Salaries of

employees

● Names and titles of

all employees being

hired

● Compensation

package for

employees not

being hired

OTHER TERMS

● Directors / Board

seats

● Lock-in provisions:

lock in founder team

for certain duration

Do your research and take your time

● Research what the acquirer has done in previous deals (usually disclosed in

10Qs, 10Ks filed with SEC)

● Don’t be eager to sign a termsheet without understanding the implications.

Until you sign, everything is verbal

Respect the potential acquirers in the process

● Don’t shop the offer around too much; acquirers often don’t like this and

may rescind their offer

● Once you get a termsheet, tell other bidding companies about the deals on

the table; some acquirers may not want to bid on the offer

Engage professionals as needed in the process

● Consult a lawyer early on in the process to make sure your interests are

covered, help negotiate terms

● Hire a banker for larger transactions to help negotiate on valuations, bring

connections; advantages having a US banker

● Don’t let investors negotiate for you. CEO-investor relationship should be

more of an ‘informing rather than advising relationship during negotiations

TermsheetKey tips

GETTING SIGNATURES:

Multiple documents at

various stages will need to

be physically signed by

potentially geographically-

dispersed investors. Ensure

shares are dematerialized

(not in physical format) or

have them converted and

allow for time to get the

signatures

RED FLAG TERMSSome termsheets carry

clauses that say if any of the

founders quit before a year,

no one gets any payout.

Watchout for red-flag terms

and always consult a lawyer

before you sign.

Legal & Fin. DD

Documents & signatures

Secure documents:

Secure all imp documents (eg.

original employee hiring certificate,

bonuses)

Maintain hard copies of docs, if

available with at least 1 signed

Ensure employment contracts in

place (employees for at least a year

for processing of L1 visas / move

team to US)

Signatures needed (if US entity):

● Founders / preferred

stock holders to sign

● e-signature ok

● Drag Along rights

Counsels (cross-border M&A)

Cross-border M&A can

have 2 counsels

(Indian/ US) on each

side

Language differences,

legal nuances can

result in

miscommunication

Identify lead counsel

for entire process early

on

Match the lead counsel

with the buyer i.e. if it’s

a US buyer, the lead

counsel should be US

for both buyer and

seller

Overview

Once termsheet has

been signed, 45-60

day ‘no-show’ - can’t

shop company around

● Allows

potential

acquirer time

for legal & fin.

DD on target

● Can be

outsourced or

done in-house

● Target

company must

be proactive

with providing

all needed info

Other

Escrow

15-20% of deal value

(for contingencies)

Valuing IP

If IP is held by Indian

entity, value IP from a

merchant banker (eg.

Morgan Stanley,

E&Y), sell IP to the

US entity, pay

relevant taxes on the

sale and then use the

IP wherever

Specific assets of company (eg.

Tech/IP, team etc)

Acquihire: common to acquire

team, license IP perpetually, &

shut down product

Share Purchase Agreement

Share Purchase Asset Purchase

All shares of

startup

Shell company remains which

owns non-acquired assets

Eventually shuts downCeases to exist

Need to analyze the tax

efficiency of transferring assets

piecemeal v. slump sale

Min. 2 members/

stockholders

required

WATCHOUT: Shutting down a company in India is time consuming and slow; hence, most startups prefer a full stock purchase

IT - Income Tax; CA - Chartered Accountants; HNWI - High Net Worth Individuals

Acquirer buys

Differences

from US

Startups of Startup

Transfer of Funds

● India first has to receive funds and only then are

shares transferred to the acquirer

● Multiple investor banks takes more time; minimize

no. of recipient bank accounts to reduce time and

complexity

● Funds will come in trenches but in India can’t pay

partial shares – have to buy in one shot

shareholder’s bank to RBI; only then transfer shares

Relocation of team

● L1 visas are commonly used to ‘move’ a team to the

US post acquisition

● Employees need to meet the “One year in last 3

years” rule for eligibility

● Asset purchases reset the L1 visa clock: ie

employee will need to be at the acquirer for 1 year

post-acquisition for L1 eligibility. hence, share

purchase is strongly recommended

IMP (but not show

stoppers)

Show StoppersKeep in mind potential make-or-break issues

SHOW STOPPERS

Allotments on cap-table,

ownership of shares to

be clean with relevant

stamps on original

documents etc.

Ownership on IP clean,

limited open source

Compliances (labor,

employment)

Hire good company

secretary/attorney early

on to ensure compliance

is clean

Ownership of

shares

Compliances

Ownership of IP

As long as funds are through

100% FDI route, RBI good about

getting all filed. May pay fine

later on, but want to regularize

transaction

Categories of RoC filings (eg.

Audit report filed late, board

meeting minutes not reflected)

can be rectified

Don’t need to compound even if

lawyers say you must

Usually done for property deals

in India, not share deals, but

increasingly common by

overseas buyers to avoid liability

on/risk of ownership of shares

Takes 2-3 weeks

RBI/FDI

Tax Clearance

Certificate

RoC Fiings

This document has been prepared by iSPIRT in consultation with several partners including Inventus Law for discussion purposes only. The

information contained in this document is intended for information purposes only. They are derived from public and private sources which we

believe to be reliable and accurate but which, without further investigation cannot be warranted as to their accuracy, completeness or correctness.

This information does not in any manner constitute, and should not be construed to be, legal advice or a legal opinion. Note that any information

you provide during the course of this presentation will not be subject to legal privilege. This information is supplied on the condition that iSPIRT,

Inventus Law and any partner, employee or affiliate are not liable for any error or inaccuracy contained herein, whether negligently caused or

otherwise, or for loss or damage suffered by any person due to such error, omission or inaccuracy as a result of such a supply. iSPIRT, Inventus

Law and its affiliates are also not liable for any loss or damage howsoever caused by relying on the information provided in this document.

For any legal advice you require, please seek advice from a qualified lawyer in the relevant jurisdiction.

M. Thiyagarajan (Rajan)

Fellow, M&A Connect, iSPIRT

rajan@ispirt.in

For Questions Please Contact

Thank You

iSPIRT Foundation is an industry think-tank founded by key participants and proponents of the Indian software product industry. iSPIRT enables a strong

ecosystem, connects and guides software product entrepreneurs and helps catalyse business growth. It encourages buyers to improve performance by

leveraging software products effectively. iSPIRT advises policymakers on interventions that can set the industry on a higher growth trajectory.

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customizable fee structures. To learn more about their Corporate, Intellectual Property, and Commercial Law Practice, please visit inventuslaw.com.