“Shutting down a company is hundred times more difficult than starting a company,” said an entrepreneur who recently shuttered his startup, requesting anonymity as liquidations proceedings were still ongoing.
Several entrepreneurs echo this sentiment. Winding up a company is not only about laying off employees and closing operations. It involves several other procedures to take the company off official records. One way to shut a company is to show a year’s record of no operations (revenue) and zero assets and liabilities, after which it will be struck off the register of the Registrar of Companies (RoC), said corporate lawyer Vaibhav Parikh, a partner at Nishith Desai Associates.
The other is to take the court route, which is a longer and costlier process that involves meetings with creditors and several court dates. This could take two to five years based on the complications involved.
The government recently brought in schemes to help with the closing of a company — the Bankruptcy law and the notification of the National Company Law Tribunal, which is likely to replace the traditional courts for company insolvency and disputes.
These schemes are timely, given that an increasing number of startups beset primarily by an unexpected capital crunch are winding down this year. According to startup-focused research firm Xeler8, nearly a thousand startups in India have wound up since June 2014.
According to Parikh, startups may not need to use the Bankruptcy law option as many of them do not have debt. “However, they may be able to take benefit of voluntary winding up. The objective is to limit the process to a shorter time frame of up to 90-180 days, but its effectiveness remains to be seen,” Parikh said.
Nasscom president R Chandrashekhar, too, said the Bankruptcy law may not be suitable for most startups. “The new Bankruptcy code, perhaps, is a little more oriented towards traditional business that have huge assets and huge institutional lending and designed from the perspective of lending institutions and to curb crony capitalism,” he said in a recent interaction with ET.
“These are desirable objectives but not necessarily focused on the quick three-month closure we would like in cases where there is no debt.”
Voluntary winding up, which can be done by either members or creditors, is done without court supervision. When the winding up is complete, relevant documents are filed before the court for obtaining an order of dissolution. But while the process may seem straightforward, the reality is often very different.
The entrepreneur quoted above said he was “forced” to adopt the liquidation process.
“It is forced because you don’t have enough money to pay what you owe to your creditors as well as employee salaries and statutory payments. In this route, the creditors file cases against directors (of the company) and you need to personally handle multiple creditors, which could lead to unethical issues such as threats and harassment,” he said.
“It is also a very lonely and stressful process if the investors resign from the board and cofounders who are not on the board leave abruptly, as it happened in our case.”
The bureaucracy and costs involved in closure is a main reason why several companies remain dormant without legally shutting operations. Parikh said nearly 90 per cent of the startups that fail continue to exist on paper despite closing operations. Of the remaining, a majority choose to strike off the company’s name from the RoC’s records.
“If a company remains dormant, it still has to bear costs for maintenance and compliance with annual filings, failing which it could be fined by the registrar,” he said, adding that in case startups don’t want the hassle, they can register as a limited liability partnership (LLP).
Pardeep Goyal, who shuttered his startup SchoolGennie in 2014, advises that bootstrapped companies should avoid the costly procedure of incorporating a private limited company if they can do business as a proprietary or partnership firm.
“I feel there is no need to incorporate private limited unless you have to raise capital from investors or have many stakeholders in the company. We incorporated a private limited company that involved the cost of incorporation and (chartered accountant’s) expenses. It’s costly to incorporate, maintain and wind up a private limited firm,” he said.
“We had not earned much revenue but spent Rs 30,000 on incorporation, Rs 15,000 for annual maintenance to CA and another Rs 10,000 in closure. It was painful to see the balance sheet in loss and still having to pay additional money for closure procedures,” Goyal said, adding he had to wait six months to get the closure status of the company.
Source – ET Retail
To improve ease of doing business, Commerce and Industry Minister Nirmala Sitharaman today said a start-up would now need only a certificate of recognition from the government to avail IPR-related benefits.
Earlier, a budding entrepreneur had to go through an elaborate process of approaching an inter-ministerial board to procure the Intellectual Property Rights (IPR) benefits.
“A start-up would now require only a certificate of recognition from the Department of Industrial Policy and Promotion (DIPP) and would not be required to be examined by the inter-ministerial board, as was being done earlier. This is one rapid change that we have brought in,” she said here at the ‘Start-up India States’ Conference’.
Under the ‘Start-up India’ action plan, the government has announced three-year tax holiday and other benefits to these entrepreneurs.
She also said that the ministry has lined up a series of meetings with different stakeholders, including investors to resolve start-up issues. She will also meet investors, industry and journalists soon.
Commenting on views of some critics about interference of government in implementing the action plan for start-ups, particularly on extending tax holiday, Sitharaman said the government is committed to facilitate young entrepreneurs.
“…many questions are being raised about ‘minimum government and maximum governance’. I want to ensure that the government is only facilitating you,” she said.
However, she said, “As and when money has to be spent, it will have to be looked into. All of us are duty-bound to be accountable and transparent…Accountability and transparency warrants that if tax breaks have to be given, in cases when the government defers, postpones or foregoes, we have to have some kind of accountability system. Therefore, there has to be an inter-ministerial board”.
The Minister also said that seven proposals for research parks, 16 for TBIs (Technology Business Incubators) and 13 proposals for Start-up Centres have been recommended by the National Expert Advisory Committee formed by the Human Resource Development Ministry.
“These proposals will be implemented in the current financial year itself,” she added.
Source – ET Retail
When billionaire investor and e-commerce sceptic Rakesh Jhunjhunwala committed to become the biggest investor in Exfinity Fund that backs business-to-business technology ventures, last November, he only did what bricks-and-mortar industrialists have been doing for a while–putting their money into the country’s burgeoning consumer internet and tech startups, trusting them to strike it big. It is also their way to hedge against the disruptive power of online businesses.
Ratan Tata, the 78-year-old chairman emeritus of Tata Sons, has invested in 36 startups, including Ola, Paytm and Bluestone. Marico chairman Harsh Mariwala has invested in Securens, Wooqer and even beauty products e-tailer Nykaa, while Ness Wadia of the Wadia group has invested in Bengaluru-based ticketing platform Explara.
What brought Jhunjhunwala on board Exfinity was the depth of its team. After a 45-minute meeting with former Infosys board members TV Mohandas Pai and V Balakrishnan, the 56-year-old `Indian Warren Buffet’ agreed to add tech firms to his $1 billion (Rs 6,653 crore) portfolio.
Pai, who has backed Exfinity Fund and co-founded Aarin Capital, said promoters of large businesses are slowly getting over their reservations about the technology industry .”We want to promote Indian venture capital. In China, about 60% of the capital is local money , while in India it is 5%. But many are rent-seekers and feel happy about the 14-15% interest. They don’t want to take a risk.” He added that the early movers are building investor confidence.”We ask them to participate in investments only after we have parked our money . We are trying to make it easy for businesses so that more and more entrepreneurs solve India’s problems.”
Fabulous returns reaped by new-age risk investors like People Group founder Anupam Mittal and Orios Venture Partners founder Rehan Yar Khan have caught the attention of the old houses that are now spending money and effort on identifying the winners among startups. Mittal owns 1% and Khan 1.8% in Ola, which is valued at $5 billion (Rs 33,264 crore).
The startup prospectors can spot disruptions to their businesses and constantly scout for newbies redefining customer experience. “We began investing in tech companies when the family office wanted to invest the dividends in several instruments. As the startup ecosystem in the country grew, it was seen as a good investment,” Harsh Mariwala said. His son Rishabh Mariwala has overseen their technology investments in funds, including Exfinity , IndusAge Partners and innovation sandbox AntFarm.”While we don’t have the technology expertise, we do help startups with operational expertise and human resources,” Harsh Mariwala added.
Pai’s Rs 125-crore Exfinity Fund 1 had a roster of non-tech CXOs -former UB Group CFO Ravi Nedungadi, Jain Group of Institutions’ founder-chairman Chenraj Roychand and Havells India joint-MD Anil Gupta, among others. Bengaluru’s promi nent industrialists, including Dilip Surana, CMD of gener ics firm Micro Labs, Rajendra Gandhi, MD of StoveKraft, and Tejraj Gulecha, promoter of Valmark Realty and Infra, are floating a Rs 50-crore ear ly-stage fund awaiting Sebi ap proval to invest in technology startups. In Kolkata, old busi nesses from tea plantations to jute and stockbroking are signing up for Calcutta Angels (CAN). “Traditional business tycoons want to invest 5-10% of their portfolio in startups.
They understand that technol ogy is pervasive and want to get a bird’s eye view of the tech disrupting their businesses. And they find comfort in co-in vesting with lead investors,” said Exfinity’s Balakrishnan.
Mudit Kumar, a fourth-gen eration tea entrepreneur and director in SPBP Tea Planta tion, has invested in five start ups. “We are busy with our tra ditional business but I thought of investing in a startup three years ago. It’s an investment opportunity as well as encour agement for new ideas to flour ish.” The real estate-to-retail Primarc Group has invested in several startups, including Catapooolt, Ketto and iKure.
Siddharth Pansari of Primarc, a second-generation entrepre neur, is also the president of Calcutta Angels Network. Pan sari has floated his seed fund called Primarc iVenture to identify new-age firms. Ronnie Screwvala, who built business es in cable TV , home shopping and media, has set up a ven ture fund that has invested in a range of areas, from agricul, ture to artificial intelligence.Startups have grown rap. idly in India over the past five years. They have raised $18 billion (Rs 1.2 lakh crore) in l the period. A YourStory report said $9 billion (Rs 59,875 crore) spread over 1,000 deals was invested in Indian startups last year alone. Despite the recent funding slowdown, the prom, ising startups are still getting ‘ investor attention.
Source – ET Retail
A term sheet essentially is a nonbinding agreement with the basic terms and conditions under which an investment will be made. But it can also be ridden with clauses that could come back to haunt an entrepreneur and his company and needs to be negotiated carefully.
For investors, term sheets help assign rights, carve out protections, and, if necessary, haggle over claims to future returns when a company is being sold or listing its shares on a stock exchange.
For entrepreneurs, it is important to consult with their peers and mentors before starting negotiations on a term sheet, listing clauses they would be willing to discuss and what they consider non-negotiable.
An entrepreneur would do well to have ready a so-called ‘best alternative to a negotiated agreement,’ or approaching an investor for Plan B or even a C. This becomes even more important for entrepreneurs during times like now, when wary investors seek to wrest as much control as they can before agreeing to put money into a startup.
Among the most important terms for entrepreneurs to consider are those relating to a company’s valuation and how much stake they would have to dilute. Clauses such as ‘liquidation preference’ could reduce the founders’ equity worth to much lower than what it appears to be.
Terms like these are widely misunderstood in the industry, and entrepreneurs should negotiate carefully. “Liquidation preference is fundamentally a downside protection instrument, which disincentivises entrepreneurs from selling a company at a sub-optimal price,” said Mukul Singhal, cofounder of venture capital firm Pravega Ventures, who has over a decade of experience in early-stage deal making.
“Some investors have started using it to juice up returns by negotiating a three-four times liquidation preference.” Liquidation preference, though, is meant to help investors recover their capital-in other words, a 1x return on investment before founders and employees start making money from a sale.
Another important term for founders is sweat equity. “As a founder, if you are able to sell a company in two years, but haven’t put in the clause of ‘accelerated vesting’ during a liquidity event (M&A or IPO), then you suffer even though you made a perfectly salable company,” said Aprameya Radhakrishna, cofounder of TaxiForSure that Ola acquired for $200 million in 2015.
While, typically, stock options are vested or allotted after completion of each year over 4-5 years, accelerated vesting allows employees to get the benefit of all options rather than having to wait as scheduled. Another point to consider is how many approval rights an investor can have in areas like new loans taken by a startup, fresh offering of shares or hiring an executive above a certain salary level.
“Supermajority rights are critical, which are things (an entrepreneur) cannot do without the approval of investors,” said Vipul Parikh, chief financial officer of online grocery BigBasket. Entrepreneurs should also watch for clauses such as ‘private matters’-a fine print typically inserted at the end of a term sheet.
It controls all top management hiring, any change in business strategy and the creation of any subsidiary. Even if a founder plans to take a home loan above a certain limit, the ‘private matters’ section will govern his decision.
Many investors also try to lock in promoters for periods of 45-90 days during which time they cannot negotiate terms with other investors.
While investors use this clause so founders do not shop term sheets with others to get a better offer, the standard period for this should not be more than 30 days.
“Fund raise, in my experience, has been a trust-building game. It pays to be honest, transparent and to not shop around in the early stages,” said Amarendra Sahu, chief executive of home rental startup NestAway. “In a way, good investors vet the moral compass of founders in addition to business acumen and passion.”
Source – ET Retail
For an entrepreneur, hiring a CXO can be an exhaustive task, albeit one that if done right, can be deeply rewarding, and in the same breath one small mistake while recruiting can be extremely detrimental to the business.
Because the entrepreneur’s view and vision of their business in unique, hiring the right leaders becomes an entirely “strategic” necessity, which unfortunately given the entrepreneur’s paucity of time is often reduced to a transaction with very limiting outcomes.
Entrepreneurial firms need to take a divergent route to hire the right fit for their business and work culture. They not only need to assess thoroughly for potential but also for the ability of the candidate to fit into an environment which is dynamic, where decisions need to be taken on the fly and the candidate’s ability to work with ambiguity. Another interesting observation is that entrepreneurial firms don’t want to invest the time and money that is required to hire the right leader.
It’s a classic Catch-22″ situation – “I want my business to grow, and I want the right leaders to help me grow the business. However I cannot incur the cost/time associated with the hiring, and the business paradigm challenging that is that the right leader can help you grow your revenue exponentially”.
The old adage “penny wise and pound foolish” is so apt, because several incredibly conclusive studies also show that the cost of a wrong hire on business can be more than – 5X of the revenue.
I firmly believe that the captain steering an entrepreneurial ship needs an entirely different set of skills than those at the helm of a more established business.
Here are 7 ‘stellar’ tips to help you navigate your next CEO/CXO hire:
1. Choose Potential over Pedigree:
A utopian hiring is one where the candidate hired has an excellent pedigree and tremendous potential. But that is utopia, and not always reality.
For Entrepreneur led businesses, it’s imperative for chose potential over pedigree. For start-ups, this is particularly the case, “leadership potential trumps experience”. Businesses need people who have the zeal to learn new skills, flexibility to adapt and the courage to persevere in the face of ambiguity and failure rather than experienced candidates who perform well, but have absolutely no desire to learn or change. I personally believe this is an area where the right recruitment partner can make all the difference. Choose an entrepreneurial firm to partner with, and the difference is evident in the outcome.
2. Focus on authenticity and maturity:
Take a measure of the candidate’s authenticity and maturity. Most CXOs are seasoned interviewers and can easily impress with ‘just the right answer’. How does one assess authenticity and separate the wheat from the chaff? Again, the right HR Head or the right Executive Search partner can add tremendous value. We use several techniques, assessment tools and tests to find the best fit.
While hiring can be open in your search and interactions, CXO hiring’s often get derailed due to inbuilt biases for candidates with a substantial same industry experience. Candidates with the right set of competencies irrespective of industry experience are often the ones that create greater value. They bring to the table a fresh outlook, many times a new perspective on an old problem. Willingness to adapt ensures survival and proliferation of the fittest. Charles Darwin’s theory holds true for organizations too.
4. Zoom Out with an External Perspective:
It is a good idea to involve your board or external advisors when hiring for senior positions. An outsider’s perspective adds diversity and color into the hiring, often challenging thoughts and ideas that an entrepreneur could have overlooked in his zealousness to hire.
5. Vision drives the process:
When we marry, we look at the long term. We see ourselves getting old with our partner. CXO hiring is akin to marriage. It’s a decision that affects all other decisions and will determine the course of your business in the long term. It should not be a ‘here and now’ decision. It needs to be completely aligned to the entrepreneur’s long-term vision.
6. Hiring is a Science, but Retention is an Art:
In retrospect, hiring is just the first hurdle crossed. Retention, of course, is a marathon run. As much as hiring deserves the full attention of an Entrepreneur, retaining the right individual is a bigger challenge. I recall an incident when after considerable time and effort our client, a billion dollar entrepreneurial company hired a CEO One year into the role the candidate quit. The client’s feedback was “he doesn’t live up to our expectations”. Over a cup of coffee the candidate told us that the Entrepreneur had not met him more than three times in the last nine months, so understanding expectations needed crystal ball gazing. A great company, a fantastic hire and a situation easily avoidable if both parties had spent time communicating more.
Entrepreneurs need to have well-defined & documented KRAs for CXOs and a robust, seamless mechanism of communication and review. Correct and timely communication is the key to retention.
7. Focus on candidate’s professional needs
Lastly, it’s always a smart idea to do a reverse evaluation. As you assess the candidate’s fit into your company, do take time out to check reverse fit also. Review your candidate’s career path to predict what would appeal to him/her as the next great challenge with reference to his/her professional strengths and skills. A right fit between a personal growth plan and organizational growth plan can point to your next Dragon Warrior!
Source – Entrepreneur Magazine