What Are Pre-Emption Rights?

Pre-emption rights pertain to the legal privileges granted to existing shareholders of a company, entitling them to purchase additional shares or ownership stakes before they are offered to external parties. In a shareholders’ agreement, pre-emption rights are contractual provisions that define the conditions and procedures governing how existing shareholders can acquire shares or interests that another shareholder intends to sell or transfer within the company.

Pre-emptive rights of shareholders are statutory rights conferred by the company law, allowing current shareholders to acquire new shares issued by the company before they are made available to external investors. These rights serve to maintain the existing ownership structure of the company.

What Role Do These Rights Play In The Startup Context?

Pre-emptive rights play a crucial role in preserving ownership and control of a startup among its current shareholders.

This safeguard is vital in upholding the continuity of decision-making authority and control within the group already committed to the startup’s development.

What Are Pre-emption Rights Under The Companies Act 2013?

The pre-emption rights under the Companies Act 2013 in India are delineated in Section 62 of the Act. This section outlines the regulatory framework governing the issuance of shares, including the rights of existing shareholders to acquire additional shares before external parties.

Who Cannot Claim Pre-emption Rights?

Pre-emption rights are generally reserved for existing shareholders and not all individuals or entities can assert these rights.

Individuals like external investors or non-equity holders typically do not have the entitlement to claim pre-emption rights. However, this may vary based on the company’s specific provisions.

What Are The Different Types Of Pre-emption Rights?

Pro-rata Pre-emption Rights: Existing shareholders have the opportunity to purchase additional shares in proportion to their current ownership percentages when the company issues new shares.

Rights Of First Refusal: Shareholders possess the right to match any offer made by an external party to buy shares before the shares can be sold to that external party.

Rights Of Co-sale: Existing shareholders can sell their shares in tandem with another shareholder who intends to sell their stake, ensuring they have an opportunity to exit their investment concurrently.

Tag-Along Rights: In the event that a majority shareholder decides to sell their stake, minority shareholders can “tag along” and sell their shares on the same terms and conditions.

Drag-Along Rights: Majority shareholders have the authority to compel minority shareholders to sell their shares if they opt to sell their stake in the company.

The post Here’s Everything You Need To Know About Pre-Emption Rights appeared first on Inc42 Media.

What Is Patient Capital?

Patient capital refers to a type of investment characterised by a long-term perspective, where investors are willing to tie up their capital for an extended period, often several years or even decades, expecting a return on investment.

This form of capital is focussed on businesses, projects or ventures that may require time to mature and generate profits.

What Are The Types Of Patient Capital? 

There are various types of it, some of these are: 

• Family Office Investments: Wealthy families or individuals may provide it to support entrepreneurial ventures.
• Impact Investment Funds: These funds invest in socially or environmentally focussed projects with long-term objectives.
• Corporate Venture Capital: Large corporations may invest in startups and technologies to foster innovation and secure strategic advantages.
• Sovereign Wealth Funds: Government-managed funds may allocate capital to long-term, diversified investments.
• Endowments & Foundations: These organisations may invest their assets with a long-term horizon, often with a focus on achieving specific societal goals.

What Is Patient Capital In Entrepreneurship? 

In entrepreneurship, it refers to funding or investment that is provided to early-stage or growth-stage businesses with a focus on long-term sustainability and success.

Unlike traditional venture capital, which often seeks rapid returns, it allows entrepreneurs to build their businesses with a focus on long-term growth, innovation and impact.

What Are The Other Names Of Patient Capital?

It is also called patient financing or long-term capital. These terms allude to the characteristic of having an extended investment horizon, where investors are willing to wait patiently for returns on their capital over a more extended period.

What Are The Advantages And Disadvantages Of Patient Capital?

Advantages

• Stability & Sustainability: It can provide stability and sustainability to businesses by allowing them to focus on long-term growth and development rather than short-term financial pressures.
• Risk Mitigation: It allows entrepreneurs and businesses to take calculated risks as they have the assurance of long-term support.
• Flexibility: Investors providing it may be more flexible in repayment and return expectations.
• Innovation & Growth: It can support innovative and high-impact projects that might not be immediately profitable but have the potential to transform industries.

Disadvantages

• Limited Liquidity: Investors may face challenges in accessing their capital quickly as it is committed for a longer time.
• Uncertain Returns: Patient capital investments often come with higher uncertainty regarding returns as compared to short-term investments.
• Opportunity Cost: The capital tied up in patient investments cannot be used for other opportunities, potentially missing out on more immediate and lucrative ventures.

What Is The Differences Between Patient Capital And Venture Capital?

Patient Capital

• Long-Term Investment: Patient capital refers to capital invested in a business with a long-term perspective. The investors are willing to wait for a more extended period, often years, to realise substantial returns.
• Focus On Sustainable Growth: Investors providing patient capital are more concerned with sustainable growth rather than quick, high returns. They often support businesses with a vision for steady and long-term development.
• Less Pressure For Rapid Returns: There’s less pressure on the business to generate immediate profits or demonstrate quick growth. Investors are willing to tolerate slower growth initially to allow the business time to establish itself and grow steadily.
• Support For Innovation: Patient capital is more likely to support innovative or socially impactful ventures that may take time to mature and become profitable.
• Lower Risk Of Investor Interference: Investors providing patient capital typically have less involvement in day-to-day operations. They trust the management to execute long-term strategies.

Venture Capital

• High-Risk, High-Return Model: Venture capital involves investing in early-stage and high-potential companies with the expectation of high returns but also higher risk. Venture capitalists seek substantial returns within a relatively short time frame, often 5-10 years.
• Focus On Rapid Growth: Venture capital often targets startups with disruptive potential in rapidly growing markets. There’s a strong emphasis on achieving quick growth and market expansion.
• Active Involvement: Venture capitalists often play an active role in the companies they invest in, offering expertise, guidance and networking opportunities to accelerate growth.
• Exit Strategy: Venture capitalists aim for an exit strategy such as IPOs (initial public offerings) or acquisitions to cash out their investments and realise profits.
• Higher Pressure For Performance: There’s significant pressure on startups to demonstrate rapid growth, meet milestones, and achieve profitability within a shorter timeframe to satisfy investor expectations.

The post Here’s Everything You Need To Know About Patient Capital appeared first on Inc42 Media.

What Is Distributed To Paid-In Capital?

Distributed to Paid-In Capital (DPI) is a financial metric used in the context of private equity and venture capital investments. It measures the ratio of cash distributions that investors have received from a venture capital or private equity fund to the total capital they initially invested in the fund.

In other words, DPI represents the return on investment that investors have received from the fund, expressed as a ratio or percentage of their original capital contributions. It is an important measure for evaluating the performance and success of a fund in returning capital to its investors.

What Is The Formula For Distributed To Paid-In Capital (DPI)?

The formula for Distributed to Paid-In Capital (DPI) is as follows:

DPI = Total Distributions to Investors / Total Paid-In Capital

DPI measures the ratio of cash distributions that investors have received from a venture capital or private equity fund to the total capital they initially invested in the fund.

What Is The Distributed Value To Paid-In Ratio?

The Distributed Value to Paid-In Ratio (DPI Ratio) is a measure used in the context of private equity or venture capital funds to assess the efficiency of capital deployment and the returns generated for investors. It is calculated as follows:

DPI Ratio = Distributed Value / Paid-In Capital

The DPI Ratio indicates how much capital investors have received back in distributions compared to their initial capital contributions.

How Do You Calculate DPI?

To calculate DPI (Distributions to Paid-In Capital), you need the following information:

• Total Distributions to Investors: This includes all the cash distributions that have been made to the fund’s investors over a specified period.
• Total Paid-In Capital: This represents the total capital that the investors initially committed to the fund.

The formula for calculating DPI is:

DPI = Total Distributions to Investors / Total Paid-In Capital

What Is The DPI Value?

The DPI value represents the ratio of cash distributions that investors have received from a venture capital or private equity fund to the total capital they initially invested in the fund.

DPI is expressed as a percentage or a decimal. A DPI value greater than 1 indicates that investors have received back more capital than they initially invested, signifying a positive return. A DPI value less than one means that investors have not yet received back their initial capital.

What Is DPI Measured In?

DPI is typically measured as a ratio or a percentage. For example, if the DPI is 1.2, it means that investors have received 120% of their initial capital in distributions.

If the DPI is 0.8, it indicates that investors have received 80% of their initial capital back in distributions. DPI is a crucial metric in assessing the success and performance of private equity or venture capital funds in returning capital to their investors.

The post Everything You Need To Know About Distributed To Paid-In Capital appeared first on Inc42 Media.

What Are Flat Rounds?

Flat rounds refer to investment rounds in which a company raises capital at a valuation that is roughly the same as or very similar to the valuation it had in its previous funding round.

In other words, the company’s valuation remains relatively unchanged, resulting in flat or stable pricing for the company’s equity or securities.

What Is A Flat Round Investment? 

A flat round investment occurs when a company secures funding from investors without a significant increase in its valuation. The investment amount and terms may change, but the company’s value remains relatively stable compared to the previous funding round.

Flat rounds can occur for various reasons such as when a company is in a challenging market or facing difficulties that are preventing it from commanding a higher valuation.

What Is An Example Of A Down Round?

A down round is a funding round in which a company raises capital at a lower valuation than it had in a previous round. For example, if a startup raised $10 Mn at a valuation of $50 Mn in its Series A round but later had to raise additional funds at a valuation of $30 Mn in its Series B round, the Series B round would be considered a down round.

However, in an up round, a company raises capital at a higher valuation than it had acquired in a previous funding round. 

What Are Private Rounds?

“Private rounds” typically refer to fundraising activities conducted by private companies that are not publicly traded on stock exchanges. In private rounds, companies seek investment from private investors or institutional investors, and these rounds often involve the sale of equity, debt, or other securities to raise capital.

Private rounds are a common method for early-stage startups and private companies to secure funding for growth and expansion.

What Are The Benefits Of A Down Round?

Down rounds are generally not viewed as beneficial for a company or its existing shareholders because they indicate a decline in the company’s valuation. However, there are potential reasons why a down round may be pursued or considered advantageous in certain situations:

Survival: A down round can provide a company with much-needed capital to survive and continue operations when facing financial challenges.

Attracting New Investors: A down round may attract new investors who see the company as undervalued and are willing to invest at a lower price, potentially leading to future gains.

Reset Expectations: A down round can help reset expectations and make the company’s valuation more realistic, which may lead to a stronger foundation for future growth.

Reducing Overvaluation: In some cases, down rounds can correct previous overvaluations, bringing a company’s valuation more in line with its true market value.

The post Here’s Everything You Need To Know About Flat Rounds appeared first on Inc42 Media.

What Is Anti-Dilution Protection?

Anti-dilution protection is like a safety net for investors. It is often included in investment agreements, especially in venture capital financing, to protect the rights of earlier investors in a company when new shares are issued at a lower price than the previous investment round.

It aims to prevent the dilution of the ownership stake and economic interests of existing investors in case of a down round.

The following are some of the examples of anti-dilution provisions:

• Full Ratchet Anti-Dilution: If new shares are issued at a lower price than what an early investor paid, the investor’s shares are adjusted downward to match the new lower price.
• Weighted Average Anti-Dilution: This method takes into account the number of new shares issued and the price at which they are issued, resulting in a less severe adjustment to the investor’s shares compared to the full ratchet.
• Broad-Based Anti-Dilution: It’s a more investor-friendly method that considers not only common stock but also convertible securities like stock options and warrants in the anti-dilution calculation, providing better protection to investors.

How Do You Protect Against Dilution Of Shares?

To protect against dilution of shares, you can:

• Invest in securities with anti-dilution provisions like preferred stock or convertible notes.
• Negotiate for stronger anti-dilution terms in your investment agreement.

What Does Anti-Dilution Protection Mean For Minority Shareholders? 

Anti-dilution protection ensures that any investor, regardless of their ownership percentage, is protected from losing value in their shares when the company issues additional shares at a lower price.

This protection maintains fairness and transparency in the ownership structure, benefiting all shareholders, not just the majority.

How Anti-Dilution Is Different From Preemptive Rights?

Anti-dilution and preemptive rights are both methods to protect existing shareholders from losing ownership when a company issues new shares. The key difference is in how they achieve this:

Anti-Dilution

• Protect existing shareholders’ ownership when new shares are issued at a lower price.
• Adjusts share price or the number of shares held by existing shareholders after new shares are issued.
• Full Ratchet and Weighted Average Anti-Dilution.
• Common in convertible securities such as preferred stock.

Preemptive Rights

• Allow existing shareholders to buy additional shares before others, maintaining ownership.
• Grants existing shareholders the right to purchase more shares before they are offered to others.
• Commonly referred to as Preemptive Rights.
• Often found in company bylaws or shareholder agreements.

The post Here’s Everything You Need To Know About Anti-Dilution Protection appeared first on Inc42 Media.

What Is Fair Market Value?

Fair Market Value (FMV) refers to the price at which any tangible asset changes hands between a willing buyer and a willing seller when both parties have reasonable knowledge of the relevant facts and neither is under any compulsion to buy or sell. It represents the true and objective value of an asset in a free and open market.

FMV is used in various contexts in real estate, securities, and charitable contributions.

How Do You Calculate FMV?

The calculation of FMV can vary depending on the type of asset or property involved. Generally, FMV is determined by considering various factors such as comparable sales, income potential, replacement cost, and the condition of the asset. Common methods used to calculate FMV include:

Market Comparison Approach: This method involves comparing the asset in question to similar assets that have recently been sold in the market.

Income Approach: This approach is used for income-generating assets and considers the potential income the asset can generate in the future.

Cost Approach: This method assesses the cost to replace or reproduce the asset at the current market rates.

Is Market Value The Same As FMV?

Market value and FMV are closely related concepts but are not the same. Market value is a broader term and can sometimes include factors such as buyer and seller motivations and special circumstances.

FMV, on the other hand, focusses on a hypothetical transaction in a typical market with willing parties, devoid of external influences or pressures.

How Is FMV Calculated For Shares?

Calculating the FMV for shares typically involves evaluating the financial health of the company, its earnings, growth potential, and other relevant market factors. The market price of publicly traded shares is often used as a starting point.

For private company shares, more complex methods may be employed, considering the company’s financial statements, industry trends, and any recent transactions involving similar shares.

How Does FMV Impact Valuation Methods & Taxes?

FMV is a crucial concept in valuation methods and taxation. Its impact can be significant in determining the value of assets and in tax assessments.

Valuation Methods:

• Asset Valuation: FMV is often used to determine the value of assets during various transactions such as sales, mergers, acquisitions, or for financial reporting purposes. It helps in assessing the worth of an asset in a competitive and open market.
• Estate Planning: In estate planning or during inheritance, FMV is essential to determine the value of assets passed on to beneficiaries. It ensures fairness in the distribution of assets and can have implications for estate taxes.
• Financial Reporting: Companies use FMV for financial reporting purposes, especially for assets and liabilities carried on the balance sheet. The assigned value impacts financial ratios, disclosures, and potential impairment charges.

Tax Implications:

• Income Tax: FMV is used to determine the tax liability arising from the sale or exchange of property or assets. Capital gains or losses are calculated based on the difference between the selling price and FMV at the time of acquisition.
• Estate and Gift Tax: FMV is crucial for estate and gift tax purposes. The value of assets subject to gift tax or estate tax is based on their fair market value at the time of gifting or the decedent’s death.
• Property Tax: Local governments often use FMV to assess property taxes. The assessed value of real estate or personal property determines the tax obligation of the property owner.

Impact:

• Accuracy In Valuation: FMV ensures a fair and accurate assessment of assets, reducing the potential for undervaluation or overvaluation, which could impact tax liabilities and financial decisions.
• Compliance: Adhering to FMV standards is essential for compliance with tax laws and regulations. Failure to use an accurate FMV can lead to penalties or legal issues.
• Negotiations and Transactions: FMV plays a crucial role in negotiations, especially during transactions. Parties involved often refer to the FMV as a benchmark for fair pricing.
• Economic Conditions: Fluctuations in market conditions can impact FMV, affecting valuations and, subsequently, tax implications.

The post Here’s Everything You Need To Know About Fair Market Value appeared first on Inc42 Media.

What Is The Meaning Of Clawback In Legal And Contractual Terms?

A “clawback” refers to a legal or contractual provision that allows a party to recover or take back previously distributed funds, benefits, or assets in specific circumstances. It is often used to rectify overpayments or to address situations where certain conditions or obligations are not met.

An example of one can be found in the financial industry, where executives of a company might receive performance-based bonuses or stock options. If it is later discovered that the financial results that led to these bonuses were misrepresented or fraudulent, the company may invoke a clawback provision to recover the bonuses or options granted to the individuals involved.

Are Clawback Clauses Applicable To Salaried Employees?

Yes. A clawback clause in salary or compensation is a contractual provision that allows an employer to recover part of an employee’s compensation under specific circumstances.

For instance, if an employee receives an advance payment or a signing bonus but leaves the company before fulfilling certain obligations, it might enable the employer to recoup a portion of the paid amount.

Is Clawback Legal In India?

Its provisions can be legally enforced in India, but their applicability and legality depend on specific terms of employment contracts, company policies, and relevant labour laws.

Indian companies may include its clauses in employment agreements to protect their interests in cases of non-compliance or financial impropriety.

What Is A Clawback Policy?

It is a formalised set of rules and procedures governing the application of its provisions within an organisation.

This policy outlines the conditions under which it can be triggered, the methods for calculation and recovery, and the responsibilities of all parties involved, including employees, employers, or stakeholders.

Who Pays Clawback?

The responsibility for paying it typically falls on the party seeking the recovery — an employer or a financial institution.

They initiate the process to recover funds or previously disbursed benefits. This process may involve legal action, negotiations, or regulatory authorities, depending on specific circumstances.

What Is Clawback Provision As Per The RBI?

The Reserve Bank of India (RBI) has introduced clawback provisions to regulate the compensation practices of banks and financial institutions in the country. These provisions aim to ensure that a portion of the variable pay given to CXOs is subject to clawback in cases of poor performance, misconduct, or risk-related issues.

The RBI’s clawback regulations are designed to promote sound risk management practices and protect the financial stability of institutions.

The post Here’s Everything You Need To Know About Clawback appeared first on Inc42 Media.

What Are Pro Rata Rights?

Pro rata rights, sometimes called proportional rights, are rules in investment deals, especially for startups. These rights let existing investors put more money into the company when it raises more funds. This way, they keep the same percentage of ownership they had before. In simple words, it helps them stay as important owners as the company grows, even when new people invest in it.

For startup investments, it means that investors can invest money in proportion to the ownership they already have. This keeps their ownership the same even as the company creates more shares or gets more money. These rights are useful for early investors because they protect their ownership and help them benefit from the company’s growth and success.

How To Calculate It?

Calculating pro rata rights involves a straightforward formula:

Pro Rata Rights = (Investor’s Ownership Percentage) x (New Investment Amount)

Let’s break this down with an example:

Suppose an investor holds a 10% ownership stake in a startup with a current valuation of $1 million. If the startup decides to raise an additional $500,000 in a new funding round, the investor’s pro rata rights would allow them to invest an additional amount to maintain their ownership percentage. In this case, the calculation would be:

Pro Rata Rights = (10%) x ($500,000) = $50,000

So, the investor would have the opportunity to invest an additional $50,000 in the new round to keep their ownership stake at 10%.

Preemptive Rights Vs Pro Rata Rights

Preemptive rights and pro rata rights are closely related concepts in the world of startup investments, but they serve slightly different purposes.

Preemptive Rights: Preemptive rights, also known as anti-dilution rights, give existing investors the option to purchase additional shares at the same price and terms as a new funding round. This helps protect their ownership percentage from dilution due to new investments. If the investor decides to exercise their preemptive rights, they can maintain or even increase their ownership stake.

Pro Rata Rights: As discussed earlier, it allows existing investors to participate in a new funding round to maintain their ownership percentage. While preemptive rights focus on preserving the ownership percentage, it enable investors to invest a proportional amount to their existing stake.

In summary, preemptive rights are more about protecting ownership percentage through additional shares, while pro rata rights ensure proportional investment to maintain the existing ownership percentage without necessarily increasing it.

Are Pro Rata Rights Included In SAFE?

A SAFE (Simple Agreement for Future Equity) is a common instrument used in startup financing. SAFE documents can include pro rata rights, providing certain protections and opportunities to investors.

Pro rata rights in a SAFE typically grant existing investors the option to participate in future equity financing rounds of the startup. This means that if the startup decides to raise additional capital through an equity financing round, investors with it under the SAFE will have the opportunity to invest an amount proportional to their existing ownership stake to maintain that stake.

SAFE agreements can vary, and not all of them include pro rata rights. The inclusion of it in SAFE is negotiable between the startup and the investor. 

The post Here’s Everything You Need To Know About Pro Rata Rights appeared first on Inc42 Media.

What Is An Accredited Investor?

An accredited investor is an individual or entity that meets certain financial criteria and is allowed, under securities regulations, to invest in private securities offerings that are not registered with regulatory authorities. 

These criteria are put in place to ensure that they have a level of financial sophistication and the ability to bear the risks associated with investing in unregistered securities. 

They have access to a wider range of investment opportunities, including hedge funds, private equity, venture capital and other private placements.

How Do You Qualify As An Accredited Investor?

The requirements set by the Securities and Exchange Board of India (SEBI) aim to ensure that they are financially stable and possess the necessary experience to make informed investment decisions, especially in the context of unregistered investments.

Net Worth Requirement For Business Entities: Business entities seeking accredited investor status in India must have a minimum net worth of INR 25 Cr. This threshold is indicative of their financial stability and capacity to bear the risks associated with unregistered securities.

Liquid Worth And Income For Individuals: Individuals aiming to be considered accredited investors must meet specific financial criteria. They should have a liquid net worth of INR 5 Cr and a total annual gross income of INR 50 Lakh. This demonstrates their financial capability and willingness to take on higher-risk investments.

Adherence To Financial Stability Requirements: One of the primary considerations for accredited investor status in India is financial stability. Entities and individuals should be financially capable of absorbing potential losses associated with unregistered investments.

Experience And Profitable Portfolio: As per SEBI guidelines, they should have some years of experience in financial markets and investments. This experience, along with a profitable investment portfolio, ensures that they are well-informed and experienced in making investment decisions.

Who Is An Accredited Investor In India?

Qualified Institutional Buyers (QIBs): These are institutional investors like mutual funds, banks, financial institutions, insurance companies, and foreign institutional investors (FIIs). They are considered accredited investors and can invest in securities that may not be available to retail investors.

High Net Worth Individuals (HNIs): While there isn’t a strict definition of HNIs in India, it usually refers to individuals with significant wealth or financial assets. HNIs are often approached by companies for private placements and other investment opportunities.

Angel Investors & Venture Capitalists: Individuals or entities that invest in startups and early-stage companies are often considered accredited investors in the Indian context. They typically have a higher risk tolerance and a track record of investing in high-risk, high-reward ventures.

It’s important to note that the regulations around them in India can vary depending on the specific investment vehicle and the regulatory authority involved. SEBI plays a significant role in regulating and defining the rules for them in India.

Who Does SEBI Certify As An Accredited Investor? 

SEBI has defined certain categories for them in the context of alternative investment funds (AIFs). As per SEBI, accredited investors include:

Institutional Investors: This category includes entities like banks, financial institutions, foreign institutional investors (FIIs), and other institutional investors as defined by the market regulator.

Family Offices: Family offices that meet specific criteria and are registered with SEBI are considered accredited investors.

High Net Worth Individuals (HNIs): SEBI defines HNIs as individuals with a net worth exceeding INR 2 Cr or those who have an annual income of at least INR 1 Cr.

Trusts: Certain trusts that meet the prescribed criteria are eligible to be called accredited investors.

Registered AIFs: Other AIFs that are registered with SEBI also qualify as accredited investors.

What Are The Advantages And Disadvantages Of Being An Accredited Investor?

Advantages

Access To Exclusive Investments: Accredited investors get the opportunity to invest in private placements, venture capital, private equity, hedge funds, and other alternative investments that are not available to the general public. These investments may offer higher potential returns.

Diversification: By having access to a wider range of investment options, accredited investors can diversify their portfolios more effectively, which can help manage risk.

Potential For High Returns: Many alternative investments are designed to provide higher returns, which can be appealing to investors seeking above-average growth in their portfolios.

Greater Control: Accredited investors often have more control over their investment choices, as they can directly invest in specific opportunities or work with private investment managers.

Networking Opportunities: Participation in exclusive investment opportunities can lead to valuable networking opportunities and connections within the financial and business world.

Disadvantages

Higher Risk: Many alternative investments available to accredited investors are inherently riskier than traditional investments. The potential for higher returns often comes with a higher risk of loss.

Lack of Liquidity: Investments in private placements and other alternative assets can be illiquid, meaning that it may be challenging to access your money when you need it.

Limited Regulation: Some alternative investments have fewer regulatory protections, which can expose investors to a greater risk of mismanagement and fraud.

Complexity: Alternative investments can be complex and require a deeper understanding of the investment vehicle and its associated risks.

High Investment Minimums: Many exclusive investment opportunities have high minimum investment requirements, making them inaccessible to some accredited investors.

Lock-Up Periods: Private equity and venture capital investments often come with long lock-up periods, during which investors cannot access their capital.

The post Here’s Everything You Need To Know About Accredited Investors appeared first on Inc42 Media.

What Does The Term Cost Of Goods Sold (COGS) Mean?

Cost of Goods Sold (COGS), often referred to as cost of sales or cost of revenue, is an accounting term that represents the direct costs incurred by a business to produce or acquire the goods it sells during a specific accounting period.

It includes all expenses associated with the production or purchase of goods that are intended for resale. These costs are subtracted from a company’s total revenue to calculate its gross profit.

How Do You Calculate COGS?

It is calculated by adding up all the direct costs associated with the production or acquisition of the goods that a company sells during a specific accounting period. 

COGS = Opening Inventory + Purchases (or Cost of Production) – Closing Inventory

Opening Inventory represents the value of goods a company had on hand at the beginning of the accounting period.

Purchases or Cost of Production refers to the cost of additional inventory acquired or produced during the period.

Closing Inventory is the value of the inventory remaining at the end of the accounting period.

By subtracting the closing inventory from the sum of the opening inventory and purchases (or cost of production), one can determine the cost of goods sold.

What Is An Example Of COGS?

Let’s say you run a retail clothing store. At the beginning of the month, you had $10,000 worth of clothing inventory in stock (opening inventory). During the month, you purchased $5,000 worth of new clothing inventory (purchases), and at the end of the month, you had $3,000 worth of clothing inventory left (closing inventory).

Using the COGS formula: COGS = $10,000 (opening inventory) + $5,000 (purchases) – $3,000 (closing inventory) COGS = $12,000

In this example, your cost of goods sold for the month is $12,000, which represents the cost of clothing items that you sold during that period.

Is COGS An Expense?

Yes, COGS is considered an expense on a company’s income statement. It is an operating expense that represents the direct costs associated with the production or acquisition of the goods a company sells.

COGS is subtracted from a company’s total revenue to calculate its gross profit, which is the profit generated before deducting other operating expenses and taxes.

The post Here’s Everything You Need To Know About Cost Of Goods Sold appeared first on Inc42 Media.

What Is Carried Interest And What Characteristics Does It Have?

Carried interest, or carry, is a financial arrangement commonly used in the investment and private equity industry. It represents a share of the profits earned by an investment fund’s managers, typically the general partners, when the fund’s investments generate positive returns. It serves as an incentive for fund managers to maximize returns for the fund’s investors, who are the limited partners.

Key characteristics include:

• Profit Sharing: It is a form of profit sharing. Fund managers receive a percentage of the fund’s profits, typically after a specified minimum return, known as the “hurdle rate,” has been achieved for the investors.
• Performance-Based: The receipt of it is contingent on the fund’s performance. It encourages fund managers to make profitable investments and enhance the fund’s overall returns.
• Percentage Share: It is usually calculated as a percentage of the fund’s profits above the hurdle rate. Common percentages range from 10% to 30%, but the exact percentage can vary depending on the fund’s specific terms and agreements.
• Alignment of Interests: It aligns the interests of fund managers with those of the investors. Since managers benefit from the fund’s success, they have a strong incentive to make prudent investment decisions.
• Long-Term Horizon: It often includes a “clawback” provision, which means that fund managers may be required to repay a portion of previously received carried interest if the fund’s overall performance deteriorates over time.

How Does Carried Interest Work?

It is typically structured as a share of the profits earned by an investment fund after a certain minimum return, known as the “hurdle rate,” has been achieved for the fund’s investors.

It is often calculated as a percentage of the fund’s profits above the hurdle rate. Fund managers receive it as an incentive for their performance in generating returns for investors.

What Does 20% Carried Interest Mean?

A 20% carried interest means that the fund manager is entitled to receive 20% of the profits generated by the investment fund after the fund has achieved the hurdle rate or a specified minimum return for investors.

This percentage represents the share of the upside profits that the fund manager can claim as their carried interest.

What Is The Difference Between Carried Interest And Performance Fees?

Carried interest and performance fees are terms that are often used interchangeably in the context of investment funds, but they can have slightly different meanings depending on the specific fund structure. Both typically refer to a share of the fund’s profits that fund managers receive for their performance.

The key difference may be in terminology and the specific terms used in a fund’s legal documents. It is more commonly associated with private equity and venture capital funds, while performance fees may be a broader term encompassing various types of investment funds.

Why Is It Called Carried Interest?

The term “carried interest” is derived from the historical practice of nautical partnerships in the 18th century. Ship captains and crew members would enter into agreements to share the profits from successful voyages. The captain’s interest, or share of the profits, was known as the “carried interest” because it was carried over and above their regular wages.

This concept was later adapted to the financial world, particularly in the private equity and investment fund industry, to describe the share of profits that fund managers receive.

The post Here’s Everything You Need To Know About Carried Interest appeared first on Inc42 Media.

What Do Redemption Rights Mean?

Redemption rights refer to the legal or contractual provisions that grant investors or shareholders the ability to demand the return of their investment or repurchase of their shares under certain circumstances.

They are significant for investors as they provide a means to exit their investments, but the terms and conditions of these rights can vary widely and are subject to negotiation and agreement between investors and fund managers.

What Are Redemption Rights In Private Equity

Redemption rights in private equity refer to a contractual provision that allows investors, typically limited partners in a private equity fund, to request the return of their investment from the fund after a specified period. These rights are often exercised when investors wish to exit the investment before the fund’s end date.

They can have various conditions and restrictions, and they are a crucial component in the limited partnership agreement governing the private equity fund.

What Is The Difference Between Redemption Rights And Put Options?

Redemption rights and put options share some similarities as both provide investors with a means to exit their investments under certain circumstances. However, there are key differences between the two:

• Redemption Rights: These are typically associated with private equity investments in funds. They are governed by the terms of the limited partnership agreement, and they often have specific conditions and timelines for exercising. Investors use these rights to request the return of their capital from the fund, which may or may not be subject to certain restrictions and fees.
• Put Options: Put options are financial instruments that allow an investor to sell their shares or securities back to the issuer or another party at a predetermined price. Put options are more commonly associated with public markets and can be traded independently. They provide investors with greater flexibility to exit their investments on short notice.

Are Redemption Rights Common?

Redemption rights are relatively common in private equity, particularly in the context of limited partnership agreements for private equity funds. However, specific terms and conditions of these rights can vary widely from one fund to another.

Whether or not they are included in a particular investment depends on the fund’s strategy, objectives, and the terms between the fund manager and limited partners.

What Is A Redemption Term Sheet?

A redemption term sheet is a document outlining the terms and conditions related to redemption rights in an investment or fund. It typically includes details such as the timing and frequency at which investors can exercise their redemption rights, any notice requirements, any fees or penalties associated with redemptions, and other relevant provisions.

This term sheet is an essential part of the agreement between investors and fund managers, providing clarity on how and when investors can exit their investments.

The post Here’s Everything You Need To Know About Redemption Rights appeared first on Inc42 Media.

What Is Capital Stack? 

Capital stack is a concept used in finance, particularly in the context of real estate and corporate finance, to represent the hierarchical structure of various sources of capital or funding that a project or business uses to finance its operations, investments, or development. It typically consists of different forms of capital, each with its own characteristics and priority of claim on the project’s or company’s cash flows and assets.

In a traditional capital stack, the different layers or “stacks” are organised in a hierarchy, with the most secure or senior forms of capital at the top and the riskier or junior forms at the bottom. The common components of a capital stack include:

• Equity: This represents ownership in the project or company and is the riskiest form of capital. Equity investors, such as shareholders, have the potential for the highest returns but also bear the most risk as they are the last in line for repayment if the project faces financial distress or liquidation.
• Debt: Debt capital includes loans, bonds, or other forms of borrowed funds. Debt investors, including lenders and bondholders, have a priority claim on the company’s assets and cash flows for interest payments and repayment of principal. Senior debt is higher in the hierarchy than mezzanine or subordinated debt.
• Mezzanine Debt: Mezzanine financing is a hybrid form of capital that combines debt and equity features. Mezzanine lenders often have a lower priority for repayment than senior debt but a higher claim than equity investors.
• Preferred Equity: It includes preferred equity, which is a type of equity that has preferential rights over common equity but ranks below senior debt in terms of repayment priority.

What Is Capital Stack In Corporate Finance?

In corporate finance, the capital stack refers to the hierarchy of different sources of funding a company utilises to operate, grow, or finance specific projects. This structure typically consists of various forms of capital such as equity, debt, and sometimes hybrid instruments like preferred stock or convertible debt.

Why Is Capital Stack Important?

It is essential in corporate finance because it determines the order of priority for repayment in case of financial distress or liquidation. It plays a significant role in assessing the financial risk and returns for investors and creditors. Understanding it is crucial for both businesses and investors to make informed decisions regarding financing, investment, and risk management.

What Does It Mean To Be Higher In The Capital Stack?

Being “higher” in the capital stack means having a more secure position with a higher claim on the company’s assets and cash flows in the event of financial distress or liquidation. 

In the capital stack hierarchy, Equity holders are at the lowest level and are the last to receive any remaining assets after all debts and obligations have been paid. Mezzanine debt or preferred stockholders occupy an intermediate position. Senior debt holders are at the top of the capital stack, enjoying priority in repayment.

What Is The Most Secure Form Of Capital Stack?

It consists of capital that has the highest priority for repayment and the lowest risk. In the traditional capital stack hierarchy, senior debt is typically the most secure capital because it is the first to be repaid in the event of financial distress or liquidation. This capital has a legal claim to the company’s assets before other forms of capital, providing a relatively high level of security for lenders.

The post Here’s Everything You Need To Know About Capital Stack appeared first on Inc42 Media.

What Is A Follow-On Investment

A follow-on investment, in the context of venture capital, is an additional investment made in a startup by an existing investor. This investment occurs after the initial funding round and is aimed at supporting the company’s growth and development. Follow-on investments are typically made to help the startup reach important milestones, such as expanding its market presence or launching new products or services.

What Is A Follow-On Strategy?

It is a predetermined plan of action by a venture capital firm regarding its continued support for a portfolio company. Based on the startup’s performance and funding needs, this strategy outlines when and how follow-on investments will be made. It involves setting criteria and triggers that determine when additional capital should be injected into the company.

What Is The Difference Between A Lead And Follow-On Investor?

A lead investor and a follow-on investor are two distinct roles within the venture capital landscape. The lead investor is typically the first to invest in a startup’s initial funding round. They play a significant role in negotiating terms, and setting the valuation and often take a more active role in guiding the company.

In contrast, a follow-on investor participates in subsequent funding rounds. They build upon the lead investor’s initial investment and can be existing investors or new investors who join as the company progresses.

Which Are The Two Types Of Follow-On Markets?

• Primary Market: The primary market involves the issuance of new securities, including additional equity, convertible debt, or other financial instruments, by the startup. These new securities are offered to existing investors in follow-on funding rounds.
• Secondary Market: In this market, existing shares of a startup are bought and sold between investors. This allows early investors, employees, or founders to liquidate their holdings without waiting for an exit event such as an IPO or acquisition.

The post Here’s Everything You Need To Know About Follow-On Investment appeared first on Inc42 Media.

What Is A Special Purpose Entity?

A Special Purpose Entity (SPE) is a legal structure established for a specific purpose, often to isolate assets, liabilities or financial activities from a parent company. These entities serve purposes such as risk mitigation, project financing and regulatory compliance and are commonly used in sectors such as finance, real estate and project development. 

SPEs are a profitable proposition as they enable the separation of specific financial functions or assets while protecting the parent company from related risks or liabilities.

What Is The Difference Between Special Purpose Entities & Special Purpose Vehicles?

Special Purpose Entities (SPEs) and Special Purpose Vehicles (SPVs) are often used interchangeably, but they are two distinct terms. An SPE is a legal entity created for a specific purpose, while an SPV is a subset of an SPE created to isolate risk and assets. The primary distinction lies in their objectives. An SPE might be established for a broader range of purposes, while an SPV is a more specific subset designed to achieve a particular financial goal.

A common example of an SPE can be found in the world of asset transformation. When a financial institution wants to offload a portfolio of loans or assets to minimise risk and free up capital, it can establish an SPE to purchase and hold these assets. The SPE then issues securities backed by these assets, which are sold to investors. In this scenario, the SPE serves as a legal structure that separates the assets from the parent company, reducing the parent company’s exposure to potential losses.

What Are The Types Of Special Purpose Entities?

Special Purpose Entities come in various forms, each tailored to specific financial needs and objectives. Some common types of SPEs include: 

1. Trusts: Trusts are often used in securitisation transactions. They hold assets on behalf of beneficiaries and then subsequently distribute the income generated from these assets among investors.
2. Corporations: Some SPEs are structured as corporations, with limited liability for the parent company. These entities are often used in project financing and real estate development.
3. Partnerships: Limited partnerships and limited liability partnerships can also serve as SPEs. They offer tax benefits and are frequently used in joint ventures and investment structures.
4. Limited Liability Companies (LLCs): LLCs are another popular choice for creating SPEs. They provide a flexible ownership structure while offering liability protection to the parent company.
5. Statutory Trusts: Statutory trusts are commonly used in the creation of mortgage-backed securities (MBS). They offer legal protections and a clear framework for managing assets.

What Is An Special Purpose Entity In Banking?

In the banking sector, a Special Purpose Entity (SPE) is often used for risk management and capital optimisation. When banks want to reduce the risk associated with certain assets, loans or securities, they can create an SPE to hold these assets. 

This separation of assets helps the bank reduce its capital requirement, as only the SPE’s assets are considered while calculating regulatory capital. It allows the banks to free up capital for other purposes and maintain a more favourable capital position.

What Is An SPE Transaction?

An SPE transaction is a financial arrangement or operation conducted through a Special Purpose Entity (SPE). These transactions are structured to achieve specific financial objectives such as risk mitigation, tax optimisation, or financing.

The primary purpose of an SPE transaction is to create a legal separation between certain assets and their owners or originators. This separation can have several benefits, including reducing risk exposure, enhancing financial efficiency, and achieving regulatory compliance.

SPE transactions are prevalent in various industries, including:

1. Securitisation: Banks and financial institutions often use SPEs to securitise assets such as mortgages, auto loans, or credit card receivables.  
2. Project Financing: In infrastructure and construction projects, SPEs are frequently established to isolate the project’s assets and liabilities from the parent company. This allows for more straightforward project financing, as investors can assess the project’s financial health independently.
3. Real Estate: Developers often create SPEs to manage individual real estate projects. This structure can provide liability protection for the parent company and make it easier to secure financing for the project.
4. Risk Management: Some companies establish SPEs to hedge against specific risks like currency fluctuations, interest rate changes, or commodity price fluctuations. These entities enable businesses to isolate risk and protect their core operations.

The post Here’s Everything You Need To Know About Special Purpose Entity appeared first on Inc42 Media.

What Are Tag-Along Rights In Venture Capital?

Tag-along rights or “co-sale rights” are a provision in venture capital and shareholder agreements that protect minority shareholders, typically investors, by allowing them to join in the sale of their shares when a majority shareholder decides to sell their shares to a third party. 

Tag-along rights ensure that minority shareholders have the option to sell their shares on the same terms and conditions as the majority shareholder, effectively “tagging along” in the transaction.

An example of a tag-along right clause in a shareholder agreement might read as follows:

“If [majority shareholder’s name] intends to sell any of their shares of the Company to a third party, the minority shareholders shall have the right to ‘tag along’ and include their shares in the proposed sale. The terms and conditions of such sale, including the purchase price and other material terms, shall be the same for the minority shareholders as for the majority shareholder.”

What Is  Tag Along In Startup Terms?

In the startup context, “tag along” refers to the ability of minority shareholders, typically early-stage investors, to join in the sale of their shares when a majority shareholder or a founder decides to sell their shares to an external party.

This right ensures that minority shareholders have the option to sell their shares under the same terms and conditions as the majority shareholder, providing them with some degree of protection and allowing them to realise the same benefits from the sale.

What Are Drag-Along Rights For Founders?

Drag-along rights are a provision in shareholder agreements that benefit the majority shareholders, often founders or controlling stakeholders. These rights enable majority shareholders to force minority shareholders to join in the sale of the company to a third party on the same terms and conditions.

Drag-along rights are used to facilitate the sale of a company by ensuring that all shareholders are bound by the decision of the majority, which can be essential in exit scenarios or when a buyer seeks a complete acquisition. 

What Is The Difference Between Tag-Along And Drag-Along Rights?

• Tag-Along Rights: These protect minority shareholders (often investors) by allowing them to join the sale of their shares when a majority shareholder decides to sell their shares to a third party. The purpose is to ensure that minority shareholders can realise the same benefits and terms as the majority shareholder.
• Drag-Along Rights: These benefit majority shareholders, typically founders or controlling stakeholders, by allowing them to force minority shareholders to participate in the sale of the company to a third party on the same terms and conditions. Drag-along rights help facilitate the sale of the entire company by ensuring that all shareholders are bound by the decision of the majority.

The post Here’s Everything You Need To Know About Tag-Along Rights appeared first on Inc42 Media.

What Constitutes A Shareholder Agreement In The Context Of India?

When it comes to identifying and regulating the complex dynamics that exist among shareholders of a firm, a shareholder agreement is a crucial piece of legal documentation in India. This document is known as a shareholder agreement. 

This agreement, which is often prepared with the assistance of legal experts, entails a complete set of terms and conditions that are legally enforceable, and these terms operate as a guiding framework for the behaviour of shareholders within an organisation.

Moreover, this agreement comprises a legally binding clause that states that any shareholder who violates this clause will be held liable.

Who Are The Signatories To A Shareholder Agreement?

The signatories to a shareholders agreement are the shareholders themselves, as they affix their signatures to this document, thereby formally and legally acknowledging their respective roles, commitments, and responsibilities in the corporate structure.

This is a critical step towards formalising their association with the company.

What Is The Significance Of Having A Shareholder Agreement?

The importance of having a shareholder agreement cannot be overstated. It serves as a robust safeguard for the company and its shareholders, primarily by providing a structured platform for decision-making and dispute resolution.

By setting clear guidelines and procedures, it helps to mitigate potential conflicts and ensure the smooth functioning of the company. This agreement is, therefore, an indispensable tool for protecting the rights and interests of shareholders.

Who Possesses Ownership Of The Shareholder Agreement?

Ownership of a shareholders agreement is collectively vested in the shareholders who have appended their signatures to this document. It serves as a shared covenant that governs their involvement in the company, reflecting their collective commitment to abiding by its terms and provisions.

The agreement is, therefore, a shared asset that holds significance in their mutual relationship as shareholders.

What Components Are Typically Included In A Shareholder Agreement?

A shareholders agreement is a multifaceted document, often tailored to the specific needs of the company and its shareholders. It generally includes provisions related to various aspects such as voting rights, procedures for the transfer of shares, dispute resolution mechanisms, management and decision-making processes, and other vital facets of shareholder participation within the company.

The exact content can vary depending on the company’s nature, structure, and specific objectives.

Who Is Qualified To Draft A Shareholder Agreement?

The process of drafting a shareholder agreement is a complex legal task that involves an in-depth grasp of the laws that govern businesses and companies. It is highly recommended to delegate this job to an experienced legal practitioner or an attorney who specialises in these laws.

These specialists have the expertise and experience to guarantee that the agreement complies with the legal requirements while also catering to the specific objectives and goals of the firm at hand and its shareholders.

The post Here’s Everything You Need To Know Shareholder Agreement appeared first on Inc42 Media.

Who Are Super Angels?

Super angels are high-net-worth individuals who provide capital and support to early-stage startups and entrepreneurs. The term comes from an angel investor. An angel investor is an affluent individual who provides financial backing to early-stage businesses or startups in exchange for equity ownership or convertible debt.

These investors often use their funds to support entrepreneurs and help them grow their businesses.

However, they typically invest large amounts of capital compared to angel investors and often have a more extensive portfolio of investments in the startup ecosystem.

What Is The Difference Between Angel Investors And Super Angels?

The primary distinction between angel investors and super angels lies in the scale of the investments they make. Angel investors typically invest small amounts of capital to back startups, while super angels make more substantial and bigger investments.

They are often experienced entrepreneurs themselves and play a more active role in mentoring, networking and advising the startups they fund.

Park+’s Amit Lakhotia, Pine Labs’ Amrish Rau, General Catalyst’s Anand Chandrasekaran, People Group’s Anupam Mittal are examples of angel investors in India, while CRED’s Kunal Shah can be considered a super angels.

The post Here’s Everything You Need To Know About Super Angels appeared first on Inc42 Media.

What Is Sidecar In Investing?

Sidecar, in the context of investing, refers to a separate investment vehicle or fund that is established alongside a main investment fund or project to provide additional capital, often on a deal-by-deal basis.

Sidecar investments are typically made by a subset of the investors in the main fund or by external investors who have a specific interest in a particular opportunity or asset.

What Is An Example Of  A Sidecar Fund?

A private equity fund might create a sidecar fund to pursue a specific investment opportunity that aligns with the interests of a smaller group of its limited partners.

The sidecar fund allows these investors to participate in a single deal without committing to the entire fund. This structure can provide flexibility and customisation in investment strategies.

What Is The Difference Between Sidecar And SPV?

• Sidecar Fund: A sidecar fund is typically a separate investment vehicle established to invest in a specific opportunity or asset alongside a main fund. It often involves a subset of investors from the main fund. Sidecar funds are used for a specific purpose or investment, and their lifespan is relatively shorter. 
• SPV (Special Purpose Vehicle): An SPV is a legal entity created for a specific purpose, often to isolate risk or hold specific assets. SPVs can be used in various financial transactions, including securitisation, real estate investments, and structured finance. While SPVs can be a component of sidecar investments, they are not limited to this use. They are separate legal entities used to achieve various financial and legal objectives.

What Is The Difference Between Co-Investment And Parallel Fund?

• Co-Investment: Co-investment refers to the practice of existing limited partners in an investment fund (for example a private equity or venture capital fund) investing additional capital directly alongside the fund in specific deals or opportunities. It allows investors to increase their exposure to specific investments without the fees associated with the main fund.
• Parallel Fund: A parallel fund is a separate but parallel investment fund that runs in tandem with the main fund. It is often established to accommodate different types of investors, such as those with specific tax or regulatory requirements. Investors in the parallel fund typically have similar exposure to the same investments as the main fund, and it allows for more flexibility in accommodating diverse investor needs.

The post Here’s Everything You Need To Know About Sidecar appeared first on Inc42 Media.

What Is A Special Purpose Acquisition Company Or SPAC?

A Special Purpose Acquisition Company (SPAC) is a publicly traded company formed with the primary purpose of raising funds through an initial public offering (IPO) to acquire another company. SPACs are often referred to as “blank-check companies” because it has no commercial operations when it goes public. Instead, it seeks to identify and merge with a private company, effectively taking that company public.

A well-known example is the merger between Virgin Galactic and Social Capital Hedosophia, led by Chamath Palihapitiya. This deal brought Virgin Galactic, the space tourism company, into the public market.

What Is The Difference Between RTO And SPAC?

While both RTOs (Reverse Takeovers) and SPACs involve a private company going public, they differ in their approach. In an RTO, a private company acquires a publicly traded shell company to gain access to public markets. In contrast, SPACs are shell companies created for the specific purpose of acquiring a private company.

SPACs are typically funded through IPOs and explicitly state their intention to merge with a private entity in their offering documents while RTOs do not always make such intentions clear upfront.

Are SPACs Allowed In India?

The regulatory environment in India does not have provisions specifically tailored for SPACs, and the regulatory authorities may need to adapt or introduce new regulations to accommodate this financial vehicle. 

How Are SPACs Helpful?

• Speed To Market: It can take a private company public faster than traditional IPOs.
• Access To Capital: Private companies can access capital markets more easily.
• Reduced Risk: It allow investors to know the exact terms of the acquisition upfront, reducing uncertainty.
• Mergers & Expertise: It sponsors often bring industry expertise and guidance to the private companies they acquire.

How Does It Works?

• SPAC Formation: A group of sponsors forms a shell company and raises capital through an IPO.
• Search For A Target: They have limited time to identify and acquire a private company.
• Merger Announcement: Once a target is identified, a merger agreement is announced and shareholders vote.
• Public Listing: Upon approval, the private company becomes publicly listed through the merger, and the SPAC transforms into an operating company.
• Trading As A Public Company: The combined entity begins trading on a stock exchange, giving investors a chance to buy shares in the newly public company.

The post Here’s Everything You Need To Know About SPAC appeared first on Inc42 Media.

What Is A Washout Round?

A washout round, in the context of venture capital and startup financing, is a funding round in which the ownership stakes of existing investors, particularly common shareholders, are significantly reduced or ‘washed out’. 

This typically occurs when a company is in financial distress or experiences a sharp decline in its valuation, and new investors are willing to invest at a much lower price per share. In a washout round, the new investors may demand more favourable terms and a higher ownership percentage in exchange for their investment, which can dilute the ownership of existing shareholders.

What Is Washout In Trading?

In trading, the term washout refers to a situation where a security’s price experiences a rapid and sharp decline, often breaking through key support levels. It can lead to heavy selling and panic in the market and may trigger stop-loss orders or margin calls. Washouts can occur in stocks, commodities, or cryptocurrencies, and are typically characterised by a significant drop in the price of the asset.

What Is A Cram Down?

A cram down in venture capital refers to a situation where new investors in a funding round negotiate terms that are unfavourable to existing investors, particularly early-stage investors and common shareholders. This can include issuing new shares at a lower valuation, which results in the dilution of the ownership stakes of the existing shareholders. Cram downs are often used when a company is struggling or requires additional capital and new investors aim to secure a more significant share of the company at the expense of existing stakeholders.

What Is The Difference Between A Down Round And A Cram Down?

Down Round: A down round is a funding round in which a company raises capital at a lower valuation compared to the previous round. In a down round, all shareholders experience dilution as the company’s valuation decreases. This can happen for various reasons, including financial difficulties or changes in market conditions.

Cram Down: A cram down doesn’t necessarily involve a lower valuation for the company. Instead, it pertains to the negotiation of unfavourable terms in a funding round that disproportionately impacts existing investors. This can include the issuance of new shares with preferential terms to new investors, reducing the ownership percentage and influence of existing shareholders.

What Is The Cram Down Process?

It typically involves a negotiation between new investors and the company’s management to secure more favourable terms for the new investment. These terms can be detrimental to existing investors, leading to the dilution of their ownership stakes and influence in the company. The exact process may vary depending on the specific circumstances, negotiations, and the level of financial distress the company is facing.

The post Here’s Everything You Need To Know About Washout Round appeared first on Inc42 Media.

What Are Coworking Spaces?

Coworking spaces are shared work environments where individuals from different organisations or professions come together to work in a shared setting. These spaces offer flexible, cost-effective alternatives to traditional offices and provide a sense of community and collaboration among freelancers, entrepreneurs, remote workers and small businesses.

It can be categorised under different categories:

• General Coworking Spaces: Open to diverse professionals from various industries.
• Niche Coworking Spaces: Specialised for specific industries or professions.
• Corporate Coworking Spaces: Offered by large corporations for employees and external members.
• Incubators & Accelerators: Focussed on nurturing startups and providing mentorship.
• Why Do Freelancers And Employees Working Remotely Consider Joining Such Spaces?

Networking Opportunities: It brings together professionals from diverse fields, offering freelancers the chance to network, collaborate, and potentially find new clients or partners.

Professional Environment: Unlike working from home or a café, coworking spaces provide a professional atmosphere that can boost productivity.

Cost-Effective: Renting an office space independently can be costly. They offer a more affordable solution with flexible plans, reducing overhead costs.

Access To Resources: These spaces often come equipped with high-speed internet, office supplies, meeting rooms, and other essential amenities that a freelancer might need.

Flexibility: Such spaces typically offer flexible membership options, allowing freelancers to choose when and how often they use the facilities, which is ideal for those with varying schedules.

Community & Support: Being part of a coworking community can provide emotional and motivational support. It can be isolating to work alone, and being around others can help alleviate this.

Learning & Skill Development: Many coworking spaces host workshops, training sessions, and networking events, offering opportunities for personal and professional growth.

Increased Creativity: Being in a dynamic and diverse environment can spark creativity, providing new perspectives and ideas.

Reduced Distractions: Compared to working from home, coworking spaces can offer a more distraction-free environment.

Brand Image & Meeting Spaces: Having a professional address and access to meeting rooms can enhance a freelancer’s brand image and provide a suitable space for client meetings.

What Amenities Should You Expect From A Coworking Space?

In India, coworking space startups such as Innov8, 91Springworks, CoworkIn, WeWork, and GoHive are making a significant impact. These facilities offer shared infrastructure and services, ensuring high-quality amenities at reasonable costs. 

Major urban centres like Delhi NCR, Mumbai, and Bengaluru are witnessing a surge in coworking spaces, driven by the increasing number of startups and technological growth. The coworking industry in the country is experiencing rapid expansion.

This sector is quickly establishing a robust presence, with international entities like WeWork becoming increasingly popular. India’s coworking space trend is firmly establishing itself, positioning the country as the third-largest startup ecosystem globally.

The value of coworking spaces depends on individual needs and preferences. They can be worth it for those seeking a collaborative, flexible work environment with access to resources and networking opportunities. However, it’s essential to assess costs and benefits to determine if they align with your freelancing goals.

What Is The Difference Between Coworking And Shared Office Spaces?

Coworking spaces are open and shared by professionals from different organisations, fostering collaboration while the shared office spaces are often used by a single organisation that rents excess space to others, offering a more traditional office environment.

The post Here’s Everything You Need To Know About Coworking Spaces appeared first on Inc42 Media.

What Does Mezzanine Financing Mean?

Mezzanine financing is a hybrid form of business funding that combines elements of both debt and equity financing. It is typically used by companies to raise capital for various purposes like expansion, acquisitions or restructuring. Mezzanine financing sits between traditional loans and equity in a company’s capital structure. 

Mezzanine Financing works as follows:

• Debt Component: Mezzanine financing includes a significant debt component, which is a loan that the borrowing company agrees to repay with interest over a specific period.
• Equity Component: In addition to the loan, mezzanine financing often includes an equity component, such as warrants or convertible preferred shares. This allows the lender to participate in the company’s future growth and success.
• Higher Interest Rates: Mezzanine loans typically have higher interest rates compared to traditional senior debt due to the added risk and potential for equity-like returns.
• Subordinated Position: Mezzanine lenders have a subordinated or lower priority claim on the company’s assets compared to loan holders. In case of bankruptcy or liquidation, senior debt is paid off before mezzanine lenders.
• Use Of Funds: Companies use mezzanine financing for various purposes such as funding acquisitions, capital expenditures, or expansion.
• Exit Strategy: Mezzanine lenders often have a predetermined exit strategy, such as a maturity date or conversion to equity, which provides them with potential upside if the company performs well.

What Is The Mezzanine Financing Structure?

The Mezzanine Financing structure typically includes the following components:

• Mezzanine Loan: This is the primary debt component of the financing, which includes the principal amount and interest to be repaid by the borrowing company.
• Equity Component: Mezzanine financing may include an equity stake or rights that allow the lender to convert their debt into equity or participate in the company’s future profits.
• Interest Rate: Mezzanine loans have higher interest rates compared to traditional loans, reflecting the increased risk and potential for equity-like returns.
• Subordination: Mezzanine lenders accept a subordinate position to senior debt holders, meaning they have a lower claim on the company’s assets in case of default or liquidation.
• Exit Strategy: The financing agreement typically outlines the lender’s exit strategy, specifying when and how the lender can convert debt to equity or exit the investment.

What Are The Key Factors To Consider When Securing Mezzanine Financing?

When securing mezzanine financing for capital needs, companies and borrowers need to carefully consider several key factors related to the maturity, redemption, and transferability clauses. Mezzanine Financing is a hybrid form of financing that combines elements of both debt and equity, and the terms and conditions associated with these clauses can significantly impact the financial and strategic flexibility of the business. Here are the key factors to consider:

• Maturity Date: The maturity date is the deadline by which the mezzanine debt must be repaid in full. Borrowers should consider the term length carefully to ensure it aligns with their business plan and expected cash flow. Longer terms can provide more flexibility, but they may come with higher interest costs.
• Call Option: Some mezzanine instruments may include a call option, allowing the issuer (lender) to redeem the debt before the maturity date. Borrowers should be aware of these provisions and understand the conditions under which the lender can exercise the call option.
• Prepayment Penalties: Borrowers should review the terms for prepayment penalties or fees. These fees can be significant and may deter the borrower from paying off the debt early.
• Restrictions On Transfer: Mezzanine debt may include restrictions on the transfer of the debt or ownership interests in the company. Borrowers should understand whether they can transfer debt or equity without lender approval and if there are any restrictions.
• Change Of Control Provisions: Lenders often include change of control provisions, which can trigger repayment or other obligations if there is a significant change in ownership or control of the company. Borrowers should be aware of these provisions and their potential impact on the business.
• Convertible Features: Some mezzanine financing may include convertible features that allow the lender to convert their debt into equity under certain conditions. Borrowers should carefully consider the impact of potential equity dilution.
• Covenants & Restrictions: Borrowers should review any financial or operational covenants that may be associated with mezzanine financing. Violating these covenants could trigger serious consequences.
• Interest Rate & Payment Terms: Understanding the interest rate structure and payment terms associated with mezzanine debt is imperative. Some mezzanine instruments may have interest that is payable in cash, while others may be payable at maturity.
• Negotiation & Flexibility: Companies should negotiate these terms to the best of their ability to ensure they align with their financial goals and business strategy. Experienced legal and financial advisors can be invaluable in this process.
• Exit Strategy: Consider how the maturity, redemption and transferability clauses align with your long-term exit strategy.
• Default Consequences: Understand the consequences of default, including potential acceleration of the debt and the lender’s rights to the company’s assets.
• Legal & Tax Implications: Consult with legal and tax advisors to understand the legal and tax implications of mezzanine financing, including the treatment of interest payments, potential equity conversion, and any transfer of ownership.

What Is Mezzanine Financing in Real Estate?

Mezzanine Financing in real estate refers to using mezzanine loans or instruments to fund real estate projects. It typically involves providing a subordinate loan secured by the property, which ranks below senior debt but above equity in terms of repayment priority.

Mezzanine financing is commonly used in real estate development, allowing developers to leverage their investments and complete projects.

The post Here’s Everything You Need To Know About Mezzanine Financing appeared first on Inc42 Media.

What Is Market Capitalisation And How Is It Calculated?

Market capitalisation, often called a market cap, is a measure of a company’s total value as perceived by the stock market. It’s calculated by multiplying the current stock price by the total number of outstanding shares. The formula to calculate market cap is:

Market Cap = Current Stock Price × Total Number of Outstanding Shares

It categorises companies into different groups based on their sizes:

• Large-cap: Companies with a market cap over $10 Bn.
• Mid-cap: Companies with a market cap between $2 Bn and $10 Bn.
• Small-cap: Companies with a market cap of less than $2 Bn.

How Can It Be Used In Investment Strategies?

Using market capitalisation, investors select investments based on risk and prospective return. Large-cap stocks are typically viewed as secure but with sluggish growth; mid-cap stocks are balanced; and small-cap stocks may be riskier but have greater growth potential.

How Does Diluted Market Capitalisation Impact Shareholders?

The diluted market capitalisation takes into account not only outstanding shares but also possible shares from options, bonds, etc. It is crucial because it indicates the maximum number of shares that could exist, potentially diluting the ownership of existing shareholders.

What Common Misconceptions Exist Regarding Market Capitalisation?

A common misconception is that it is the price at which a company could be acquired. In actuality, acquisition costs frequently exceed it.

What Does A Company’s High Market Capitalisation Reveal?

A high market capitalisation indicates a well-established presence in its industry. It is generally considered a secure investment, but its development may be delayed compared to that of lesser companies.

Does It Impact The Share Price?

It does not affect the stock price directly. The price of a stock is influenced by supply and demand. However, variations in market capitalisation can affect investor sentiment, thereby influencing stock prices.

What Role Does It Play In Determining The Value Of A Company?

It provides a rapid evaluation of a company’s scale and influence. It assists investors in selecting investments consistent with their goals and risk tolerance. Additionally, it affects the performance of various benchmarks and stock market indices.

The post Here’s Everything You Need To Know About Market Capitalisation appeared first on Inc42 Media.