unlocking the term sheet for startups by george korah

Start Up Saturday-Term Sheet & beyond

M.George Korah,FCA,DISAM.George Korah,FCA,DISAM/s Korah & Korah, CAsM/s Korah & Korah, CAswww.korahandkorah.comwww.korahandkorah.com Demystifying Finance & Accounting

T R A I N I N G

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

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Session Details

• Business Entities• Common Financial Terminology• Term Sheets• Valuation Methodologies• ESOPs• Sweat Equity

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

www.bmgtraining.com

COMMON BUSINESS ENTITIES IN INDIA

Proprietorship Partnership Corporates LLPs

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Demystifying Finance & Accounting

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PROPRIETORSHIP

One Owner

Small to medium scale enterprises

Low Capitalisation

Unlimited liability for owner

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Demystifying Finance & Accounting

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PROPRIETORSHIP

Quick setup

Freedom for Decision making

Returns are all yours !

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Demystifying Finance & Accounting

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PARTNERSHIP..

At least two Owners (Partners)

Maximum of 20 Partners

Medium scale enterprises

Medium level capitalisation

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Demystifying Finance & Accounting

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PARTNERSHIP..

Governed by Partnership Act, 1932

Unlimited liability for Partners

Setup requires a Deed of Partnership

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Demystifying Finance & Accounting

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Corporates

Governed by Companies Act, 2013

Private Limited Companies

Public Limited Companies

OPC

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Demystifying Finance & Accounting

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PRIVATE LIMITED COMPANIES

Minimum 2 Share holders

Maximum 200 Share holders

Minimum Authorised & Paid up Capital INR 100,000

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Demystifying Finance & Accounting

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PUBLIC LIMITED COMPANIES

Minimum 7 Share holders

Maximum Shareholders – no limit

Minimum Authorised & paid up capital INR 500,000

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Demystifying Finance & Accounting

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Corporates

Limited Liability

Ease of entry & exit for Owners

High Compliance level requirement

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

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Financial Terminology

Authorised & Paid up Capital

Balance Sheet, Profit/Loss Statement & CFS

Equity Shares, Preference Shares, Debentures

Partly paid up & Fully Paid up

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

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Term Sheet

Outlines the terms by which an Investor will make a Financial Investment in your Company

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Demystifying Finance & Accounting

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TERM SHEET

A non-binding agreement setting forth the basic terms and conditions

First step to entering a more detailed legal binding agreement

Covers the more important aspects of a deal, without going into every minor detail

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

www.bmgtraining.com

Term Sheet

Investor Perspective

Growth of Investment and easy exit

Protect their investment

Ensure key persons continue

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

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Term Sheet

Start up Owners perspective

Raise as much Capital without giving up too much stake

Retain operational & management independence

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

www.bmgtraining.com

Term Sheet

A Term Sheet will spell out

Approximate Funding & timeline

Percentage of Stake expected

Valuation methodology to be adopted

Major expectations of both sides

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

www.bmgtraining.com

Valuation

Concept of Net Worth

Future Potential

Different Valuation methodologies

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Demystifying Finance & Accounting

BMGBMGT R A I N I N G

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Valuation Methodologies

Venture Capital Method (calculates valuation based on expected rates of return at exit)

Berkus Method (estimates value for different attributes of a start up viz Idea,Team,Prototype,Strategic Relationships etc)

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Demystifying Finance & Accounting

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ESOPs

ESOPs gives Employees the option to purchase a certain number of shares in a company at a predetermined price

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ESOPs

The Companies (Share Capital and Debenture) Rules, 2014 govern the grant of stock options

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Demystifying Finance & Accounting

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ESOPs

Neither a ‘promoter’, nor a director holding more than 10 per cent of the equity shares of the company is entitled to take part in this scheme

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Demystifying Finance & Accounting

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ESOPs

An ESOP scheme is to be drafted and approved by shareholders

Letter of Grant should be issued to the employee informing him how many options are being granted to him, what the vesting period would be and how the exercise price will be determined, should he choose to exercise the vested options.

Employee should make an Exercise Application to his employer

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Demystifying Finance & Accounting

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Sweat Equity

Sweat Equity

can be granted to founders for non-cash consideration such as for providing know-how etc

can only be issued after the company has been in business for at least one year

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Demystifying Finance & Accounting

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Sweat Equity

Sweat Equity

a company cannot issue in an year, sweat equity of more than 15 per cent of its total paid-up capital or having value of more than Rs five crore, whichever is higher

Sweat Equity cannot exceed more than 25% of paid up capital at any time

shares issued by the way of sweat equity cannot be transferred for a minimum period of three years.

25

Demystifying Finance & Accounting

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Setting up a Business Entity

Questions?

gkorah@gmail.com

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