Funding Compliances Normally Founders Miss

Funding Compliance is a buzzword these days and it gives a lot of confidence to founders to execute their dreams,

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Funding Compliance is a buzzword these days and it gives a lot of confidence to founders to execute their dreams, and visions quite fast. At times start-ups do not get funding at the right time and sometimes they take advantage of borrowing from friends and family, taking loans from banks and NBFCs, and mezzanine funding from angel funds, VCs, etc. In addition, founders do raise money in the form of capital by way of equity or preference shares.

While raising funds for business in whatever forms it’s very critical that founders clearly understand and read the fine lines of the agreement terms they are signing. Ideally, founders should take the help of competent professionals to be their advisors instead of depending on someone who is not capable of handling such cases.

Problem: At in the last 30 days we have been approached by three start-ups that already raised funding by way of debts (loans, promissory notes, debentures) and preference share capital, however, did not do any compliance in line with the terms of the agreement, requirement as per law (Companies Act, RBI, Income Tax and FEMA). The larger issue was that all the founders were not even aware of non-compliance and they all had qualified professionals but may not be competent professionals as their retainers. The issue came to light in all these cases when these start-ups went for a series A round and at the time of due diligence, the issue cropped up about non-compliance. In addition, in one of the cases the founder had signed on to the issuance of compulsorily convertible debentures at a very low valuation. In this situation, though the amount was small, however, it resulted in a lot of dilution to the founder. This made the founder very furious since the founder did show the legal agreement to someone who did not give the right advice.

Solution: We got a call from one of these three start-ups asking for immediate help to do good with the funding compliance lapses and as they say when you do an excellent job to client satisfaction that is the best marketing. So when we were able to complete compliance for the first client and were able to convince the due diligence firm, we got two references from the first highly satisfied client. Both these reference clients also had similar issues including the issue of dilution. Though the dilution issue could not be resolved since the agreement was signed, however, we were able to protect the founder from further dilution by guiding him through paying the debt and canceling the agreement. With this, the founder was so happy that he took away from existing professionals and gave us an assignment to handle all Accounting, Tax, Legal, and Secretarial compliances. He also availed our services on drafting and reviewing series A funding and we advised him on the terms of the agreement which may not be favorable to him and the cost of compliance the Company has to bear upon completion of fundraising.

Takeaway for start-ups: Please do not follow shortcuts and do proper homework while going through the fundraising round. Also ensure that you take advice from competent professionals for the complex services of CA, CS, and Lawyers. In today`s world not only qualification but practical knowledge of business intricacies and understanding of start-up ecosystem is very critical. Please do give us a call at 808080 9301 in case you need a free diagnostic of your legal documents used for fundraising to give you a real picture if your Company is in compliance or not. We assure you we will not chase you for business.

Please visit to avail the services.

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