Sunday, November 25, 2007

Dealing with a Venture Capitalist !

A Sample Memorandum of Understanding

Between Investee Pvt. Limited (Investee) and Seed Ventures (“Investor”)

Please note that the terms indicated in this draft are only indicative of the nature of agreement made between an entrepreneurial startup and an investor organization. Do not take it to be a legal document.

This is only for your reference and understanding of how deals with VC organizations are worked.

This summarises an offer made to Investee by “Investor”, and accepted by Investee. This document by itself is not the actual legal agreement, but is the framework on which legal agreements will be drawn up.

1. Investee seeks to build out a business based on XYZ

2. “Investor” would like to help Investee become the leading player in its space in India, through infusion of funding and advice.

3. Investee is represented by Promoter One and Promoter Two (“Promoters”). “Investor” is represented by Mr. X, Y and Z. (“Investor”).

4. “Investor” agrees to buy a stake of x% in Investee for a consideration of Rs. XX crores.

5. “Investor” believes that a key factor in retaining and motivating Investee employees will be their participation in the equity upside of the company. One condition to this agreement is that Investee will create a pool of ESOPs of up to 7% of the company’s stock, to be kept aside for distribution to non-promoter full-time employees of the company.

6. Investee will re-constitute its Board as follows: a three-member board, with one person a representative of the Promoters, one a “Investor” representative and a third will be an independent professional nominated by the Promoters and approved by “Investor”.

7. “Investor” believes that early-stage businesses require regular advice and mentoring. “Investor” agrees to offer the following:

a. Appointment of a “lead partner” for Investee from among the fund’s partners, agreed to by both parties – who will be the primary point of contact with Investee

b. Best efforts for connectivity with business and referrals that could be useful to Investee.

c. Availability of lead partner on an on-going basis for meetings and other advisory sessions with the Investee team

d. The services of other “Investor” people on an if-available basis when requested by the Investee team

8. The above describe specific points in the agreement. We will now lay out other “Standard template” points that are likely to be present in the legal agreement.

a. The agreement, because of its variable, success-based nature, is likely to be in the form of a combination of equity and convertible debentures.

b. Promoters need to attest to “Investor” that all the shareholding by various people and entities in Investee is fully disclosed, along with the family and other relationships that exist between all shareholders.

c. Investee will need to execute employment, non-compete, confidentiality and other agreements with its promoters and key staff to the satisfaction of “Investor”

d. Promoters and other Investee people will need to execute agreements to the satisfaction of “Investor” that transfer all copyrights, trademarks, domain names or other rights relating to Investee’s business to the Investee company.

e. Investee will indemnify “Investor” against all losses and claims that can arise from any or all third parties in the course of Investee’s business

f. Investee will give “Investor” and its affiliates the right to maintain current level of stake holding in the next round too, by letting it subscribe to financial instruments at the price determined by the lead investor in that round.

g. Promoters will commit not to pledge, mortgage, sell or otherwise raise a lien on any or all of their stock in Investee without “Investor”’s permission

h. In case Investee is dissolved or wound up, the proceeds of this dissolution shall first go to clear the cost basis of “Investor”’s investment, and only then shall the remaining assets be divided between all investors in the ratio of their shareholdings

i. In case Investee is sold or merged into another business, the proceeds of the event shall be distributed as follows: the first sum worth a minimum of 2x of “Investor”’s investment shall be payable to “Investor”. In case the proceeds due to “Investor” are greater than 2x of its investment, then all proceeds shall be distributed in proportion to the shareholders’ stake in the company, in such a way that “Investor” always receives a sum which is the greater of the two options.

j. Both parties expect that Investee will be ready for an IPO within about 5 years of the date of investment. All shareholders may offer a percentage of their shares for sale in the same promotion, with “Investor” having a right to offer greater than the others’ proportion of shares. “Investor” shall not be considered a “promoter” in the company, and “Investor”’s shares shall not be subject to lock-up provisions.

k. Promoters shall have operational control of Investee – but the following will require the approval of “Investor”:

i. The creation of any new shares or class of security or financial instrument in the company

ii. Any amendment to the powers and rights of “Investor”
iii. Any issue of debt in the company of more than Rs. 10 lakhs
iv. Any change of control in the company
v. Any amendment to business plan or budget
vi. Any change in accounting / tax policies
vii. Any changes to the rights of common stock owners
viii. Any changes in the company by-laws or the articles of incorporation or memorandum and articles of association of the company
ix. Any changes in the board of directors
x. Any appointment / terminations of senior personnel in the company
xi. Terms of employment and changes in remuneration of the promoters
xii. Any change in the company’s line of business
xiii. Any restructuring, merger / acquisition / sale of whole or part of the company
xiv. Any creation of subsidiaries / entering into partnerships / alliances / joint ventures

xv. Any sale of assets greater than Rs. 15 lakhs
xvi. Any purchases greater than Rs. 10 lakhs

l. “Investor” shall have the right of first refusal if Promoters want to create and sell new or existing shares in the company

m. “Investor” and Investee will agree to standard reporting frequency and data in reports

n. If the promoters wish to sell their shares to an outside party, “Investor” shall have tag-along / drag-along rights – i.e. the rights to also sell its stake at the same terms

o. Investee will obtain key person insurance for its Promoters at reasonable cost

p. Investee will obtain D&O insurance for its directors at reasonable cost

q. Investee will retain an auditing firm of repute, satisfactory to “Investor”

9. The agreement will close subject to accounting and legal due diligence, completion of legal documentation and no material or adverse change in situation and law.

10. All terms of this agreement shall be kept in total confidence by Promoters and Investee

11. On the acceptance of this MoU, the promoters shall agree to cease all negotiations with any other investing parties for a period of 60 days, or till the legal agreement with “Investor” is completed, whichever comes later.

12. “Investor” hopes to use its resources to help make Investee a big success – and looks forward to a warm cordial working relationship with all Investee promoters and staff.


For Investee For “Investor”

Saturday, November 24, 2007

The i2I Invite!

The Day of the Launch Arrives!

The Challenge Begins Now

Be a part of this historical National Entrepreneurship Challenge - Visit us at

Basics of Venture Capital

i2I '08

As a curious onlooker, i2I might come across as another B-plan writing contest where you send in your executive summaries, get into subsequent rounds based on how good you and your plan are, and end up being happy that you made it to the top 1-2 positions, subsequently forgetting about it. However, the similarity ends there.

The objective of i2I is to move away from the traditional Business Plan contests which turn out to be paper-writing competitions and proof of concepts, rather than the endeavour of an entrepreneur to see his dream turn to reality. i2I strives to promote only those plans which are backed by serious and dedicated teams, which have the potential to turn to successful ventures based on financial support..

The participants can be students as well as working professionals, and this means the contest is not merely academic in nature, rather an idea building up to a venture. The offering of seed investment only while starting up, rather than cash prizes to the winners shows that entrepreneurship is serious business and i2I means business. Start-up investments of the order of crores to plans that might still be in the incubation stage just shows how serious i2I is about the execution. The mentoring of the budding entrepreneurs by a team of experts will provide a level playing field to the students to match up to their working counterparts to do well in the investor marketplace. The judging parameters might not only be the best plan, but the determination and seriousness of the entrepreneur to carry it out.

One thing about the winner of i2I '08 is already known. The winning team will be a set of resolute entrepreneurs with a sound plan, who will have to hold fort under tough scrutiny. Success at the final level at i2I would mean a great chance for the entrepreneur to seek further partners and investors he would be trained and exposed enough to face the future, much better prepared and much more confident to succeed in the real world.

In future, it would come as no surprise if a number of successful entrepreneurs claim that this is where it started for them – i2I helped them take their first steps into business superstardom.

Written by:
Kaushik Saha

B Plan Presentation

Putting In The Big Buck

What does a Venture Capitalist look for?

How to write an Executive Summary?

From the VCs

Saturday, November 17, 2007

Some inspirational videos

Steve Jobs Stanford Commencement Speech 2005

The Great Dictator - speech by Charlie Chaplin

Al Pacino's Inspirational Speech

Take Ownership & Decide your Own Development