Startup Investors To Lose Their Special Rights
When a startup gets money from an early investor, it is more about investor’s faith in some people with an idea. It is a huge financial risk for the investors.
The startup founders have less financial risk compared to the investors. To compensate this, the investors get special rights as part of their investment agreement, along with the shares.
The special rights include right to veto, right to information, right to prevent divestment or liquidation of the company etc.
There is also a risk of founders leaving the company midway while keeping their shares.
To prevent this, the founders get lesser rights and their shares are usually vested over a period of time. That means they get their shares only if they remain with the company for a predefined period of time.
This is also done with the help of agreements during the investments.
Now, when these startups want to get listed in the stock market, all the shareholders need to cancel their special rights. This is a mandatory step by market regulator, SEBI, which has to be done before applying for the IPO.
SEBI says that this is to ensure that no shareholder gets superior rights than others in a public company.
This is fine as stock market listing means the shares of the company will most likely increase in value giving the early investors a chance to get good returns by sale of their own shares.
But, if company fails to get listed, the investors have lost their special rights and it is very complex to get their rights back.
So, this is a big risk for the investors.
But these same investors already took huge risk by investing in a few people with an idea, and that idea now being IPO bound clearly means they were right in doing so. So I am sure they can again take a wise decision.
What are your views on this?
Note: Image generated with the help of AI