3 Basics to Investing in a Start-Up

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3 Basics to Investing in a Start-Up
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• Investing in a start-up is almost the new age
  lottery ticket, if the idea works, you will
  become an overnight millionaire. But if the idea
  does not work, it will cause a massive loss. The
  lottery ticket price in this case is not a mere
  Rs. 100, but can be in millions again. Despite
  having the perfect unicorn start-up ingredient
  base sometimes IIM/IIT graduates as founders,
  unique business ideas, first mover advantage,
  funding from successful venture capitalists, etc.
  lapses in governance and timely disclosures
  causes the start up to fail. Angel investors and
  venture capital investors keep an approximate
  target that only two out of ten investments are
  going to give them returns, while the others may
  fail. It keeps them prepared for the uncertain
  future they are used to living in. So should you
  be scared and not invest in start-ups? It depends
  on many factors. We have come a long way in
  corporate governance matters, and with just a
  little bit of precaution, the signs of a failing
  company can be identified early.

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• (Before investing in a start-up, a shareholder
  agreement is executed laying down the
  understanding between the entrepreneurs and the
  investor. Simple clauses can ensure that the
  management is working well and you can be
  relatively sure of getting your investment back.
  Company profile Before investing, check the
  type of organisation of the start-up.
  Entrepreneurs in their fire for success often do
  not give importance to this factor, but as an
  investor, it matters a lot. If the start-up is a
  private limited company or even a Limited
  Liability Partnership, it is required to file
  audited financial statements with the Registrar
  of Companies. That implies, a mandatory yearly
  check on the financial story of the company. Of
  course, this does not imply the absence of fraud,
  but at least the company will think twice before
  making incorrect filings. In the case of
  unregistered associations and sole proprietors,
  they may not even maintain financial statements,
  making it impossible to authenticate financial
  transactions. Board representation Having an
  investor-appointed director on the Board of
  Directors of the company, who will report the
  meeting updates to the investor is a plus point.
  In terms of Company law, such directors are
  called nominee directors. They are invited to
  every board meeting and are aware of the
  prospects/challenges faced by the company.

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• Right of inspection After investing in the
  capital of the start-up, every investor has the
  right to check the financial statements and
  certain other records maintained by the company.
  A large financial investor may even be in a
  position to hold a meeting with the board of
  directors to understand quarterly or annual
  financial statements. Investors must actively
  exercise such options as they are in the interest
  of not just the investors themselves, but the
  society at large. The uncertainty faced by a
  failing companys employees, and suppliers is
  unthinkable today. A slight increase in vigilance
  could definitely save the start-up and all those
  related to it.
• Researched Written by  CS Renucka Vaiddya  
  Kedar Nadgonde (Financial Analyst Coach )
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