FAQs for investors

The lead sets the price and the terms, negotiates and signs the term sheet, usually takes the board seat, and runs the diligence that everyone else in the round relies on. In exchange the lead typically takes the largest share of the round and the most influence over it.

It is the role that makes a round close. A company with six interested followers and no lead has no round at all, because nobody has agreed what the company is worth. At this end of the market the lead is often a single fund, or a syndicate with one named anchor doing the work.

Most priced rounds in India are done as compulsorily convertible preference shares, which is what carries a liquidation preference and protective rights alongside ordinary equity. Smaller or simpler rounds are sometimes plain equity, and compulsorily convertible debentures appear from time to time. The SAFE common in the United States is much less standard here.

Where the investor is non-resident, the pricing guidelines apply and a valuation report from a registered valuer is generally needed before shares can be issued — worth establishing at term-sheet stage rather than at closing.

Proportionate to the cheque, but the same shape every time:

• Management accounts, and audited financials where they exist.
• Bank statements that reconcile to the books, plus GST and statutory filings.
• A cap table listing every instrument that can convert, not only issued shares.
• Material customer and supplier contracts, with the concentration visible.
• IP ownership and assignments, including from early contractors and founders.
• Employment records and the ESOP, granted and reserved.

What is most often missing is the paperwork from the company’s first two years. That is usually disorganisation rather than concealment, but it is where timelines slip.

• Liquidation preference. What you get back before ordinary shareholders on an exit. A 1× non-participating preference is the ordinary standard; participating preferences let you take the preference and your pro-rata share, which becomes expensive for founders at modest exit values.
• Anti-dilution. Protection if a later round prices lower. Broad-based weighted average is conventional; a full ratchet transfers a great deal of value from the founders and is read as aggressive.
• Reserved matters. The list of decisions needing investor consent. Small print that governs the company day to day far more than the preference does.
• ROFR, tag-along and drag-along. Who may sell, who may join a sale, and who can be compelled into one.
• Information rights. What you are entitled to see, and how often.

Terms that are ordinary in a growth round can be disproportionate in a ₹3 Crore one. The test is whether the protection still leaves the founders motivated to run the business.

A company at this size will usually need two or three more rounds before any exit, so the first cheque is rarely the last one. Reserving capital for follow-on is what stops your best position being diluted away by the investors who arrive after you.

Pro-rata rights give you the option to maintain your percentage; they are only worth having if you have actually reserved the money to exercise them. It is worth deciding the reserve ratio before the first cheque, not when the next round is already being priced.

Rarely a listing. At this size an exit is most often a strategic sale to a larger operator in the same category, sometimes a secondary where a later investor buys out an earlier one, and occasionally a buy-back by the founders.

Draavi advised on the sale of Comic Con India to Nodwin Gaming. See our transactions.