Startup Founders in India Face Equity Risks as VCs Warn on Exits

By Sunil Sonkar
2 Min Read
Startup Founders in India Face Equity Risks as VCs Warn on Exits

It is true that nothing is certain in the world of startups and at least related to the equities held by the founders. The journey from concept to exit is treacherous in the Indian startup scenario. The balance of power shifting between founders and their investors is continuous. Venture capitalists (VCs) are tightening their grip on equity rules and as an aftermath they are making the path to a lucrative exit complicated.

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The Indian startup ecosystem has witnessed a roller-coaster of valuations and corporate dramas in recent years. Founders earlier felt secure in their equity stakes. But now they are grappling with new exit clauses introduced by cautious VCs. The clauses are said to be designed to protect investments. However, it often come at the expense of the potential earnings of the founders.

Bharatpe co-founder Ashneer Grover had a stake of 9.5% in the company and would be valued at Rs 2,000 crore (approximately US$240 million). Due to corporate governance issues and the stringent new exit clauses, his potential payout could plummet to just Rs 95,000. This is one of the burning examples in recent months and it is becoming a cautionary tale for many startup founders in India.

VCs are rewriting the playbook to reduce risks and ensure the financial pitfalls are not repeated. The changes mainly focus on avoiding overvaluation and mismanagement issues. However, they pose some challenges while the founders hope to cash in on their hard work.

The revised clauses often include such conditions that tie the ability of the founders to exit to stringent performance metrics and governance standards. The measures are understandable from the perspective of an investor. They place additional pressure on the founders.

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