Start-ups have become the most valuable asset of the country. But what’s backing the unprecedented growth of some of the highest valued unicorn, IPO, and pre-IPO stage start-ups in India? Money, of course! A downpour of funding from private equity firms, M&As (Mergers & Acquisitions) and some good old VC deals. Money is thus the bloodline of the Indian start-up ecosystem but with all the funding pouring in, start-ups naturally have questions they need answered.

Giving up shares for deserving stakeholders.

When a number of investors come on board, it’s a tough call to decide about dilution of shares. But it’s important for start-ups to be in tune with the goals of the business to understand what’s best. If you’re a team of co-founders or if you plan to give up shares to your employees, make the decision based on who has the best interests of the company at heart. A number of start-ups are giving up small percentages of their company to employees via Stock Appreciation Rights (SARs). By giving stakes in your company to the core team, you know your company is in the right hands.

How to raise start-up funding without losing equity

The worry about having to give up full or partial ownership of your business to fulfil your operating capital needs shouldn’t keep you up at night. Funding often leads to loss of equity but there are ways to ensure that you have full ownership of your start-up. Bootstrapping is surely the best method to keep your equity. If you are a start-up with low capital expenditures, you are at an advantage because you can become a fully bootstrapped start-up (reliant purely on your existing revenue). The next best way to keep equity is to go for business loans. There are a ton of start-up and MSME loan options that you can avail now that the Government is actively supporting the start-up community.

How to get Funding

Getting start-up funding has become relatively easy. If your idea is based on a ground-breaking technological revolution, you can pitch to Angel Investors, Incubators/Accelerators or Venture Capitalists. You can also apply for the Start-up Seed Fund scheme, The Atal Innovation Mission, and look into other Governmental Grants and schemes to get funding for your start-up.

Which Funding option suits me?

The biggest Angel Investors are generally scouring for unicorns to add to their portfolio. On the other hand, Venture Capitalists rarely take a second look at pitches that don’t excite them right off the bat. So how will you know which funding option is best suited for your start-up? Irrespective of the industry you belong to, you can always choose to crowdfund your start-up, approach an incubator/accelerator as an early-stage start-up, or apply with a micro-VC (they usually pitch into pre-seed and seed funding rounds). You can always approach NBFCs (Non-Banking Financial Corporations) who are microfinanciers that are much more flexible than traditional banks. Bank loans are also an option but one that’s not highly recommended for start-ups that are scaling up. Unless you are confident of your ability for timely paybacks. There’s also always a degree of risk involved in bank loans.

The best funding option for all start-ups in India is to seek capital from Government programs. There are several new programmes launched like the 10,000 Crore Start-up Fund, the Bank of Ideas and Innovations Program (a program to share your innovation in exchange for capital). There is also the ‘Pradhan Mantri Micro Units Development and Refinance Agency Limited’ (MUDRA) which is funding SMEs. There are also several state level programs dedicated for small businesses. You can also approach SIDBI (Small Industries Development Bank of India) which is dedicated to offering loans for MSMEs.

A development which has steadily been picking up pace is that the Indian start-up ecosystem has been announcing ESOP (Employee Stock Option Plan) buybacks, one after the other. ‘The Employee Stock Ownership Plan Liquidity Offer 2021’ is highlighted now because most start-ups are facilitating such liquidity programmes to help their staff weather the second wave of the Covid-19 pandemic. 

What is ESOP?

ESOP is essentially an employee benefit plan exclusively made available for key roles within an organisation. It’s a program where employees are given a share within the company. Employees associated with the company for a long time as well as decision makers are mostly a part of this programme. 

Why are startups considering ESOP buyback exercise?

It’s common knowledge that the domestic economy has taken a beating and any recovery has been stamped out once again this year. Start-ups have seen fit to buyback company stocks from their employees to reward them. Employees are being granted an alternate opportunity for wealth creation. Start-ups are determined not to let their employees’ motivation dwindle due to the bleak circumstances. 

Companies in the spotlight

Udaan

The first start-up in the spotlight is Udaan which is doing a buyback exercise for employee stocks worth INR 165-175 Cr. An online B2B Marketplace, Udaan is extending eligibility for the buyback to its active employees who held vested stocks as on the 31st of March 2021. 

CRED

The next start-up in the spotlight is CRED which recently concluded its ESOP buyback programme. CRED did the buyback for all its employees, even those that were no longer associated with the company. CRED’s buyback happened during its Series C funding round in November of last year during which time their employee ESOP liquidation was valued at INR 9 crores. The eligibility criteria was extended to employees holding vested stocks and they were able to sell up to 50% of their vested ESOP shares. 

Acko

The next start-up worth mentioning is Acko (Bengaluru-based Insurance start-up whose employees could liquidate 40-100% of their vested ESOPs. The eligibility criteria covered employees who were associated with Acko for 3 years. Acko’s ESOP buyback was valued at $2M and 40 employees benefited from the programme. 

Other start-ups in the spotlight include PhonePe, PayTM, Zerodha. There’s also Browserstack, and Zetwerk (manufacturing start-up) in the long list of start-ups who’ve been buying back company stocks.

News recently broke out that Barbeque Nation, a leading casual dining chain in the country is listing its IPO both on the NSE as well as the BSE on the 7th of April 2021. 

Investors already have the declaration that Barbeque Nation’s IPO is a weak listing since the grey market premium of its unlisted shares took a major tumble, down to Rupees 10. 

The IPO coming from Barbeque Nation is the first of its kind for the financial year 2021-22 which has baffled investors. Mainly because food services have been most impacted due to low customer spending. Even five-star restaurant chains turned into start-ups and had to start from scratch. Casual dining is equivalent to fine dining among Indian customers and Barbeque Nation’s move is being viewed as bizarre since they are also planning to open 5-6 more outlets soon. 

What’s interesting to note is that in the Grey Market, the ‘Grey Market Premium’ (GMP) shares of Barbeque Nation went from Rupees 40 to between 10-12 Rupees in the span of just one week. 

The reason for the fall in the GMP shares of Barbeque Nation is obviously the coronavirus wave riding high once again in India which is leading to numerous lockdowns and curfews being imposed. Another reason is the volatility in the equity market. 

The last day of the Barbeque Nation IPO, the 26th of March saw a subscription count of 5.98. Investors can now view their allotment status.

The IPO is valued at INR Cr 453 and retail investors are the majority backers. Also, the IPO is fully subscribed as of date.