How Start-up Funding Works - A Hypothetical Startup Goes from Idea to IPO

"How Funding Works – Splitting The Equity Pie With Investors"

Companies generally cannot grow without receiving large amounts of outside funding. But promoters can't take too much outside funding if they want to maintain control of the company they nurtured, and ownership of their intellectual property.

If promoters take outside funding, they are forced to focus entirely on short-term returns, as opposed to on long-term growth, or a higher vision or social mission.

- Right now, India is experiencing an enormous loss of capital, with many of India's brightest young minds and companies deciding to move abroad. Promoters do this because it is the only way they can raise substantial capital while still maintaining control of their company or ownership of their intellectual property.

The above issue can be address by issuing "Shares with Differential Rights". For example, Class A shares are sold to the public and/or to investors with principally financial interests in a company and they often carry voting rights many times lower than of Class B shares, while receiving a larger dividend. Class B shares are generally held by a company's promoters or senior management, and carry significantly higher voting rights than Class A shares. Live example is Google in which Larry Page and Sergey Brin control 58.4% of the voting shares, while owning only 13.9% of the profits.

- Indian regulations actually envisage the issuance of shares with differential voting rights. Section 43 of the Companies Act, 2013 recognises that the equity share capital of a company includes equity shares capital with "Differential rights as to dividend, voting or otherwise". But with this enabling framework also come certain constraints. For instance, the Companies (Share Capital and Debentures) Rules, 2014, requires that such shares cannot exceed 26% of the total paid-up equity share capital.

- SEBI has been supportive of introducing this product by allowing listed companies like Tata Motors and Gujarat NRE Coke to issue shares with differential voting rights.

Embracing this will hugely beneficial to the government's plans to "Make in India", "Create in India" and "Brand in India", by allowing Indian companies to Remain in India and Grow in India.

Special comments by CA Rahul Gupta (www.linkedin.com/in/cargupta), founder of M R T & Associates, Chartered Accountants. For more details, contact us at mrtandassociates@gmail.com

Regards, CA Rahul Gupta

M R T & Associates, Chartered Accountants