Why founders buying back investor shares is a good sign

Oyo founder Ritesh Agarwal is reportedly trying to buy back shares from early investors, which experts say should be seen as a bold move that other promoters can replicate, as it shows the founders' confidence in the company

Pranit Sarda
Published: Jul 15, 2019 03:44:08 PM IST
Updated: Jul 15, 2019 03:50:35 PM IST

g_118647_startuppromoters-573121573_280x210.jpgImage: Shutterstock

If the Securities Exchange Board of India (Sebi) approving a framework to issue differential voting rights (DVR) is an encouraging sign for startups, industry experts believe that Oyo founder Ritesh Agarwal reportedly trying to buy back shares from early investors should be seen as a bold move that could be replicated by other promoters to gain more control. The founder of India’s most valuable hotel chain is trying to increase his stake in the company from under 10 percent to 30 percent.

“In spite of the startup movement, India may not end up having any big institution as compared to the US, and the biggest reason is that promoters are not in control,” says Anand Lunia, founding partner of venture capital company India Quotient. “[Promoters buying back shares] is a bold move. I hope more and more founders go ahead and do it. Investors should give more control to the founders.”

The most common method to fund a startup has always been through the founders giving up equity. After multiple rounds of funding, the entrepreneur is left only with a minority stake. The Sebi is promoting DVR, which goes against the ‘one share, one vote’ policy, with shareholders having different numbers of votes—thereby enabling founders to retain control even with a minority stake. Moreover, founders have various other legally-permissible methods to regain equity or control of their companies.

While Oyo’s Agarwal is reportedly pledging shares against debt, the Clawback clause allows founders to pay money back to investors, typically after four to five years, when the company gains in terms of valuation. The Management Stock Option Plan (MSOP) allows buying company stocks at a preset price, at some date in the future. Then there are phantom stocks, where entrepreneurs could receive benefits of holding stocks without owning them; sweat equity, where founders gain for their labour; and bonus, which allows them to gain equity without paying cash.

Vinayak Burman, managing partner of law firm Vertices Partners, says that promoters buying back shares from an early investors reflects his or her belief in the company, a good sign for later-stage investors. “Promoter buying stakes could lead to a legal issue if the shareholders agreement and the articles have transfer restrictive terms. There are various ways to factor these, such as reverse claw-back, bonus issues, sweat equity, phantom stocks, conversion ratchets etc. Obviously, these should be thought out in advance during negotiating terms in the transaction documents.”

(This story appears in the 02 August, 2019 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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