Exit rights

Explaination: The Exit term in the Term Sheet stipulates that the Startup shall provide exit mechanisms to investors as after the period agreed to mutually. Herein as per the term sheet, three methods have been provided including “Qualified Public Offering” by listing equity shares, “Strategic Sale”.

The Exit term also stipulates that if the Startup is not able to provide the Exit at the agreed period then the Investor(s) can have other exit options like “Buy-back” of securities by the Startup of the shares held by the Investors or “Drag Along” the securities held by other security holders of the Startup.

How it applies to Startup/Investor and its impact: Investors always invest with an outlook for a return. Accordingly, they will get a return from their investment when they can sell their shares. However, it is to be noted that with each successive round of investment the Exit Period keeps getting reset. Therefore, a circumstance where the Investor would enforce exit on a Startup rarely occurs

Note to Startup – While exit rights are important for an Investor, it should be kept in my mind that the investments being made in a Startup which is a risky sector and it is widely known that only 1 out of 10 startups succed. In such a scenario the Founders shall in no event be made personally liable to provide an exit to the Investors.

Note to Investors – An Investor should not make a Founder personally liable for an exit. Further, the Investors should not require any exit with a compulsory IRR and should endeavour to share risk with the Founder.

Ideal position – An ideal exit clause should be for a period of 5 years with a Drag right available to the Investor enforceable if no exit has been provided in 6 years. Further, the Drag right should be taken only in case the investment are being made at an early stage.

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