A consistently active member of the startup ecosystem in India for many years, Jiten Gupta offers a unique perspective of the inner workings of what it takes to build a successful business.
Jiten founded Citrus Pay in 2010 (acquired by PayU in 2016) and Jupiter in 2019. He is also an active angel investor.
Evolutions in the Fundraising Landscape
According to Jiten, a lot has changed in the startup world over the last decade. Funding is relatively more readily available now; but startups face more pressure to deliver specific returns at predetermined milestones. He believes that investors take this stance since the market is growing rapidly, and staying relevant depends on economic contexts.
However, Jiten adds, investors were reluctant even when he was raising funds for Citrus Pay in 2011. In fact, he had to make around 30 pitches and wait for eight months for a concrete offer. But Jiten notes that since the market he was operating in was an untapped one, the capital of $1.8 million he had raised for Citrus Pay lasted for two years!
On the other hand, finding investors for Jupiter Pay was much easier. Jiten attributes this ease to good credentials and business relationships.
But Jiten asserts that success is never guaranteed, especially since it depends largely on timing and the relevant economic contexts. “In a fast-moving market, expectations are different, and you have to deliver constantly,” says Jiten.
Jupiter-founder Jiten Gupta’s Thumb Rules for 1st-time Fundraising and Negotiations
Here are the thumb rules and negotiations shared by Mr. Jiten Gupta in the webinar:
1. Staggering your fundraising
For anyone planning to lead their company even 20 years after its inception, it is incredibly important to retain maximum equity. Jiten advises maintaining at least 40% to 45% in equity after the series C round to ensure having a meaningful stake in the business.
Anything less than 40%, and business owners run the risk of being at the mercy of shareholders and having to beg for more stocks and stock incentives. “You lose interest and become like any employee who holds stock options,” he says.
However, retaining equity is unimportant if the plan is to sell the company after 4 or 5 years.
But let’s work backward, and take a look at how new business owners can stagger their fundraising to retain maximum equity:
- Angel/seed round—maximum 10% dilution
- Series A—maximum 20 – 24% dilution
- Series B—maximum 13 – 15%
- Series C—move toward single-digit dilution
- ESOPs after the Series C round should be minimum 8 – 9%
2. Dealbreakers: what should you be firm on?
Negotiating the T&Cs of a Term Sheet or Shareholder’s Agreement (SHA) can be difficult, but Jiten advises understanding what matters to investors while simultaneously setting boundaries on what is non-negotiable, such as:
- Liquidation terms—anything more than 1X is an unfair deal.
- Return guarantees and IRRs—avoid these, as investing in a startup is about risk-taking, and returns cannot be guaranteed.
- Rights—various rights are important to investors, such as tag-along rights, pre-emptive rights, affirmative rights, and anti-dilution rights. But thresholds are necessary to determine who is entitled to a particular right. For instance, a 2% shareholder wouldn’t qualify for affirmative rights until the threshold percentage is crossed. Additionally, Jiten advises watching out for Right of First Refusal (ROFR) which puts you at the mercy of the stakeholder. Instead, opt for Right of First Offer (ROFO), which affords more flexibility and control. “It’s up to you to take the initiative, and it’s your choice to accept an offer or not,” he adds.
3. Determining valuation
Jiten advises fundraising when capital is available, but only at the correct dilution. However, he cautions against sacrificing dilution levels and agreeing to unfair terms to pursue a higher valuation.
Valuation is irrelevant without equilibrium, and the amount of capital raised at the desired dilution level should take precedence. This automatically filters out the extra capital.
Jiten asserts, “With equilibrium, goals become clearer, and you have a better outcome.”
Building Leadership Team and Managing Capital
The seed for startups may be product ideas, but efficient management ensures growth. Jiten stresses the importance of creating a yearly plan with expenditure estimates and having quarterly reviews to track progress.
This method keeps businesses accountable and ensures financial responsibility while chasing growth. Additionally, Jiten counsels hiring a financial expert who can manage and grow the capital, while simultaneously taking care of compliance and accounting responsibilities. “You can pretty much count on the capital and the salary of this expert being recovered in no time if they do their job well and manage the capital wisely,” he chuckles.
Lastly, it is essential to have employees invested in the company’s growth and who have the skills to expand with it. Hence, it’s crucial to hire for fit and scale.
SARs vs. ESOPs
Employees increasingly understand the value of company stocks, and while rampant buybacks of Employee Stock Ownership Plans (ESOP) may reinforce their value, they are restrictive in terms of exercise rights and tax benefits.
For these reasons, Jiten favors Stock Appreciation Rights at Jupiter. SARs are tax-friendly and afford employees flexibility and choice while cashing out, either for stocks or cash. They simply work better in the long-term incentivization of employees.
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