Navigating Venture Capital Transactions: India & The United States

In India, VC transactions often rely on customized agreements tailored to the requirements of the parties involved. While the broader framework remains the same, each deal often has its unique set of terms and conditions which may result in a more time-consuming closing process

Venture capital (VC) funding has become a crucial source of capital for start-ups. While the fundamental principles of VC transactions are broadly similar across the world, there are unique nuances in how these are implemented in different geographies.

There are several factors which influence the terms of a transaction, from risk appetite, exit strategies to regulatory frameworks.

In this article, we have specifically explored key divergences between VC transactions in India and the United States.

Standardisation v/s Customisation

With a long-standing history of venture capital funding, successful start-ups, and a developed regulatory framework, the US boasts of a well-established VC ecosystem. This robust VC ecosystem is strengthened by a set of standardized documents and templates rolled out by the National Venture Capital Association (NVCA).The NVCA template documents detail the key terms and conditions of VC transactions including protective provisions, transfer restrictions, liquidation preference and governance provisions. The NVCA documents are popularly utilised across all stages of VC deals in the US and they help provide a well-accepted and established framework for streamlined negotiations and transaction processes. While standardisation adds to the efficiency and transparency of VC transactions, there is lesser scope to negotiate and tailor terms to the needs of a particular deal.

In India, VC transactions often rely on customized agreements tailored to the requirements of the parties involved. While the broader framework remains the same, each deal often has its unique set of terms and conditions which may result in a more time-consuming closing process. While standardized templates streamline negotiations and are time efficient, they can restrict flexibility, especially when one size does not fit all VC transactions.

General Protections

Given the ever-changing and dispersed regulatory landscape in India, VC documentation tends to have heavily negotiated and detailed representations and warranties around the target company’s business, finances and general regulations governing the company. These representations and warranties are backed by indemnities. The legal due diligence also tends to be more detailed in Indian transactions.

The NVCA documentation provides for a list of standard representations and warranties to be given by target companies, and these are seldom negotiated. Further, rarely backed by founders, the only recourse to a contractual breach is seeking damages in a court of law; indemnity is not market practice and only seen in rare cases. The legal diligence of American companies also tends to focus on the big picture and key red flag items, with no detailed diligence reports.

The Exit Route

Another key difference across both geographies is the exit process. In the US, we rarely see elaborate exit timelines being set out in the documents; it’s also commercially understood that when the start-up is successful, investors will be offered an exit organically. Initial public offerings (IPOs) seem to be the preferred exit path in the US; with robust public markets and a long history of successful tech IPOs, this stands out as an attractive option for most founders and investors. Drag-along right is not necessarily linked to exit failures, but often provided as a right which can be exercised by stockholders at any point. It is a democratic right involving concurrence of the board and majority stockholders.

More recently, while there has been a spurt of IPOs in India, the market is still nascent. VC documents here have elaborate timelines and exit obligations to be performed by the companies and founders. However, the primary exit route still seems to be secondary sales and merger and acquisitions. This might change, as India becomes a market that’s easier to do business in and the exuberance in the public markets increase.

To Conclude

As India’s VC market continues to further evolve, we may see more and more American VC principles being implemented in India. The Indian regulatory framework will have to change to compliment the adoption of these principles. There is also a growing market sentiment to bring about standardisation in Indian VC documentation and set market practices. Till such time, it is important for both investors and entrepreneurs to understand and adapt to the VC ecosystem they operate in; it will only help them navigate the systems efficiently and set them up for success.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.