While for most start-up’s, Debt option in very difficult to get access to because they don’t have a proven record in terms of financial history. Leaving with them to raise funds using Equity mode. Primarily raising equity can be done through two routes as provided in Companies Act 2013 i.e. Right Issue and Private Placement.

While Right issue aims at offering shares to shareholders who are already on the boat in the proportion of their current shareholding. This is the easiest way to raise equity in the company as there is no requirement of a valuation certificate. But for a start-up, this right issue route is not feasible.

The most common and widely used route is Private Placement. When a start-up’s pitch their products in front of the prospective investors they offer a certain valuation which they seem is correct for the company. When the new investors understand the business or see a viability and a good return on investment opportunity on their money, they bring in the money at the valuation fixed in the terms of Private Placement. A private placement is an offer which is made to less than 200 persons or institutions.

While making a Private Placement Offer one needs to comply with section 42(2) of the Companies Act, 2013. Private Placement is the most correct route through which a new investor should be given shares at the agreed valuation. But since the process of Private Placement is cumbersome, many start-ups tend to resort to different methods which they assume are less cumbersome as compared to Private Placement. They end up violating the provisions mentioned in the Companies Act 2013.

Usually first round consists of Discussions followed by signing of term sheets. Then finally the offer is made and noted. There are several forms as prescribed by ministry of corporate affairs such as PAS-3, PAS-4 and PAS-5 which needs to filed along with Valuation Report by prescribed valuers and list of allottees within 30 days.