Startup Funding

363 views 5 replies

Karan Sharma

Director

30 Points Joined March 2019

Hi, I want to under the if a Startup whose Paid Up Capital is 1 Lacs opts for early stage funding where it agrees with an investor that it would give 20% Shares to the Investor for 20% will issue shares?

I mean if the Co. issues shares at Face Value, the founder would stand nowhere.

If the shares are issued at Premium, the premium has to be kept in a select bank account and it could not be used for working capital for which business is taking funding.

So how would we issues shares to ensure Investor stays at 20% but still the money brought in can be used for business purposes.

thanks in advance

Replies (5)

Chirag

Professional

1979 Points Joined December 2017

No ,Share capital is always issued for expansion ( except certain general corporate purpose ), no one will invest money in business for their cyclical funding ,you can go for cc/od for such needs....ya you can write off certain allowed expenses with this premium..

Karan Sharma

Director

30 Points Joined March 2019

You didn’t read my question properly. We do have an agreed investor.

Chirag

Professional

1979 Points Joined December 2017

Investor agrees or not ,but section 52 prescribes for utilising the securities premium only for specified purpose only ,now this situation is something different from IPO proceeds where SEBI monitor use of funds ,still in prospectus you can mention the objectives but I dont think so ,it can be used for working capital purpose ...either you can issue convertible secured debenture for premium amount or can take a loan which will be convertible in future in equity ,upto 100% of networth from shareholder is exempted u/r2(1)(c) or can make him director and get loan subject to declaration that money given through own fund by him/her ...

Disclaimer- For educational purpose only ,should not be acted...

Guest

You could have gone for a Convertible Note. But if the investor is insistent on obtaining shares immediately, you can go for right issue. The existing shareholders can renounce their entitlement to the Investor.

In case of right issue, the compliance requirement faced in preferential allotment and private placement can be avoided.

Chirag

Professional

1979 Points Joined December 2017

I'm correcting my Old Reply ,may be that interpret confusion about debit securities premium account ,but if query is use of amount raised ,then yes it can be used for working capital purpose ,because AMOUNT and ACCOUNT both are different

just eg.
issue Rs.10 FV share at Rs 90 premium ,then entry will be

Bank Dr
To Capital
To Securities Premium

Now Bank/Cash can be used for any purpose or as stated in prospectus but whatever stood in Securities Premium will be debited only for stated purpose in section 52..

No need to open seperate bank account for parking Securities Premium account

Disclaimer - For education purpose only not a professional advice