But startup equity investing involves taking on high risk, say experts. “Startups have the highest risk-reward ratio,” said Ram Kalyan Meduri, founder and CEO, Jama Wealth, a SEBI registered investment advisor. Mint tells you how this alternative investment works and the risks associated with it.
How does this work
Digital platforms like Tyke and Grip list startups that are looking to raise funds. While Tyke lets retail investors at least get started 5,000, Minimum investment required for Grip 2 lakhs and opens up opportunities only for Accredited Investors (AI).
As per Securities and Exchange Board of India (SEBI) guidelines, investors are eligible to become AI if they meet any one of these three criteria: Annual income of more than 2 crores; or more than net worth 7.5 crores, out of which at least 3.5 crore in financial assets; or more than annual income 1 lakh and net worth 5 crore or more at least 2.5 crore in financial assets.
On Gripp, retail investors have to invest through Anicut Grand Capital, a SEBI-registered alternative investment fund (AIF). “The additional requirement is that the investor has to be committed” 25 lakh in the next five years from the date of the first investment made in the startup,” said Vivek Gulati, co-founder of GRIP. This amount is committed to various schemes launched by AIF. Failure to make this contribution led to There may be forfeiture of the units held by the investor or suspension of the right of the investors to receive distributions in respect of the units held.
Tyke allows everyone to invest through its platform. “The investment collected from investors goes through an escrow account authorized by a SEBI-registered debenture trustee, and after the completion of the deal, the money is transferred to the startup,” said Karan Mehra, founder, Tyke.
for small quantities up to 50,000, investors receive a CSOP or community stock option pool in return for their investment in Tyke. “CSOPs are phantom stocks or financial contracts that have the same financial rights as equity shares, but they do not affect the cap table and do not come with voting rights,” Mehra explained.
For a higher investment ticket size, in most cases, investors are allotted compulsorily convertible debentures (CCDs), which are bonds that convert into equity upon maturity (IPO or acquisition).
In the case of Gripp, since the AIF is the transaction vehicle, shares equal to the total amount invested by all retail investors are allotted to the AIF, which then allocates fractional units to each retail investor.
risk and reward
Jyoti Prakash Gadia, Managing Director, Resurgent India said that the success rate of startups is only 10% to 20%.
“About 80-90% of Indian startups fail within the first five years of establishment.” The closure of a startup would mean that you lose all your money.
To ensure that investors understand this risk, Mehra said that they announce to investors that they should only invest the amount they can afford completely, without loss affecting their lifestyle. without doing
In addition, investors can reduce risk by diversifying the total amount they intend to invest in multiple startups. Startup equity investing also scores low on liquidity because the shares are private.
The exit options available to retail investors are similar to those of angel investors in the form of mergers and acquisitions, initial public offerings and secondary sales.
However, investors going through the AIF route should be aware that the decision to exit as selling units to other investors rests entirely with the investment manager in the AIF.
Currently, none of the platforms facilitate the sale of shares in the secondary markets in startup equity investments.
As for taxation, CSOP is treated similarly to ESOP or Employee Stock Ownership Plan.
“For the understanding of taxpayers, the difference between the fair market value (FMV) and the exercise price may be taken as profit from business or profession and taxed as business income at the time of allotment of shares. Is. Further, gains on subsequent sale of shares should be taxable as capital gains – long term or short term, depending on the period of holding of such shares,” said Sachin Garg, partner, Nangia Andersen LLP .
In the absence of any specified regulation with regard to the head of income under which it should be taxed, it is suggested to report it under “Other Sources”, said Manit Pal Singh, Partner, IP Pasricha & Co. Is.