“(Ashok) Arora, a B-Tech from IIT-Bombay (a colleague said he walked into the entrance exam unprepared and came out with flying colours), who wrote most of the critical programs for the company those days, didn’t have the patience and sold his shares in the then unlisted company to the other co-founders for just Rs 25 lakh.” – from a Business Standard article
1. ‘All promoters, who are signatory to the SHA, shall devote their full time and attention to the company’. This means a promoter cannot do two ventures, or cannot walk out of a venture.
2. ‘Promoters will not have the right to resign or leave the company without written permission of the investor’
3. ‘If a promoter does not wish to continue working full-time with the Company, such promoter will be required to sell all of its shareholding in the Company at minimum 75% discount to the price at which shares were issued in the round of funding immediately prior to such required sale. Investor and the remaining promoters will be entitled to purchase such shares on a pro-rata basis from such non-committed promoter’.
1. Investor & Co-founders should acquire pro-rata the stake of the exiting founder. (The author believes this is not as draconian as investors reserving the right to acquire shareholding of all promoters at par, if any one promoter exits.)
2. Insist on a clause whereby any exiting or non-committed promoter should cease to be a director of company immediately (even though their shareholding may continue).
3. In case the exiting promoter was vital to the business, then the investor may consider invoking material breach to allow the investor to force a sale of the company.
4. Having a Non-Compete Clause including barring the leaving promoter from hiring employees of the company. The time period for this is typically 3 years and can be upto 5 years as well.
5. Another small clause to prevent an indirect exit of promoter(s) is to bar them from pledging their shares to any third party, without written permission of the investor.
