Quiz 3: Advanced — Founders' Agreements and Startup Legal Setup

Question 1 of 5

A startup has raised a seed round at a Rs. 10 crore valuation. It now wants to raise a Series A at a Rs. 5 crore valuation (a down round). The seed investor has a broad-based weighted average anti-dilution provision. What happens?

AThe seed investor's shares are cancelled and re-issued at the lower valuation BThe conversion price of the seed investor's preference shares is adjusted downward (investor gets more shares upon conversion), but less severely than under full ratchet anti-dilution CThe seed investor has the right to block the down round entirely DThe existing founders must transfer their shares to the seed investor as compensation for the down round

Question 2 of 5

A co-founder is dismissed for cause (material breach of the founders' agreement) 2 years into a 4-year vesting schedule with a 1-year cliff. Under a standard bad leaver provision, what happens to their 50% vested equity?

AThe vested equity is retained in full regardless of the circumstances of departure BBad leaver provisions can require the vested equity to be transferred to the company or remaining founders at face value (or a discounted value), not just the unvested equity CThe vested equity is automatically converted into non-voting shares DThe bad leaver's vested equity is distributed to employees through the ESOP pool

Question 3 of 5

A startup incorporated in India wants to raise capital from a US venture capital fund. The VC fund insists on a 'flip' to a Delaware C-Corporation structure as a condition of investment. This is primarily because:

AIndian companies cannot receive FDI from the US BUS institutional investors are more familiar with Delaware corporate law and structures, which provide specific governance protections, and many US VC funds have investment mandates that restrict investing in Indian-incorporated entities CSEBI requires foreign investment in startups to be through US holding companies DIndian tax law imposes a higher rate on exits from Indian companies

Question 4 of 5

A startup's SHA contains a 'tag-along' right. The founder wants to sell 30% of their shares to a strategic acquirer. What must the founder do?

AThe founder can sell without any restriction because tag-along only applies to 100% acquisitions BThe founder must offer the investors the right to sell a proportionate percentage of their shares to the strategic acquirer at the same price and on the same terms CThe founder must first buy out the investors before selling to the strategic acquirer DThe founder must obtain a court order to sell shares to a strategic acquirer

Question 5 of 5

A startup wants to grant ESOPs to its employees. The ESOP plan has not been approved by shareholders via special resolution. The options are granted anyway. What is the legal effect?

AThe options are voidable but effective if not challenged within 3 years BThe options are void — options granted without a shareholder-approved ESOP plan are not valid under the Companies Act; the company and its directors may face penalties under the Companies Act CThe options are valid because the board of directors has authority to grant options DThe options are valid for the first year and then require retroactive shareholder approval

Quiz 3 — Advanced