Like a house on fire

MOHAN R LAVI | Updated on January 23, 2018 Published on May 17, 2015

Startups need independent directors

One of the lesser known facts about Twitter is that during its heady growth phase it had quite a few CEOs. Many of these changes were driven by the investors in the company -- venture capitalists, whom some refer to as ‘vulture capitalists’.

Something similar seems to be happening in India at housing.com. Six of its co-founders have quit the company while the present CEO Rahul Yadav and investors seem to be at war with each other. One fine day, he resigned from the company after sending a scathing mail questioning the intellectual capacity of the investors.

An apology from him bought some temporary peace and he continued as CEO. Recently, in a surprise move, Yadav decided to give away his personal shares worth about ₹200 crore to all the employees of the company. He reasoned that the problem of housing has not been solved anywhere in the world and that it is too early for him to think of making money.

Now that everyone knows that he is a high-voltage person, not many are buying this argument. It is possible that the share donation largesse is due to the fact that he is on the way out from housing.com. This share donation would have earned him quite a few loyalists in the company.

In case he does commence another .com venture in housing, he need not have spend money on recruitment consultants.

Corporate governance

The word ‘risk’ is an integral part in the world of startups. If commencing a startup is a risk for the venturer, funding a startup is even riskier for the investor. Quite a few of the startups do not start. Startups do not face too much of scrutiny apart from complying with the provisions of the Companies Act and paying taxes, if they are not in the red.

Recently, the International Advisory Board (IAB) of SEBI has observed that entry barriers to ensure participation of only sophisticated investors in the initial stage for technology startups is a good idea, given the high-risk high-return trade-offs involved in financing. The regulatory concerns arising out of ease of raising capital versus investor protection need to be addressed.

IAB felt the need for a balanced regulatory approach towards valuation of startups. An important point that IAB emphasised was the need for adequate disclosures, including suitable caution to investors about valuation.

To enhance the participation of institutional investors in the governance of investee companies, the IAB suggested SEBI may set up a code (like the Stewardship Code of the UK) based on the approach of ‘comply or explain’.

Independent directors

A successful startup is a happy marriage of the promoters’ idea with the investors’ money. The Board of many startups invariably contain equal representations from the promoters and the investors. In many instances, this leads to a difference of opinion.

There is a need for a balancing factor in the boards of many startup companies. Experienced independent directors could be the balancing factor that many startups are looking for. Such directors could act as a third umpire whenever there is a conflict of interest.

A couple of strong independent directors in housing.com may have ensured that the Rahul Yadav episode remained an internal issue. A take-away for many startups from this could be to appoint independent directors.

The writer is a chartered accountant

Published on May 17, 2015
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