There are many similarities in the technology ecosystem between Silicon Valley and Bangalore. Both areas are chock full of intelligent people driven with great ideas, enthusiasm, energy, not to mention pots of money chasing them. This creates a situation where there are hundreds, if not thousands of entrepreneurs with unique insights into markets and therefore potentially good ideas for businesses. This makes for a great feeding ground for venture capital investors and board members. Investors in both ecosystems are completely supportive of their investments - helping with their network and lending their combined experience as much as they can. That said, my observation is that as soon as the topic turns to early stage fundraising, quite a lot of the similarity between Bangalore and Silicon Valley ends.
In the Valley, in a majority of the cases that I have seen, there seems to be an acknowledgement with early stage investors and the board that, among other things, it is the investor's and board member's job to set the overall direction and strategy, approve the yearly operating plans and investments, enforce governance processes, and then let the management team go about their business, while regularly advising and consulting with management. This is regularly reflected in the terms of the pre-series A or series A funding agreement. Early stage funding terms are generally such that the investors set the value for the company and invest money for which they are given shares representing a percentage ownership in the company. In order to mitigate the risk of such an early investment in a company with just a few ideas, no product, or a product with unproven market fit, these early investors also ask for and usually receive some preferential rights for the shareholders, as well as a board seat. These preferential rights include things as share conversion ratios and the right to invest in future rounds of funding, among other things.
In several early funding term sheets that I have seen given to Bangalore-based startups, the tone and tenor of the funding round is far less entrepreneur and management friendly than their Silicon Valley counterparts. It is almost as if they have forgotten that they are investors and do not run the company. In addition to the funding amount being reflected as a percentage ownership and a board seat, Indian venture investors seem to be asking, as a rule, for reserve rights over and above those needed to specify the financial basis for the investment and cross into the territory of managerial control. These rights include veto rights over almost anything and everything that the company requires to execute the business: investments, any, however minor, alterations from the board approved plan, and veto rights over the board approvals even if the investor is a (sometimes less than 10% holding) minority investor. To top it off, the founder and management vesting of shares are oftentimes draconian and not at all founder and management friendly in terms of vesting relative to time served with the company.
It is the board's job (specifically a simple or super majority of the board membership- depending on the situation) to make decisions regarding governance, investment, and strategy. In no situation should investors with small, minority stakes of less than 10% be able to override the board's decision and effectively veto a decision. It makes the board less accountable to the business and renders the founders and management unaccountable to the success of the business.
One would assume that the nature of the terms sheets in India is either a reflection of some bad actors and experiences in the past, or a general immaturity in venture funding in India. When investing in an early stage startup, the investors should set a collaborative and consultative approach with management that should be reflected in the term sheet. If they believe that there is a substantive risk of the management team being the wrong team or making egregious decisions, the answer is to not invest or tie management's and the boards' hands behind their backs in legal documentation with effective veto power in the form of reserve rights. Draconian term sheets just ensure a management team that is looking over their shoulders and becoming very tentative and gun shy as the whole. I have been in many situations where company decisions of all sorts (product, sales, investments, marketing, etc.) have been coloured by the infamous "The investor needs to approve that" or "the investor won't go for that," and the sheer burden of having to go through that process kills the idea.
While board oversight is critical and management and the entrepreneurs need to run the gauntlet of board approval, the board and seed/series A investors should hold the management team accountable for their ideas, statements, and execution, but they should allow them enough leeway to be creative and free to make decisions that may differ from the original idea without the spectre of a minority veto and overbearing reserve rights. Invariably, early stage investments are about the team and the idea because the execution will differ from the original stated plans; flexibility and management accountability is what makes the difference between success and failure.
(Jayant Kadambi is entrepreneur, technologist, and business leader who led his most recent company, YuMe, to an IPO as a global leader in digital media technology. Jayant is based in Silicon Valley and is spending his time as an advisor, board member, and angel investor.