Jan 10, 2023

The Ken × How the fine print in VC funding can ruin a startup’s dreams Chicago-based Guild Capital’s unusual investment terms lead to founder resignations and legal troubles for early stage startups MegaExams and Wink & Nod among others 9 Jan 2023 Ed tech company MegaExams is facing legal proceedings after its American investor Guild Capital dragged it to court over GST dues worth Rs 8 lakh What might seem like an extreme reaction is a step in a series of events that brought the startup and Guild to this point Guild Capital is an unusual investor which also earns out of providing startup services Guild’s insistence on hiring costly consultants has had strong ramifications on a few startups Want to read our free stories and try our newsletters? In October 2022, Prasanth Parameswaran, the founder of MegaExams (an online-exam software run by Phio Technologies) received an email carrying a petition filed against him in the Bombay High Court. Guild Capital—a venture-capital firm that had invested in Parameswaran’s seed-stage edtech valued at US$1.3 million—had moved court to seek seizure and attachment of Parameswaran’s personal assets. The notice was not a surprise to Parameswaran, as the relationship between MegaExams and Guild had been deteriorating for some time. In April 2022, the Chicago-based VC had sent a 'put' notice'put' noticePut Notice to MegaExams, demanding that the edtech company return the entire US$300,000 that Guild had invested in it. This meant that the edtech had to buy back all of the shares at the same valuation at which Guild had invested, and also pay an additional 18% interest from the day of the investment in January 2019. The reason for this demand was a claim for GST (goods and services tax) dues worth Rs 800,000 (US$11,000) in 2017-18, as well as allegations against Parameswaran of tax evasion and failure to maintain the books. With Parameswaran no longer running the company, Guild-run MegaExams paid the fee, but called this mismanagement, and sent Parameswaran a notice. The characters in this case may look insignificant and quite ordinary, but the events are not. They hold important lessons that any startup seeking funding would ignore at its own peril. Guild Capital is an early investor in India that has put in about US$10 million across a dozen companies over the last two years. The 13-year-old fund has made over 35 investments globally, investing an average of US$1 million, and has an overall fund size of over US$550 million. In addition to MegaExams, Guild has also invested in small startups such as Wink & Nod, a firm that sells mattresses and other sleep-focussed products; Nursery Live, an online gardening supplies company; and it nearly invested in MobiChemist, an online medicine-delivery startup. According to people close to these companies, all these startups have had to deal with unusual investing terms from Guild. They were required to pay board fees to investors, which is rare for venture capital firms to request. They were also made to hire senior consultants at high salaries, and even had to pay the investor for assisting with these hires. Multiple people mentioned in the story declined to be named as they didn’t want to be seen publicly commenting on their companies and rivals. As a result of meeting some of these terms, founders of companies like MegaExams ended up quitting or selling their companies. If few knew about these companies when they were around, even fewer know that they are now gone. It is not uncommon for startups to fail, with over 90% not surviving for various reasons such as lack of funding, poor product-market fit, or founder conflicts. Arundhati Ramanathan Arundhati is interested in how people use money in the digital age and how new economies will take shape based on that interaction. She writes the newsletter Ka-Ching! every Monday. She lives in Bengaluru and has spent over 12 years reporting and writing on various subjects. Read this story. Subscribe Now This story is available across both editions. Subscribe to the one that’s most relevant for you. Questions? 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