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Investors seek stringent anti-dilution clauses, control over founders in the wake of Byju’s fiasco

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Nikhil Patwardhan

17 reads
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Nikhil Patwardhan

17 reads

With edtech major Byju’s and its investors currently locking horns over the former’s impending rights issue, the wider investor ecosystem has realised just how easily their own bets could turn to ash. Investors are now seeking more stringent clauses in funding deals in a bid to protect themselves.

February 12, 2024

9 MINS READ

Key Takeaways

  • In light of the Byju's fiasco, investors are expected to introduce additional clauses and conditions to funding deals
  • This could include implementing more stringent anti-dilution clauses and imposing restrictions on founders' controls, signalling a shift in the investor-founder dynamic
  • Investors may also opt for a more proactive involvement in their portfolio companies to uphold governance standards effectively
  • This hands-on approach could involve increased scrutiny of founders' equity vesting and veto rights as well

“It finally collapsed,” was the first reaction of many investors when they saw troubled edtech major Byju’s launch a rights issue at a whopping 99% discount to its previous valuation. Everything that has followed, however, has seen any schadenfreude replaced by concern.

While Byju’s is aiming to raise $200 million through the rights issue to address an immediate liquidity crisis, the drastic decision has put the company’s investors in a bind. As The CapTable had reported earlier, many of the edtech’s biggest investors have lost hope in the company turning things around under the current leadership of founder-CEO Byju Raveendran. 

Following the announcement of the rights issue, these investors even called for an extraordinary general meeting in an attempt to oust Raveendran. The company responded to this by stating that the shareholder agreement does not grant investors the right to change the CEO or management, forcing these investors to contemplate whether participating in the rights issue will be akin to throwing good money after bad. With the rights issue being held at such a steep discount, however, not participating would see their positions on the company’s cap table all but wiped out since they have no anti-dilution protection.

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