Sneak a Peek into How Founders with Low Stakes Give Rise to Serious Risks

According to market research by Tracxn , India has only 17 profitable unicorn startups out of 114 unicorns. Zerodha, Firstcry, Zoho, and Billdesk are a few of the profitable startups. With almost 92,000 registered startups, India boasts the third-largest startup ecosystem after the US and China. Even though startups may be struggling to find funding, with investments falling by as much as 50%, particularly for late-stage startups, it is crucial to remember that 2021 was a pivotal year for this ecosystem.??

But did you know recently, there have been concerns that founders of unicorn startups may have very little skin in the game due to a significant decline in their holdings? A Tracxn research shows that founders’ median stakes in their unicorn firms have decreased from 26.15% in 2018 to roughly 12.5% this year. These issues raise eyebrows and cause questions as to whether these founders are the ones who actually run the company, if not, who owns or manages these companies. Do these founders have a say in the company??

Startups with Low Stakes of Founders??

Do you know what is common between startups like Zepto, Policybazaar, Zomato, Delhivery, and Paytm? Their founders own single-digit stakes in them!?

Founder of Delhivery, after the listing, owns a mere 1.79% stake in his logistics business; Policybazaar founders Alok Bansal and Yashish Dahiya have stakes of 1.5% and 4.3% , respectively. Zomato stakes are more interesting as the post-public listing shareholding pattern shows promoter holding as zero! Interestingly, both founders of Zepto, Aadit Palicha and Kaivalya Vohra, together own a mere 2.5% stake in the company.?

Despite some founders having low stakes, there are startups like Nykaa, where Falguni Nayar and her family still hold a high stake of 52.34% .?

The founders of many startups take up a growth-at-all-costs viewpoint, frequently leading to founders giving up a significant stake in their company to obtain substantial sums of money from investors. They might not understand, though, that investors have their own objectives and want to participate actively in the company’s management. While such investors have played a crucial role in the growth of the startup ecosystem in India, their funding often comes with strings attached, leaving founders feeling trapped and without options.

How Founders with Low Stakes Give Rise to Serious Risks??

Startup founders risk giving away too much equity in exchange for funding, resources, or other assistance, which can have serious implications for the business’s success.

First off, giving up a sizable stake in the firm may leave the founding team with little influence over its course. Making decisions without investors’ approval might be challenging when they retain a sizable interest in the company. The entrepreneur’s influence is reduced since essential decisions must now be made with the investor’s involvement. Investors may also urge founders to take actions not in the company’s best interests due to their conflicting goals.

Secondly, giving too much stake might lessen incentives for founders to put extra effort into the company and benefit from its success. With lesser ownership, founders can feel less personally engaged in the business’s success and less inclined to put up the extra effort, which could slow growth and cause lost opportunities.?

Additionally, giving up stakes too soon could make it increasingly challenging for the startup to obtain funding in the future. Investors may be wary of investing in a firm that has already given up most of its ownership because they perceive it to be risky.?

Finally, giving up too much stake could prevent entrepreneurs from considering different exit options. Founders may have difficulty negotiating an exit deal that suitably rewards them for their work when others have a significant share in the company.?

A common misconception is that the company’s founders are only its popular face, while the actual power is with someone behind the throne. This misconception has been strengthened by recent, highly publicized founders departing from startups like Zomato and BharatPe.?

Conclusion

It is evident that having low stakes as a founder has significant implications for all parties involved, particularly for the enterprise that requires dedicated leadership and passionate entrepreneurship. Therefore, it is prudent for founders and investors to recognize and be conscious of the potential pitfalls and make reasonable, thoughtful decisions.