January 28, 2024

Bridge rounds are interim financing rounds raised between larger funding rounds. Bridge rounds can imply that a startup is facing difficulties—although this is not always the case. Bridge rounds are typically structured as convertible debt. When a startup needs additional capital between two rounds of financing, they might raise a “bridge financing round” (often abbreviated to just “bridge round”).  What is a bridge round? It’s an interim financing round intended to keep the company afloat until the next, larger financing round.  While bridge rounds often carry negative connotations—such as implying the company is in financial trouble—that is not always the case. Bridge rounds might also provide an interim cash infusion to capitalize on rapid growth or prepare for an IPO. What Is Bridge Financing? Bridge financing, often in the form of a bridge loan, is an interim financing option used by companies and other entities to solidify their short-term position until a long-term financing option can be arranged. Bridge financing normally comes from an investment bank or venture capital firm in the form of a loan or equity investment. Bridge financing is also used for initial public offerings (IPO) or may include an equity-for-capital exchange instead of a loan. Why Do Startups Use Bridge Rounds? Financial difficulties. The startup is not getting enough traction, and their cash is quickly running out. Without a bridge round, the startup will likely shut down (29% of startups fail because they run out of cash). This scenario is the reason bridge rounds often have negative connotations. While this scenario may arise from a sudden change in market conditions, it can also be due to poor decision-making or financial planning by the founders. To hit certain milestones or sustain accelerated growth. Sometimes, raising a bridge round allows the startup to hit certain milestones. Achieving these milestones could result in a nice valuation bump in the next priced round. The startup could also be experiencing higher-than-expected growth, and require more cash to sustain this pace. These are positive scenarios and should be an easy sell to investors. Large, late-stage companies also use bridge rounds to put together additional financing in preparation for an IPO.  Time Extension: Startups may need more time to achieve critical milestones that make them more appealing to larger investors. A bridge round provides the runway needed to reach these goals. Market Volatility: Economic fluctuations or market uncertainties can disrupt funding plans. A bridge round can help startups weather these fluctuations until the market stabilises. Cash Flow Management: They offer a temporary infusion of funds to cover immediate operational expenses, ensuring continuity while preparing for a more substantial funding effort. Valuation Enhancement: If a startup’s valuation has not yet reached the desired level for a significant funding round, a bridge round can help it build value and attract higher valuations from investors in the future. How Is A Bridge Round Structured? Bridge round is typically structured as either convertible debt or equity. Convertible debt involves raising funds through a loan that can later be converted into equity during the upcoming funding round. This allows investors to lend money to the startup with the expectation of receiving equity at a predetermined valuation. Equity bridge rounds, on the other hand, involve direct investment by purchasing shares at a fixed valuation. Here’s an example: Consider a scenario in which a tech startup secures seed funding to develop an innovative software application. However, during the development phase, the startup realises the need for additional features and testing before launching a more extensive funding campaign. To address this gap, the startup initiates such rounds by offering convertible notes to existing investors. These notes represent a future conversion into equity at a discounted rate when the larger funding round takes place, incentivising early investors to participate. What To Consider While Raising A Bridge Financing Round Transparent Communication: Startups must maintain transparent and open communication with both existing and potential investors regarding the purpose and terms of the bridge round. Exit Strategy: Clear plans should be in place for how the bridge financing will transition into the larger funding round, ensuring a smooth process and alignment of interests. Terms And Valuation: Striking a balance between attractive terms for investors and maintaining fairness for both existing and future stakeholders is critical. Investor Relations: Establishing strong investor relations by providing updates and progress reports fosters trust and engagement. 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India is gradually on its mission to build a robust startup ecosystem. In order to promote and support startups, the government has formed a ministry (department) dedicated to helping new businesses. Furthermore, the Central Government of India has also introduced many schemes to bolster entrepreneurship in India and to assist emerging startups financially with their innovative initiatives. One of the significant steps taken by the Government was the introduction of convertible notes under the Companies Act, 2013, specifically for start-ups. The Term Convertible Note (CN) was first introduced by the Ministry of Corporate Affairs (MCA) vide Notification dated 29th June 2016, which amended the Rule 2 of The Companies (Acceptance of Deposits) Rules, 2014  wherein an amount of INR 25 Lakh or more received by a Start-up Company by way of Convertible Note was from thereon treated as an exempted deposit: “An amount of twenty-five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five (now ten years) years from the date of issue) in a single tranche, from a person, shall not be treated as Deposits” Further, Reserve Bank of India has also amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2016 vide Notification No. FEMA.377/2016-RB. to introduce the concept of convertible notes as an investment option for startup companies with effect from January 10, 2017. A. What is Convertible Note? 1. Companies Act, 2013 What is Convertible Note Companies Act, 2013 -According to Rule 2, in sub rule (1), in clause ©, in sub-clause (xvii) of The Companies (Acceptance of Deposits) Rules, 2014: “An amount of twenty-five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding ten years from the date of issue) in a single tranche, from a person, shall not be treated as Deposits” Explanation II – For the purposes of this sub-clause- “Convertible note” means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument Apart from above provision, there is no other provision in the Act which talks specifically about issuance of convertible note. Foreign Exchange-Management Act, 1999 ‘Convertible Note’ is an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument. Who can issue Convertible Notes Only a Start-up Company, recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) can issue a Convertible Note. The term ‘start-up’ or “start-up company” means a private company incorporated under the Companies Act, 2013 (18 of 2013) or the Companies Act, 1956 (1 of 1956) and recognized as start-up in accordance with the notification issued by the Department of industrial Policy and Promotion, Ministry of Commerce and Industry” An entity shall be considered as a Startup as per DPIIT notification dated 19th February, 2019 (superseding the notification dated 11th April, 2018), as below: Should be Private Company or Limited Liability Partnership or Partnership Firm. However, it does include a Private Company which is a subsidiary of a Public Company. Further, Entity should not have been formed by splitting up or reconstructing an already existing business. Up to a period of ten years from the date of incorporation/ registration Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees. It is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. What is the procedure for issuance of Convertible Notes 1. to a resident person 2. to a person resident outside India 1. Companies Act, 2013 Company can issue Convertible Note under the provision of Section 62(3) of the Act (i.e., raising money as convertible debt) by passing Special Resolution and accordingly file form MGT-14 with ROC within a period of 30 days. a. Brief steps for issuance of Convertible Note to a resident person 1. Spot an Investor(entity/individual) 2. Finalize the Terms of Convertible Note agreement and procure Valuation Report 3. Convene a Board Meeting for approval of below:  Execution of Convertible Note agreement   Issuance of Convertible Note   Check your articles, if alteration required   Notice of General Meeting 4. Convene a Shareholder Meeting for approval of below: Issuance of Convertible Note Alteration of Articles, if required 5. File E form MGT14 within 30 days of passing the shareholders resolution 6. Issuance of Convertible Note Instrument. There are no specific timelines as per Act. However, the Company can issue the Note as per the agreed Terms and Conditions in the Convertible Note Agreement b.Conversion of Convertible Note On completion of 10 years or upon occurrence of specified events as per the terms and conditions agreed to and indicated in the instrument or Convertible Note agreement, whichever is earlier, Company may convert the note into equity shares at the agreed conversion price 1. The Company is required to adhere with the terms and condition of conversion, if any, stipulated in the instrument or Convertible Note Agreement 2. File PAS 3 within 30 days of the allotment of equity shares upon conversion. Include the name of the Holder as a shareholder in the register of members maintained by the Company and apply for stamping for shares

The Food Safety & Standard Authority of India (FSSAI) vide its notification dated 25th November 2021 has introduced Licence/ Registration or application number based user ids on Food Safety and Compliance System (FoSCoS) portal. FoSCoS provides multiservice for Food Business Operator (FOB), such as granting licenses and registration to FOB, and other regulatory compliances services. FSSAI registration is one of the most important registration required by every person involved in the food business, such as persons who wish to open a restaurant, bakery, hotel, cloud kitchen or food stall in India. Every Food Business Operator (FBO), such as entities or persons involved in manufacturing, preparation, selling, transportation, distribution and storage of food articles/products, are also mandatorily required to have an FSSAI registration to carry on their food business. Synopsis of FSSAI Notification To address the issue of control of user-id by the FBO, FSSAI has introduced a new methodology for FoSCoS user ID, it provides a solution to the following type of FBOs: Existing licensed/registered FBO FBOs whose applications are under process FBOs who are filing new applications for FSSAI License/Registration FoSCoS User ID for Existing Licensed/Registered FBOs With this notification, FSSAI announced that Login Methodology has been changed for Existing Users of FoSCoS. Existing users can now log in based on a 14-digits license/registration number or 17-digits application reference number and the Password is the same as earlier. FBOs shall reset their passwords after the first login. FSSAI has decided to segregate the existing user IDs of the system to the new license/registration number based user IDs i.e each user id of FoSCoS has now been linked to single license /registration. The password of newly created IDs will be the same as of existing parent user IDs, which can be updated by the users on initial login to FoSCoS. FSSAI stated that while migrating the existing user-ids to new user-ids the contact details in existing user-ids have been moved to ‘Primary’ contact details of new user-ids as a one-time measure while the contact details of the person nominated in Form ‘IX’ as submitted in Form B or contact person mention in Form A have been copied to ‘Secondary’ contact details of the newly created ids. FoSCoS User ID for FBOs whose applications for new license/registration are under processing For FBOs whose applications for new license/registration are under the processing stage, the name-based user ids have been converted to 17 digit application-based user-ids. The contact details of the existing IDs have been moved to primary contact details and the contact details as mentioned in the application have been moved to secondary contact details. Benefits of New Methodology for FoSCoS user ID Capturing primary and secondary contact detail will help in sending the notification and password reset OTPs to both the contacts i.e. to the food business and to the person who has provided any assistance in applying. The new methodology will also ease the resetting of passwords for user IDs. FBOs can reset passwords by entering the application/license/registration number. A password reset OTP would be sent to both primary and secondary phone numbers/email IDs. An online utility “Know your new user-id” has been placed on the FoSCoS login businesses page to provide ease to FBOs in identifying their newly created User-IDs. Users can access the utility by entering the existing User-ID. Guidelines For Applying Nw FSSAI license/registration FBOs are not required to create name-specific user-id before applying. Instead, they can apply for FSSAI license/registration directly from the FoSCoS homepage. FBO can check their eligibility based on the Kind of Business they are involved in and proceed with the selection of food products category/products. After entering the required details, FBOs are assigned a 17-digit application number based user ID on submission of “PRIMARY” or “SECONDARY” contact details under the sign-up details window. The System generated 17-digit User-ID is valid for future login purposes till the generation of license/registration. After the grant of license/registration, the 14-digit license/registration number becomes the user-ID. Updating of Email ID and Phone number in FoSCoS User ID In case any FBO is not able to reset the password of the FoSCoS user id for want of having his/her email id & phone number under primary & secondary contact details, he/she may send a request through email to the concerned Designated Officer or Registering Authority of the concerned district as per the SOP. Such FBOs are required to represent their case through email or written letter to the concerned Designated Officer [Licensing Authority] or Registration Authority with the following documents: Request for updating of Phone number and Email ID should be on the letterhead of the firm/company duly signed by an authorized person of the firm, clearly stating the reason for the non-accessibility of login credentials. A copy of photo identity card such as Aadhar Card, Voter ID card of the authorized signatory, etc. A copy of existing license (s), registration certificate (s)/application (s) in form A or B as applicable. FAQs How to download the FSSAI registration certificate from the FoSCoS portal? When the FSSAI authorities issue the FSSAI registration certificate, they will send the certificate on the mail ID of the FBOs. The FBOs can also download the FSSAI registration certificate by logging into the FoSCoS website and clicking on the ‘Issued’ tab on the dashboard. The FSSAI registration certificate details will be displayed on the screen. Click on the FSSAI registration number and the FSSAI Registration certificate will open with the download button on the screen.  What is the FSSAI License validity period in India? An FSSAI license can be acquired for a period ranging anywhere from 1 year to 5 years. The FSSAI has prescribed different validity periods for different licenses and food products. Your fee also varies according to the food license and the validity period. How to renew your registration/license after expiry? You need to renew your FSSAI Registration/license before the expiry of its validity period. In case you end up missing the date of renewal of the application, you will have to apply for a fresh FSSAI license if you