Introduction
In the initial stages of the start-up, speed trumps structure. Start-up owners should focus on building, selling, and surviving, leaving legal work to an absolute minimum.
There are distinct phases in a start-up, and each phase requires different legal services. The first stage in any start-up is the Pre-Seed Stage, which covers idea validation and team building. In the Pre-Seed stage, preparing partnership and non-disclosure documents, foundational IP (patents and trademarks, as applicable to the start-up’s business model), and the company’s preliminary structure would be a major focus.[i]
The second stage in start-ups is called the Seed Stage: the formation of the business entity and the creation of the prototype/MVP. The legal aspect of the Seed Stage is selecting between a Sole Proprietorship, an LLP, and a Private Limited Company. It depends on the business liability and Taxes[ii]. Many start-ups fail to obtain industry-specific licenses, health, and/or environmental licenses before opening. Obtaining your tax numbers, like GST numbers/Federal & State numbers regarding your initial tax liabilities. Many start-ups fail to obtain necessary industry-specific permits (e.g., food safety, health, or environmental) before launch. Obtaining Tax ID numbers (like GST or Federal/State IDs) and understanding initial tax liabilities[iii].
The third stage is the Early Stage, focused on product development and fundraising. At this point, start-ups pursue Series A funding and customer expansion. Legally, this involves navigating securities laws, FDI regulations, shareholder agreements, employment compliance, and evolving data protection frameworks such as GDPR and India’s DPDP Act.
The fourth stage is the Growth and Expansion phase, centred on market scale, international entry, and profitability. Legal priorities expand to regulatory compliance, stock option structures, data security at scale, cross-border operations, and M&A preparedness.
The fifth phase of a start-up is the Maturity Stage and Exit, which focuses on considering an acquisition, merger, or Initial Public Offering (IPO). The legal focus is on Due Diligence and IPO Compliance, as investors or buyers will rigorously audit all prior legal records. If any missing documentation is found, it could lead to the devaluation or termination of the deal for IPO Compliance, as it must meet stringent SEBI or SEC regulations.[iv]
This article will cover the role of a Fractional General Counsel (“Fractional GC”) in the Fifth Stage of a Start-up: Maturity and Exit. An exit, therefore, represents a thorough, meticulous examination known as legal due diligence. It is where all the early shortcuts are peered at through a microscope. The cap tables are interrogated, contracts torn apart, and ownership of the intellectual property scrutinised line by line.[v] This, however, is exactly where the role of the Fractional GC kicks in. This is unlike outside counsel, who are not notified until the deal goes live, by which time the weaknesses are already being used by the buyer as leverage.
Examination of The Cap Table
A cap table is a detailed spreadsheet that shows a company’s ownership, lists the assets to be divided equally among the directors, and details the types of shares issued over time, such as preferential shares and equity-based shares. A cap table is essential for understanding ownership, dilution, and financial planning during fundraising or exit transactions.[vi]
These include unexecuted equity agreements, unexercised options, missing filings to the Registrar of Companies, and discrepancies in the authorised and issued share capital.[vii]
A Fractional GC performs a forensic analysis of the cap table. Each issuance of shares is documented in the minutes of board meetings, legal filings, and stamped stock certificates. ESOPs are examined not only for allocation but also for the proper issuance of grant letters and vesting periods.
Where errors exist, such as unpaid stamp duty or late submissions, the Fractional GC takes preventative measures long before carrying out due diligence. This prevents founders from having that sinking, panic-inducing realisation at the most critical point of key discussions, only to discover they don’t have their ownership houses in order, thereby making a potentially expensive mistake.
Contractual issues during Maturity Stage
Another area that often surprises an existing firm is the contracts. In many commercial contracts, there is what is called the ‘Change of Control’ provision that allows the other party in the contract to cancel or renegotiate it if the company has a change in control, probably as a consequence of being acquired[viii]. This provision is usually not noticed until the other party’s attorneys bring it up.
In cases where the value of the company is ins dependent on one of their key customers or vendors, an unfavourable term in the agreement could cause a substantial reduction in the value of the deal. It is the duty of a Fractional GC to review these agreements well in advance and then use the company’s leverage to renegotiate or neutralise such provisions with the business team while the company is still in a position of strength.[ix]
The same applies to intellectual property. Early on, freelancers, consultants, or interns might have contributed to core technology without proper IP assignment agreements in place. Without written assignments, ownership may still legally remain with the creator. A Fractional GC does the gap analysis and secures confirmation of assignment deeds to ensure that the company actually owns the IP it is trying to sell.
Reviewing The Company's Data
This is where the buyer’s legal team forms its first impression of the company. A disorganised data room signals risk. Missing documents raise questions. Inconsistent filings invite deeper scrutiny. The Fractional GC treats the data room as a strategic asset, not just a filing cabinet. It curates and indexes the documents to tell a coherent story of compliance and governance. Everything from the statutory registers, tax filings, licences, and board records aligns.
Where documents are missing or historical gaps exist, the Fractional GC prepares disclosure notes in advance, controlling the narrative rather than reacting defensively. This level of preparation can greatly shorten the due diligence timeline and help maintain deal momentum.
Case Studies
BYJU’s Acquisition of White Hat
In the year 2020, BYJU’s acquired WhiteHat Jr. for approximately $300 Million, which later proved to be a cost burden[x] for BYJU’s. As of 2022, the 2020 acquisition accounted for approximately 27% of BYJU’s losses. Some problems arose post-acquisition, including high customer acquisition costs, a one-on-one classroom model that was difficult to scale, and potential violations of advertising regulations for deceptive advertising[xi]. Most experts believed that the aforementioned problems were not adequately considered in the due diligence process, given the intense capital-raising.
Snapdeal’s purchase of FreeCharge:
Snapdeal acquired FreeCharge in 2015 for approximately $400 million to expand its ecosystem and enable cross-selling across its e-commerce and payment services.[xii] This purchase failed due to a mismatch in user bases between the two services and a severe burn rate. As a consequence, it lost FreeCharge to Axis Bank for only $60 million, showing an 85% loss, which proves that the lack of consideration for financial facts at the time of the merger can lead to the failure of even the best merger plans.
OLA’s acquisition of Foodpanda India:
Ola ventured into the food delivery business in 2017 with the aim of exploring other sectors beyond ride services[xiii]. Although it made a significant investment in the deal, it could not compete with established firms in the market, such as Swiggy and Zomato, which contributed to the acquisition’s failure. Ola did not consider market factors before implementing the acquisition.
These case studies make it clear that the process of mergers and acquisitions does not depend solely on higher valuations and expansion plans. If companies are unable to conduct due diligence across legal, financial, compliance, and intellectual property matters, they may incur significant financial losses and even face business failure.
Requirement for Fractional GC in the Exit Strategy
A Fractional GC understands how the day-to-day operations of a start-up work, why certain filings were pushed back, why certain contracts were not signed, and why certain board meetings occurred without any formal paperwork. The Fractional GC helps them work through these problems and then assists in reframing them into a legal structure that complies with applicable regulations. This is especially important for Indian startups, as compliance with the Companies Act, FEMA regulations, and other industry regulations is being rigorously monitored. A Fractional GC helps a company become not only commercially successful but exit-ready.
Conclusion
An exit can be as much about governance as about growth. A clean cap table, meaningful contracts, and IP ownership are not administrative formalities; they immediately affect valuation. Every open issue in the start-up presents an opportunity for the buyer to revalue or harden the terms.
For start-ups that have progressed to maturity, a Fractional GC is not an expense but an investment in value protection, providing proactive remedies for legal concerns and helping founders trade last-minute anxiety for confidence.
In the intense environment of M&A, Fractional GC is like insurance that operates quietly in the background, so founders can confidently walk into the deal room as leaders. When it comes down to putting “the final John Hancock on the deal,” it is not only a time of relief; it is a well-deserved victory.
References:
[i] IP Leaders, ‘Legal Challenges Faced by Start-ups While Raising Funds’
[ii] Legal Lands, ‘Key Legal Challenges for Startups in India and How to Overcome Them’
[iii] ibid
[iv] SEBI, ‘ICDR Regulations, 2018’; SEBI, ‘Listing Obligations and Disclosure Requirements Regulations, 2015’
[v] IBA, Legal Due Diligence Guidelines (IBA 2018)
[vi] Companies Act, 2013 42, 62(1)(b)
[vii] ibid; Companies Act, 2013 ss 173, 174, 88
[viii] Indian Contract Act, 1872 (No. 9 of 1872) (India), s 10
[ix] Bridge Counsels (n 1)
[x] BYJU’s Investor Relations, Annual Report 2022 (BYJU’s 2022); WhiteHat Jr Financial Reporting (2020-2022)
[xi] Central Consumer Protection Authority (CCPA), Investigation into Jr Advertising Practices (2021); Ministry of Consumer Affairs, Government of India
[xii] Indian E-Commerce Giant Snapdeal Buys Bill Payment Service FreeCharge | TechCrunch
Snapdeal FreeCharge Acquisition Documents, 2015; TechCrunch India, ‘Snapdeal FreeCharge Write-Down Analysis’ (2017)
[xiii] Ola acquires Foodpanda India from Delivery Hero, to invest $200 million
Ola Investor Disclosures, Foodpanda India Acquisition Report (2017)
Gaurav Gupta is the Founder and Managing Partner at Bridge Counsels & Raghav Singhal is a 4th year, BBA LLB (H) Student at Vivekananda Institute of Professional Studies-Technical Campus (VIPS-TC) and Intern at Bridge Counsels.
