BharatPe co-founder Ashneer Grover claimed that the reported new round of funding by beleaguered pharmacy major PharmEasy will serve as a “sudden death” to the founders and its employees because of the anti-dilutive clause kicking in. According to media reports, PharmEasy is planning to raise around ₹2,400 crore through a rights issue at a 90 per cent markdown from the previous valuation in a bid to repay its loan from Goldman Sachs.
Citing a report from Tech Crunch, Grover argued that the new round of funding at a significantly reduced valuation, resulting in what is commonly known as a “down round”, can have severe consequences for the founders and employees because of the anti-dilutive clause in place.
“Down Round + Anti Dilutive Clause = Sudden Death (Jhatka) for the Founders!” the Shark Tank India fame entrepreneur said in a tweet.
An anti-dilutive clause is a provision in an investment agreement that protects investors from dilution, ensuring that their ownership percentage and investment value are not significantly affected in subsequent funding rounds.
In this case, Grover claimed, the anti-dilutive clause will come into effect, causing the Venture Capital investors who invested in PharmEasy at a higher share price (more than ₹5/share) to receive additional shares, effectively reducing their average cost per share to ₹5.
As a result, Grover said, even the VC investors who participated in the last funding round at ₹55/share will receive ten times more shares for free, effectively reducing their average holding cost to ₹5/share. However, this means that the founders and employees will see a significant reduction in their ownership percentage. The founders’ and ESOP (Employee Stock Ownership Plan) holders’ ownership stakes may be reduced to a negligible fraction, such as 0.001%, according to Grover.
“So if this news about Pharmeasy is correct – it’s not a down round – it’s the end. Because anti – dilutive clause will kick in, meaning VC investors who invested in @pharmeasyapp at more than ₹5/share ever will get more shares so their holding cost comes to ₹5/share,” he said.
“Simply even last round VC investors who invested at ₹55/ share will get 10x more shares for free so their holding comes to ₹5/share. Everyone BUT the Founders and Employees !!” he further noted.
Grover also suggested that debt taken by the founders in 2021 may turn out to be the most expensive capital raised by them, considering the adverse impact on their ownership and potential returns.
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