CSOP (Community Subscription Offer Plan) — Suitable for Retailers?

Someone asked me — is the CSOP (Community Subscription Offer Plan) structure of investing in startups — a robust tool for retail investors?

Most of these CSOPs are advertised as — Invest Rs 5000 and make manifold times thru them

I really didnt have a concrete answer as with my limited bandwidth, i try and stay away from complex structures

So, then, I probed deeper and analysed some sample term sheets and here are my observations:

1) It is an instrument issued under the Indian Contracts Act,1872 and not under Companies Act 2013- the latter should ideally be the right legislative piece for fund raise by a company

2) When you subscribe to CSOPs, you are termed as an Evangelizer and not a Shareholder — The term sheet is structured as if you are not an investor but have been given these in appreciation for promoting your Company and its products and/or services . The company seeks to leverage the network effect created through this community and achieve improved GMV/GTV…

The declaration you sign in the term sheet is :

(The CSOP Plan is an incentive-based scheme designed by the Company to reward its community evangelizers and is not a security under the Companies Act, 2013 and does not give me any rights in relation to the Company as a security holder)

3) There are voluntary exit events — when the party is on and the company raises funds at a higher value- so the Board gets Fair Market Value assessed and gets you a 2X, 3X , 4X exit.

Also, unlike shares or ESOPs, you dont have a right to stay invested for long term value creation — if the company so wants, you have to necessarily sell out -

Am not sure of what happens if there is a down round. The term sheets for CCPS that we usually come across have anti-dilutive clauses to protect the investor’s interest. But couldnt find any

4) More critical are the involuntary exit events — liquidation etc -

The term sheet writes “In case of a liquidation event of the Company, the Subscribers’ priority to receive the payment shall be as follows at par with equity holders.

how will be a CSOP compete with an Equity Shareholder, in the eyes of an Official Liquidator under the Companies Act.

Of course, these are startups and anyways there is nothing left when they go down under

5) No dividend/voting rights/guarantees — and for sure , you have signed up for indemnifying founders from any mandatory payment obligations under the exotic structure :

“The Company is a startup and the growth of the Company is linked to multiple factors including many, which are not in the control of the Company and the Company and the Founder/s shall not be liable in any manner to me in relation to the Payout Amount for the SARs held by me”

So, these are some basic points, why only sophisticated investors such as VCs would be best positioned to invest in such instruments and not retailers

what do you think ?

#startups #investing #csop