Sachin Bansal’s Exit form Flipkart- Lessons for Founders

US retailer Wallmart Inc. acquired a 77% stake in India’s largest online retailer for almost US$ 16 billions in its biggest acquisition to date. With this acquisition, brings an end to journey of Poster Boy- Sachin Bansal &  Flipkart.

Though it s a moment of ecstasy and celebrations for startups especially Flipkart, there are few questions which must have to looked seriously by the Founders/Startups.

Sachin Bansal- Exit from Flipkart-

Sachin was involved in talks with Wallmart from the beginning and it was expected that he could get a bigger role at Flipkart after the sale then the Executive Chairman. However, a last minute disagreement with Lee Fixel and Krishnamurthy over hos role and rights after the sale led to a bitter ouster. It’s the final affirmation of who controls the Company.

Sachin being a Founder of Flipkart wanted stronger rights such as preferential ‘founder rights’ & guarantees that he would have  a lot more say in Flipkart’s operations, however this was strongly refuted by Krishnamurthy who later on been retained as CEO by Wallmart.

“Since the start of Flipkart, Sachin’s life has revolved around it. For him every conversation is about Flipkart & everything is about Flipkart.” – Abhishek Goyal, Co-founder of Traxcn and early investor of Flipkart.

It has also been confirmed that with this ouster, there would be certain restriction on Sachin professional life as part of his exit from Flipkart:

1.       Restriction on starting any business that directly or indirectly competes with Flipkart for a minimum period of 18 months;

2.       Not to make nay investments or take management role in any competing business for atleast next 36 months.

At first Sachin Bansal is been forcefully exit from Flipkart and now cannot do any business as per his expertise.

Questions for Founders:

1.       Why couldn’t Binny Bansal or Sachin Bansal be able to stop the unenviable exit of Sachin Bansal from Flipkart?

2.       Sachin Bansal is the most important energy and reason for the Flipkart’s success. However, his exit form Flipkart shows that it’s the investor who takes all decisions and not the Founders. In Indian ecosystem, this kind of incident had happened earlier also- Forced exit of Mr. Rahul Yadav from Housing.com on disagreement with investor- Sequoia Capital.  Do this undue advantage can be checked at the beginning by the Founder’s themselves?

3.       The restrictive clause after the exit would make Sachin as spectator for a time period and there is a possibility that he may loose his spot in business world or atleast he would lag behind his competitive founders and may have to start fresh. Is there any way out for Founders to protect themselves or are they on the mercy of investors?

Way out-

At the time of execution of idea and starting of startup journey, most of the Founders are focused on the success of their startups, however, they forget to protect themselves. And, by the time their startup reached to the milestones as desired by the Founders, they need more partners to grow, especially investors and at alter stage of startup when investor join hands with Founders, they are very straight forward objective- to make more profit and to secure the money even at the cost of Founders. Though, investors have rights to protect their investment, does this protection extent beyond the point that for more profit, Founders can be forced out of their own startup and that to without their own consent.

Now, with growing awareness, most of the Founders are executing Founders Agreement, which not only protect the Founder’s interest but also enable them to negotiate the rights with investors instead of being cowed.  Therefore, it is very necessary to build a solid foundation before taking next step with your business. And, when you are having more than one founder for a startup, its wiser to execute a Founders Agreement among themselves. It will act as baseline for the relationship among the Co-Founders during the high & low of their professional journey.

In similar situation like of Sachin Bansal, Ola’s Founder, Bhavish Aggarwal had acted smartly and blocked his rights from the very beginning through Founders Agreement and the same has been agreed in the Investors Agreement.

To put it simply Founders Agreement is an agreement between founders of a company on number of issues they may face. It categorically states what is expected out of them and how decisions will be made.

There can be no perfect timing but one can say the sooner the better, but late is better than never. A good rule of thumb for when to think about a founders’ agreement is that point at which you start thinking about a company instead of merely an idea. If you have passed that point and have not yet created a founders’ agreement, better late than never.

As an old proverb -“Prevention is better than cure”, it would be wiser for Founder’s to execute a Founder’s Agreement which should govern the followings:

1.       Founders’ Objectives;

2.       Relationship & Obligation of each Founders;

3.       Decision making powers;

4.       Investment & contributions;

5.       Equity Holdings & Entrenchment Rights;

6.       Limitation & liabilities;

7.       Protection of intellectual property  & IP assignment

8.       Vesting Clause for the shares of the Founders;

9.       Appointment & removal of Key Managerial Personnel;

10.  Entry of Investor/third parties in the Company;

11.  Exit Mechanism;

12.  Non-Compete;

As a startups grows, you may discover that there are differences among co-founders on the future of startup or its mission. So, its better to execute a Founders Agreement inclusive of the terms mentioned herewith to create a mutually accepted terms for resolve the differences and grow together.

For any clarification, please feel free to connect with us at admin@equicorplegal.com / 08448824659.