LLP Advantages and Disadvantages: Everything You Need to Know

What is a Public Company?

A public company, also known as a publicly traded company, is a corporation whose shares are freely bought and sold by the public on stock exchanges or over-the-counter markets. Key aspects of a public company include:

• Unlimited number of shareholders.
• Shares are publicly traded and easily transferable.
• Must issue a prospectus before offering shares to the public.
• Strict disclosure and reporting requirements.
• Ability to raise substantial capital through public markets.
• Governed by a board of directors responsible to shareholders.

Public companies must comply with stringent regulations set by securities commission like the the Securities and Exchange Board of India (SEBI). These regulations ensure transparency, protect investor interests, and maintain market integrity.

Features of Public Limited Company

1. Free transferability of shares: Shares can be freely bought and sold on stock exchanges, providing liquidity to investors.
2. No limit on number of shareholders: There is no restriction on the maximum number of shareholders a public company can have.
3. Prospectus requirement: Public companies must issue a prospectus before offering shares to the public, disclosing key information about the company.
4. Public disclosure of financials: Public companies are required to publicly disclose their financial statements on a regular basis.
5. Strict compliance norms: Public companies are subject to stringent regulations and disclosure requirements set by governing bodies like SEBI.
6. Access to capital markets: Public companies can raise substantial funds from a large pool of investors through various securities like IPOs, FPOs, rights issues and preferential allotments.
7. Listing on stock exchanges: The shares of public companies are listed and traded on recognised stock exchanges.

What is a Private Company?

A private company, also referred to as a privately held company, is a business entity whose shares are not publicly traded. Ownership is closely held by a limited group of shareholders, such as founders, family members and private investors. Key characteristics of a private company include:

• Limited to a maximum of 200 shareholders
• Shares are privately owned and not freely transferable
• Minimal disclosure requirements and greater privacy
• Raising capital through private means like angel investors or venture capital
• Closely controlled and managed by founders and early investors

Private companies have more flexibility in their operations and decision-making as they are not subject to the same level of public scrutiny and regulatory oversight as public companies.

Features of Private Company

1. Restricted share transfer: Shares of a private company cannot be freely transferred and are subject to restrictions outlined in the company's articles of association.
2. Limited number of shareholders: Private companies can have a maximum of 200 shareholders.
3. No prospectus requirement: Private companies are not required to issue a prospectus to the public for raising funds.
4. Confidentiality of financial information: The financial statements of private companies are not publicly disclosed and remain confidential.
5. Fewer compliance requirements: Private companies have lesser compliance and regulatory filing requirements compared to public companies.
6. Flexibility in management: Private companies have greater flexibility in their management structure and decision-making processes.
7. No requirement for a statutory meeting: Private companies are not required to hold a statutory meeting or file a statutory report.

Public Company Vs Private Company

Following are the key differences between public and private companies:

The choice between operating as a public or private company depends on various factors such as the company's capital requirements, desired level of control and flexibility, willingness to disclose financial information, and long-term objectives.

Can A Public Company Convert into a Private Company and Vice Versa?

Yes, a public company can be converted into a private company and vice versa, subject to certain conditions and procedures outlined in the Companies Act 2013.

To convert a public company into a private company, the following steps need to be taken:

1. Pass a special resolution in a general meeting of the company to approve the conversion.
2. Alter the company's memorandum and articles of association to reflect the changes required for a private company.
3. File an application with the National Company Law Tribunal (NCLT) for approval of the conversion.
4. Obtain approval from the NCLT after considering any objections or suggestions from regulatory authorities or other stakeholders.
5. File the NCLT order approving the conversion with the Registrar of Companies (ROC) within 30 days.
6. The ROC will issue a fresh certificate of incorporation reflecting the company's status as a private company.

Similarly, a private company can be converted into a public company by following these steps:

1. Pass a special resolution in a general meeting of the company to approve the conversion.
2. Alter the company's memorandum and articles of association to comply with the requirements of a public company.
3. Increase the number of directors to the minimum required for a public company (3 directors).
4. File an application with the ROC for approval of the conversion.
5. Obtain approval from the ROC after ensuring compliance with all the necessary provisions.
6. The ROC will issue a fresh certificate of incorporation reflecting the company's status as a public company.

Conclusion

Understanding the differences between private and public companies is crucial for entrepreneurs, investors and other stakeholders. While public companies offer the advantage of access to public capital and liquidity for shareholders, they also face stricter compliance requirements and public scrutiny. On the other hand, private companies provide greater control and flexibility to shareholders but have limitations in raising capital and providing liquidity to investors.

Regardless of the choice, both private and public companies play vital roles in the economy, driving innovation, creating jobs, and contributing to overall economic growth. Understanding their distinct characteristics and the implications of each structure is essential for navigating the complex world of business and making sound decisions.

Frequently Asked Questions

Lack of a Clear Value Proposition

A strong value proposition is the foundation of any successful fundraising pitch. Yet, many founders struggle to explain what truly sets their startup apart. VCs in India often report that over 60% of the pitches they reject fail at this first hurdle. Investors aren't just backing ideas—they're investing in solutions that address real market needs with a clear, defensible growth path.

The Impact:

• A weak or generic value proposition makes it hard for investors to see the potential for a 10x-100x return on investment.
• It raises doubts about the founder’s understanding of the market. An average investor spends less than three minutes reviewing a pitch deck; a confusing message means instant rejection.

How to Avoid It:

• Articulate your Problem-Solution Fit: Quantify the problem. Instead of "we help SMEs digitize," say "we help India's 63 million SMEs reduce their average monthly accounting overhead by 30%."
• Highlight Unique Differentiators: Is it your proprietary tech, an exclusive partnership, a revolutionary business model (e.g., unique GTM strategy for Tier-2/3 cities), or a founding team with deep domain expertise from a relevant unicorn?
• Keep it Concise: Practice a 30-second elevator pitch that clearly states the problem, solution, target market, and secret sauce.

Underestimating Market Size and Competition

Many founders present overly optimistic market size estimates, often citing a massive, irrelevant TAM. Investors quickly pick up on these gaps, which signal poor research and a weak business strategy.

The Impact:

• Claiming the entire $150 billion Indian retail market for a niche D2C fashion brand erodes credibility instantly.
• Ignoring direct and indirect competitors shows a lack of preparedness. An investor will likely know the competitive landscape better than you.

How to Avoid It:

• Use Credible Data: Back your market estimates with data from sources like NASSCOM, Bain & Company, Inc42, Tracxn, or government reports (e.g., Economic Survey of India).
• Present a Clear TAM, SAM, SOM:
  
  • Total Addressable Market (TAM): The total market demand (e.g., The entire Indian EdTech market, valued at $29 billion by 2030).
  • Serviceable Available Market (SAM): The segment you can target (e.g., K-12 test prep market in India, estimated at $10 billion).
  • Serviceable Obtainable Market (SOM): What you can realistically capture in 3-5 years (e.g., 1-2% of the SAM, representing a $100-$200 million revenue opportunity).
• Showcase Competitive Analysis: Create a competitive matrix that maps key players against features, pricing, and market share. Clearly articulate your unique edge.

Insufficient Due Diligence on Investors

In the rush to secure funding, many startups forget that an investor-founder relationship is a long-term partnership, often lasting 7-10 years. Not every investor is the right fit for your business.

The Impact:

• Misaligned goals can lead to conflict. An investor seeking a quick 2-year exit will clash with a founder building for long-term market leadership.
• Some investors carry reputational risks or have a portfolio full of conflicting companies, which can harm your business.

How to Avoid It:

• Research Investor Portfolios: Use platforms like Tracxn or Crunchbase to see their past investments, sector focus, typical cheque size, and involvement level.
• Conduct "Reverse Due Diligence": Talk to at least 2-3 founders from their portfolio. Ask about their experience, the value-add beyond capital, and how the investor behaves during challenging times.
• Ensure Vision Alignment: Discuss your long-term vision, potential exit scenarios, and governance expectations before signing the term sheet.

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Poor Financial Projections

Financial projections aren’t just numbers on a slide—they're a reflection of your business acumen. Investors expect thoughtful, data-driven projections that are realistic and achievable.

The Impact:

• Projecting 100% month-on-month growth for 36 months without validated unit economics (CAC, LTV) is a major red flag.
• Unrealistic forecasts that show profitability in six months for a deep-tech R&D startup diminish trust in your planning abilities.

How to Avoid It:

• Build Bottom-Up Projections: Base your forecasts on key drivers: marketing spend, conversion rates, sales team efficiency, production capacity, and churn rates.
• Show Key Metrics: Clearly state your assumptions for Customer Acquisition Cost (CAC), Lifetime Value (LTV), Churn Rate, and Monthly Burn Rate. A healthy LTV/CAC ratio (ideally >3:1) is a strong positive signal.
• Present Scenarios: Show a baseline (most likely), an optimistic, and a conservative case. This demonstrates strategic thinking.

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Ignoring Legal and Regulatory Compliance

This is one of the most critical and overlooked areas. Non-compliance with Indian regulations can kill a deal during due diligence.

The Impact:

• Legal and compliance issues are a leading cause for fundraising delays, with 25-30% of deals facing hurdles at the due diligence stage due to poor documentation.
• Non-compliance with the Companies Act, 2013, or FDI norms can lead to hefty penalties, voiding of share allotment, or even criminal proceedings.

How to Avoid It:

• Maintain a "Virtual Data Room" (VDR): Keep all documents audit-ready. This includes:
  
  • Corporate Documents: Certificate of Incorporation, Memorandum of Association (MoA), Articles of Association (AoA).
  • Secretarial Records: Up-to-date statutory registers, board minutes, and shareholder resolutions.
  • Cap Table: A clean, accurate capitalization table. Any discrepancy here is a major red flag.
  • IP: All intellectual property assignments from founders, employees, and consultants are properly documented.
  • Employee Documentation: Compliant employment agreements and a properly structured and approved Employee Stock Option Plan (ESOP).
• Comply with FDI Regulations: If raising from foreign investors, ensure compliance with FEMA (Foreign Exchange Management Act) regulations, including sectoral caps, pricing guidelines, and timely reporting to the RBI through the FIRMS portal (Form FC-GPR must be filed within 30 days of share allotment).
• Engage Professionals: Work with a qualified Company Secretary (CS) and a corporate lawyer from day one. The cost is negligible compared to the cost of a failed funding round.

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Overvaluing Your Startup

An inflated valuation without the backing of strong metrics can scare off investors. The Indian market has seen valuation corrections, with late-stage valuations dropping by 20-25% in 2023.

The Impact:

• A high valuation sets unrealistic expectations, making future rounds difficult and increasing the risk of a "down round," which demoralizes employees and signals distress to the market.
• For a pre-revenue idea, asking for a ₹50 Crore ($6 million) valuation will likely get you laughed out of the room. A typical Indian idea-stage valuation is in the ₹5-15 Crore ($0.6M - $1.8M) range.

How to Avoid It:

• Benchmark Your Valuation: Research recent deals in your sector and stage in India. A seed-stage SaaS startup with ₹1 Crore ($120k) in ARR might command a valuation between ₹10-20 Crore (10x-20x ARR), not ₹100 Crore.
• Focus on Building Value: Traction speaks louder than projections. Show month-on-month growth in users, revenue, or engagement before demanding a premium valuation.
• Be Negotiable: Use convertible instruments like iSAFE notes (India Simple Agreement for Future Equity) to defer the valuation discussion to a later, metrics-backed round.

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Focusing Solely on Equity Funding

Equity isn't the only option. India's venture debt market has grown significantly, with over $1.2 billion disbursed in 2023. Overlooking alternatives can lead to unnecessary dilution.

The Impact:

• Selling 20-25% of your company at the seed stage can lead to founders having less than 50% ownership by Series A, reducing their control and motivation.
• You may be missing out on non-dilutive capital that is better suited for your needs (e.g., funding inventory).

How to Avoid It:

• Explore Venture Debt: If you have predictable revenue streams, venture debt can fund working capital or marketing expenses with minimal dilution (1-2% warrant coverage vs. 20% equity).
• Look into Grants and Government Schemes: Investigate programs like the Startup India Seed Fund Scheme (SISFS), SIDBI Fund of Funds, and various state-level grants that provide capital without taking equity.
• Consider Revenue-Based Financing: For businesses with recurring revenue (SaaS, D2C subscriptions), platforms offer capital in exchange for a percentage of future revenue, with no equity dilution.

Rushing the Fundraising Process

Fundraising is a marathon, not a sprint. The pressure to secure capital often leads to a rushed process, resulting in bad deals or missed opportunities.

The Impact:

• A rushed pitch appears unprofessional and unprepared. Investors can sense desperation.
• Founders often accept the first term sheet they receive, which may have predatory clauses (e.g., aggressive liquidation preferences, broad veto rights).

How to Avoid It:

• Plan for a 4-6 Month Cycle: The average fundraising process in India, from the first outreach to money in the bank, takes 4-6 months. Start well before your cash runs out.
• Prepare a Target List: Research and build a list of 50-100 relevant investors. Fundraising is a numbers game. You might need 100+ conversations to get 1-2 term sheets.

Build Relationships Early: Don't reach out to investors only when you need money. Connect with them on LinkedIn, share updates, and seek advice months in advance. A warm introduction from a trusted source increases your chance of getting a meeting by over 10x.

What is the valuation of a company?

Company valuation is the process of determining a business's financial worth or fair value. It is not just about looking at profits or assets- it’s about considering both financial and non-financial factors that influence the company’s value.

For example:

• Financial factors include revenue, profit margins, debt levels, and cash flows.
• Non-financial factors include brand reputation, customer base, intellectual property, and market potential.

A valuation helps stakeholders, founders, investors, lenders, or acquirers understand the true worth of a company for purposes like fundraising, mergers & acquisitions, taxation, or stock market investing.

How to calculate company valuation?

There is no single method to calculate company valuation. Instead, there are three primary approaches commonly used:

1. Income Approach

• Focuses on the company’s future earnings potential.
• The most common method here is the Discounted Cash Flow (DCF) model.
• DCF estimates the present value of future cash flows, adjusted using the Weighted Average Cost of Capital (WACC).
• Useful for startups and growing companies where future cash flows are expected to be significant.

2. Asset Approach

• Focuses on the net value of the company’s assets after deducting liabilities.
• Often called the Net Asset Value (NAV) method.
• Formula: NAV = (Fair Value of Total Assets – Total Liabilities).
• Suitable for asset-heavy businesses like real estate, manufacturing, or holding companies.

3. Market Approach

• Values a company by comparing it with similar businesses in the market.
• Uses multiples such as:
  
  
  • Price-to-Earnings (P/E) Ratio
  • Price-to-Sales (P/S) Ratio
  • Price-to-Book Value (PBV) Ratio
    
    
• Helps determine whether a company’s stock is undervalued or overvalued compared to peers.

Key metric: EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) is often used in valuation since it reflects a company’s operating performance without non-cash and non-operating costs.

Company Valuation Formula

There is no one universal formula for valuation- different methods use different formulas. Here are some of the most widely used:

1. Asset Approach (Net Asset Value)

NAV = Fair Value of Assets - Total Liabilities

Example: If a company has assets worth ₹100 crore and liabilities worth ₹40 crore, its NAV = ₹60 crore.

2. Income Approach (Discounted Cash Flow)

Where, 

CFt = Cash flow in year t

W ACC = Weighted Average Cost of Capital

t = Time period

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This gives the present value of all future cash flows.

3. Market Approach Ratios

• P/E Ratio

• P/S Ratio

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• PBV Ratio

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These ratios are compared with industry averages to determine valuation.

Company Valuation Examples

Example 1: Discounted Cash Flow (DCF)

Suppose a company is expected to generate free cash flows of ₹10 crore annually for the next 5 years. The discount rate (WACC) is 10%.

= ₹37.9 crore (approx).

If the market cap of the company is ₹30 crore, the stock may be undervalued.

Example 2: Relative Valuation (P/E Ratio)

• Company A’s P/E ratio = 18x
• Company B’s P/E ratio = 12x
• Industry average P/E ratio = 15x

Here, Company A is trading above the industry average (possibly overvalued), while Company B is trading below (perhaps undervalued).

Importance of Calculating a Company’s Valuation

• For Investors: Helps identify whether a stock is overpriced or a good buying opportunity.
• For Founders: Essential during fundraising, mergers, acquisitions, or strategic exits.
• For Lenders: Determines the borrowing capacity and creditworthiness of a business.
• For Markets: Provides transparency and helps maintain fair pricing of securities.
• For Business Growth: Guides decision-making on expansions, investments, and restructuring.

Frequently Asked Questions (FAQs)

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