Pledge
A pledge embodies a contractual agreement wherein one party commits to transferring cash proceeds from equity liquidation to another party. This transfer occurs in exchange for cash received before the liquidation event transpires.
What it Means:
In startup finance, a pledge serves as a safeguard mechanism, ensuring that cash received earlier is repaid through the proceeds generated from liquidating equity. It solidifies the commitment between parties involved in the transaction.
How to Calculate:
Calculation of a pledge involves assessing the cash amount received upfront and determining the corresponding cash proceeds from equity liquidation. The pledge amount is typically equivalent to or less than the anticipated liquidation proceeds.
Why Measure:
Measuring a pledge is crucial for evaluating the financial obligations and commitments between parties. For Indian founders, understanding the magnitude of pledges provides clarity on the financial transactions associated with equity liquidation.
Examples:
Consider an Indian startup wherein an investor pledges to transfer 50% of the cash proceeds from equity liquidation to a lender who provided a loan of 20 lakh INR earlier. If the equity liquidation yields 50 lakh INR, the investor would transfer 25 lakh INR to fulfill the pledge.
In the dynamic landscape of startup finance, pledges play a pivotal role, facilitating transparent and structured financial agreements among stakeholders.