The dark side of startup M&As — did Jugnoo backstab SabKuchFresh?

It was the third week of March 2016 and everything seemed usual at SabKuchFresh’s 500 sqft office at Grain Market, Sector-26, Chandigarh.

Founders Arun Kumar, Sudarshan, and Narendra Patel were busy discussing operational loopholes in the business. The trio had started an online grocery delivery service and were highly optimistic.

One afternoon, things got exceptionally exciting when Samar Singla, the poster boy of Chandigarh’s startup circle, entered their office. Samar is the founder of Jugnoo, a growth-stage startup that has raised more than $25 million in funding from the likes of Paytm and Snow Leopard Ventures. The company is an on-demand, multi-service provider built on top of a fleet of auto-rickshaws.

It was no ordinary meeting. Samar had come with a proposal to acquihire SabKuchFresh (SKF). The offer sounded lucrative as Samar explained Jugnoo’s aggressive plans to scale hyperlocal business in fresh vegetable, fruits, and grocery verticals.

Jugnoo was primarily trying to give impetus to its hyperlocal play Jugnoo Fatafat by acquiring SabKuchFresh in the tri-city (Chandigarh, Panchkula, and Mohali) area. The company relaunched Fatafat in May this year after pulling the plug last year.

Jugnoo has been busy trying out various models to open up monetisation channels. “We were happy that Jugnoo had shown interest in SKF. After a series of internal discussions, we were ready to fly with them,” says Arun Kumar, then Co-founder and COO of SKF.

Announcement of the news on YourStory: Jugnoo to relaunch ‘fatafat’ deliveries for consumers, acquihires SubKuchFresh

Fast-forward to the first week of April, when Samar and team discussed the pros and cons of the acquihire. However, there was a problem. SKF was a combination of two proprietary firms —SabKuchFresh and Sai Traders. The former was owned by Sudarshan, while the latter belonged to Narendra. To set a context, both are brothers. “We were in the process to form a private limited firm much before the offer from SoCoMo Technology Pvt Ltd, Jugnoo’s parent company,” says Arun.

SoCoMo Technology is a mother company that operates Jugnoo, hyperlocal delivery platform Fatafat, and a few more.

Samar wanted the deal to happen fast and asked the SKF founders to float a private limited firm as a special purpose vehicle (SPV) to facilitate the transaction. Somewhere in the third week of April, SKF became part of a newly-constituted private limited firm called Exo Fresh (referred to as Exo internally). The same week, an important aspect like valuation (Rs 1 crore) against (80 percent) of Exo Fresh’s equity was discussed. The remaining 20 percent was supposed to go to the founders (7.5 percent to Sudarshan and Arun respectively, and five percent to Narendra).

Also read: What goes into an M&A deal: a comprehensive timeline of events

YourStory is in possession of the emails that detail these conversations.

Vanshika Jain, (then VP with Jugnoo) sent the final deal (via email) structure to the Exo Fresh founders on behalf of SoCoMo Technology. The structure has the following clauses:

1. Getting Jugnoo directors on board

2. Transfer of shares from Sudarshan, Narendra, and Arun to Jugnoo at par value

3. Investment by Jugnoo in Exo Fresh against allotment of shares

4. Exo Fresh purchases assets of Sai and SKF

5. Arun and Sudarshan to be on rolls of Exo Fresh

Sudarshan and Arun had a few concerns to the above structure. By then, Narendra was out of the venture as he had to join a government job. Narendra’s equity got transferred to his brother Sudarshan.

The first concern was that they (founders of SKF) wanted a confirmation from Jugnoo’s side that Exo Fresh would not terminate the contract before their entire options vested (vesting period decided as four years).

Second, they wanted Jugnoo Fresh also to be part of Exo Fresh since they would like to hold a stake in the product they would be working on.

Third, they wanted that their share in Exo Fresh should not dilute till the time Jugnoo was putting the money.

Last, they wanted to continue as directors in Exo Fresh along with Jugnoo directors.

By the first week of April, the Exo Fresh team moved to Jugnoo’s office as Samar requested them to.

Related read: Why companies get into multi-million dollar M&A deals

Surprise, surprise

Around April 28, Arun and Sudarshan were taken aback by a surprise announcement from Samar.

“During a meeting on the same day, Samar mentioned that the acquihire amount will not be worth Rs 1 crore as discussed. It would be Rs 20 lakh less (Rs 80 lakh),”

Arun says, the pain and frustration visible in his tone. The Jugnoo team also put in another clause which had not been talked about earlier — 80 percent of the promised cash amount would be paid initially and the other 20 percent (Rs 16 lakh) would be target driven. The target was to grow the revenue by 1.5X in three months from the acquisition.

Meanwhile, according to Isha Singla, Co-founder of Jugnoo, the final deal value was agreed at Rs 64 lakh plus Rs 16 lakh (based on performance). She adds,

“The deal value was decided mutually and on the basis of the valuation report and DD of the company.”

She says that the amount of Rs 16 lakh was to be paid to Sudarshan and Narendra as they were the proprietors of the businesses (Sai Traders & SKF) acquired by Exo Fresh. “Arun had no stake in those businesses as per records available with us,” she emphasises.

The above argument did not go down well with Arun. “I really find it shocking when Jugnoo denies the basic things. What me, Sudarshan, and Narendra had internally is none of their business. He (Samar) just needs to answer if I was a 35-percent stakeholder in Exo Fresh or not. Was my share 7.5 percent after it or not?” he questions.

Interestingly, the email thread essentially meant for acquisition-related communication has no mention of Sai Traders and SKF. The thread clearly implies that Jugnoo was dealing with Exo Fresh, not the above proprietaries.

Complete acquisition was never in the picture

“We never agreed to a complete acquisition of the company,” adds Arun. On May 1, two days before the acquisition was to materialise, the duo was jolted as Samar expressed interest in acquiring 100 percent of SKF to safeguard the company’s interest. “It was a catch-22 situation for us. By then, we had been sitting in Jugnoo’s office and everyone in the team was excited about the acquisition. Backing out wasn’t an option at that stage,” says Arun.

Responding to this allegation, Jugnoo said that there were several rounds of discussions and negotiations with Exo Fresh and the final deal was for 100 percent equity acquisition in the company by Jugnoo. Says Isha,

“This was mutually decided and agreed upon by both the parties. The 20-percent stake was to be given in the form of ESOPs with vesting time of four years (with one year cliff and three years linear slope).”

Dismissing the claims of any prior discussion about 100-percent equity acquisition, Arun adds, “Initially, it started as a request that they will want the whole 100 percent, then it changed into a force [sic] and later it was said that it will come via an agreement or a sweat equity or a reverse vesting. This should have been done as soon as the deal was complete. We were made to go door-to- door for several months.”

Also read: Why these global mergers and acquisitions fell apart

Email interaction with SKF’s founders and Jugnoo clearly states that the initial discussion was essentially for 80-percent stake and not 100 percent. YourStory has access to this email.

Later that day, Arun and Sudarshan brainstormed on the acquisition details. The next day, Samar presented an alternative to pay the mentioned stocks. Jugnoo agreed to allocate stocks through an agreement, sweat equity, reverse investing, and some other means. “We agreed to his new plan with a heavy heart,” says Arun.

Things were back on track until the first half of June. “By that time, we met the target and asked the Jugnoo team to pay the remaining Rs 16 lakh. We kept following up for over a month with Samar and team but it did not yield any result,” says Arun. Soon, the relation turned sour. “Samar and the Jugnoo team started avoiding us,” he adds.

As of now, Jugnoo has paid about Rs 12 lakh. Sudarshan has confirmed the payment of the above amount to YourStory over a phone call.

However, our detailed email queries to him remain unanswered despite multiple follow-ups.

Trail of unsuccessful and unending follow-ups

Besides the money, Arun and Sudarshan had also asked for the required papers for equity allocation in SoCoMo Technology. However, they got only timelines and assurances for the equity allocation. “Sometimes they said that they are reaching an agreement and that the paperwork was in process to get the board’s approval. They kept giving us excuses time and again,” says Arun.

Meanwhile, Arun’s salary started getting delayed. “When I asked why, the Jugnoo team gave non-performance as the reason,” adds Arun.

Jugnoo admitted a delay in salaries in a few instances. “Salaries could not be paid on time for a couple of months and this was discussed as well and agreed upon by the co-founders,” says Isha. However, Arun disagrees that there was any prior commitment or mention of salary delay in the deal structure, including any other documentation.

During the second half of August, Arun started a series of follow-ups for the equity. “Samar and Prachi (VP, finance, Jugnoo) asked us (Sudarshan and me) to get stock via equity stock option (ESOPS). It caused a lot of frustration for us,” says Arun.

Jugnoo wanted directors to become employee for ESOPs

Let’s revisit Jugnoo’s plan of paying 20 percent of deal value through stock to the founders. Hang on. Is it feasible?

No, it’s not, as Arun and Sudarshan were directors and promoters of SKF. According to the ESOP guidelines laid down by Company Law of India, promoters or promoter group (family members and close associate) aren’t entitled to own ESOPs.

When the duo highlighted this technicality to Prachi, much to their surprise, she forced them to step down as promoter directors and maintain the status of employees. This was again an impractical solution as they had all the agreements and rights based as promoter directors. If they had stepped down, the agreements would have become null and void.

“I felt dejected and humiliated,” says Arun.

Last nail in coffin: founder’s ouster

Fast-forward to the last week of August, Arun had an altercation with a few senior employees of Jugnoo over alleged cheating in equity allocation and non-payment of promised cash. On the evening of September 8, Arun got an email from Jugnoo about a board meeting the very next day. The subject of the meeting was to terminate Arun from the company.

“Technically or legally, there should have been a gap of one week between notice and date of the meeting. But Jugnoo simply didn’t bother to follow this,” says Arun. The next day, the board unanimously voted in favour of ousting Arun from the company.

Replying to this allegation, Jugnoo said that the meeting was called as per the provisions of the law for shorter notice. “The reason was outlined in the notice circulated to the board. The reason for Arun's termination was his non-performance which was communicated during the board meeting,” says Isha. However, this claim turned out to be false. As per the share-holding agreement (between Jugnoo and SKF), there is no provision of a shorter notice. YourStory is in the possession of a copy of the shareholders' agreement between the two parties.

Arun says that Jugnoo can’t call for a meeting on short notice as it was against the shareholding pattern. “Request for a meeting for tomorrow (on September 8) was sent at 6:29 pm after office hours. Moreover, no reason was given. Perhaps, the only reason was that they wanted to retain the share,” he adds.

Refuting Jugnoo’s reason for his ouster, Arun says, “When the company was acquired, the average revenue was Rs 20 lakh a month. In June, the revenue jumped by 3X (Rs 60 lakh). Not sure how the performance is measured here,” he notes.

Whom vs who: violation of non-compete clause

While it seems like a one-sided story with the big guy trying to crush a smaller competitor, there’s more to this tale.

Jugnoo alleges that Arun has already started a competing business under the name of ‘Agro Fresh’ and poached its clients as well as employees.

“This is a gross violation of the non-compete clause in his employment agreement and manifests his mala fide intentions against Jugnoo,” says Isha.

Arun admitted that he violated the non-compete clause. However, he asks, “What about them? They twisted, violated, and abused all the major clauses.”

While Jugnoo laments the violation of the non-compete clause, our probe revealed that they started Jugnoo Fresh as a competing business against Exo Fresh even when Arun was very much a part of the company. Jugnoo Fresh was started somewhere around the middle of August.

YourStory has confirmed this from three sources in the tri-city area. These sources were approached by the Jugnoo Fresh team to on-board as vendors. Additionally, we also spotted a picture that boasts Jugnoo Fresh as part of the company through a catchy signboard (outside Jugnoo’s office).

Recalling one bizarre incident, Arun says, “I witnessed that some senior executives posed themselves as a part of Jugnoo Fresh instead of Exo Fresh to vendors. I was baffled by this and when I asked about their motive behind pushing Jugnoo Fresh, Samar said it was Jugnoo Fresh from now on and not Exo Fresh. We also had an argument over it. It came as a real shocker,” he concludes.

Little history of Jugnoo’s claims

To give readers a bit of background about Jugnoo’s past mess ups, we will take you through a couple of examples. In July last year, Jugnoo — or to be precise, Samar — confirmed to multiple media outlets, including YourStory that it had acquired Mumbai-based BookMyCab. However, this turned out to be false.

Later in March this year, BPO transport service provider Wings Travels closed the acquisition of taxi aggregator BookMyCab. Almost a similar situation emerged when Jugnoo prematurely confirmed the acquisition of Pune-based Autowale. The deal didn’t happen for some unknown reasons.

While we observe that the majority of startups announce Series B at one go (even if it comes in tranches and with growth targets), Jugnoo announced $15.5 million worth Series B across three tranches in the duration of six months (Nov 2015 to April 2016).

With the entire funding scenario heading south and a correction setting in, the unbridled enthusiasm which often led to rash decisions failed to withstand. The above is a clear case of miscommunication, jumping guns, and chasing unrealistic targets of making castles in the air.

In this case, both sides have suffered, but hopefully, it will be a lesson for the whole startup ecosystem.

What do you make of this controversy? Let us know in the comment section below.