New way to ride the tech boom: Help startups with legal issues


US-based hedge fund Naples Global LLC has teamed up with Indian third-party litigation funding startup LegalPay to set up a fund to help finance local entrepreneurs embroiled in disputes with their investors, including private equity firms.

They have entered into an agreement to create a special purpose vehicle (SPV) that will help cash-strapped founders fight litigation, arbitration and other disputes with their investors.

“Since most founders are first-generation entrepreneurs, they lack the financial muscle to assert their legal rights,” said LegalPay CEO Kundan Shahi. “The idea behind this product is to create a level playing field for those disgruntled founders so that they don’t give up on their legitimate rights due to financial constraints.”

LegalPay will assess every dispute and its risk-reward ratio before committing up to ₹5 crore towards the legal costs in a case.

“Our growing investor community continues to remind us that the demand for alternative investments is increasing and now we need to go outside the USA. LegalPay and their leadership team fit that category perfectly as they are creating a lucrative asset class in India/Asia,” said Kerry Morris, partner, Naples Global LLC. “We are looking forward to expanding our asset allocation as we grow our US business and service new international markets.”

The fund has primarily committed to deploy $5 million (about ₹37 crore), with an option to increase the exposure. Naples Global’s business model appears to have worked in the US and other developed markets. With Indian startups gaining size and scale, the hedge fund has decided to test the water here, said people aware of the matter. However, it cannot comment on the matter in view of the non-disclosure agreements signed with its clients, they said.

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Common in mature economies

The development comes at a time when founders such as Ankiti Bose of Singapore-based business-to-business e-commerce startup Zilingo and Ashneer Grover, co-founder of BharatPe, are at the loggerhead with investors.

However, the SPV to be set up by Naples Global and LegalPay will focus on smaller startups where founders have strong cases but face financial constraints to fund their disputes.

Such funds finance founders’ litigation costs. Subsequently, the founders can either pay back along with predetermined interest or they will have the option to give away a portion of the equity in the startup to the fund. Confidentiality agreements bind most such agreements.

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