By Vaibhav Tambe
Startups face numerous challenges when launching a new business, including securing funding and building a customer base. Amidst the excitement, it is vital for startups to implement robust financial practices that protect their interests and foster trust with clients and partners. Escrow accounts provide startups with a valuable tool for securely managing financial transactions and ensuring smooth business operations.
Security and protection are the primary drivers behind the adoption of escrow accounts for startups and their clients or investors. In high-value transactions, such as receiving investments or making substantial purchases, escrow accounts serve as a trusted intermediary. Instead of funds being directly exchanged between parties, they are securely held in the escrow account until specific conditions are met. This instils confidence in all involved parties that the transaction will be completed as agreed upon. For startups, which often face resource constraints and heightened risks, utilizing an escrow account can effectively minimize the risk of non-payment or non-delivery, ensuring that funds are released only when predetermined conditions are fulfilled.
Establishing trust and credibility is paramount for startups in their early stage. By employing an escrow account, startups demonstrate their unwavering commitment to transparency and accountability. Clients and investors gain peace of mind knowing that their funds are protected and will be released only when the agreed-upon terms are fulfilled. This level of trust forms a solid foundation for cultivating fruitful relationships and attracting future business opportunities.
While Escrows are extensively used by Startups, few of the notable escrows used in recent times are as below:-
Startup | Purpose | Deal Details |
Flipkart | Acquisition by Walmart | In 2018, the Indian e-commerce giant Flipkart was acquired by Walmart in a landmark deal worth $16 billion. As part of the agreement, a significant portion of the deal value was held in an escrow account. |
OYO Rooms | Investment from SoftBank Vision Fund | OYO, a prominent Indian hospitality startup, secured a substantial investment of $1 billion from SoftBank Vision Fund in 2018. To safeguard the interests of both parties, a portion of the investment amount was held in an escrow account. |
BYJU’s | Acquisition of WhiteHat Jr | Byju’s, an Indian edtech startup, acquired WhiteHat Jr, an online coding platform for children, in a deal worth $300 million in 2020. A portion of the acquisition amount was placed in an escrow account during the transaction. |
Startups often engage in multi-step transactions or partnerships involving milestone-based payments or contractual obligations. Without an escrow account, managing these transactions can be laborious and time-consuming, leading to potential disagreements or delays. By utilizing an escrow account, startups simplify the process, ensuring accurate allocation of funds and timely releases at the appropriate stages. This reduction in administrative burdens provides a clear framework for all involved parties, minimizes conflicts, and facilitates smoother business operations.
In conclusion, escrow accounts offer numerous benefits that hold immense significance for startups. They provide security, protection, and peace of mind for startups and their stakeholders. By prioritizing the utilization of escrow accounts, startups can build trust, streamline financial transactions, safeguard intellectual property, and establish themselves as reliable and credible business partners. As startups navigate the challenges of establishing their ventures, integrating escrow accounts into their financial strategy sets them on a path to success, fostering transparency, accountability, and efficient fiscal management.
(The author is Mr Vaibhav Tambe Founder & CEO, TransBnk, and the views expressed in this article are his own)
