Start-up Advisory

The two decisions that are expensive to reverse are both taken in the first month, usually without advice: what the entity is, and who owns it.

• Private limited, LLP or one person company: A private limited company is what institutional money can invest in and what carries ESOPs; an LLP is cheaper to run and taxed without a second layer on distribution. The right answer depends on whether you are raising, and when.
• Founder agreements and vesting: Equity that vests over time, with a cliff, and with what happens on a founder leaving written down before it happens. A cap table settled on a handshake is the single most common thing that stops a term sheet converting.
• The cap table as a document: Share certificates issued, the register of members written up, and PAS-3 filed. Investors do not take a spreadsheet as evidence of who owns the company.

Recognition is free and takes a form. The deduction behind it is worth real money and takes a case.

• DPIIT recognition: Available to a private limited company or LLP within ten years of incorporation with turnover under ₹100 crore in any year, working on innovation or a scalable model. It is the gate to most other benefits and we file it.
• Section 80-IAC: A hundred per cent deduction of profits for three consecutive years out of the first ten, for eligible start-ups incorporated within the window the section allows. It needs a separate certificate from the Inter-Ministerial Board, not merely DPIIT recognition — two steps, and most applicants stop at the first.
• Which three years: The deduction is claimed in the years the company is actually profitable, which is a choice to be made with the projections in front of you rather than taken by default.

Angel tax under section 56(2)(viib) was abolished with effect from assessment year 2025-26, and a good deal of outdated advice has not caught up. Valuation still matters — just for different reasons.

• What the abolition did and did not do: It removed the charge on a resident company issuing shares above fair market value. It did not remove the pricing guidelines under FEMA for a non-resident investor, and it did not remove section 56(2)(x) in the hands of a person receiving shares below value.
• Reports that survive scrutiny: Discounted cash flow or net asset value under Rule 11UA, and a merchant banker's certificate where FEMA requires one. We prepare the working so the assumptions are defensible three years later, when the assessment arrives.
• ESOP valuation: Needed for the perquisite in the employee's hands and for the company's own accounting, and it is a different exercise from the round valuation.

What an investor's accountant asks for is knowable in advance. Most of the delay in a round is a company assembling, under time pressure, what it should have been keeping.

• The instrument: Compulsorily convertible preference shares, convertible notes, or a SAFE, each with different tax, FEMA and accounting consequences on conversion. We model the consequence before the term sheet is signed, not after.
• Section 68 and the money that comes in: Share capital and premium are the classic section 68 addition. Identity, creditworthiness and genuineness have to be provable from the investor's side, which means collecting the papers when the money arrives and not when the notice does.
• FEMA reporting: Form FC-GPR within thirty days of allotment to a non-resident, and the valuation certificate behind it. A missed filing is compoundable but it is also the first thing the next investor's lawyer finds.
• The data room: Statutory registers, board and shareholder minutes, tax filings, TDS reconciliations and employment contracts, kept current rather than reconstructed.

An option pool is a compensation decision, a dilution decision and a tax decision, and the third is the one that is usually left to chance.

• Where the tax falls: The spread at exercise is a perquisite taxed as salary; the gain on eventual sale is capital gains. The employee therefore has a tax bill on a day no cash has changed hands, which is the problem the scheme has to be designed around.
• Deferred withholding for eligible start-ups: A start-up holding the section 80-IAC certificate can defer the tax deduction on the perquisite under section 192(1C), to the earliest of forty-eight months from the end of the relevant assessment year, the sale of the shares, or the employee leaving. Very few companies that qualify use it.
• Pool sizing and the trust question: How large a pool, whether it sits with a trust or is issued directly, and the SH-7 and MGT-14 the Act requires behind it.

A start-up's tax position for its first profitable year is decided by what it did in the loss-making ones.

• Section 79 and the carry-forward: A closely held company ordinarily loses its brought-forward losses unless shares carrying not less than fifty-one per cent of the voting power stay with the same persons, so a change of more than forty-nine per cent costs them — which is what a funding round does. Eligible start-ups are relieved from this for losses of the first ten years, provided every shareholder who held shares when the loss was incurred still holds them. It is a condition that can be broken accidentally in a secondary sale.
• The compliance calendar: TDS returns, advance tax, GST, ROC filings and the audit, run on a calendar rather than on reminders. Interest and late fees are the cheapest thing to avoid and the most common thing on a start-up's balance sheet.
• Books an investor and an officer will both accept: The same records answer a diligence questionnaire and a scrutiny notice. Keeping one set that does both is less work than keeping neither properly.