Chapter – 4

STARTUPS AND ITS REGISTRATION

Synopsis
1. Introduction to Startups
2. Evolution of Start-ups
3. Startup Eco-system
4. Startup India Policy
5. Process of Recognition of Startup
6. Key Points
7. Indian States with startup Policies
8. Exemptions for Startups
9. Tax Exemptions for the Startups, Effective from 2017-18
10. Benefits or Exemptions to Start-ups under Companies Act, 2013
11. Following are the Important Points for a Start Up
12. Financing Options Available For Startup Companies
13. Different financing options
14. Mudra Banks (Micro Units Development and Refinance Agency Bank)
15. Procedure for loan from MUDRA Bank
16. MUDRA Card

Quick Recap
“Make in India” (2014)

2015 = Start-up Policy

A B C

Funding Knowledge Knowledge

+ + +
Time Time Funding
+ + +
No knowledge No Funding No Time

Start up Business

1. Introduction to Startups
 A startup company is an entrepreneurial venture which is typically an emerging, fast- growing
business that aims to solve an unmet need by developing a viable business model around an
innovative product, service, processor a platform.
 A startup is usually a company designed to effectively develop and validate a scalable business
model.
 Start-ups may have high rates of failure, but the minority of successes includes companies that have
become large and influential.
180 Startups and their Registration Chap. 4

Quick Recap
Introduction to Start-ups

Entrepreneurial Emerging goods & Innovation Result

venture services (Business)

Maximum are failure

Very few

Successful

Large & Influential

2. Evolution of Start-ups
 Startup companies can come in all forms and sizes.
 Typically, a startup will begin by building a first minimum viable product (MVP), a prototype, to
validate, assess and develop the new ideas or business concepts.
 In addition, startups founders do research to deepen their understanding of the ideas, technologies or
business concepts and their commercial potential.
 A Shareholders’ Agreement (SHA) is entered into between the founders and investors to confirm
investment terms, rights of investors, exit clauses and any other important agreement terms.
 A company may cease to be a startup as it passes various mile stones, such as becoming publicly
traded on the stock market in an Initial Public Offering (IPO), or ceasing to exist as an independent
entity via a merger or acquisition.
 Given that startups operate in high-risk sectors, it can also be hard to attract investors to support
the product or service development or attract buyers.
Quick Recap
Evolution

All forms Tasks Generally

&
Av Financer
Sizes Minimum Viable
Co-founder (Idea) (Angel Investor
Product

AV Oyo Like minded Product with just Share Holding Agreement

(+ enough features to
Classes Rooms
satisfy early
) consumers
Complimentary skills
& Amount
To provide +
Finance feedback for future Rights
developments +
Technical Know how Exit clause
Chap. 4 Startups and their Registration 181
3. Startup Eco-system
Startup ecosystems generally encompass the network of interactions among people, organizations, and
their environment. Any particular start-up ecosystem is defined by its collection of specific cities or online
communities. In addition, resources like skills, time and money are also essential components of a start-
up ecosystem. The resources that flow through ecosystems are obtained primarily from the meetings between
people and organizations that are an active part of those startup ecosystems. These interactions help to create
new potential startups and to strengthen the already existing ones.
Quick Recap
Start-up ECO System

Money Networking
+
Time
+
Physical (+) Online
Skills

Both

4. Startup India Policy

1. Start-ups Campaign
2. Government initiatives
3. Exemptions for Start-ups
4. Tax benefits
5. Cooling period for start ups
Startup India campaign is based on an action plan aimed at promoting bank financing for start-up
ventures to boost entrepreneurship and encourage startups with jobs creation. The campaign was first
announced by Prime Minister Narendra Modi in his 15 August 2015 address from the Red Fort.
The Government of India has announced 'Startup India' initiative for creating a conducive environment
(Environment of Certainty) for startups in India. The various Ministries of the Government of India have
initiated a number of activities for the purpose.
Quick Recap
Start up Policy

Start-up Campaign

15th August, 2015

PM Modi Ji

At Red Fort

“Start up policy is an action plan aimed at Promoting

Bank Financing” to boost

Entrepreneurship (+) Jobs Creation

182 Startups and their Registration Chap. 4
Definition of Start Up
An entity shall be considered as a 'startup'—
 Up to Ten years from the date of its incorporation.
 If its turnover for any of the financial years has not exceeded Rupees 100 crore.
 It is working towards innovation, development, deployment or commercialization of new
products, processes or services driven by technology or intellectual property;
Quick Recap
Meaning of Start-up

First 10 Years of (+) Turnover ≤ 100 Crore in (+) Work

Incorporation each of first Ten
Financial Years
New Goods
& (Innovation)
Services

New IPR

Caution - Any such entity formed by splitting up or reconstruction of a business already in existence
shall not be considered a 'startup'.
Startup company as defined in notification, by Department for Promotion of Industry and Internal Trade,
Ministry of Commerce and Industry, Government of India, may issue sweat equity shares not exceeding 50%
of its paid-up share capital upto10 (ten) years from the date of its incorporation or registration.
Upto a period of ten years from the date of incorporation/registration, if it is incorporated as a private
limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under
section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability
Partnership Act, 2008) in India
Further, in order to obtain tax benefits a startup so identified under the above definition shall be required
to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting
of:
 Joint Secretary Department of Industrial Policy and Promotion
 Representative of Department of Science and Technology
 Representative of Department of Biotechnology
An entity shall cease to be a startup on completion of Ten years from the date of its incorporation or if its
turnover for any previous year exceeds Rupees 100 crore.
Chap. 4 Startups and their Registration 183
Quick Recap

AB Ltd. Incorporated in 2001

2018

Demerger

A Ltd. B Ltd.

Start-up?

No
“In case of demerger or reconstruction of existing company & forming new
company shall not be a part of startup”.

Certifications required to be Considered as Start-up Venture

Joint Secretary of DIPP Department of (+) Department of Bio-

(+)
(Department of Industrial Science & Technology
Policy & Promotion) Technology

Note:- All 3 Certifications Given by Inter Ministerial Board (IMB)


184 Startups and their Registration Chap. 4
5. Process of Recognition of Startup
The process of recognition as a 'startup' shall be through mobile app/portal of the Department of
Industrial Policy and Promotion.
Quick Recap
(Real time recognition number)

Application
Start-up Inter-Ministerial Board

Recommendation Attach

Incubator in Post Incubator recognized Incubator funded (or) Letter of funding

(or) (or)
Graduation by Government of by Government
College India

CG SG

Letter of Funding Patent filed & published in Journal

(or) by Indian Patent Office
Angel Funds
or (Given by officer of PDT)
Private Equity Fund ≥ 20% investment in
or Equity Patent Design Trademark
AIF

(Alternative Investment Scheme)

(AIF + AF + PEF)

Regulated by SEBI

Penalty for wrong information

Minimum 25,000 to Maximum 50% of

Paid-up Capital

Procedure to be Recognized as Start-up

IMB

Mobile Application (+) Online Portal

Chap. 4 Startups and their Registration 185
Startups will be required to submit a simple application with any of following documents:
 A recommendation (with regard to innovative nature of business), in a format specified by
Department of Industrial Policy and Promotion, from any Incubator established in a post-
graduate college in India
or
 a letter of support by any incubator which is funded (in relation to the project) from Government
of India or any State Government as part of any specified scheme to promote innovation
or
 A recommendation (with regard to innovative nature of business), in a format specified by
Department of Industrial Policy and Promotion, from any Incubator recognized by Government of
India
or
 A letter of funding of not less than 20 per cent in equity by any Incubation Fund or Angel Fund or
Private Equity Fund or Accelerator or Angel Network duly registered with SEBI that endorses
innovative nature of the business
or
 A letter of funding by Government of India or any State Government as part of any specified
scheme to promote innovation
or
 A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with
the nature of business being promoted.
Department of Industrial Policy and Promotion may, until such mobile app or portal is launched, make
alternative arrangement of recognizing a 'startup'.
Once such application with relevant document is uploaded, a real-time recognition number will be issued
to the startup. If on subsequent verification, such recognition is found to be obtained without uploading the
document or uploading any other document or a forged document, the concerned applicant shall be liable
to a fine which shall be fifty per cent of paid up capital of the startup but shall not be less than Rupees
25,000.
A startup is an entity that is headquartered in India which was opened less than Ten years ago and
has an annual turnover less than `100 crore. The government has already launched I MADE, an app
development platform aimed at producing 1,000,000 apps and PMMY, the MUDRA Bank, a new institution
set up for development and refinancing activities relating to micro units with a refinance Fund of `200 billion.
Quick Recap

Note Start-Ups Central Government

Case
Study

PMMY I-Made

Application
MUDRA BANK Development
Mechanism

6. Key Points
 Single Window Clearance even with the help of a mobile application
 10,000 crore fund
 Reduction in patent registration fee
 Modified and more friendly Bankruptcy Code to ensure 90-day exit window
186 Startups and their Registration Chap. 4
 Freedom from mystifying inspections for 3 years
 Freedom from Capital Gain Tax for 3 years
 Freedom from tax in profits for 3 years
 Self-certification compliance
 Innovation Hub under Atal Innovation Mission
 Starting with 5 lakh schools to target 10 lakh children for innovation programme
 New schemes to provide IPR protection to start-ups and new firms
 Encourage entrepreneurship
 Stand India across the world as a start-up hub.
7. Indian States with startup Policies
Few State Governments have also taken initiatives and launched startups policies for their states. A
few of these states include:
1. West Bengal
West Bengal launched its policies relating to startups in January 2016. They have launched a
website by the name of www.startupbengal.in in an effort to get all the stakeholders in that
community on a single platform. With this initiative, communication between startups, investors,
service providers etc. is expected to become easier and smoother. These policies will be in effect
until December 2021.
2. Uttar Pradesh
The Government in this State is working to get more IT investment into the state and promoting
upcoming startups in this particular segment.
3. Odisha
The government of Odisha has launched its policy with a vision of making Odisha one of the top
three investment destinations in India. To achieve their goal they have come up with a 10-year
plan, which will work till 2025. The Government has announced its plan along with “Make In
India” in February, 2016.
4. Rajasthan
Rajasthan launched its plans in October, 2015. The Government plans to help set up around 500
startups within the next five years. For this purpose, they have allocated funding and also plan to set
up around 50 incubators across the state. With their efforts, they plan to bring in a funding of
around ` 500 crores in the next 5 years.
5. Karnataka
Karnataka has a setup a 5-year plan with very specific goals and targets which they hope to achieve
by the end of the plan. They want to have at least 25 technology related startups that aim to solve
the social problems faced by the state. Along with this, they want around 2000 startups focused just
on technology and 600 startups based on products. With their policies, they are aiming to create
around 18 lakh jobs in the state itself.
6. Gujarat
They have a threefold strategy which involves the innovators, the Institutions, and the government
committee. These three form a chain, wherein the innovators come up with the idea which will be
facilitated by the institutions and then approved and financed by the government committee.
7. Jharkhand
Jharkhand is the most recent entrant in Indian states with startup policy. The state government has
facilitated $1.5 Mn (INR 10 Cr) for Innovation and Incubation Centres in different part of states.
An innovation lab would also be set up with the help of IIM Ahmedabad. With this startup policy
initiative, the state government aims to encourage the startups in the sectors like Information
Technology, Health, Tourism, Agriculture, Biotechnology, and alternative energy.
Chap. 4 Startups and their Registration 187
Quick Recap
State Government Initiatives for Start-up

West Bengal UP Odisha Rajasthan Karnataka

Jan, 2016, IT Sector Feb, 2016 Oct, 2015 5 year plan

Investment only +
To be named in Top 3 25 Tech related
Adopt policy Investment Destination 500 Startups in Startups
Next 5 Years +
in India by 2025
Website + 600 Product Related
+ 500 Crore Startups
Easier &smooth Part of Make in India = 18 Lakhs new jobs
Business 50 Incubators to creation (target)
+ be created
Effective Dec, 2021

Gujarat Jharkhand

3 Fold Strategy 10 Crore

Start–ups = IT + Health +
Agriculture + Bio- tech
Innovator Government
With help of IIM Ahmadabad
Idea Approval

Financial institution

Funding

8. Exemptions for Startups

To promote growth and help Indian economy, many benefits are being given to entrepreneurs establishing
startups.
1. Simple process
Government of India has launched a mobile app and a website for easy registration for startups.
Anyone interested in setting up a startup can fill up a simple form on the website and upload
certain documents. The entire process is completely online.
Note:-
Start-up Cost: Fee for filing SPICe+, MoA and AoA has been reduced to Zero for proposed
companies, where the authorized capital is upto `15 Lakhs in case of company having share capital
Or
where the number of members are upto 20 in case of company not having share capital.
Note:-
Start can be incorporated as,
A private limited company (as defined in the Companies Act, 2013)
Or
188 Startups and their Registration Chap. 4
Registered as a partnership firm (registered under section 59 of the Partnership Act, 1932
Or
A limited liability partnership (under the Limited Liability Partnership Act, 2008) in India,
Upto a period of ten years from the date of incorporation/registration.
Quick Recap
Exemption to start-ups

Simple process Mobile App (or) Website

Upload Documents online

2. Reduction in cost
The government also provides lists of facilitators of patents and trademarks. They will provide
high quality Intellectual Property Right Services including fast examination of patents at lower fees.
The government will bear all facilitator fees and the startup will bear only the statutory fees.
They will enjoy 80%reduction in cost of filing patents.
Quick Recap
Reduction in cost

Patent & Trade Mark

Facilitation fee Statutory fee

80% Expenses 20% Expenses

Government bear Start-up

3. Easy access to Funds

A 10,000 crore rupees fund is set-up by government to provide funds to the startups as venture
capital. The government is also giving guarantee to the lenders to encourage banks and other
financial institutions for providing venture capital.
Quick Recap
Easy Access to Funds

Government 10, 000 Crore funding

(+)
Government Lender Start-ups

MFI NBFC
Chap. 4 Startups and their Registration 189
4. Tax holiday for 3 Years
Startups will be exempted from income tax for 3 years provided they get a certification from Inter-
Ministerial Board (IMB).
Quick Recap
Tax holiday for 3 years

Certification of Inter Ministerial Board

5. Apply for tenders

Startups can apply for government tenders. They are exempted from the “prior experience or
turnover” criteria applicable for normal companies answering to government tenders.
Quick Recap
Application for Tenders

Now a days government has started excepting new

tenders with no minimum experience clause

6. R&D facilities
Seven new Research Parks will be set up to provide facilities to startups in the R&D sector.
Quick Recap
Research & Development Facilities

New research parks are being setup government

+
100 Crore investment
+
Guwahati + Hyderabad + Kanpur + Kharagpur +
Bangalore + Delhi + Gandhi Nagar

7. No time-consuming compliances
Various compliances have been simplified for startups to save time and money. Startups shall be
allowed to self-certify compliance (through the Startup mobile app) with 9 labour and 3
environment laws.
Quick Recap
No time consuming compliances

9 Labour laws 3 Environment laws

Mobile App

Self certification
190 Startups and their Registration Chap. 4
8. Tax saving for investors
People investing their capital gains in the venture funds setup by government will get exemption
from capital gains. This will help startups to attract more investors.
Quick Recap
Tax Saving Scheme

(2) Capital Gain

Property

(1) Sell

(4) Investment
AV Start-up

(3) CG Tax No Capital Gain tax

Income Tax

9. Choose your investor

The startups will have an option to choose between the VCs, giving them the liberty to choose their
investors.
Quick Recap
Choose your Investor

MUDRA Bank SRCC IIT IIM E-venture

10. Easy exit

In case of exit, a start up can close its business within 90 days from the date of application of
winding Up.
Quick Recap
Easy Exit Scheme

Winding up within 90 days of application

11. Meet other entrepreneurs

Government has proposed to hold 2 startup fests annually both nationally and internationally to
enable the various stakeholders of a startup to meet. This will provide huge networking
opportunities.
Quick Recap
Opportunity to meet

Annual two meeting

National International
Chap. 4 Startups and their Registration 191
9. Tax Exemptions for the Startups, Effective from 2017-18
Following tax exemptions for the startups had been introduced that was made effective from 2017-18.
The proposed incentives and exemptions are:
1. Income Tax Exemption on profits under Section 80-IAC of Income Tax (IT) Act. The Inter-
Ministerial Board of Certification is a Board set up by Department for Promotion of Industry and
Internal Trade (DPIIT) which validates Startups for granting tax related benefits.
A DPIIT recognized Startup is eligible to apply to the Inter-Ministerial Board for full deduction on
the profits and gains from business (exemption under Section 80-IAC of the Income Tax Act)
provided the following conditions are fulfilled.
The entity should be a private limited company or a limited liability partnership, Incorporated on or
after 1st April 2016 but before 1st April 2021, and Products or services or processes are
undifferentiated, have potential for commercialization and have significant incremental value for
customers or workflow.
2. The deduction is for any three consecutive years out of seven years from the year of incorporation of
start-up.
3. Tax Exemption on Investments above Fair Market Value. – DPIIT Recognized Startups are exempt
from tax under Section 56(2)(viib) of the Income Tax Act when 212 EP-SBEC such a Startup
receives any consideration for issue of shares which exceeds the Fair Market Value of such shares.
4. The startup has to file a duly signed declaration in Form 2 to DPIIT [as per notification G.S.R.
127(E)] to claim the exemption from the provisions of Section 56(2)(viib) of the Income Tax Act.
5. Introduction of Section 54EE in the Income Tax Act, 1961. Exemption from tax on long-term capital
gain if such long-term capital gain is invested in a fund notified by Central Government. The
maximum amount that can be invested is `50 lakh
6. Amendment in Section 54GB of the Income-tax Act Exemption from tax on capital gains arising out
of sale of residential house or a residential plot of land if the amount of net consideration is invested
in prescribed stake of equity shares of eligible Startup for utilizing the same for purchase of specified
asset:
 The condition of minimum holding of 50% of share capital or voting rights in the start-up relaxed
to 25%
 The period of extension of capital gains arising from for sale of residential property for
investment in start-ups has been extended up to 31st March 2021.
7. Amendment in Section 79 of Income Tax Act. Startups can carry forward their losses on satisfaction
of any one of the following two conditions:
 Continuity of 51% shareholding/voting power
Or
 Continuity of 100% of original shareholder.
OR
DPIIT Start-up India Recognition
 The government of India under its flagship programme “Start-up India” introduced the concept of an
“eligible start-up” in the year 2015.
 A formal national policy framework was launched in February 2016 called the Start-up India Action
Plan.
 Department of promotion of Industry and internal Trade (“DPIIT”) has defined the criteria for
“Eligible start-up”.
 “Eligible start-up” entitled to benefits announced by government under various programmes, schemes
and regulations.
 Start-up can get recognition through an online application on www.startupindia.gov.in
192 Startups and their Registration Chap. 4
The DPIIT may, after calling for such documents or information and making such enquires, as it may
deem fit, – a. recognise the eligible entity as Startup; orb. reject the application by providing reasons.
Registrations
 Registration under Department of promotion of Industry and internal Trade (“DPIIT”) to
recognise as “Eligible start-up”.
1. Types of entities: Incorporated as a “Private Limited Company, Registered Partnership Firm
or Limited Liability Partnership”.
2. Incorporation criteria: not older than 10 years from the date of incorporation/registration.
3. Turnover: Annual turnover not exceeding `100 crore for any of the financial years since its
incorporation/Registration.
4. Innovation, Development/Improvement, employment/wealth creation: working towards
Innovation. Development/Improvement of a product, process or service and/or scalable business
model with high potential of employment generation or creation of wealth.
5. NO splitting/reconstruction: entity should not have been formed by splitting up or
reconstructing an already existing business.
 Information required for registration
1. Details of the company//LLP/Partnership firm: Name, Industry, Sector, Categories, PAN, Address
2. Details of partners/Directors
3. Current number of employees(including founder)
4. Stage of the startup
 Ideation-you have an idea for product or service
 Validation-build prototype
 Early traction- acquiring customers.
 Scaling grow and create sustainable profits.
 Is your startup creating an innovative product/service/process or improving the existing product/service/
process.
 Is your startup creating scalable business model with high potential of employment generation or creation
of wealth.
 Brief note about innovation, improvement and scalability.
 Start-up activities
 What is the problem solving
 How start-up will help in problem solving
 Uniqueness of solution
 How does your start-up generate revenue
 Pitch-deck
1. Brief how your start-up is innovative and/or scalable.
2. No of people employed and funding raised, if any
3. Credentials of founders/management.
4. Screenshots of images of product/website link, if any.
 Start-up video link
 Copy of Incorporation/registration certificate.
 [U/Section 80-IAC] Certification of eligible business from Inter-Ministerial Board of Certification
1. Types of entities: Incorporated as a “Private Limited Company or Limited Liability Partnership”.
2. Incorporation criteria: incorporated on after 1st April, 2016 before 1st April, 2021
3. Definition of “Eligible Business” working towards Innovation. Development/Improvement of a
product, process or service and/or scalable business model with high potential of employment
generation or creation of wealth.
Chap. 4 Startups and their Registration 193
4. NO splitting/reconstruction Entity should not have been formed by splitting up or reconstructing an
already existing business.
Entity should not be formed by the transfer to a new business of machinery or plant previously used for
any purpose. (Except only 20% of the total value of the machinery or plant previously used can be
utilised in start-ups).
 [U/Section 80-IAC] Information required for registration
 Application can be made online in form 1 on www.startupindia.gov.in
 Details of start-up: Name of start-up, date of incorporation, Incorporation no, address, Nature of
business, DIPP no
 Contact of details of start-up
 Documents required for registration u/s 80-IAC: MOA/LLP deed, Annual accounts & ITR for
last 3 financial years, Start-up video link, pitch-deck.
How to avail deduction
 Amount of deduction: 100%of profits and gain derived from start-up business.
 Turnover criteria: Annual turnover not exceeding `100 crore for any of the financial years for which
deduction is claimed.
 Period of deduction: Deduction available, at the option of assesse for any 3 consecutive assessment
years out of 10 years beginning from the year in which the eligible start-up is incorporated.
[Section 56(2)(viib)] Angel tax incentive
 Angel Tax is a term used for tax proposed to be levied on consideration received by privately held
companies towards issue of shares for a value that exceeds the face value of such shares.
 Where such value i.e. essentially the premium on the shares cannot be justified.
 Valuation Report from merchant Banker for valuation carried out under discounted cash flow
method.
Eased conditions for start-up
 Notification No. GSR 127(E), dated 19-02-2019
 Declaration in form 2 must be filled with DPIIT.
[Section 56(2)(viib)] - Exemption From the provisions, if it fulfills the following conditions:
 It has been recognized by DPIIT;
 Aggregate Amount of paid up share capital and share premium of the start-up after issue or proposed
issue of share) <= INR 25cr.
Exclusion in the limit of INR 25 CR
 Investment from non-resident
 Or Venture Capital or Venture Capital fund.
 Or Specified Company (A company whose shares are frequently treated and whose net worth on the
last date of financial year preceding the year in which shares are issued exceeds INR 100 Crore or
turnover for the financial year preceding the year in which shares are issued exceeds INR 250 Crore.
[Section 54GB] Tax Exemption on capital gain
 Nature: Long term capital gain arising from transfer of residential property.
 Available to: Individual/HUF.
 How to Claim exemption: Utilization of the net consideration for the subscription in the equity shares
of an eligible company.
 Eligible company: It is a company which qualifies to be a small and medium enterprise under the
Micro, Small and Medium Enterprises Act, 2006 or is an eligible start-up.
 Incorporation Criteria It is a company incorporated in India during the period from the 1st day of
aril of the previous year relevant to the assessment year in which the capital gain arises and ending on
the due date of furnishing of return of income under sub-section (1) of section 139 by the assesse;
194 Startups and their Registration Chap. 4
 Share Capital It is a company in which the assesse has more than 25% of the share capital or more
than 25% of voting rights after the subscription in shares by the assesse.
 What Eligible company has to do
 Investment in purchasing of new assets within one year from the date of subscription in the equity
shares by the assesse,
 Block period of 5 years from the date of their acquisition of equity shares or asset by company.
 Company must be holding Certification from Inter-Ministerial Board.
 Restrictions on end use of investment:
New plant and machinery does not include:
 Any machinery or plant which, before its installation by the assesse, was used either within
or outside India by any other person;
 Any machinery or plant installed in any of the office premises or any residential
accommodation, including accommodation in the nature of a guest-house;
 Any office appliances including computers or computer software (except for technology-
driven start-up, the holding period shall be three years);
 Any vehicles;
 Any machinery or plant, the whole of the actual cost of which is must not be allowed as a
deduction (whether by way of depreciation or otherwise) in any previous year.
[Section 79] Relaxation in change of shareholding for carry forward of losses
Carry forward loss even if there is change in 51% shareholding, provided all shareholders as on year of losses
continue to be shareholder in current year (i.e. year of set-off)
 Section 54EE in the Income Tax Act, 1961. Exemption from tax on long-term capital gain if such
long-term capital gain is invested in a fund notified by Central Government. The maximum amount
that can be invested is `50 lakh
 The condition of minimum holding of 50% of share capital
Or
 voting rights in the start-up relaxed to 25%
The period of extension of capital gains arising from for sale of residential property for investment in start-
ups has been extended up to 31st March 2021
10. Benefits or Exemptions to Start-ups under Companies Act, 2013
1. By Notification dated June 13, 2017 an explanation has been inserted in Section 2(40) of the
Companies Act, 2013 i.e. Financial Statement which provides the definition of a “Start up” or
“start-up company.”
2. The Companies (Acceptance of Deposit) Rules, 2014 have been amended to provide that an
amount of twenty-five lakh rupees or more received by a start-up company, by way of a
convertible note in a single tranche, from a person shall not be treated as a deposit.
3. The provisions of clauses (a) to (e) of Section 73 of the Act shall not apply to a start-up company
for Ten years from the date of its incorporation.
4. Start-ups are allowed to issue Employee Stock Options to promoters working as employees.
5. The limits with regard to sweat equity that can be issued by a start-up company has been increased
from 25% of paid up capital to 50% of paid up capital upto Ten years from the date of its
incorporation.
6. The annual return of a start-up company may be signed by the company secretary, or where there
is no company secretary, by the director of the company.
7. For start-ups, convening at least one meeting of the board of directors in each half of a calendar
year with the gap between the two meetings of not less than Ninety (90) days is sufficient to meet
the requirement of Section 173(5) of the Act.
NOTE: The startup company can be registered likewise any other company and the procedure for
Incorporation of Company shall be followed to Incorporate Startups also.
Chap. 4 Startups and their Registration 195
Quick Recap
Benefits in Companies Act, 2013

Section 2(40) Financial Statement

Start-up Cash Flow Statement

Deposits 25% 35% No limit

Employee stock option To promoters

Sweat equity shares

Others 25% Start-ups -50% (+) upto

10 yrs

+
Annual Return

MGT – 7
Company ROC
In 60 days of AGM

Signature CS

Directors

Atleast 4 BM

2 with minimum gap of 90 days (Every half year)

196 Startups and their Registration Chap. 4
Quick Recap

Deposits

Not deemed as deposits & not follow section 73 to 76

Convertible notes
Start-up AV

25 Lac or more (one time)

11. Following are the Important Points for a Start Up

Quick Recap
How to start-up company in India?
(or)
Procedure to incorporate company (Start Up)
(or)
How to setup company in India as a Start Up

1. Choose the right legal structure for your startup

Choosing an appropriate legal structure is one of the most crucial decisions for any startup. The
decision should be taken based on individual circumstances and a host of factors such as
 Nature of business operation
 Business trajectory
 Regulatory and tax considerations
 Costs of formation
 Ongoing administration
 External capital requirement
 Type of funding sought,
 Legal liability protection required
 Number of stakeholders
 Balance required between ownership and management
 Proposed mechanism for profit sharing or distribution amongst stakeholders
Note- Preferred entity structures for startups in India are limited liability partnership and private
limited company.
Quick Recap
Important points about start-up

Choose the right legal structure for your start-up

Sole Proprietorship LLP

Partnership Firm Company

Private Public
Chap. 4 Startups and their Registration 197
2. Registrations and business licenses
Post incorporation of a business entity in India, some necessary registrations are required and
mandated by law. Some examples are Permanent Account Number (PAN), Tax Deduction and
Collection Account Number (TAN), GST registration etc.
Business licenses are permits issued by government authority that allow startups to start or continue
to operate a particular business within its territorial jurisdiction lawfully.
Factors determining License requirements are:
 Nature of business activity
 The number of employees
 Location of business
 Form of business ownership
Some examples are:
 Food Safety License
 Health License
 Trade license
 Shops & Establishment License etc.
Quick Recap
Registration & Licenses

License
Registration

(+) Hotel & Restaurant

TAN Card (Tax Deduction &
Collection Account No.) Food license
(+)
GST No.
Hospital Health License

3. Intellectual Property Protection

Intellectual Property Rights are a very important asset class for a startup. Developing and protecting
intellectual property with proper registration can help startups gain competitive advantage. It
is advisory to obtain trademark registration for the business name or trade name under the
Trademarks Act.
All Intellectual Property including
 Trademark
 Copyright
 Design
 Trade secrets
 Inventions
 Patents
Should be registered in the name of the entity and not in the name of the promoters or founders of the
startup.
198 Startups and their Registration Chap. 4
Quick Recap
IPR Protection

Trade mark Copy right Patent Design Geographic

Indication

Incorporeal Assets

Intangible assets (Intellectual Property)

Specific class of assets

(+)

Registration of IPR in Not in the name of

(+)
the name of entity promoter or founder

4. Founder Equity – Split and Vesting

Founder equity should be split amongst founders based on the nature of role played by each founder
along with their time, effort and capital contribution to the startup.
Splitting founder equity equally by default without a thorough discussion on expectations and
contribution generally leads to tension and unhappiness amongst founding teams as the startup
matures.
Founder shares should be always subject to vesting schedule i.e. over a period of three to four
years. When vesting is imposed on a founder equity, the unvested shares held by the founder become
subject to a contractual right to repurchase or transfer often at a nominal value, if one of the
founders is terminated or voluntarily leaves the startup. This is very important to ensure future
viability of the business.


Chap. 4 Startups and their Registration 199
Quick Recap
Founder Equity Split & Vesting

Founder – 1 Ownership Founder – 2

50 Lac 50 Lac

9 to 5 pm 5 pm to 9 pm

Time
(+)
Efforts
(+)
Capital contribution

Clarity Ambiguity

Smooth going Tension

(+)
Unhappiness

5. Founder agreements
The founder agreement is the most valuable tool to establish the relationship between the founders of
a startup. The agreement should represent a clear understanding between the founders on all
key issues related to the startup.
Founder agreements should clearly mention:
 Roles and responsibilities of the founders
 Clauses detailing the decision making
 Operating structure of the startup
 Founder equity split with vesting
 Assignment of all intellectual property in favour of the startup
 Termination of a promoter
 Exit process
200 Startups and their Registration Chap. 4
Quick Recap
Founder Agreement

Founders Agreement Start-Up

Role of founder Role of founder Founder Equity Exit process

-1 -2 split

Production Marketing

Operational structure

6. Employment contracts
Startups must ensure to enter into clear employment contracts detailing terms and conditions of
employment with their employees.
While employment contracts are certainly valuable to the employees as it details terms regarding:
 Description of job profile
 Compensation
 Other associated benefits
 Non-Compete Clauses such as stopping employees from setting up competing entities
 Non-Solicitation Clauses such as poaching other employees or clients or customers.
 Preventing employees from claiming any intellectual property right on the work done or
developed during the course of employment.
Quick Recap
Employment Contracts

Job profile
(+)
Compensation (salary)
(+)
Non-Solicitation Clause
(+)
No right on IPR if developed or invented during
employment

7. Employee Stock Option Pool (ESOP)

ESOP’s are incentives given to employees or directors of a company to attract talent and retain
employees by rewarding them. ESOPs create a sense of ownership amongst employees.
They are structured in a way that they are option to buy shares at a discounted price and can be
exercised only after a certain vesting period which is decided by the company granting the ESOPs. In
India, we typically see a pool of 10 per cent to 15 per cent allocation towards an ESOP Pool.
Chap. 4 Startups and their Registration 201

Quick Recap
Employee Stock Option Pool [ESOP]

ESO Scheme ESO Purchase

Or
ESP Scheme
In lieu of salary

Tool to attract talented employees to retain As a part of public issue

them
(+)
Brings sense of belongingness & ownership
(+)
(10-15% share)

Bhushan kumar ` 100 Share Employee

` 50/- Share
(+)
Buy back [after 5 years]

` 500 (or) Market price

Whichever is higher

“ESO are the shares issued at discount by the issuer company to its employees
with certain rights to be exercised after vested period”

8. Third Party Agreements

Prior to entering into a third-party agreement and while negotiating the terms, it is advisable to
execute a non-disclosure agreement. If creation or development of intellectual property is a
component of such a third-party agreement, it must clearly state that all rights to the
intellectual property rights shall vest and be owned by the startup and the third-party shall not
stake any claim on the same and will do all acts to ensure the protection of the intellectual
property.
Clauses related to:
 Breach of terms
 Termination of Contract
 Dispute resolution
should be well negotiated and captured in all third-party agreements.
202 Startups and their Registration Chap. 4
Quick Recap
Third Party Agreement

No claim on IPR
(+)
NDA (Non-Disclosure Agreement)
(+)
Dispute settlement clause

9. Investment structuring
One of the most challenging and time consuming aspects of operating a startup is to raise capital for
working capital requirement and growth.
In India, Investors (HNIs or Angel Funds) invest in early and growth stage companies in different
structures and on varied terms. It is imperative for startups to seek proper legal advice while
negotiating the deal terms for investment and the rights of the investors.
Typically, as a process an intention document detailing the structure of the transaction called the
Term Sheet is executed followed by due diligence of the startup and execution of investment related
definitive agreements.
Quick Recap
Investment Structuring

Seed funding

Incubators

Angel Investors Term sheet

Private Equity Players

Series Funding

10. Compliance management

Compliance and its importance is often overlooked by many startups.
There are multiple laws applicable to specific entity structures under which separate event
based and annual compliance is mandated. It is extremely critical for the sustainable growth of any
business that the startup is in compliance with:
 Legal
 Secretarial
 Accounting
 Taxation
 Employee related compliances
The consequences of non-compliance can be levy of punitive fines on the startup.
Chap. 4 Startups and their Registration 203
Quick Recap
Compliance Management

Multiple laws
(+)

Legal
Annual compliances
(+)
Tax Half yearly
FEMA Business laws

(+)
Accounting
(+)
Employee related laws

12. Financing Options Available for Startup Companies

Finance is the life blood of any business. In case the venture is self-funded there can be no better option
than that. However, a Startup is mostly the result of a novel idea that is the brainchild of its founders and
more often than not, funds are always a challenge.
Analysis of the different financing options:
1. Equity financing
2. Debt financing
3. Grants
Characteristics of Equity financing Debt financing Grants
investment
Nature There is no component of Invested funds to be repaid There is no component of
repayment of the invested within stipulated time frame repayment of the invested
funds with interest. funds.
Risk Risk factor of the investor is Risk factor for the investor is There is no risk factor for
higher as he has no lower as he has collateral the start up as no collateral
guarantee against his against his investment. is involved.
investment
Pressure for the Less pressure for startup’s More pressure for startup’s No pressure for repayment
payment to adhere to a repayment to adhere to repayment as grants are a form of
timeline, but added pressure timeline and as a result more monetary support provided
from investor to achieve pressure to generate cash for a specific purpose.
growth targets. flows to meet interest
repayments
Return to Investor Capital growth for investors Interest repayments. No return

Involvement in Equity fund investors Debt fund has very less No direct involvement in
decision making usually prefer to involve involvement in decision decision making.
themselves in decision making.
making process.
Sources Angel investors, self Banks, non-banking Central government, state
financing, family and financial institution, government, Corporate
friends, venture capitalist, government loan, Schemes challenge, grant programs
crowd funding, Incubator. (MUDRA, Startup-India) of private.
204 Startups and their Registration Chap. 4
Quick Recap
Funding

Finance is the blood of business

Self-finance is the best option

13. Different financing options

Quick Recap

Finance options

Equity Debt IPO Unconventional modes

Venture capital
fund ECB Incubator Crowd funding
Loan from
Angel investors banks
& External
NBFCs Commercial
Series funding Borrowing

Bridge finance Credit Guarantee Trust

Seed Capital
 Startup business needs the nurturing of finance to explore and grow. The funding done at the
nascent stage is called seed funding and the capital is known as a seed capital.
 Technically, seed capital is the initial capital used at the time of starting the business.
 This capital can come from the founders, families or friends.
 It is required for the market research, product development, and other initial stage operations.
 Seed funding permits exploration of the business idea and converting it into a viable product or
service that further attracts venture capitalists.
 A business founder must be clear on how to utilise seed capital in the most optimum manner to
ensure smooth transition to the advanced stage of the business.
 Being a risky investment option, as most funding agencies would like to adopt a wait and watch
strategy to see the business potential. From the founder’s point of view, the option of obtaining
seed funding has to be carefully utilised as obtaining seed funding may result in dilution of ownership
of the founder.
 The paperwork involved in seed funding is relatively less and straightforward, compared to
advanced rounds of funding. Even the legal fees required are also quite less as compared to the seed
equity. The interest rates too are usually lower and there are mostly no restrictions in the manner of
business working as it is still in the nascent stage.
Chap. 4 Startups and their Registration 205
Quick Recap
Seed capital

Funding at In others words Family Purpose

nascent stage is +
called seed The capital used Friends
funding Market research
at the time of
& starting the
Such capital is Product develop
business is
called seed capital
called seed
capital
Minimum viable
product

Clear vision How to utilize seed capital in the most optimum manner to
ensure smooth transition to the advanced stage of business

Seed capital

Investor Founder

Very difficult Dilution of ownership

+
Risky investment
(wait & watch)

To confirm business
potential

Benefits of seed capital

Less paper work (+) Less legal compliances (+) Lower

interest rate (+) No restrictions

Types of Financing
 Equity financing
 Debt-financing
A. Equity Financing
Startups are usually equity financed or funded by way of a venture capital or private equity investors or
angel investors.
(1) Venture Capitalist or Private Equity
 Venture capital or Private Equity is often the first large investment a startup can expect to
receive.
 Convertible instruments are usually the preferred option and most commonly used
securities for VC or PE investment which includes compulsory convertible preference shares
and compulsory convertible debentures.
206 Startups and their Registration Chap. 4
 The investor and startup will normally enter into a non-binding offer based on the preliminary
valuation of the startup usually followed with a financial, legal and technical due diligence on
the startup as required by the investors.
 Due-diligence will help the investors to finalize the representation and warranties and also to
identify conditions precedent to the completion of investments and conditions subsequent in the
aforesaid transaction documents.
Quick Recap
Venture capital fund

First large investment

(+)
After due diligence

Legal Technical financial

(+)
Equity or convertible bonds
(+)
Agreements

Funding Procedure
(a) A Term Sheet or Letter of Intent or Memorandum of Understanding is entered into, setting
out the following:
 Basic commercial understanding between the VC and the startup.
 Legal terms for the agreements to follow the due-diligence.
(b) The contracting parties will enter into a Share Subscription Agreement or Debenture
Subscription Agreement. It usually captures the following:
 The issuance of shares in the share capital or debentures at subscription amount determined
based on the valuation of the startup.
 Condition precedents to completion of transaction or conditions subsequent to be
completed within the agreed time frame after the completion date.
 Sets of representation and warranties and indemnification resulting from due-diligence
exercise or otherwise, etc.
(c) Thereafter, the contracting parties may enter into a Shareholders' Agreement providing for the
following:
 Nomination or representation rights on the board of investee.
 Information and reporting right and disclosure obligation of investee to the investors.
 Redemption rights on debenture or preference shares.
 Pre-emption rights, Right of First Refusal or Right of First Offer, Tag Along Right, Drag
Along Rights, Lock-in-period for the investor or promoter's holding, put and call options,
affirmative vote rights on certain reserved matters, anti-dilution provisions.
 Exit options to investors after the lock-in-period etc.
(d) Issuance of Securities through Private Placement process.
(e) Filing of necessary e-Forms with ROC for completing the process of issuance and allotment of
securities.
(f) Amendment of AOA as per Shareholders’ Agreement.
(g) Completion of Condition Subsequent.
Chap. 4 Startups and their Registration 207
Quick Recap

Procedure for VCF

Letter of Intent or Memorandum of Understanding or

Term Sheet

Legal terms Basic understanding Between VC

clauses &
Start-up

Share Subscription Agreement

Issuance of shares on Conditions to be Warranties

the basis of valuation of complied from time to &
start-up time Indemnification
(Debentures only)

Shareholder Agreement

Right for Disclosure Rights of Right issue

appointment of obligation of redemption or
nominee investee to Right of first
investors refusal

Legal compliances

PAS – 3
Company ROC
Return of allotment

(2) Angel Investors

Angel investors are usually individuals or a group of industry professionals who are willing to fund
the venture in return for an equity stake. Under the SEBI (Alternative Investment Funds) Regulations,
2012 which was subsequently amended in 2013, SEBI has made the following restrictions
applicable to angel funds investing in an Indian company:
1. Angel funds shall invest in venture capital undertakings which:
(a) Complies with the criteria regarding the age of the venture capital undertaking/startup
issued by the Department of Industrial Policy and Promotion under the Ministry of
Commerce and Industry, Government of India vide notification no. G.S.R. 180(E) dated
February 17, 2016 or such other policy made in this regard which may be in force;
(b) Have a turnover of less than `25 Crore;
(c) Are not promoted or sponsored by or related to an industrial group whose group
208 Startups and their Registration Chap. 4
turnover exceeds `300 crore; and
(d) Are not companies with family connection with any of the angel investors who are
investing in the company.
2. Investment by an angel fund in any venture capital undertaking shall not be less than `25
Lakhs and shall not exceed `10 Crores.
3. Investment by an angel fund in the venture capital undertaking shall be locked-in for a period
of one year.
(3) Bridge Round
Quick Recap
Bridge Finance

Bridge finance normally comes from an investment bank or

venture capital fund in from of loan or equity investment
(+)
This type of financing only occurs when a company runway is
shorter than its future financing options & its needs to remain
solvent in order to obtain such long term financing

(4) Series Funding

After Seed Funding Round or Angel Funding Round and Bridge Funding Round, Series Funding
Round will start like Series A to Z.
Series preferred stock is the first round of stock offered during the seed or early stage round by
a portfolio company to the venture capital investor. Series preferred stock is often convertible into
common stock in certain cases such as an Initial public offering (IPO) or the sale of the company.
Series rounds are traditionally a critical stage in the funding of new companies. A typical series A
round is in the range of $2 million to $10 million, purchasing 10% to 30% of the company. The
capital raised during a series round is usually intended to capitalize the company for 6 months to 2
years as it develops its products, performs initial marketing and branding, hires its initial employees,
and otherwise undertakes early stage business operations.
Quick Recap

Series Funding

A to Z
(+)
Outsiders
(+)
Series of preferential stock is the first round of stock offered during
seed or early stage round by a company to its venture capital
investors
(+)
2-10 million $
(+)
Purchase (10% -30%) stake
(+)

Funding

Marketing Branding Hiring of

employee
Chap. 4 Startups and their Registration 209

Sources of capital
Because there are no public exchanges listing their securities, private companies meet venture capital
firms and other private equity investors in several ways, including warm referrals from the investors' trusted
sources and other business contacts, investor conferences and demo days where companies pitch directly to
investor groups.
As equity crowd funding becomes more established, startups are increasingly raising part of their Series
round online using platforms such as
 One vest or Seed Invest in the USA
 Seeds in the UK
 VC-Circle, Private Circle, Lets Venture and Tracxn Labs etc. in India
These blended rounds include a mix of angel investors, strategic investors and customers alongside the
offline venture capital investors.
Structure
Smaller investment amounts are usually not worth the legal and financial expense, the burden on a
company of adjusting its capital structure to serve new investors, and the analysis and due diligence on the
part of institutional investors. A company that needs money for operations but is not yet ready for
venture capital will typically seek angel capital. Larger amounts are usually unwarranted given the cost of
business in fields such as software, data services, telecommunications, and so on. However, there are
routinely series A rounds in excess of $10 million in fields such as pharmaceuticals, semiconductors, and real
estate development.
Things to Know When Raising a ‘Series A Round’:
If a startup is looking to raise a Series A, it might be a good idea to get familiar with what venture funds
looks for to ascertain if your company is Series A ready.
The first time that a startup raises capital is normally called a ‘seed round’. Other names include angel
round or HNI round. Some even call it a pre-Series A round, but this term usually refers to a small interim
fundraising exercise between the seed round and Series A.
1. Be Series A Ready
If you are looking to raise a Series A, it might be a good idea to get familiar with what venture funds
looks for to ascertain if your company is Series A ready.
Some key factors that are taken generally taken into consideration
 Promising unit economics
 Revenue
 Proof of business model
 Systems ready to support efficient scaling
 Product or market fit
 Customer acquisition strategy and success,
 Quality of team
It is wise to evaluate where you company stands against these metrics to figure if you are ready for
Series A.


210 Startups and their Registration Chap. 4

Quick Recap

Series a Funding

Be series a ready

Proof of business model

(+)
Economical
(+)
Effective scale
(+)
Revenue
(+)
Product it
(+)
Market fit

2. Start Early
Fundraising in the current environment is a time consuming process - be realistic about the
timeframe. Make sure you start the process at least 7-8 months prior to when you want to raise a
Series A financing. The deal process has two parts:
 Pre-Term sheet
 Post-Term sheet
Underestimating the time required inevitably leads to desperation and will often need to alter your
funding strategy to include diverting attention to raise a bridge round to sustain the business.
Quick Recap
Early Start

Time consuming process

(+)

7-8 Months

Pre Term Sheet (+) Post Term Sheet

3. Leverage Your Network

Seed funding is more plentiful and easier to raise as compared to Series A. Leveraging your network
and building genuine relationships before you start your Series A fundraise will make it easier for
you to get potential meetings with investors. Reach out to your extended network and request
them to reach out to their connections. These second degree network have powerful and favourable
outcomes. Spreading word about your business through your network or through PR or
marketing initiatives is always helpful.
Chap. 4 Startups and their Registration 211

Quick Recap
Leverage your Network

Family Seed funding was Series A

& very easy
Friend Potential meeting

External investors

4. Practice your “Pitch”

The key is to take as many meetings as possible. Speak to other founders who have successfully
raised Series A and take their inputs for your pitch. Meet the low priority investors on your list
first - they will ask you relevant question and provide you valuable feedback which you should
incorporate in your pitch before meeting the top priority investors on your list. Treat the pitch a
product – iterate on it until it is great.
Quick Recap
Practice your Pitch

Ask Founders who have Successfully raised series A

(+)
Primary meeting with low potential investors

5. Create a Fundraise Momentum

Approaching multiple venture funds at the same time is a good idea to get a competitive dynamic into
the process. Try keeping your conversations with interested investors moving along at as close to
the same pace as possible. This may not be easy but is if you manage to orchestrate well, you may
be able to negotiate from a high bargaining power that generally leads to better valuation and deal
terms. Nothing accelerates the process and you landing up a term sheet from one VC – you are likely
to get few more.
Quick Recap
Create fund raise Memorandum

One should have more investors in his company

(+)
Strong negotiation by start-up & not by the investor

6. Know the “standard market practice”

Keep yourself up to date with the commonly offered deal terms for a Series A. It is highly possible
that the first version of your term sheet you receive is not exactly “founder-friendly”. The
strongest line of defense and the most accepted rationale for negotiating such terms is that they are
not standard market practice.
Quick Recap
Know standard Market Practice

To make term sheet “Investor friendly”

&
“Founder Friendly”
212 Startups and their Registration Chap. 4

7. Get the deal terms right

It is imperative that you ensure that the deal terms for your Series A are right and consistent with the
trajectory of your business. The Series A terms will play as a foundation for all future rounds -
many of those same terms that you have signed up for in your Series A are likely to carry through to
future rounds i.e Series B or Series C – hence important to get them the right the first time itself.
Quick Recap
Get the Deal terms right

Foundation for series B & C rounds

8. Engage a Company Secretary

If you’re raising venture capital, you need a lawyer who specializes in structuring venture
capital financing. A lawyer who has done multiple such deals understands the nuances involved in
structuring such rounds both from the perspective of which deal terms are important, what the
“standard market practice” is and when to stay firm and when to concede to the investor. This will
aid you to close your investment documents faster and more efficiently.
Quick Recap
Engage CS

Lawyer Agreements

9. Paperwork in place
Shorten your transaction closing time by having all paper work in place for due diligence. Ensure
that your company’s legal documentation and compliance is up to date and have your team put
together all records relating to employees, past financing, corporate structure and establishment,
client contracts, intellectual property, cap table, etc. The paperwork should be organized and ready
for review by the Investor appointed legal counsel or diligence team.
Quick Recap
Paper work in Place

Legal documents (+) Post financial (+) Employees

(+) IPR (+) Clients contract

10. Raise 10-15% more than budgeted for

Within reason, if you have access to capital and the deal terms including dilution are decent, raise 10-
15% more than budgeted as the business initiatives or operations don’t always materialise as
planned. Raise enough to allow you a fair shot to meet your milestones for the next round of
financing so that you can channel all your focus on building the business and scaling it in the right
direction. Raising every round of funding post Series A becomes significantly difficult and therefore
is time consuming process and highly distracting. Additionally, there is a transaction cost every
time you close an additional round.
Quick Recap
Raise 10-15% Higher of the corpus required
(+)
If required again then time consuming
Chap. 4 Startups and their Registration 213
B. Debt Financing
(1) Loan from Banks & NBFCs
Loans from banks and NBFCs help finance the purchase of inventory and equipment, besides
securing operating capital and funds for expansion. More importantly, unlike a VC or angels,
which have an equity stake, banks do not seek ownership in your venture. However, there are
several drawbacks of such funding option. Not only do you pay interest on loan but it also has to be
done ontime irrespective of how your business is faring. They require substantial collateral and a
good track record, besides the fulfilment of other terms and conditions and a lot of documentation as
follows:
 Application for loan sanction by borrowers.
 Issue of sanction letter by the Bank.
 Agreement of Loan.
 Security or collateral documentation, such as
o Deed of Mortgage
o Deed of Hypothecation
o Deed of guarantee
o Share pledge agreement
o Memorandum of Entry
(2) External Commercial Borrowings
External Commercial Borrowings (ECB) in form of bank loans, buyers' credit, suppliers'
credit, securitized instruments (e.g. non-convertible, optionally convertible or partially convertible
preference shares, floating rate notes and fixed rate bonds) can also be availed from non-resident
lenders to fund the business requirement of a company. ECB can be accessed under two routes:
 Automatic Route
 Approval Route
depending upon the category of eligible borrower and recognized lender, amount of ECB availed,
average maturity period and other applicable factors.
ECB raised has also certain end use restrictions such as that it cannot be used for
 On lending or investment in capital market
 Acquiring a company in India
 Real estate sector etc.
Under ECB also the borrower needs to create certain charge on immovable assets, movable assets,
financial securities and issue of corporate or personal guarantees in favour of overseas lender, to
secure the ECB raised by the borrower, subject to compliance of certain conditions as prescribed
under ECB guidelines framed by Reserve Bank of India. The documentation on similar lines as
mentioned under bank loan section above will need to be executed.


214 Startups and their Registration Chap. 4
Quick Recap

ECB

Automatic Route Approval Route

(+)

(or)
Rs. INR Foreign $

Restrictions on Investment

Real estate Acquision in India No investment in capital

market

(3) CGTMSE Loans

Under the Credit Guarantee Trust for Micro and Small Enterprises scheme launched by Ministry of
Micro, Small & Medium Enterprises (MSME), Government of India to encourage entrepreneurs, one
can get loans of up to 1 crore without collateral or surety. Any new and existing micro and small
enterprise can take the loan under the scheme from all scheduled commercial banks and specified
Regional Rural Banks, NSIC, NEDFI, and SIDBI, which have signed an agreement with the Credit
Guarantee Trust.
Quick Recap

Credit Guarantee Trust for Micro & Small Enterprises Scheme (CGTMSE Scheme)

SIDBI (+) RRB

Loan upto ` 1 Cr
(+)
No collateral


Chap. 4 Startups and their Registration 215
Quick Recap
Debt Debt Financing

Bank & NBFCs Stages under loan from External Commercial

Loan banks & NBFCs Borrowing (ECB)
Inventory (Working capital)
Application for loan Borrowings raised from
Equipments (Fixed capital) recognized lender outside India
Sanction letter for commercial purpose
No sacrifice of ownership
Agreement
Interest E.g:- Bank loan
(+)
Collateral Buyer’s advance
Collateral (Security) (+)
Supplier’s credit
Excessive documentation Pledge Deed of
agreement Hypothecation

FCCB (+) FCEB

Mortgage deed Guarantee contract

Foreign currency
exchangeable bonds

Foreign currency convertible bonds

(1) Bonds
A Ltd. Public
(1) Bonds
A Ltd. Public (2) Transfer
(2) Surrender

(3) Equity share B Ltd. (3) Equity share

C. IPO

Once the startups achieve stable operations and revenue flows, it may consider an Initial Public
Offering (IPO) to raise the funds or increase the magnitude of the business operations.
During the IPO, the Company raises funds by offering and issuing equity shares to the public. An IPO
allows a company to tap a wide pool of stock market investors to provide it with large volumes of
capital for future growth. The existing shareholding will get diluted as a proportion of the company's shares.
However, existing capital investment will make the existing shareholdings more valuable in absolute terms.
Companies can also issue of American Depository Receipts ("ADRs") or Global Depository
Receipts ("GDRs") to raise funds from international stock investors.
Various parties such as investment bankers, underwriters and lawyers need to be engaged as part of the
procedure of IPO.
216 Startups and their Registration Chap. 4
Quick Recap
IPO Initial Public Offer

It allows companies to tap a wide pool of stock market investor

to provide with large volume of capital for future growth.

Company (RIL)

Equity shares Bonds

Debentures ADR/GDR

Depository Receipts

Company Investments Public

Country - 1 Country - 2

Depository receipt is a negotiable instrument issued by company

to its investors residing abroad.

DR
ADR IDR
GDR
America India

Europe & Rest of the world

D. Unconventional modes
Unconventional modes of financing options which are now becoming popular in India
1. Crowd Funding
This is recent phenomena being practiced for getting seed funding through small amounts
collected from a large number of people (crowd), usually through the Internet. Now we have
companies existing in India which are specializing in "Crowd Funding".
The entrepreneur can get money for his venture by showcasing his idea before a large group of
people and trying to convince people of its utility and success.
The entrepreneur needs to put up on a portal his profile and presentation, which should include:
 The business idea
 Its impact
 The rewards and returns for investors.
 It should be supported by suitable images and videos of the project.
Chap. 4 Startups and their Registration 217
SEBI in 2014, even rolled out a 'Consultation Paper on Crowd funding in India' proposing a
framework in the form of Crowd funding to allow startups and SMEs to raise early stage capital in
relatively small sums from a broad investor base.
Quick Recap
Crowd funding

Funding from crowd through internet

There are certain companies in India to which

crowd funding can be outsourced
A

Idea display B
AV Website
C
D
Business profile (+) Returns (+) Rewards

Presentation

Video (+) Images

SEBI Consultation paper on crowd funding in India

Definition Crowd funding means & includes the solicitation of fund

from multiple investors through a web based platform

(or)

Through social networking sites

Specific business project

(or) Social cause

2. Incubators
These set-ups precede the seed funding stage and help the entrepreneur develop a business idea or
make a prototype by providing resources and services in exchange for an equity stake ranging from
2-10%.
Incubators offer
 Office space
 Administrative support
 Legal compliances
 Management training
 Mentoring
 Access to industry experts
 Funding through angel investors or VCs.
218 Startups and their Registration Chap. 4
These are usually government-supported institutes like the IIMs or IITs, technical institutes or
private business incubators run by industry veterans or companies. The incubation period can
be 2-3 years and admission is rigorous. Some of the top options in India include IIM-Bangalore,
IIT-Kanpur, and the Sriram College of Commerce (SRCC).
Quick Recap
Incubator

(Primary) Seed Funding Stage

(+)
Helps Entrepreneur to develop Idea
(+)
2-10% Equity Purchase
(+)
Offer = Office Space + Administrative Support + Legal Compliance
+ Management Training

Incubation Period = 2-3 Years

(+)
Eg:- (World wide) E-Ventures + Infinity
(+)
Eg:- (Indian) SRCC + IIT Kanpur +IIM Bangalore

14. Mudra Banks (Micro Units Development and Refinance Agency Bank)
 MUDRA Bank is a public sector financial institution in India to provide loans at low rates to
micro-finance institutions and non-banking financial institutions which then provide credit to
MSMEs.
 It was launched by Prime Minister Narendra Modi on 8 April 2015.
 It will provide its services to small entrepreneurs outside the service area of regular banks.
 About 5.77crore small businesses has been identified as target clients using the NSSO survey of
2013. Only 4% of these businesses get finance from regular banks. The bank will also ensure that
its clients do not fall into indebtedness and will lend responsibly.


Chap. 4 Startups and their Registration 219
Quick Recap
Mudra Bank (Scheme)

Micro Units Development

& Public sector
Refinance Agency Bank Financial
institution
8 April, 2015 (+) Modi Ji

MUDRA

Loan Loan

Micro Financial (+) NBFC

Institution

Loan MSME

National Sample Survey Organization (NSSO)

Identify

5.77 Crore small scale business in India

(+)
Only 4% can get finance from regular banks
(+)
96% Cash Crises

Categories of Clients
The bank will classify its clients into three categories and the maximum allowed loan sums will be based
on the category:
Shishu- Allowed loans up to ` 50,000 to Fruit and vegetable vendors.
Kishore - Allowed loans up to ` 5 lakh to Shopkeepers and Artisans (Skilled worker).
Tarun- Allowed loans up to ` 10 lakh to Small manufacturing unit.
Quick Recap
3 Categories

Shishu Kishore Tarun

Upto ` 50, 000 Upto ` 5 Lac Upto ` 10 Lac

Fruit & vegetable vendors Shopkeepers Small manufacturing units

+
Artisans
(workers in skill trade)
220 Startups and their Registration Chap. 4

Points to Remember
1. The basic criteria of age should be 18 years old.
2. Loan under the scheme of the Pradhan Mantri Mudra Bank Loan will be available if and only if it is
for commercial and business purposes and not for personal purposes.
At the most, borrower can buy vehicle from mudra loan, given that it is used for commercial
purposes.
3. Lastly, this loan is for new business and is only applicable for small business owners.
Quick Recap

Criteria

18 years of age
+
New business
+
Small size

15. Procedure for loan from MUDRA Bank

Once the beneficiary identifies an idea and comes up with a business plan, he is supposed to select the
business category under which he wishes to avail the loan (Shishu, Kishor or Tarun).
The beneficiary can contact the nearest Public or Private sector bank where he or she can apply for
business loan under PMMY. The list of institutions partnering in the MUDRA initiative is available on the
MUDRA portal.
An application form under this scheme will be available with each of the above listed institutions.
Documents to be attached with Application Form
This application form has to be submitted along with the following documents for the approval of the
loan:
 Self-attested Identity Proof (Aadhaar Card)
 Self-attested Residence Proof (Recent Utility Bill or Property Tax Receipt (not older than 2 months)
or Voter ID Card or Aadhaar Card or Passport or Domicile Certificate or Certificate Issued by a local
authority)
 Applicant’s recent photograph (not older than 6 months)
 Quotation of Machinery or other items to be purchases
 Name of the Supplier alongwith details of Machinery and its price.
 Proof of Identity or Address of the Business Enterprise (Business Registration Certificate)
 Proof of Category (General or Reserved)
The Banks are not supposed to take any processing fee and are not supposed to ask for any
collateral. The repayment period is also extended to 5 years. But it is also made clear that the applicant
should not be a defaulter to any Bank or financial institution.
MUDRA Bank is not a separate bank (like SBI etc.). It is a government financing scheme to provide
business loan to new small businesses in India.
The rate of interest will be fixed by the institutions time to time based on guidelines from the RBI.
16. MUDRA Card
After the loan has been sanctioned under MUDRA Yojana, the candidate will get a MUDRA Card, a card
like the credit card which the candidate can use to buy business raw material, etc. Mudra Card will have a
limit of 10% of the business loan (subject to ` 10,000 maximum).
Chap. 4 Startups and their Registration 221
Quick Recap

Procedure for seeking loan from MUDRA Bank

Kishore

Shishu Tarun
(1) (4) Loan Granted

(3) Application
AV Bank
ID Proof + Photo (Max 6 Months old)
(2) Mudra Portal (+)
Details of Machinery to be Purchase
(+)
Bank Details of Suppliers
or
(+)
PMMY
Business Address
Pradhan Mantri Mudra (+)
Yojana Category (SC/ST/OBC/Others)
(+)
Other Documents specified by banker

Important notes about MUDRA

No Processing fee 5 years repayment MUDRA is a scheme MUDRA Card = Credit

not a bank Card
+
10% of Business loan
No collateral is No loan to existing
required defaulter
Rate of Interest
Subject to the max of `
prescribed by RBI
10,000
from time to time

Case Studies On Unicorn

Unicorns Startups
A unicorn is a term used to indicate a privately held startup company with a valuation of over $1
billion. For a unicorn, the journey starts from the growth stage, they are disruptors which start out in
an incredibly unique way to solve everybody problem. The reasons these startup become so successful
is because all of their solutions fill a specific need in a new and different way.

The Indian startup ecosystem has developed dynamically in recent times. Two decades back, there
were only few active investors and limited number of support organisations, such as incubators and
accelerators.

However, in the past decade. There has been a significant increase in both investment activity and
infrastructure facilities to provide the much-needed impetus to the expansion of the unicorn tribe.
222 Startups and their Registration Chap. 4

The Indian Unicorns are flourishing in the fast-paced and dynamic economy of today. These startups
are not only developing innovative solutions and technologies but are generating large-scale
employment. Till FY 2016-17, approximately 1 unicorn was being added every year. Over the past four
years (since FY 2017-18), this number has been increasing exponentially, with a whopping 66% Year-
on-Year growth in the number of additional unicorns being added every year. As of 07th September
2022, India is home to 107 unicorns with a total valuation of $ 340.79 Bn. Out of the total number of
unicorns, 44 unicorns with a total valuation of $ 93.00 Bn were born in 2021 and 21 unicorns with a
total valuation of $ 26.99 Bn were born in 2022.

The year 2021, 2020, and 2019 saw the birth of the maximum number of Indian unicorns with 44, 11,
and 7 unicorns coming each year, respectively. COVID-19 has caused a great amount of socio-economic
suffering globally, but it is during this time when the resilient Indian Entrepreneurs have worked
effortlessly to not only contribute to the economy but to also contribute toward COVID-19 relief efforts.
The year 2020 witnessed the birth of more than 10 unicorns. ‘Its raining unicorn’ has been the motto of
the year 2021 with 44 unicorns pumped in the ecosystem and many soonicorns waiting in line.

Geographically, the center of India’s high-tech industry, Bengaluru is India’s unicorn capital with the
largest number of unicorns headquarters followed by Delhi (NCR) and Mumbai. Traditional sectors
such as E-commerce, Fin-tech, E-commerce, Supply Chain & Logistics, and Internet Software & Services
do dominate the arena but a strong wave of unconventional sectors such as Content, Gaming,
Hospitality, Data management & analytics, etc are making their place on the list.

Indian Startups turned Unicorns

In 2021 itself, India witnessed the birth of 44 unicorns with a total valuation of $ 93 Bn. Bengaluru,
Delhi NCR, and Mumbai continue to be the top cities preferred as unicorn headquarters in 2021.
Unconventional sectors and sub-sectors marked an entry into the unicorn space including, NBFCs,
Conversational Messaging, Cryptocurrency Exchanges, D2C, Cloud Kitchens and many others. Indian
unicorns are also exploring the public listing avenues as a next step to realise the growth potential.
Some one of big unicorn names that offered an IPO include Zomato, Nykaa, PolicyBazaar, Paytm and
Freshworks. Some of the Startups turned unicorns are:
 Amagi
 Cred Avenue
 Deal Share
 Tata 1mg
 Livspace
 Purple.com
 Acko
 BharatPe
 Blink It
 Cred
 Car Dekho
 Ease My Trip
 Meesho
 Share Chat
 Mobikwik
 Mamaearth
 Groww
 PharmEasy
 Meesho
 Firstcry
 Byju’s
Chap. 4 Startups and their Registration 223
 Delhivery
 Bigbasket
 Glance
 Lenskart
 Dream 11
 Unacademy.

Case Study On Zomato – India’s First Listed Unicorn

About the Company:

Zomato was originally incorporated as “DC Foodiebay Online Services Private Limited” as a Private
Limited Company under the Companies Act, 1956 at New Delhi, on January 18, 2010. The Company’s
name was changed to “Zomato Media Private Limited” on May 25, 2012. Subsequently, pursuant to a
special resolution passed by the company’s Shareholders on April 3, 2020, the name of the Company
was changed to “Zomato Private Limited” on April 22, 2020.

Consequent upon conversion into a public limited company under the Companies Act, 2013 in the year
2021, the fresh certificate of incorporation was issued by the RoC with the name “Zomato Limited” on
April 9, 2021.

The Company is a professionally managed company and does not have an identifiable promoter in
terms of the SEBI (ICDR) Regulations and the Companies Act. It’s Board has eight Directors comprising
of one executive Director, two Non-Executive Nominee Directors and five Independent Directors
including four women Independent Directors.

Growth of Business from year to year:

The business of Zomato has grown substantially in recent years. Since its incorporation in 2010,
Zomato have evolved from a single -service category provider to a multi-category service provider,
offering various services across food delivery, diningout, Hyperpure and Zomato Pro. Almost all aspects
of its business, in particular food delivery, have experienced rapid growth in recent years. Its revenue
from operations has grown from INR 13,125.86 million in Fiscal Year 2019 to INR 19,937.89 million in
Fiscal Year 2021. In particular, as lockdowns in response to the COVID-19 pandemic eased in India
towards the end of May 2020, Zomato’s food delivery business started recovering and in the fourth
quarter of Fiscal 2021 it recorded the highest gross order value (GOV) achieved by Zomato in any
quarter till March 2021.

Main Products of Zomato:

The technology platform of Zomato connects customers, restaurant partners and delivery partners,
serving their multiple needs. Customers use its platform to search and discover restaurants, read and
write customer generated reviews and view and upload photos, order food delivery, book a table and
make payments while dining-out at restaurants. On the other hand, Zomato provide restaurant
partners with industry-specific marketing tools which enable them to engage and acquire customers to
grow their business while also providing a reliable and efficient last mile delivery service. Zomato also
operates a one-stop procurement solution, Hyperpure, which supplies high quality ingredients and
kitchen products to restaurant partners. It also provide its delivery partners with transparent and
flexible earning opportunities. The company products can be broken down in 3 parts:
 B2C Marketplace to identify the Restaurants for Food Delivery
 B2C Marketplace to identify the Restaurants for Dining Out
 B2B Marketplace for Restaurants to Order Grocery
224 Startups and their Registration Chap. 4
Food-delivery app Zomato Ltd. became the nation’s first unicorn to make its stock-market debut,
raising $1.3 billion with backing from Morgan Stanley, Tiger Global and Fidelity Investments. The IPO,
which opened on July 14, 2021 and closed on July 16, 2021 was oversubscribed by over 38.25 times.
The IPO received very strong subscription from qualified institutional investors, non-institutional
investors, and retail investors with each category being subscribed multiple times. The public issue was
subscribed 7.45 times in the retail category, 51.79 times in the QIB category, and 32.96 times in the NII
category and 0.62 times in Employee category.

Zomato’s Role during COVID-19:

Zomato had launched contactless payments and deliveries to reduce face-to-face interaction, which
was a win-win situation for both the customers and the delivery executives at the time of COVID-19.
Zomato took the initiative of training hygiene practices to their delivery partners and the platform that
provided free medical consultation to the delivery partners and ensure their financial safety as well.

Conclusion:
Zomato becomes one of the successful food delivery apps in India. The customers appreciate the
Zomato food delivery apps start-up in India. Strong advertising channel, efficient personnel, the good
rating system and social media and experienced sources of funds are some of the main successive
factor of Zomato.

Study On Delhivery – E-Commerce-Focused Logistics Platform

About the Company:
The Company was incorporated as “SSN Logistics Private Limited”, a private limited company under
the Companies Act, 1956, on June 22, 2011. Subsequently, the name of Company was changed to
“Delhivery Private Limited”, with effect from December 8, 2015. On the conversion of the Company
from Private Limited to a Public Limited company, its name was changed to “Delhivery Limited” on
October 12, 2021.

The main objects of Delhivery as placed in its MOA are:

1. To provide logistics and delivery solutions to consumers and a wide range of businesses, to
provide logistics means, option and facilities to all kinds of business houses, corporates on
contract or otherwise.
2. To provide web hosting, internet content development, web interface, web sites design, domain
name services, and website maintenance services to other businesses.

The company have 11 Directors on its Board, comprising of 3 Executive Directors, 3 Non-Executive
Nominee Directors and 5 Non-Executive Independent Directors, including one woman Director.
Delhivery became a unicorn in 2019 when it raised $413 million in a Series F round led by SoftBank
Vision Fund, Carlyle Group, and Fosun International. It was then valued at $1.5 billion. Delhivery has
last been valued at $4.77 Billion in May 2022.

Financial Aspects from year to year:

The company incurred restated losses for the year/period of INR 17,833.04 million, INR 2,689.26
million, INR 4,157.43 million, INR 2,974.92 million and INR 8,911.39 million in Fiscal 2019, Fiscal 2020
and Fiscal 2021 and the nine month periods ended December 31, 2020 and December 31, 2021,
respectively. The restated losses included a fair value loss on financial liabilities at fair value through
profit or loss of INR 14,806.64 million, nil, INR 91.95 million, nil and INR 2,997.39 million in Fiscal
2019, Fiscal 2020 and Fiscal 2021 and the nine month periods ended December 31, 2020 and
December 31, 2021, respectively, which is a non-cash item.
Chap. 4 Startups and their Registration 225
As the scale of the company’s business grows further, its revenue from contracts with customers has
improved from INR 16,538.97 million in Fiscal 2019 to INR 36,465.27 million in Fiscal 2021 and from
INR 26,438.66 million for the nine months period ended December 31, 2020 to INR 48,105.30 million
for the nine months period ended December 31, 2021.

Main Offerings of Delhivery:

Delhivery has currently been hailed as India’s leading supply chain Services Company. It is one of
India’s largest B2B, B2C, and C2C Logistics Courier Service providers. The company is best known for
the economical shipping rates that it charges for its services. Furthermore, Delhivery claims to have -
No Setup Fees or Subscription Charges. The services offered by Delhivery can be divided into 3 primary
departments:
1. Warehousing - Flexible warehousing across 40+ cities in India
2. Transportation - Largest pan-India reach across 19000+ pin codes and 2500+ cities
3. E-Commerce - Ready integration with Shopify, WooCommerce, Magento & Opencart.
Since its inception, Delhivery has fulfilled over 1.4 billion orders across India. It has built a nation-wide
network with a presence in every state, servicing over 18000 pin codes, 21 automated sort centres, 96
gateways, 93 fulfilment centres, 2948 direct delivery centres, and a team of over 58000 people make it
possible to deliver 24 hours a day, 7 days a week, 365 days a year.

Its mission is to enable customers to operate flexible, reliable and resilient supply chains at the lowest
costs. It provide supply chain solutions to a diverse base of over 29,200 active customers such as e-
commerce marketplaces, direct-to-consumer e-tailers and enterprises and SMEs across several
verticals such as FMCG, consumer durables, consumer electronics, lifestyle, retail, automotive and
manufacturing. Delhivery achieved the same through high-quality logistics, infrastructure and network
engineering, a vast network of domestic and global partners and significant investments in automation
that drive network synergies within and across its services and enhance the value proposition to
customers.

Delhivery’s Role during COVID-19:

During the period of April to June 2021, Delhivery partnered with Hunger Heroes to import 8419
oxygen concentrators. It also partnered with “ACT Grants” and others to import 35875 oxygen
concentrators, oxygen plants, oxygen cylinders, equipment required to set up new oxygen plants and
various medical supplies from around the world and distributed them across India.

Conclusion:
Delhivery became a unicorn in 2019 when it raised $413 million in a Series F round led by Soft Bank
Vision Fund, Carlyle Group, and Fosun International. The company is attempting to change the logistics
industry by trying to innovate more and more and by coming up with new strategies every day. The
company grew and evolved from following a small and local business model to focusing just on the e-
commerce sector. With the industry being so competitive, Delhivery has experienced outstanding
growth since its inception.