Startup Compliance in India 2026: Founders, Funding, ESOPs, DPIIT

Incorporate as Pvt Ltd if external funding is even a possibility within 18 months — investors will not fund LLPs without a conversion clause; the cost of conversion at fundraise time is non-trivial in time and tax.

Founders' / shareholders' agreement (SHA) — drafted before the team starts disagreeing, signed in week one. Core clauses: vesting (typically 4-year with 1-year cliff), reverse vesting on existing founder equity, IP assignment to the company, ROFR + ROFO on share transfers, drag-along, tag-along, board composition, reserved matters.

IP assignment — every founder and consultant signs over all pre-incorporation IP via a written assignment agreement, plus a present-tense "IP created during engagement" clause going forward. Without it, your codebase belongs to whoever wrote it personally.

Banking and books — open the bank account before raising any money. Move to a proper accounting system (Zoho Books, Tally, or hire a virtual CFO from day one) — angel investors will ask for monthly MIS at the seed pitch.

DPIIT recognition — application on the Startup India portal. Requirements: registered in India for less than 10 years, turnover under ₹100 crore in any of the last financial years, working towards innovation/improvement. Approval is administrative — usually 2-5 working days.

80-IAC tax exemption — for DPIIT-recognised startups incorporated between 1 April 2016 and 31 March 2025 (extended budgets keep moving this). 100% tax deduction on profits for any 3 consecutive years out of the first 10. Requires Inter-Ministerial Board approval; turnaround 3-6 months.

Angel tax exemption (§56(2)(viib)) — DPIIT-recognised startups are exempt from the share-premium tax on issuance to residents. Post the September 2023 amendments extending §56(2)(viib) to non-residents, this exemption became critical even for foreign-investor rounds.

Self-certification under labour laws and environmental laws — for DPIIT startups for up to 5 years. Reduces inspector risk for early-stage companies.

Term Sheet — non-binding (mostly) outline of the round. Investor's side typically drafts; the founders push back on valuation, preference, liquidation, anti-dilution, board, ROFR, and vesting on founder equity.

SHA (Shareholders Agreement) + Share Subscription Agreement (SSA) — the binding deal documents. SHA governs the relationship going forward; SSA governs the act of share issuance and the price.

Amended AOA — to give effect to investor protective rights, reserved matters, and class of shares (CCPS / CCD).

PAS-3 within 15 days of allotment; FC-GPR within 30 days of receipt of foreign investment via the RBI FIRMS portal. Both are statutory and routinely missed by founders — and routinely flagged in diligence.

Cap table maintenance — fully diluted, broken by class, with vesting schedules. The single most-asked-for diligence artifact after the founders' KYC.

ESOP scheme drafted and adopted by special resolution under §62(1)(b) — covers eligibility, vesting, exercise period, exit/liquidity clauses. Required even before the first grant.

Grant letters — individual documents per employee, specifying number of options, exercise price, vesting commencement date, vesting schedule (typically 4-year monthly post 1-year cliff), exercise period after exit.

Pool size — typically 8-12% post-seed; investors usually require top-up to 12-15% pre-Series A. Pool dilution comes from existing shareholders pro-rata unless specifically allocated.

Tax for employees — taxed at exercise (perquisite under §17(2)(vi)) on FMV minus exercise price, then again at sale on capital gain. DPIIT-recognised startups get a 5-year deferral on the exercise-time tax under §192(1C) — a real cash-flow lever.

Buyback during exit — typically capped at a percentage of the company's buyback capacity; structure as either capital reduction (slow, court-approved) or buyback under §68 (faster).

Constitutional: MOA, AOA (latest), Certificate of Incorporation, PAN, GST, professional-tax registration.

Cap table + share certificates + PAS-3 filings for every allotment.

Founder / consultant / employee contracts with IP assignment and NDA.

ESOP scheme + grant letters + register of options.

Statutory registers (members, directors, charges, contracts).

Audited financials for every year since incorporation (or unaudited where audit is not yet due).

GST returns + ITRs for the last 3 years.

Key customer + vendor contracts.

DPIIT recognition, 80-IAC and §56(2)(viib) certificates (where obtained).