Startup India Compliance

---
name: startup-india-compliance
description: >
  Guide Indian founders through company setup, compliance, and funding basics. Use when a founder
  needs help understanding incorporation (Pvt Ltd, LLP, OPC), DPIIT/Startup India recognition, ROC
  annual compliance, ESOP basics, cap tables, funding instruments (SAFE, CCPS, convertible notes),
  or founder equity structuring. Triggers on "how do I register my startup", "Pvt Ltd vs LLP",
  "DPIIT recognition", "what compliances does my company need", "explain ESOP pool", "cap table for
  my seed round", "SAFE vs convertible note in India", or "how much equity should I give a
  co-founder". Built for the Indian regulatory context. Not a substitute for a CA/CS on filings.
---

# Startup India Compliance Skill

Help Indian founders navigate the maze of company setup, compliance, and funding structure. Founders
routinely lose money and equity to mistakes made early - wrong entity type, missed ROC filings,
badly structured ESOP pools, or naive cap tables. This skill explains the essentials clearly.

**Filings and legal execution need a CA (Chartered Accountant) and CS (Company Secretary). This
skill helps founders understand what they're doing and ask the right questions - it doesn't replace
professional filing.**

---

## Choosing an entity type

The first big decision. Get this wrong and changing later is expensive.

| Entity | Best for | Key traits |
|---|---|---|
| **Private Limited** | Startups that will raise VC | Can issue shares/ESOP, investors require it, higher compliance |
| **LLP** | Services firms, bootstrapped, partners | Lower compliance, can't easily raise equity/VC |
| **OPC (One Person Co.)** | Solo founder, no immediate fundraising | Single owner, converts to Pvt Ltd later |
| **Sole Proprietorship** | Freelancers, very early testing | Simplest, no separation of liability, not fundable |

**Rule of thumb:** If you intend to raise venture capital or issue ESOPs, you need a **Private
Limited company**. VCs almost never invest in LLPs or proprietorships. If you're a bootstrapped
services business with no equity fundraising plans, LLP saves compliance cost.

---

## Incorporation (Private Limited) - what's involved

The founder should know the pieces even if a CS handles it:
- **DSC** (Digital Signature Certificate) for directors
- **DIN** (Director Identification Number)
- **Name approval** (via RUN / SPICe+ on MCA portal)
- **SPICe+ form** - integrated incorporation (company + PAN + TAN + EPFO + ESIC + bank account)
- **MOA & AOA** (Memorandum & Articles of Association) - the company's charter
- **Registered office** address proof

Typical timeline: 7-15 working days. Cost: varies (government fees + professional fees).

---

## DPIIT / Startup India recognition

Recognition by DPIIT (Department for Promotion of Industry and Internal Trade) unlocks benefits.

**Eligibility:**
- Incorporated as Pvt Ltd, LLP, or registered partnership
- Less than 10 years old
- Turnover under Rs 100 crore in any year since incorporation
- Working towards innovation/improvement of products/services or a scalable business model
- Not formed by splitting up/reconstructing an existing business

**Benefits of recognition:**
- **Tax exemption** under Section 80-IAC (3 consecutive years of tax holiday, if approved separately)
- **Angel tax exemption** under Section 56(2)(viib) (important for fundraising)
- Self-certification on labour and environment laws
- Easier public procurement, IPR fast-tracking, rebates on patent/trademark filing
- Access to Fund of Funds

**How:** Apply on the Startup India portal with incorporation docs and a short writeup on innovation.
Recognition itself is free.

---

## Ongoing compliance (Private Limited)

Founders underestimate this and get hit with penalties. Core annual/periodic obligations:

**ROC (Registrar of Companies) filings:**
- **AOC-4** - financial statements (annual)
- **MGT-7 / MGT-7A** - annual return
- **DIR-3 KYC** - director KYC (annual)
- **ADT-1** - auditor appointment

**Board and statutory:**
- Minimum 4 board meetings a year (with gaps not exceeding 120 days)
- Annual General Meeting (AGM)
- Statutory registers and minutes
- Statutory audit (mandatory for Pvt Ltd regardless of turnover)

**Tax:**
- Income tax return (annual)
- TDS returns (quarterly, if deducting)
- GST returns (if registered - monthly/quarterly)
- Advance tax (quarterly)

Missing ROC filings carries daily penalties that pile up fast. A CS typically manages this on retainer.

---

## ESOP basics

ESOP (Employee Stock Option Plan) is how startups compensate talent with equity.

- **ESOP pool:** A reserved chunk of equity (typically 5-15% at early stage) set aside for employees.
- **Vesting:** Standard 4 years with a 1-year cliff. Nothing vests before 1 year; then monthly/quarterly.
- **Strike price:** The price at which employees can buy their vested options (often FMV at grant).
- **Exercise:** Converting vested options into actual shares (usually on a liquidity event or exit).
- **Dilution:** The pool dilutes founders and investors - plan the size deliberately.

Flag: ESOP taxation in India is a real pain point (taxed at exercise AND at sale). DPIIT-recognised
startups get some relief on timing. Recommend a CA for the tax mechanics.

---

## Funding instruments

Founders should understand what they're signing:

| Instrument | What it is | Key point |
|---|---|---|
| **Equity (priced round)** | Investor buys shares at a set valuation | Clean but requires agreeing a valuation now |
| **CCPS** | Compulsorily Convertible Preference Shares | Most common Indian VC instrument; converts to equity, has preferences |
| **Convertible Note** | Debt that converts to equity later | Defers valuation; has cap/discount |
| **SAFE** | Simple Agreement for Future Equity | Popular globally; Indian enforceability/structuring needs care - use iSAFE variant |

**Key terms to understand in any term sheet:**
- Valuation (pre-money vs post-money)
- Liquidation preference (1x non-participating is founder-friendly)
- Anti-dilution (full ratchet is bad for founders; broad-based weighted average is standard)
- Board composition and control
- Pro-rata rights, ROFR, drag/tag-along

Always recommend a startup lawyer review any term sheet. The terms matter as much as the valuation.

---

## Cap table basics

A cap table (capitalization table) tracks who owns what. Keep it clean from day one.

- List every shareholder, their share count, and %
- Include the ESOP pool (issued and unissued)
- Model dilution for each future round before you sign
- Founders: understand your % after the round AND after the ESOP top-up (investors often require
  the pool expansion to come from founders' share, pre-money)

A messy or naive cap table causes problems in every future round. See scripts/cap-table.py for a
simple dilution modeller.

---

## Hard rules

- Never give definitive legal/tax filing advice as if certain - regulations change and specifics
  vary. Explain the concept and point to a CA/CS for execution.
- Flag angel tax and ESOP taxation as areas that genuinely need professional help.
- Don't help structure anything designed to evade tax or mislead regulators/investors.
- Encourage clean structure early - fixing entity type or cap table later is costly.

---

## Reference files

- `scripts/cap-table.py` - Simple cap table and dilution modeller