Brad Feld - Do More Faster India

There is a great impetus by the government for India funds—funds by and for Indians—and there are several funds being set up in India (SEBI registered Alternative Investment Funds). Yet most venture capital funds have been set up outside India due to tax treaty benefits. If the fund located outside India is investing into startups, the Foreign Direct Investment Policy Circular (FDI Policy) administered by the Department Promotion of Industry and Internal Trade is relevant. FDI Policy is fairly liberalized and many sectors, such as technology, are under the “automatic route.” This means there is no prior approval required from the government, but intimation of FDI has to be reported. There are a few sectors which have a sectoral cap on receiving funds or require prior government approval. For example, ecommerce, retail, and trading have several restrictions so founders will have to do research prior to accepting funding.

Another type of funding involves loans. Loans provided by foreign entities are governed by a separate set of regulations, the External Commercial Borrowings.

Most startups provide ESOPs for retention, compensation, reward, and recognition of employees. In India, ESOPs are taxed at the time a person exercises the vested grants based on the fair market value of the shares as perquisite tax. But they are also taxed based on the sale price as capital gains tax. Startups are seeking the government’s favor to remove the tax liability at the time of exercise.

One issue involving ESOPs that founders need to be aware of is that an employee who is a promoter or a person belonging to the promoter group, or a director who either himself or through others holds more than 10 percent of the equity shares of the company, are not eligible for ESOPs. This stipulation applies to a person whether or not they hold the shares directly or indirectly. However, startups that are registered under the Startup India Action Plan have the flexibility to participate in ESOPs.

Over the past few years, valuation of the investment into companies has been debated widely in India. Before a startup can issue securities in their company, they’ll have to obtain a valuation certificate from a chartered accountant or merchant banker. The valuation could be on any internationally accepted principles of valuation such as Discounted Free Cash Flow Method or Net Asset Value Method. The real issue arises if the valuation is in excess of the fair market value. If that happens, then the investor will be taxed, and this is referred to as the “angel tax.” The government is trying to address this issue through having the startups registered under the Startup India Action Plan.

The Indian government recognizes the regulatory challenges faced by startups and in 2016 launched the Startup India Action Plan, which simplifies many processes. Under the Plan, startups are defined as a private limited company, a partnership firm, or an LLP incorporated or registered in India not prior to 10 years. A startup cannot have annual turnover exceeding INR 100 crores in any preceding financial year. In addition, the Plan applies to those startups working toward innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property.

There are many benefits for startups registered under the Plan, which include self‐certification for compliances under numerous environmental and labor laws, including:

Fast‐track patent and other intellectual property protection applications, processing, and rebates

Preferences in public procurement by governmental departments

Expedited winding up of the company

Registered startups also get an exemption from the angel tax mentioned above.

The ability for a startup to certify for compliances is a huge advantage since India has a vast number of laws related to labor and employment. For example, most companies require a registration certificate under the Shops and Establishments Act or the Factories Act, depending on the nature of work carried out. But each State has its own Shops and Establishment Act which regulates many of the work‐related compliances, including:

Number of paid leaves, sick leaves, and casual leaves

Number of working days and holidays

Minimum and maximum number of working hours per day

Obviously, the startup company needs to study the relevant Act before making company policies since all employers must adhere to labor laws.

But that’s not all. Every employer is required to adhere to and maintain multiple registers under the following Acts. However, a registered startup will not be subject to inspections from government inspectors and is only required to file self‐certification that they comply with the following labor laws:

Minimum Wages Act

Payment of Bonus Act

Maternity Benefit Act

Equal Remuneration Act

Rights of Persons with Disabilities Act

Employees’ Provident Fund and Miscellaneous Provisions Act (for employers with 20 or more employees)

One other Act employers must comply with is the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act. If an employer has 10 or more employees, then it must draft and implement an Anti‐Sexual Harassment Policy at the workplace, and also create an Internal Committee to be headed by a woman employee. That person is charged with hearing and resolving disputes pertaining to complaints of sexual harassment.

The vast number of laws at the Central and State level is a major concern for ease of doing business in India and the government is attempting to consolidate the fragmented and numerous labor laws into organized labor codes. An online portal called “Shram Suvidha” aims to make labor law compliance easier and allows employers to report compliance under various laws.

There are so many compliances that are applicable, even for a startup, that it’s best to seek legal advice early in your growth. In addition to the issues listed above, there are tax issues, laws pertaining to company formation and to financing, and a host of other issues. And many of the regulations are specific to the State where a company is located. We didn’t discuss other issues like intellectual property or dispute resolution. All of these issues need to be navigated and prepared for, and the best startup founders consider India’s complex legal structure early in the formation of their company.

When startup founders first get to Techstars accelerators, they receive the red‐carpet treatment from us. They are introduced to the Techstars team—many of whom have gone through the program, sold their company, and come back to work with us. They get to meet the mentors, many of whom are well‐known within the startup community, and have earned national and international reputations. They get to talk about themselves, their idea, their vision and aspirations, and to have interested people ask them thoughtful questions. They immediately start developing relationships with the other founders in the program.

Then, reality sets in.

If we could sum up that reality in one word, it’s intensity. The amount of work that needs to be done—data to collect and validate, meetings with mentors, follow‐up contact with people, processing of feedback, and exploration of options—all happens so quickly and in such a short, compressed time, that many founders are shocked by the daunting task ahead.

We have found that the right mindset and approach to being a startup entrepreneur is the key to reducing that shock to hours, if not minutes. The following introductory chapters provide a perspective into what successful startup entrepreneurs are doing and thinking, and how they approach the startup challenge.