Start-ups & E-commerce

Under the Start-up India Action Plan, the Indian Government has notified the definition of ‘Start-up’ under G.S.R. notification 127 (E) dated February 19, 2019. As per the definition, an entity shall be considered as a Start-up if it satisfies the following criteria:

1. The entity is incorporated/ registered as:

1. private limited company; or
2. partnership firm; or
3. limited liability partnership.

2. If already incorporated/ registered, the entity is less than 10 years old;
3. The Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees;
4. The entity is:

1. working towards innovation, development or improvement of products or processes or services; or
2. scalable business model with a high potential of employment generation or wealth creation.

The entity is not formed by splitting up or reconstruction of an existing business.

An entity shall cease to be a Start-up on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds one hundred crore rupees.

Yes, an existing entity that meets the criteria as indicated in response to Question 1 can visit the Start-up India portal and Mobile App and get itself recognized for various benefits.

On successful registration, you would be able to download a system generated verifiable certificate of recognition.

There is no single correct answer to this question. There are certain factors that need to be taken into account:

• the relative value of the contributions of the founders.
• vesting dependent upon continued participation in the business i.e., to not give away a substantial portion of the shares to a person who may leave within a short span of time.
• amount of time committed to the business by each individual.
• the cash compensation to be paid as an employee.
• upon willingness of founders to invest in the business.

For establishment of a Start-up, there are two essential criteria to be fulfilled.

• incorporation of the Start-up; and
• registration of the Start-up under the Start-up India Program.

Once the company obtains the Digital Signature Certificate and Directory Identity Number, the incorporation of the Start-up is done. Once the incorporation is done, the company becomes eligible to be enlisted with the Start-up India Program. There are 4 kinds of ownership models to choose from, namely:

• Proprietorship
• Partnership
• Limited Liability Partnership (LLP)
• Private Limited Company

The application shall be accompanied by

• ​​​​​​​a copy of Certificate of Incorporation or Registration, as the case may be, and

a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

No registration is required and legally you as the proprietor have the sole ownership of the company. For taxation, your income will be taken as the taxable income, you cannot transfer the ownership of the company to any other person. Lastly, you cannot call in foreign investors to fund your venture. Note that, a sole proprietorship does not count as a Start-up in India. 

A partnership needs two people to start with, and here you may or may not choose to register your company. However, if registered, you will come under the ambit of all the legalities and compliances applicable to a partnership firm as laid down under Partnership Act, 1932. A partnership firm can only be listed as a Start-up in India if it is less than 5 years of age from its incorporation.

An LLP in India needs to be registered under the Limited Liability Partnership Act, 2008. It comes under the ambit of the Ministry of Corporate Affairs and must have at least two partners. Further, in India, an LLP mode of operation is preferred over other registration systems. There are various benefits of incorporating as an LLP, including operational flexibility, fewer compliances, among others.

They are registered under the Companies Act 2013. To be more precise, such a company can have a workforce of up to 200 members, and it needs at least 2 directors. There are additional legal formalities to register as a private limited company in India, but they have access to several other benefits accorded by the state government. 

Upon registration of a Start-up, certain steps must be taken to ensure sustainability and efficient running of the business such as:

• Executing the organizational documents;
• Opening a current bank account;
• Assigning a registered office;
• Appointment of Accountants and Auditors;
• Creation of website and marketing planning;
• Start-up recognition in order to take advantage of tax benefits, concession in loans and special schemes by banks;
• Trademark and GST registration;
• Disclosure of Director's Interest and Declaration Regarding Disqualification;
• Issuance of Share Certificates to Subscribers;
• Acquiring any other Industrial Licenses and permits.

A Co-founder’s agreement is a legal contract that spells out the terms and circumstances under which a start-up's co-founders will run the company. A Co-founder’s agreement is a written contract that protects the Co-founders in the event of a disagreement.

A Co-founder’s agreement should be written along the business's core lines and include all terms pertaining to variables for which the Co-founders are responsible. The agreement must be carefully drafted, necessitating consultation with an experienced start-up lawyer in India.

Yes. You may register the Start-up as a One Person Company (OPC) and apply for registration on the Start-up India portal. OPCs are eligible to avail benefits under the Start-up India initiative.

Yes. If the application has been marked incomplete thrice, it is rejected.

No. You will have to incorporate/ register the Start-up as an OPC/ Partnership Firm/ Private Limited Company/ LLP.

No. For every new business entity a new registration is required, so the previous registration will not be applicable.

You should consider signing a Non-Disclosure Agreement (NDA) with every person whoever you are discussing or sharing about the proposed Start-up.

If you are developing an innovative product, process or service, you should consider reaching out to an Intellectual Property (IP) lawyer to evaluate whether your development is eligible for an IP protection. If yes, consider filing for IP protection.

If there are co-founders, you should consider entering into a Co-founders Agreement to demarcate the roles and obligations of the Co-founders towards each other and the Start-up.

Followings are some of the benefits/incentives associates with having a Start-up:

1. Reduction in cost

In order to encourage Start-ups, the government provides various lists of facilitators of patents and trademark, wherein the government will bear all facilitator fees and the start-up will bear only the statutory fees. The Government also provides high quality Intellectual Property Rights Services that includes fast examination of patents at lower fees. In addition to this there is 80% reduction in cost of filing patents.

2. Easy access to Funds

To make the process of securing funds easier, a 10,000 crore rupees fund is set-up by government to provide funds to the start-ups as venture capital, known as ‘Fund of Funds for Start-ups’.  The government is also giving guarantee to the lenders to encourage banks and other financial institutions for providing venture capital.

3.  Tax holiday for 3 Years   

After receiving a certification from Inter-Ministerial Board (IMB) a Start-up will be eligible to be exempted from income tax for 3 years.

4.  Apply for tenders

A start-up qualifies to apply for government tenders and gets the additional bonus of getting an exemption from the “prior experience/turnover” criteria applicable for normal companies answering to government tenders.

5.   No time-consuming compliances

To simplify the process of starting a Start-up, various compliances have simplified which aim to save time and money. For instance, a Start-up can now self-certify compliance through the Start-up mobile app.

6. Tax saving for investors

Intended towards helping Start-ups attract more investors, exemption from capital gains is set out for people investing their capital gains in the venture funds setup by government.

7. In case of exit

To promote entrepreneurs to experiment with new and innovative ideas, without having the fear of facing a complex and long-drawn exit process where their capital remains interminably stuck a start-up can close its business within 90 days from the date of application of winding up on a fast-track basis.

Every entrepreneur or Start-up needs to be aware of majorly 7 Start-up funding stages, namely:

• Self-funding or Bootstrapping - funding from self, friends and/or family;
• Seed funding – Seed funding is an investment made at the preliminary stage of the Start-up for identifying and creating direction for the Start-up to understand the customers’ demands, preferences, and tastes, and then formulating a product or service accordingly. Funding in this round is generally raised from angel investors and incubators;
• Pre-Series A funding – This round is raised pursuant to introduction of the product(s) in the market to advertise and increase the reach of the product to the targeted audience. This round is raised through angel investors and/or Venture Capital firms aka VC;
• Series A funding - This round is raised through angel investors, VCs or accelerators for marketing and improving brand credibility in the market;
• Series B funding - This round is subsequently raised from VC and private equity firms for hiring of talent, to build better infrastructure, establishing the company as one of the key player in the segment;
• Series C funding – This round is raised for development of new products, expansion into new markets and/or to acquire other companies. In this round usually large investors such as private equity firms, investment banks, hedge funds invest in the Start-up;
• Initial Public Offering (IPO) – Shares are offered to public by listing the company shares on stock exchange such as BSE and NSE.

Venture Capital (VC) is a kind of equity financing that facilitates fund raising for entrepreneurs and small companies in their nascent stages i.e., before they begin operating or before they generate any revenue, and aims at harnessing their strong growth potential. Venture Capital funds invest in companies with strong growth potential, having high-risk-high-profit return and are termed for longer periods. Other than providing a steady pedestal for growth, VC investors also emphasize on organisational restructuring, talent recruitment and stakeholder management. So, the VC investors add a manifold value to start-ups and small business enterprises.

A Start-up accelerator is a mentorship program, usually spanning over 3-6 months that gives Start-up entrepreneur legal and financial assistance, seed funding, networking opportunities and office space in return for equity/ownership. Mentorship and instructions offered by mentors and industry professionals often prove to be extremely beneficial to start-ups that focus on rapid and global expansion.

A Start-up incubator helps in mentorship and support program for Start-ups and small business enterprises that help in initial development and growth. Although similar to Start-up accelerator, there are few significant distinctions in Start-up incubator. Incubators, as the name implies, functions as a "nursery" that provides seed funding. They are comparatively flexible or less stringent in their application process and do not adhere to any specific time frame.

The key distinction between Start-up incubators and accelerators is that accelerators are focussed more on accelerating and providing a steady growth to start-ups as early as possible, hence, there exists a deadline and a rigid application process. Incubators aim at providing funds to Start-ups on a long-term basis and yield from their high-risk-high-profit status.

An angel investor (also known as a private investor, seed investor, or angel funder) is an affluent person with a high-net-worth who invests in small businesses or entrepreneurs in exchange for a share of the company's ownership. Individuals who aim to invest in businesses in their earliest stages are known as angel investors.

These are high-risk investments that typically account for less than 10% of an angel investor's total portfolio. Most angel investors have extra cash and are seeking for a greater rate of return than standard investment possibilities can offer. Informal investors, angel funders, private investors, seed investors, and business angels are all terms used to describe angel investors. Individuals who invest funds in businesses in exchange for ownership equity or convertible debt are known as angel investors. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool capital together.

Various exit options allow investors to obtain their return on investment from businesses. At the outset of investment discussions, the VC firm and the entrepreneur should consider the potential exit possibilities. A high-growth, high-performing Start-up with outstanding management and organizational procedures is more likely to be exit-ready sooner than other firms. Venture Capital and Private Equity funds must exit all their investments before the end of the fund’s life. The common exit methods are:

• Mergers and Acquisitions
• IPO
• Exit to Financial Investors
• Distressed Sale
• Buybacks by the company