Startups in India: Definition, Benefits, and Funding
Definition of a Startup by DPIIT
The Department for Promotion of Industry and Internal Trade (DPIIT) in India defines a ‘Startup’ for the purpose of various benefits, including tax concessions. An entity (company, partnership firm, LLP, etc.) shall be considered a ‘Startup’ if it meets the following criteria:
a) Age: Up to 10 years from the date of its incorporation/registration.
b) Turnover: The turnover for any financial year has not exceeded INR 100 crore.
c) Innovation: The entity is working towards innovation, development, or improvement of products or processes or services, or it is a scalable business model with a high potential for employment generation or wealth creation.
d) Exclusion: An entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
If qualified, DPIIT provides a certificate, leading to various benefits such as tax exemptions for 3 out of 7 years under Section 80-IAC of the Income-tax Act, funding support, and simplification and handholding by government agencies.
Funding Options for Startups
Funding options depend on the stage of the startup’s life cycle:
Ideation Stage
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Bootstrapping (Self-funding): Using personal savings or funds from family and friends.
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Crowdfunding: Raising small amounts of money from a large number of people, typically via online platforms.
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Seed Round: Obtaining funds from angel investors, targeted funds, accelerators, and incubators.
Growth Stage
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Series A: Funds used for marketing, improving brand credibility, and hiring senior team members.
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Series B: Capital for expanding teams, entering new markets, and scaling up the business.
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Series C: Funding for consolidating competition and acquiring talent to prepare for an exit.
Financing Options: Equity and Debt
Equity-Based
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Equity Shares/Warrants
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Compulsory Convertible Preference Shares (CCPS)
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Compulsory Convertible Debentures (CCD): CCPS and CCDs are tradeable.
Debt-Based
Startups often find it difficult to obtain debt funding due to business risks. However, debt can be obtained through:
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Optionally Convertible Debentures (OCDs)
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Optionally Convertible Preference Shares (OCPS)
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Non-Convertible Debentures (NCDs)
Investment by way of OCDs, OCPS, or NCDs from foreign investors qualifies as Debt or External Commercial Borrowings (ECBs) in India.
Convertible Notes
The government allows eligible startups to raise capital through the issuance of Convertible Notes.