Fund Raising Advisory India — Seed, Angel & VC: Where It Goes Wrong
The failures on Fund Raising Advisory India — Seed, Angel & VC repeat, which means they are avoidable if you know what to watch. The questions below are the ones raised most often in practice; the full scope of the service is on the Fund Raising Advisory India — Seed, Angel & VC page.
What is angel tax and is it still a risk for my company?
Angel tax was the popular name for the provision under Section 56(2)(viib) of the Income Tax Act 1961, which taxed the premium received by a company on issue of shares above the Fair Market Value (FMV) of those shares as 'income from other sources' in the hands of the company. For over a decade this was a genuine risk for startups raising at a valuation above book value, particularly from resident investors without DPIIT recognition. This is now historical: the Finance Act 2024 abolished Section 56(2)(viib) angel tax for all classes of investors — resident and non-resident alike — with effect from 1 April 2025. For share allotments made in FY 2024-25 (assessment year 2025-26) and all later years, there is no angel tax exposure regardless of the premium charged over FMV. We still recommend obtaining a valuation report from a SEBI Category I Merchant Banker or registered valuer under Rule 11UA before allotment — not to protect against a tax that no longer applies, but because it satisfies FEMA pricing-guideline requirements for foreign investors and creates a defensible record should a later share transfer be scrutinised under Section 50CA or Section 56(2)(x) (Income-tax Act 1961, for income up to FY 2025-26; Sections 79 and 92(2)(m) of the Income-tax Act 2025 respectively, from tax year 2026-27).
In practice: We still see founders anxious about angel tax because it was such a prominent risk in the startup ecosystem for years. Clients raising rounds now can be reassured on this specific point — but we still insist on proper valuation documentation for the FEMA and transfer-pricing reasons above, and because sound valuation discipline is simply good governance.
What is anti-dilution protection and which type is best for founders?
Anti-dilution protection adjusts an investor's conversion ratio (for CCPS or CCDs) if the company subsequently raises money at a lower valuation (a 'down round'). The three main types: (1) Full ratchet — the investor's conversion price is reset to the new lower price; this is maximally investor-friendly and can cause severe dilution to founders in a down round; (2) Broad-based weighted average — the new conversion price is a weighted average of the old and new prices, weighted by the total shares outstanding; this is the most common and most balanced approach; (3) Narrow-based weighted average — similar to broad-based but only counts certain shares in the weighting, resulting in more adjustment toward the investor; (4) No anti-dilution — investor bears dilution equally with founders; uncommon for professional investors. Founders should strongly resist full ratchet provisions.
In practice: Full ratchet clauses that seemed academic in a bull market have caused catastrophic founder dilution in corrective funding environments. If a company with full ratchet protection raises a down round, the founder's ownership can drop dramatically — sometimes to near-zero.
Can we structure a founders' buyback or secondary sale as part of a VC round?
Yes — founder liquidity as part of a primary funding round (commonly called a 'secondary' component) is increasingly common in Indian VC deals, particularly from Series A onwards. The investor purchases some existing founder shares (from the founder as seller) simultaneously with the primary subscription of new shares. This is structurally a share transfer, not a share issuance — it triggers capital gains tax in the hands of the selling founder. Following the Finance (No. 2) Act, 2024, long-term capital gains on unlisted shares held for more than 24 months are taxed at 12.5% without indexation under Section 112 of the Income-tax Act 1961 (for income up to FY 2025-26; corresponding provisions of the Income-tax Act 2025 apply from tax year 2026-27), a lower headline rate than the earlier 20%-with-indexation regime but computed on the full gain. Founders should get a current computation before assuming the old rate applies. If the buyer is a non-resident, FC-TRS must be filed within 60 days of transfer. The parties should also confirm the transfer price is defensible against Section 50CA (deemed consideration for the seller) and Section 56(2)(x) (deemed income for the buyer if acquired below FMV) — these are separate, still-live provisions distinct from the now-abolished Section 56(2)(viib) angel tax.
In practice: The capital gains arising on founder secondary sales can be significant — particularly if the shares were issued at a nominal face value and are being transferred at a high valuation. We model the capital gains liability and explore legitimate planning options (timing the transfer within the right financial year, ensuring proper valuation documentation for Section 50CA) before the transaction is finalised.
What is a shareholders' agreement and is it mandatory?
A shareholders' agreement (SHA) is a private contract between the company and its shareholders (or among shareholders) that supplements the AoA and records the rights, obligations, and protective mechanisms agreed between founders and investors. It is not mandatory under the Companies Act — the AoA alone would be sufficient as the governing document. In practice, VC investors universally require a SHA because it allows for terms more detailed and investor-specific than an AoA (which is a public document filed with MCA), and because SHA terms can be more flexibly enforced under contract law. The SHA and AoA must be consistent — any conflict between the two is a governance risk. In many structured rounds, the SHA and the AoA amendment are negotiated in parallel, and the SHA is expressly stated to prevail in any conflict.
In practice: We review the SHA for Companies Act compliance — particularly provisions that purport to allow remedies (forced share transfer, penalty payments) that may be unenforceable under Indian contract law or that conflict with the Companies Act's prescribed procedures for share transfers and director removal.
What is a bridge round and how is it typically structured?
A bridge round is a small, short-term funding raise designed to 'bridge' the company to a larger upcoming round — usually structured as a convertible instrument that converts into equity at the price of the next round, often at a discount of 15–25% to reward bridge investors for their risk and timing. Common structures: Compulsorily Convertible Debentures (CCDs) with a conversion trigger at the next equity round, or CCPS with a conversion price set at the lower of a valuation cap or a discount to the next round price. Bridge rounds are typically raised from existing investors or close associates of the company — the process is faster than a full round. Key risks: if the conversion discount is too steep, it can create friction with the incoming lead investor who must accept significant dilution from bridge convertibles.
In practice: Bridge rounds structured without proper legal and CA review often create conversion mechanics that are ambiguous, disputed at conversion, or inconsistent with FEMA requirements for the foreign investor portion. We draft or review bridge round documentation specifically.
What is a preferred return and how does it differ from a liquidation preference?
, 8% IRR) that investors must receive before the general partner or management team shares in the profits. It is distinct from a liquidation preference: a liquidation preference gives the investor priority in a liquidity event (sale or winding up) up to a multiple of invested capital, while a preferred return accrues over time as a return metric. In Indian VC deals structured through AIFs, both concepts may appear — the AIF's fund documentation may specify a preferred return for LPs, while the investment agreement with the company specifies a liquidation preference for the CCPS held by the AIF. PNPC reviews both layers when advising on VC terms.
Where this sits in the wider engagement
Fund Raising Advisory India — Seed, Angel & VC rarely arrives on its own. The statutory basis and the current requirements are set out on the Fund Raising Advisory India — Seed, Angel & VC service page, and the related services are grouped under Business Setup.
What PNPC does
PNPC Global has practised since 1986 across India and the UAE. On Fund Raising Advisory India — Seed, Angel & VC we take the work end to end — reviewing the facts, preparing and filing what is required, and dealing with the authority through to closure.