Company Law for Startups (Part 9): Fundraising, Term Sheet, SHA and Share Issue Compliance
Term sheet clauses, CCPS vs CCD vs convertible note, shareholders agreement, Articles changes, PAS-3 and tax angles for startup funding in India.
An angel investor offers Rs 2 crore for 10% of a Hyderabad SaaS startup. The term sheet arrives in four pages. Three weeks later the shareholders agreement runs to forty. What should the founders check, and what must the company file after the money lands?
- Part 1: Incorporation
- Part 2: ROC annual filings
- Part 3: Director duties
- Part 4: Share capital and ESOPs
- Part 5: Strike-off and closure
- Part 6: Penalties and defaults
- Part 7: Board meetings, AGM and minutes
- Part 8: Related party dealings, loans and deposits
- Part 9: Fundraising, term sheet and shareholders agreement (you are here)
- Part 10: Compliance calendar and health check
1. Choosing the instrument
| Instrument | What it is | Watch points |
|---|---|---|
| Equity shares | Ordinary shares with voting and dividend rights | Simple; valuation and dilution fixed at issue |
| CCPS (compulsorily convertible preference shares) | Preference shares that convert to equity on set terms | Common for VC rounds; liquidation preference and conversion ratio drafted in the SHA and Articles |
| CCD (compulsorily convertible debentures) | Debt that converts to equity | Interest, tax treatment and FEMA pricing for foreign investors to be checked |
| Convertible note (DPIIT-recognised startup) | Instrument acknowledging a debt, repayable or convertible within 5 years (confirm) for an amount of at least Rs 25 lakh per investor in one tranche (confirm) | Exempt from deposit rules for eligible startups (confirm); non-resident rules differ |
| SAFE or ESOP pool | Pre-priced right or employee options | See Part 4 for ESOPs; SAFE structures need careful legal drafting in India |
2. Term sheet: what founders should read closely
| Clause | Why it matters |
|---|---|
| Valuation and pool | Pre-money, post-money and the ESOP pool that dilutes founders before the round |
| Liquidation preference | Who is paid first and how much on exit or winding up |
| Anti-dilution | Full ratchet is harsh; broad-based weighted average is more common |
| Board and reserved matters | Investor nominee, observer and veto list |
| Vesting and lock-in | Founder shares vest over time; leaver clauses decide what happens on exit |
| Exclusivity and conditions | Binding period and conditions precedent such as due diligence and clean records |
| Costs | Who pays legal and valuation costs |
ComplianceKart reviews the term sheet, cleans your records, prepares the SHA and Articles changes, and files the share issue forms. See our startup compliance service.
3. Shareholders agreement and Articles
A shareholders agreement binds the parties who sign it. To make key rights bind the company and be enforced through the company’s own governance, insert them in the Articles of Association by a special resolution and file the altered Articles (MGT-14, and INC-28 if the Registrar procedure applies). Courts have generally enforced restrictions on transfer and pre-emption rights that are in the Articles; rights only in a private agreement can be harder to enforce against the company (matter is litigative, confirm on facts). See our overview on why a shareholders agreement matters.
| Common SHA clause | Purpose |
|---|---|
| Pre-emption and right of first refusal | Existing holders can buy before a new outsider |
| Tag-along and drag-along | Minority exits with the majority; majority can force a full sale |
| Information rights | Monthly or quarterly MIS and annual accounts to investors |
| Reserved matters | Investor consent for budget, new shares, borrowing, related party deals |
| Non-compete and exclusivity | Founders commit their time and business to the company |
| Deadlock and exit | Buy-back, IPO or sale timeline and what happens if it fails |
4. Companies Act steps for the share issue
5. Tax angles
| Topic | Position (confirm for the year) |
|---|---|
| Angel tax (Section 56(2)(viib)) | Withdrawn from the 2025-26 assessment year by the Finance Act, 2024 for share issues to residents and non-residents (confirm for older issues) |
| DPIIT recognition | Startups recognised by DPIIT can access benefits such as the Section 80-IAC deduction for eligible companies incorporated before the sunset date, and carry-forward relief (confirm conditions and current dates) |
| Share issue stamp duty | Stamp duty on issue of shares and debentures; rate in the Telangana schedule (confirm) |
| Founder share transfer | Capital gains on transfer; check ESOP and vesting tax per Part 4 |
6. Foreign investors
Where the investor is a non-resident, FEMA applies: sector and route check, pricing at or above fair value for unlisted shares, receipt of funds through banking channels, allotment within 60 days, FC-GPR within 30 days of allotment and the annual FLA return (confirm timelines in the current NDI Rules). See FEMA Part 2.
7. Mistakes founders make
- Signing a binding exclusivity clause before reading the whole term sheet.
- Agreeing to SHA rights without matching changes in the Articles.
- Receiving money before board and shareholder approvals are in place.
- Missing PAS-3 or the 60-day allotment window.
- Poor cap table: undocumented promises to advisers and early employees.
- No cleanup of past records (see Part 7) before diligence.
Why work with ComplianceKart
ComplianceKart is a boutique practice bringing Chartered Accountants, Company Secretaries and advocates under one roof. Think of a multi-speciality hospital: the physician, the radiologist and the pharmacist read from one patient file, so you never carry reports between buildings. A funding round needs company law, tax, FEMA and contract drafting together. A team of Chartered Accountants, Company Secretaries and advocates under one roof keeps all four layers consistent.
Frequently Asked Questions
Is a term sheet binding?
Mostly no, except clauses such as exclusivity, confidentiality and costs. Read these carefully.
Do SHA rights have to be in the Articles?
For enforceability through the company, yes, key rights should be in the Articles as well (confirm for your facts).
Is angel tax still applicable?
Section 56(2)(viib) has been removed from the 2025-26 assessment year onwards (confirm).
Which form reports the share allotment?
PAS-3 within 15 days of allotment; for foreign investors also FC-GPR on the RBI portal.
How long to complete the round?
Often 6 to 12 weeks from term sheet to closing, depending on diligence.
Sources
- Companies Act, 2013: sections 42, 62, 71 and 117; Companies (Share Capital and Debentures) Rules, 2014; Companies (Prospectus and Allotment of Securities) Rules, 2014
- Finance Act, 2024 (omission of Section 56(2)(viib)) (confirm)
- DPIIT startup recognition notifications and Companies (Acceptance of Deposits) Rules, 2014 (convertible notes) (confirm)
- FEMA (Non-debt Instruments) Rules, 2019
Ready to act? Start with our startup compliance service, check pricing, or contact us.
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Educational article, last updated 11 November 2026. General information, not advice on a specific case. Laws and due dates change; confirm on the date you act. Items marked (confirm) came from secondary sources and need checking against the official text.
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