Getting the entity right the first time
A private limited company under the Companies Act 2013 is generally the
structure serious investors expect, because it allows equity fundraising,
ESOPs and standard share transfer mechanics. An LLP under the LLP Act 2008
has lighter compliance and different tax treatment, but raising equity into
it is harder. Founders sometimes start as an LLP for simplicity and convert
later, which is possible but adds cost and paperwork at exactly the moment
the business can least afford a distraction. Choosing correctly at
incorporation, based on the actual fundraising plan rather than convenience,
avoids that.
The founder documentation gap
A striking number of startups have no written founders’ agreement at all,
on the theory that co-founders who trust each other do not need one. Trust is
not the issue. The issue is that no one can predict, at the point of founding,
who will still be working full time in three years and who will have moved
on. Without a reverse vesting clause, a founder who leaves after eight months
keeps the same shareholding as one who stays for five years. Without a
decision rights clause, two equal co-founders who disagree have no mechanism
for resolving it except negotiation under stress or, eventually, court.
Compliance debt and diligence
Compliance debt is the accumulation of small lapses, a missed board
resolution here, an unsigned IP assignment there, that no one notices until
an investor’s lawyers start asking for documents. DPIIT recognition, where
applicable, brings certain compliance and tax benefits but does not substitute
for the underlying corporate housekeeping. The gaps that stall a term sheet
most often are missing IP assignments from early contractors, unsigned
employment agreements, and a cap table that does not match the statutory
registers. Fixing these after the fact is possible but slower, and it becomes
harder the longer a founder or early employee has since left on unclear
terms.
ESOP and instrument terms that get contested
Convertible instruments and ESOP schemes are drafted early and read closely
much later, usually at a funding round or an exit, when the numbers matter.
Conversion mechanics, valuation caps, and the treatment of unvested options on
an acquisition are the terms most likely to be disputed if they were drafted
loosely. Getting these right at the time of grant, rather than renegotiating
them under time pressure during a deal, is the more reliable route.
