Journey of Startup FINANCE teams in India | Outsourcing Finance teams to CFOs | (Part II of III)


The post endeavors to explain, how a startup start to hire finance talent just around their Pre A / Series A / A+ and the successful journey of scale up of finance teams mimicked with the business growth, fund raise and monetization.  Last post (I of III) was about seed funded companies and this post tries to build on that to explore how with higher round of funding and monetization role and scope of finance team needs to change.

In the situation of even a Pre A round of funding going through and company now going for monetisation it only makes it imperative for the founder to look out for a financial controller.  There is a possibility that an in house accounting professional is taking care of finance and related matters.  If such person has scaled to be able to handle finance of a growing and would be complex organization, then he can be tested to take care of financial controllership.  Else someone will need to be appointed for the same.  In some cases, the organization may have outsourced the operations to third party.  In such a case, handover is critical.  If there is an existing person it only helps.  In such a scenario, when the new person joins it acts as a great buffer to have basic things in place rather than getting a handover from an outsourced provider.  Alok of Constellation adds, “At times investors might insist a Big 4 auditor – in house FC might be in a better position to handle this as compared to a plain vanilla accounting support firm.  In house resource would also add value even in vendor negotiations etc e.g. Insurance , compliances ( FEMA follow up for FCGPR for e.g.).

At this juncture, finance structure must be developed inhouse.  That’s a non-negotiable and it has its merits too.  The caliber of the person doing the work at the outsourcing firm is never going to be way too high than the in house person, more so because the hiring of an inhouse person is in the hands of the founder and if he wants his investors. I have happily assisted few of our companies with this and it was a revelation on how much founders trust their investors. The advantage with the in house person is that – half a chance there is a deeper sense of purpose because of a long term career affinity by being in the company and growing with a startup and scaling quickly than being an accounting person and gradually moves up the value chain when a Series A happens.  Whilst most outsourcing firms may be able to do a satisfactory job on compliances and accounting entries, it does require someone within the firm to track burn and expense management on a regular basis.  While it’s inescapable to burn money at early stages of journey of a startup it’s inexcusable to loose track of the burn and preempt a need to work on raising the next round.  More importantly sounding alert that metrics are plateauing or not in line with expectations and force a discussion to consider corrective action is an important function that cannot be outsourced.

While the good founders are equipped to handle all of these, the best founder may not necessarily know it but will empower someone else to drive these with a sense of ownership.  The accounting resources in house comes in handy to support such a person. And over a period of time the system can be seamlessly handed over to the Financial Controller as and when he joins.  Good FCs can actually set up the processes, put up financial controls in place, estimate cash flows, establish revenue recognition policy, put out guidelines and framework that allows the company to launch into scale at an opportune time.  That way founders are not forced to play a catch-up and reactive approach if and when the subsequent funding round happens.  A handful of our portfolio has also benefited from appointing veteran mentors from successful biz to help and guide on these areas. These mentors have been successful CFOs and / or founders.

One can always argue as to what’s the point of keeping all this in place if the funding round (Series A) is contingent on factors that are not always within control of founders.  And if the round doesn’t happen time and money into setting these up, reporting is kind of waste.  Well I only would like to quote a small story here.

The village was going through a drought year for the second consecutive year.  The village heads decided to collect money from village and district authorities to perform a ceremony to please the rain Gods.  A young boy walked in and people started laughing becoz he was carrying a handful of umbrellas.  The villagers asked – in this scorching heat you find it funny to carry so many umbrellas. The boy’s answer stunned the seniors – we are performing the ceremony and prayers for rains to arrive.  I thought we shouldn’t get wet on our way back when the rain Gods choose to oblige.  That was faith.  If founders are optimistic enough to startup, why would they not continue the sense of optimism that it can become a biz.  Yes, appointing an FC does mean a cost and at times founders have mentioned that its better to spend money on growing biz rather than make long term investments.  Well, this is not an unreasonable point of view just that neither is it a fair argument to not appoint FCs at all.

Moving ahead in the journey of the startup, post the second round of funding (be it Pre Series A or a Series A round) as the company embarks on greater scale and traction, it does become worthwhile now to definitely create the function within the company.  No company having raised greater than Rs. 6 – 10 Cr cumulatively should not hire a financial controller and set up the function inhouse is my humble opinion as well as learning from the last few years.  It should be earlier if the company has commenced monetisation of its product.  The scales should only tilt in favour of adding some more teeth to the Finance function by adding treasury function, day to day cash flow monitoring, product pricing, unit economics assessment, forming quarterly as well as annual budgets, variances analysis between budgets and actuals to top up all of the above areas that have been listed above.

The organisation structure for finance team upon commencement of Monetisation should be Financial Controller heading the Finance function.  The ideal focus areas for FCs at this stage of the life of the company should be:

Formation of Accounting policies 

 Formation of policy and its annual review is a common process for companies but when it comes to startups, at times the company goes through change in business model.  This may warrant a change to the agreed accounting policy.  Besides, if there is a significant change in the biz model and offering it may also mean that company may have to write off of its IP costs.  This could also have a tax impact too and the loss upto that stage may or may not be available to be set off against future biz.

Day to day accounting / tax related processes

 Apart from day to day accounting this part also includes taxes (both direct tax ie Income tax and indirect taxes ie GST) management, working out the tax liabilities, deducting taxes, payment to government treasury, filling of returns within timelines.  I have already detailed out in my earlier post

Girish Rowjee, Founder, Greytip adds, “As organizations starting hiring and putting in place the first set of people, it becomes important that they pay attention to a number of hygiene factors around their employee engagement and creating a conducive and high performance work environment for these employees.

Founders generally engage team members well around the work that has to be done. But in other areas like Payroll, Leave Management, providing basic employee services like maybe Payslips for a loan or Address Proof letter for a Credit card, proper attention is not paid. Many times this causes dissatisfaction among employees and impacts productivity and sentiment. Additionally, a primary responsibility of the Founder is also to ensure that all Statutory Compliance that are required are handled. Not handling this well will lead to penalties and legal consequences.

Today good tools are available to eliminate the need on the Founder’s time and energy. These tools can easily help organizations to manage their employee information, help them move many employee processes online so as to reduce any manual work and very importantly give an assurance and peace of mind all statutory calculations that are needed are done and the Payrolls are computed accurately. greytHR is a good example of such a tool and is also widely used among startups and businesses in India. Their very attractive and startup kind of pricing helps too.

In our experience, we have seen organizations gain significant benefits from putting in good processes around HR, Payroll and Compliances at an early stage of their journey. We have seen the Founders at these organizations spend much lower time on routine activities and their employees have far lower queries on Payslips, tax, etc. Compliances are no longer a headache. Additionally, as they go into their Due diligence for their next round of funding, they are able to easily clear these with far fewer queries when compared to others who use a manual or Excel based model to managing their employee processes.”

Financial / Book closure and audit

Significant bandwidth of the Finance team will be consumed at the end of the year in book closures and getting audit done.  Given investors are private and it’s well acknowledged that there will be losses anyways it’s natural for founders not to care about financials and audits.  To add to it, there is a thrust only on metrics earlier on in the life of the biz and not enough people really seem to care about annual financials and audited reports.  Even then, this is not a very smart thing to do.  These eventually come to haunt a DD in future or even a potential exit discussion.  Besides, things like loose financial processes would largely go uncorrected during the course of the audit if it is not done with some intensity.  Eventually, this would result into needless burn and poor use of company’s hard raised resources.  Partly due to madness of scale and because that is taken as a norm, the following should be avoided by every Series A founder team / FC of a Series A startup:

There are a high number of resources that the company would go after to chase growth. It is tough to get good people and that means, fairly over priced new hires on board somehow

  1. There is also a fair bit of wage inflation that hits the company as the salaries of existing team have to be hiked by way of an across the board hike
  2. Large part of the hiring process happens haphazardly and there is a fair bit of exceptions that become the norm

 Setting up of financial controls and policies

 How does sales payment flow?  What’s the correct method of accounting for inventory?  How do we keep a tab on payables?  Under whose signature do cheques get processed?  Policies for expenses, leaves, reimbursements, travel, onboarding of new joinees, exits of team members, acquisition of fixed assets, lease agreements, credit card payouts, etc.  These are things that need to be worked on and process frameworks be put into place to ensure that there are no re revenue leakages and expense management is in line with the intent of the founders.  Best of financial controls have the right balance between:

being tight enough not to be broken and in case violated – it does create flags as a part of the process


realistic enough to facilitate the achievement of the company’s midterm goals

Here, I have consciously avoided usage of the phrase long term only because, in the long term, financial controls would have to go through a complete overhaul anyways and savvy experienced professionals would be driving it or the existing team would have matured to fix the gaps.

 Cash management / Treasury

Firms typically get chunky amounts as investment rounds close and capital is wired by investors. These monies are meant to last till such time the company manages to raise next round of funding or till such time that it becomes Ebidta positive.  Preferably the later and not the former.  It’s the responsibility of the financial controller to work with the founders and ensure that the capital raised lasts the period it is meant to.  The immediate two to there quarters post a round of funding could mean exuberant hiring, spends on facilities and infrastructure and at times this happens beyond the quantum that was planned or still worse – beyond what is meant to be spent.  Best founders would expect from their financial controller to have a tab on this kind of behaviour and make sure that preventive mechanisms are built. Whilst it’s common practice to say – prevention is better than cure, this kind of areas are such that no matter what the cure is, and how quickly it was cured, time and capital are lost irretrievably.


Most businesses have a budget.  Startups must have a budget. Many a times a certain plan is pitched to the investor and combination of factors lead to significant deviations from the plan post funding.  Startups always evolve in their journey and there could be learnings that lead to these shifts or there is some larger opportunity set that is discovered by founders as they set out with some experiments.  Or there are some experiences that lead to the change.  All of this is fine and welcome.  In fact – it’s critical to adapt in the ever changing environment.  What ends up hurting though is when – we do it without a plan and a structured roadmap to change.  It doesn’t mean that one has to call a board meeting with a 21 days notice and revisit all cells in the excel of the prior plan, take minutely considered feedback from every person involved.  When it comes to budgets and planning – it is always meant to change and realities will be different from what was envisaged.  It therefore becomes equally important on how you do it and not only what you do.  There needs to be a brief documentation between the core team outlining the projections and a rationale on the numbers that are being projected.  The assumptions behind the base numbers and the growth rates assumed are critical aspects to be covered in the note.  One also needs to add – key factors that are going to drive these numbers and how would we react to changes in key factors.  For example: demonetisation hit plans of a very high number of consumer startups.  This could have meant higher burn.  One needs to budget for developments beyond ones control and have a contingency fund to be able to tide through such circumstances.  At times impact is semi-permanent.  Example – GST implementation.

Internal and external reporting / MIS

This is self-explanatory though what I would like to emphasize on is, both quantitative and qualitative aspects of the MIS needs to be brought out.

ERP integrated with accounting systems

A high number of startups have their own systems for backend and operations which is well integrated with the front end.  They however opt to keep accounting on tally by simply posting sub-total manually by pulling numbers from systems. This is fine to start with.  But as company raises A round, they should integrate the accounting systems.  FC and his team will have a role to play in that as well. Creation of GL account heads, sub accounts mapping of entries, balancing, etc will have to be tightly done.  As scales grow this becomes tough if not integrated earlier.

All of the above seems like a lot of work.  Well, having worked with quite a few of our companies in the portfolio over the last 5 years, I can tell you that a sound financial controller / founder combination will make this not so tough process to implement eventually.  I have also had Constellation team take on parts of this role and keep growing with the company’s needs and then keep passing on as there is full time bandwidth in the company.  The key is – do it in steps. 

In the next write up, i would take up the next phase of growth and a case for a hands on CFO joining hands with the founder and the rest of the team to focus on what is the central function of a CFO – growing shareholder wealth !

Journey of Startup FINANCE teams in India | Outsourcing Finance teams to CFOs | (Part I of III)


One of the key points that signify start up having matured is – Finance team, its functioning, leadership and how it collaborates with the CEO and rest of the core team to achieve the desired goals of the startup.  While working with the founders and Constellation team on solving for these questions, there have been some learning that I feel are good to share as a starting point. Each combination of founder and company creates a different circumstance and some parts of learning may need to be customized to suit your startup. Idea of this is not to create a template but only a framework to consider whilst building Finance organization in the company.  The 3 part post starts with how a startup would work with the help of outsourced finance professionals to start with at the time of their seed funding and the successful journey of scaling up of finance teams mimicked with the startup scale up and fund raise.  In this part, I am summarising the recommendations on early stage finance and accounting teams management with some notes on audit and reporting.

Outsourcing of Finance versus in house finance team – my belief

I have always been a firm believer that finance function is a core function and should always be an in-house function.  Having said that, setting up a full-fledged Finance function is a costly affair and has ramifications for the startup.  Setting it in house may be postponed or the set up can definitely be done in stages.  At a time when company has taken on seed funding and is in the mode of setting up a prototype of its product or beta version development, founders should hire a young accounting professional with experience in book keeping (day to day accounting management).  Founders have expressed concerns over the issue that when there are just a dozen coders and company has not even commenced monetizing, it’s waste of money.  Another genuine concern that has been expressed is – who supervises this person and how do we know what is happening is right.  Thirdly, accountants are young and could lack experience and expertise to do their job well and if we have to hire an expert, it’s a costly affair.  Fair point – if there is literally no more work than processing of payroll of a dozen people and a rent cheque to the landlord, I would gladly concede and acknowledge that it’s only fair to outsource the accounting function to a firm that can take care of it in line with a startup environment and not with conventional biz approach.  There are multiple things that need to be taken care of by such a firm.  For example:

processing payroll of the team (Monthly activity),

  1. Salary workings optimized for tax efficiency. While every member will have to suffer taxes, there are ways and means to optimize taxes on salaries on income and this must be borne in mind whilst building salary packages.  If done with proper thought and care, there are smart tax structuring options well within the ambit of the tax laws to ensure that employees earning as high as Rs. 10 lakhs of salary can save over half of the tax to be paid otherwise.
  2. Leave an attendance workings – earlier on there may not be leave policies but if there is any leave policy, accountants should take care of the same whilst disbursing salaries.
  3. Reimbursements – these must ideally be paid by separate transfers over and above agreed salaries as these are not subject to taxes
  4. Employee benefits like PF, ESIC, Gratuity need to be factored for and payments be made to government bank accounts each month. We had a scenario in a portfolio company where it was discovered during the DD that they hadn’t complied with this.  There is never an intent not to comply in most founders.  Just that its slips out.  Delays can be highly costly and can hurt retrospectively.  And these departments are not the most savvy or friendly government departments who will try and help or empathize with startups.  They would generally be pursuing penalty proceedings and issue notices; trust me its not fun dealing with these.
  5. When a new member on the team has joined, there are some basic processes to follow and ensure that their bank account is integrated to seamlessly process payroll, transfer of their PF accounts from old organization to the new, approval for their salaries, performance payout structures, etc should be in place.
  6. Reversal processes need to be carried out when an old employee has left the organization. There was a stray case that I stumbled on how an employee had left the organization and still the salary was being processed.  There are worse things that happen but here the issue was that the employee was refusing to return the excess paid and claimed that he was entitled to the same.
  7. vendor management (server expenses, infrastructure costs, rent, electricity, miscellaneous costs like stationery, reimbursements of costs for employees, credit card payouts for expenses incurred to overseas vendors (all of it may be monthly or quarterly activities). The tricky thing about these is that any disruption in services could have a catastrophic impact on the business.  We all know the story of how a famed service provider missed renewing of their portal name and then had to pay a fancy sum to renew the same.  These are highly embarrassing moments and are easily avoided.  I have been a big advocate of having an online register that carries various vendors and services taken and all of their details including time duration, renewal timelines, commercial terms, key service areas, etc
  8. tax deduction as well as indirect taxes collection

all of the above payouts have to be made with suitable deduction of taxes and indirect taxes payouts when startups are receiving fees.  There is a common belief that we should deduct these taxes amounts and once deducted rather than paying to the government treasure use it for working capital financing.  This is something that should be strictly avoided.  Creditors’, employees’ and regulatory dues should be paid as due and never end up being used as a working capital finance by any company, leave alone startups.

filling tax returns (both income tax and GST as appropriate),sending monthly or quarterly metrics to investors, tracking cash flows so on and so forth.

Now, let us try and understand as to what would be the costs of such a function that us outsourced.

Most third party consultants have charged costs ranging from Rs. 20,000 to Rs. 75,000 per month for these activities in addition to the annual audit that your auditor will carry out and the secretarial services that you will need to obtain from a Company Secretary.  If the fees of external consultants (put together for all of the services) are actually on the lower side of the threshold mentioned above – great.  Please go ahead and appoint them.  Even if these are in the mid range, it sounds to be a fair proposition if the concerned appointee firm has the requisite experience to handle and manage startups.  Do make sure that in such an environment, you have an independent, strong and a highly experienced auditor who carries out reviews quarterly to ensure things are happening the way they should.  Many a times, small practitioners simply offer an entire package of service including audit etc.  If audit function is led by a separate independent team, this approach is fine.  On the other hand, if you are paying any amount greater than Rs. 50,000, it definitely makes a case to appoint an in house person in charge of all of the above.  You may top it up by having a review by an independent third party on a quarterly or monthly basis as needed to ensure that you are always following best practices and have an expert overseeing the accountant.  Further, in compliances, filings, tax and related matters it also makes sense to have a double check and also the side benefit of such a review is that the third party could act as a mentor / guide for the young accountant.  No doubt it always will be a bit costlier to have this kind of a dual structure but the cost differential is not much and will be no greater than an increase of approximately Rs. 2-4 lakhs per anum at max.  Mind you, this cost is well worth it for one big reason.  If the in house person is a sharp young guy (maybe limited prior experience) he would be able to take care of lot of administrative issues as well.  Because (S)he is a full timer and in house, one can also expect that compliances will be done in a timely manner.  The person could also be made responsible for vendor management if he has that kind of an aptitude.  The icing on the cake will be – when there will be a follow up round of funding, company will have a better readiness to handle the due diligence mandated by most institutions.


When working with outsourced providers and even junior accountants, it’s a common practice for startup founders to leave their company seals, Digital signatures with these teams.  This needs to be avoided unless the persons enjoy high trust from the founders.  Also, please try and maintain a clear record on who has it and how they would be using it.  Please note that using DSCs, lot of activities, fillings can be carried out and it’s a good idea to make sure that founders set up a process for themselves on how they would like their DSCs to be used / preserved.  On that note, it is also a good practice to ensure that as and when any fillings are carried out, a physical record is initiated and kept in a file that is maintained by the founder.  We have gone through a horrendous experience when we had appointed someone and they claimed they had been filling all things.  Handful of fillings had been missed out and so there was some notice from the government department.  When founder reached out to get access to the papers, the person who was managing this had already left the organization and it took much more time to procure these papers.  Of course, eventually we were able to submit these and there was not much of a fuss but then it was unnecessary waste of time for all of us.


There are a handful of outsourced CFO offerings in the market.  Some of them are 1-2 member teams and come with stints with Big 4 or larger companies and are trying to cater to the startup market.  And then there are others who are trying to operate as a full scale organization.  There are certain tools that our portfolio companies have developed which I find very useful for all startups to try out.  For example – GreyHR solutions.  They support the in house as well as the outsourced finance team structures with their solutions for HR, payroll, leave and reimbursement management for employees.


It is a common practice for early stage companies to update secretarial records only at the time of a follow on round of funding or end of the year at the time of filling year end forms.  There are two issues with this approach:

  1. reporting and fillings under Company law has changed significantly over the period of last 2-3 years and it is no longer easy to get away with late fillings, back dated fillings and a small penalty or charge on ROC platform.
  2. Even if that were to be easy, it is only helpful for young startups to make sure that they have the long term goal of making a sound company out of their startup. This includes governance mechanism, reporting and timely fillings not for the sake of regulatory guidelines but also for the startups own record keeping and reference.
  3. Board meetings are normally just recorded with standard agendas and fillings are done. This should be fine from the regulatory purposes but from a long term startup story tracking point of view, it does not help.  Ideal board meetings should track the startup pivots as well as key milestones and decisions be recorded.  If done well, the minutes of board meetings can be very useful source of reasons and rationales for the decisions taken.


Audit from time immemorial has been treated as a mere formality, a cost burden and hassle.  If done with a larger sense of purpose, this can be a great utility as well as a detection mechanism of any issues in terms of book keeping, revenue recognition, internal controls, accuracy of profit and loss statement and compliance with financial reporting standards.

I have not been very successful in driving this aspect to my team that audit should be done for better than regulatory reasons and more importantly in a time frame that’s better than the regulatory timeline.  If done well, it can be immensely helpful in detecting issues in financial controls, revenue recognition and process weaknesses.  For this goal to be accomplished:

  1. auditors need to be given a freehand to dig deeper into the processes and push the finance team hard to force accuracy in recognition of revenue as well as fallacy in processes. This does pose a challenge at times.  Auditors would then insist that these weaknesses that are discovered need to be reported.  Well, insofar as these are not disclaimers and qualified audit reports, these shouldn’t be discouraged and be worried about.  Provided founders are going to insist to their finance teams that once an issue is discovered cannot be repeated again.
  2. Quality and costs of audit shouldn’t be controlled beyond a point. Its fine to NOT have a Big 4 as an auditor but it definitely isn’t acceptable to have the most affordable auditor who wouldn’t care to dig and guide the company deeper.
  3. It is not critical to appoint a Big 4 auditor. In fact we have come across issues earlier on when there are auditors who find it tough to relate to startup conditions and attempt to apply every rule in the book on the biz.  There are challenges to report unnecessary detail or disclose issues basis over application on the law.  In turn founders should never shy away from this reporting so far as reporting to the shareholders is concerned because that’s fine.




(This post is not about clauses that need to be negotiated or not negotiated. It just tries to analyse how (and whether) past round documents have an impact on future round document clauses).

….before signing on the dotted line, founders need to have full conviction with regards to an incoming investor that – this is a great team that is backing us and onus is on us as founders to be able to work towards having their vote on our side when it matters. And from an investor's perspective the ideal thought needs to be – we are happy to assign this part of our capital to this startup team led by their founders who are best at what they do and shall always have our vote when needed…

During the course of round structuring and documentation process, it's quite common for advisors acting in good faith guiding the company / founders / investors alike to negotiate with their counter parties that a certain set of rights / provisions should or shouldn't be there in the documents. And the reason they cite for this advocacy or pushback is – it will set a precedent for subsequent rounds investors asking for similar rights or we will be able to hold these to our advantage if we have captured them here. Rarity but once in a while – the advisor be it a not so savvy lawyer or any other person is using this as an simple excuse to get his client to toe his line

With the right INTENT (at the end of the day – it's intent that matters), this is a reasonable argument and should be discussed. To enable a transparent discussion and thought process, I have tried to summarise below our experience during follow on funding rounds (Series A and beyond) by Blume portfolio companies. I have counted experiences of only those follow on rounds that Blume companies have gone through, across both of our funds and where we have not been lead investors in that follow on round. The number of such follow on rounds in the portfolio have been high enough to count as a good sample size in making these observations. The follow on lead investors include a wide range of investors including Indian and foreign financial investors / VCs, strategic investors as well as larger family office (funds) and angel investors.

When an investor is evaluating a company and has nearly made up his mind, he would talk about the commercial terms with the founder(s). Amongst the terms discussed, round size, % stake expected by the investor and his / her cheque size are the most common terms agreed. This means that by and large even valuation is a derived number basis the quantum to be invested by the incoming investor and his expected stake %. For example – if a VC (let's call him Lead VC) is inclined to invest ₹20 Cr in a startup and their desired % stake to be held is 25%, the POST MONEY VALUATION is implied at ₹80 Cr. I repeat – This factors only the amount that will be brought in by Lead VC and his % stake.

Now, if the founder has other existing investors (let's call them Seed round investors) and they have their Pro rata rights to invest at similar terms, founder may get them and dilute over and above the 25% to Lead VC under the same Post money valuation. So if Seed round investors have a pro rata right of 20% of the round they are entitled to contribute upto ₹5 Cr in this round. This makes it a ₹25 Cr round on a valuation of ₹80 Cr post money which results in a dilution of around 30%.

Broadly, let me try and answer the question – how far do previous round agreements shape the subsequent round documentation?

Before I give the short answer, here's the long answer.

There are lot of nuances in structuring these and initially bandwidth of most parties is spent mostly on commercial discussions around round size and dilution. At this juncture no one has actually discussed legal terms nor diligenced the documentation of the previous rounds. Yes, Lead investors may opt for discussions of the past terms agreed but by and large the same comes up at a later point in time.

Another equally important point is that if an incoming investor has a certain set of opening terms at which they want to invest, they will put it in their opening term sheet regardless of past round structures. To hope or expect that they will be considerate and not put out certain terms merely because founders have succeeded in not having it on their seed round documents is a myth. Or even vice versa – in terms of future investors putting some liberal terms favouring existing shareholders just because they have been already captured in their past documents.

The best of investors don't need an excuse of a precedent to act or not act in a certain manner – at least in terms of structuring a legal document. So to have or not have clauses in a particular document is best dictated by the needs of the parties comprising that particular round of funding. While most blue chip investors may endeavour to honour the past commitments, the same may at times not be practicable given the size and shape of company and its cap table are now going through a sea change.

Then why did I admit that this is a reasonable argument in the first part of this write up??

Position explained above holds true for most contractual rights between investors and founders as shareholders like ROFR, Tag, Exit, Vesting etc.

Discussions and intent to act becomes crucial when it comes to commercial rights like valuation adjustments or bump up or penal factors leading to share price change due to some events, or clauses that draw out relationship between founders, affirmative rights, right to drag along etc.

Here it becomes critical to discuss threadbare and document with caution not because it becomes a precedent or you will succeed in creating a situation to your advantage. But largely because – the above rights would be those where an incoming investor may have a view and sometimes if the company doesn't need to raise capital soon, it is these set of rights that will pretty much drive the relationships of various sets of shareholders (founders amongst themselves or investors vis a vis founders or investor inter se). How to structure these rights is a separate topic and requires a post which I will work towards and soon post.

The limited point of this short note is to just highlight the point that discussions and negotiation during any round of funding should be driven by needs of the Parties to the document. It's important to set the right precedents early but to have fear of precedents as a guiding post for structuring a relationship amongst people who are ideally expected to work in the same direction, is a bit of a stretch.

Past round documentation gets over ridden during subsequent fund raises anyway. The intent is that – all privileges and obligations of earlier round investors would also get restated in a fresh document which is also going to contain the rights and privileges of the newer investors. So that there should only exist one document that guides all shareholders. Besides it is also a common practice that as larger round investors set in, rights of investors or prior rounds do suffer some dilution but not when it comes to their ability to get an exit, dividends, M&A, liquidation preference on a waterfall basis, etc. Some privilege like affirmative rights, right to appoint board directors and a few others are reserved only for investor shareholders with a certain % of shareholding or clout on the cap table.

In such circumstances, just because the older version of documentation has a right or doesn't have may not make a big difference. If company has diluted in favour of some HNI who doesn't have much of a track record as an angel investor or a quasi strategic investor with certain vested privileges – due care needs to be taken in offering certain category of rights. Reason being – at the time of future rounds, founders need their consent and if these shareholders choose not to cooperate with founders at such occasions, it could easily become an opportunity loss.

Every stage at which the company raises capital is different. Investors coming in at each stage have a different role to play and even different time horizons and return expectations which lead them to make an investment in the company. Pricing is a function of the perceived risk that the company in question poses. Therefore, rights and obligations also should be function of these factors and depend from the nature of investors who are going to hold the right and their track record in such situations in the past.

So while it's not real that investors won't have rights and restrictions – but the best Founders should see to it that rights and privileges are in hands of 1-2 responsible hands (certainly not across a fragmented group) and that there is a fair mechanism laid down on how and when these get exercised such that it is binding on all. You don't need litigation after having built a nice company and at the time of the exit or the M&A.

At the end of the day, before signing on the dotted line, founders need to have full conviction with regards to an incoming investor that – this is a great team that is backing us and onus is on us as founders to be able to work towards having their vote on our side when it matters. And from an investor's perspective the ideal thought needs to be – we are happy to assign this part of our capital to this startup team led by their founders who are best at what they do and shall always have our vote when needed.

If all parties have this representation in their documentation on a best effort basis – guess negotiations will be easier if not extinct.

Managing Angel Tax Issues – Clarifications on Tax on Share Premium in the hands of Start ups

A.   Context

When any startup raises money from an equity investor, legally they have attributed a much higher value to the company's shares when allotting the deserving stake to the investors.  Quite a few companies in the portfolio and beyond have had inquiries from the Income Tax Dept (IT) when they issues shares at fancy premiums to investors.  There is nothing wrong in this practice though the IT is trying to go after such cases because there is a provision in the IT Act that allows them do so.  That said, there are some legally provided exceptions and this post intends to just state the obvious with relevant background.

B.   The provision that lays down the tax (not the exact language)

Section 56(2)(viib) of IT Act – where a company receives from any person being a resident, any consideration for issue of shares that exceeds the face value as well as fair market value (FMV) of such shares, the excess over and above such FMV shall be counted as the Income of the company and company shall be liable to pay tax on the same as applicable.

C.   Implications of the above in Para B

Suppose the start up raises Rs. 5 Cr at a valuation of Rs. 20 Cr.  Definitely the shares will be allotted to the investors at a price above their respective par value which could be Re.1 per share or Rs.10 or Rs. 100 per share or whatever the amount be.  At this juncture the onus is on the start to ensure that the 'share price per share' at which they have allotted the shares to the incoming investor(s) are at a price that is lower or equivalent to the FMV.  Suppose the FMV is Rs. 50,000 and shares have been allotted at Rs. 50,000 per share so that the valuation comes to Rs. 20 Cr at an aggregate enterprise level..

in such a case, there shall be ZERO income.  However for some reason, the FMV was certified at only Rs. 10,000 as against Rs. 50,000.  Then Rs. 40,000 per share would be the tax.  This when multiplied by number of shares issued and allotted may come to an astronomical number of Rs. 4 Cr in the current case.  In such a case, the start up will be obliged to pay tax @ 30% on 4 Cr – ie Rs. 1.2 Cr.

D.   Carve outs / Circumstances in which above tax shall not be levied

The following are the 3 specific circumstances where the above tax shall not be payable:

1.   Where money has been received from a NON RESIDENT investor regardless of the quantum of the premium – it wont be subject to taxation under this provision

2.   Where the FMV of the shares of the company has been greater or equal to the price at which the investor has been allotted shares, there is no tax payable

3.  The capital has been received from a domestic entity that operates as a SEBI registered Fund.  There are some Terms and conditions to be complied by the Fund here to ensure that the company in which they invest can get the benefit of this exemptions

This means where  start ups that have taken capital from non resident investors (non resident as defined under Income Tax law) or raised it from a SEBI registered fund or the investment from their domestic investors is at a price lower or equal to certified FMV are out of the scope of this tax.

E.  Certified FMV

If investment is coming into a company from parties other than the above (ie from Indian resident persons including corporate, individuals or firms) a certified valuation certificate report should ideally help justify the FMV of the company.  What constitutes FMV or the method of arriving at FMV is not prescribed in great detail.  Per se, the intent of the law is to ensure that unscrupulous money invested to siphon off taxes.  The spirit of the law should ideally be counted as well adhered to if, a start gets it valuation for FMV certified from a Chartered Accountant in practice for over 10 years using DCF (Discounted Cash Flow) method along with a note that details out the assumptions made to arrive at the value along with a rationale for the assumptions.

F.   So whats the problem then

In case of quite a few start ups, Tax department has been reaching out and attempting to tax or taxing companies for this premium.  If companies are covered by the above exemption, the tax department shouldn't go after and tax these share premiums.  The advisors / CFO of the cos should be able to represent the case in the light of the above.  There will hardly be a case where the inspite the above exemptions applicable the assessing officer will win the case against the company.

Besides, there are also instances where the tax officers are challenging the valuation report.  The rationale behind the same is – the certified valuation report is not realistic.  It is interesting to note why they are doing that.  Valuation reports are drawn up basis a projection of next 4-6 years.  The assessments of Income Tax happen sometimes good 2 years after the end of the year and if the Scrutiny is going on, 3-4 years post the end of the year.  By then the company would have actual data of the projections for the period for which earlier projections were drawn.  In most start ups (including some that are doing well), the revenue numbers are off and therefore even profits are far away.  There are genuine reasons for the same but the officer is reluctant to accept or acknowledge these.  He therefore ends up challenging the valuation report's authenticity and sets aside the report.

G.   That said..

There are a few cases where inspite of applicable exemptions and representations the same have been attempted to be taxed and orders have been passed refusing the exemption.  On top of it, there have also been a freak case or two where penal proceedings have been carried out saying that the amount has been withheld by the company to circumvent tax.  These type of cases may win at the appellate levels and even CIT (Commissioner of Income Tax) levels if company and its advisors are convinced that they have complied with all of their obligations under the law.

And this is not a very complex matter to represent and advisors typically shouldn't charge much.  But the implications of not doing it or losing out the battle are huge.  So please do take this seriously and sort it out with competent advice on this.

(Blume portfolio cos may reach out to for further help and queries on addressing this issue.  She has put up a detailed clarification letter for IT department for the portfolio cos)

To dos for Founders wishing to raise Foreign Capital (Part 1 of 2) – FCGPR Compliance and issues around it


A significant quantum of capital fuelling startups is from overseas sources through the Foreign Direct Investment (FDI) route.  When a company obtains capital through the FDI route, several compliances under the Foreign Exchange Management Act, 1999 (FEMA) become critical and failure to do so may lead to heavy penalties.  FEMA consists of Regulations issued by the RBI from time-to-time.  This post (including Part II of this series) is intended to achieve the following:

  1. Give early stage founders a high level overview of FCGPR and related compliances to be carried out post receiving investment by way of FDI in their companies (Part 1 of 2 being covered herein below)
  2. Issues and challenges we (Blume portfolio cos and Blume per se) have faced with possible solutions to avoid problems with the filing process (Part 2 of 2)

FC-GPR Stands for Foreign Collaboration – General Permission Route

Meaning of FDI – Foreign Direct Investment – means investment by a person / entity that is resident outside India in an Indian company.  The instruments which are considered for FDI are as follows:

(a) Equity Shares

(b) Compulsorily Convertible Preference Shares (CCPS)

(c) Compulsorily Convertible Debentures (CCDs).

(d) Warrants and Partly paid-up shares – However, these require the prior permission of the FIPB.

Shares and convertible instruments to incoming investors have to be issued at a price NO lesser than fair value of shares determined by a SEBI registered Merchant Banker or a Practicing Chartered Accountant (“PCA”) as per any Internationally Accepted Pricing Methodology in the case of unlisted companies.  Upon receiving the capital, the Company will need to give a letter of declaration stating the following alongside the Form FC- GPR:

(a)The price/conversion formula of convertible capital instruments should be determined  upfront at the time of issue of the instruments.

(b) The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the FEMA regulations.

Reporting / Advance Reporting

(a) All the FDI reporting need to be done through portal.

(b) Company will require to register before the above-mentioned portal for intimating the RBI for receipt of FDI.

(c) On receipt of the funds from the foreign investor, the Company will be required to file Advance Reporting before RBI within 30 days of the receipt.

(d) While filing of an Advance reporting before the RBI, Annexure VI with KYC of remitter and FIRC certificate needs to be filed (Advance Reporting form)

The following are the key stakeholders in the FC-GPR process:

  1. Authorized Dealer (“AD”) (Recipient Bank ):

AD bank is a regular scheduled bank with whom we operate and maintain our regular current and saving account for day to day transactions.

Role of AD:

  • Acts as a liaising entity between the Company and RBI
  • All the forms (i.e. Advance Reporting and Form FC-GPR) will be vetted by AD before forwarding to the RBI for their confirmation.
  • Any communication with RBI needs to be routed through AD only.
  • In exceptional cases, RBI will request the Company to revert directly whilst keeping AD on cc on these email exchanges.
  • To intimate to the Company for receipt of foreign fund in their account and sharing necessary paper work before crediting the amount in to the Company’s account.

(Note: some of the above may defer  fromBank to Bank)

2.     Company Secretary ( For Issuance of CS Certificate) :

Practicing Company Secretary is required to certify the following with form FC-GPR:

  • While doing an Allotment to foreign national / entity the Company has complied with all regulations applicable under the Companies Act, 2013
  • Company is eligible to issue the shares under the FEMA regulations
  • Company has complied with all applicable FEMA regulations.

In nutshell, CS certificate validates that the Company’s allotment is under the compliances of all the applicable laws

3.     SEBI registered Merchant Banker or a Chartered Accountant ( For issuance of Valuation Report)

A valuation report shall be required to be filed before the RBI.  This shares that are to be allotted to the investor shall be at a price that is NOT lower than the valuation accorded by the valuer.  The valuer may choose to adopt any internationally accepted methodology whilst arriving at the valuation and furnish a report.

4.     RBI ( Final Regulatory authority)

Advance Reporting and Form FCGPR – On receipt of Advance reporting form from the AD bank, RBI scans through the application and issue the Unique Identification Number (UIN) to the transaction.

On receipt of form FC-GPR and other supporting documents, RBI scans through all the documents and issues the acknowledgment letter to the Company.

RBI may usually take upto a period of 30 days in issuing the acknowledgment letter to the Company if the application is in order and RBI doesn’t have any objections / concerns on the form filed.

Recommendation and Quick Summary to all the Start –ups Company:

Sr.No Particulars Timeline
a) On receipt of FDI, follow up with AD bank for KYC and FIRC copy and start preparing the documentations for Advance Reporting. T + 30
b) On filing of Advance Reporting before the e-biz portal follow up with AD bank for UIN. After completion of 7 days of filings.
c) On completion of allotment file the form FC-GPR before the e-biz portal

(Company is not required to wait for UIN while filing of Form FC-GPR before the RBI on completion of allotment)

T +30
d) After filing of form FC-GPR do follow up with AD bank for the acknowledgment copy. After completion of 10 days of filings.

In the next piece, will take help of Constellation team and will narrate with a list of key issues that we have faced on FCGPR with their implications and possible ways to avoid these.  Stay tuned 🙂

PS – Jointly written in collaboration with Latesh Shah of Constellation Blu (  Readers interested to learn more about this could reach out to this email id with your questions and Latesh and / or I are happy to organize a concall for all interested on this topic


Take the following example:

Startup A offers service worth ₹50,000 to a larger business.

April 1, 2016 is the date on which service was availed and payment was due.
B will have to pay ₹50,000 to A. They won’t transfer the full value. Instead they will do the below:

B will transfer ₹45,000 to A
B will deposit the remaining ₹5,000 to the income tax department on behalf of A
This amount is called TDS (Tax Deducted Source) and remains to the credit of A and will be adjusted against A’s total income tax payable at the end of the year.

By March 31, 2017…
A has served 1,000 such customers and each customer has deposited ₹5,000 each to the government (Income tax department) on behalf of A. This results in total tax deposited to IT department is ₹50,00,000. Given A is a startup and possibly due to high expense base, they may not have any income and therefore no tax obligation. Or it could mean that it has tax obligation but it is less than ₹50 lakhs that is deposited. Now A will wait for filing return of income and pursue for a refund from the department.

This means that while A was not obliged to pay tax and got their refund, valuable ₹50 lakhs remained locked in and couldn’t be used.

The tax laws contain a provision where, every company estimating a loss in the subsequent year and will be locking in needless capital with government, can apply to the IT department and request for a certificate that authorises Startup A and similar cos to tell its customers not to deduct tax at 10%. The IT department may issue certification to deduct tax at as low as 1% or even 0%. It will depend on case to case.

Then what’s the catch and why can’t every company use it:

Please note that IT department wants to know following:

0. Your last year income showing such amount of profit that justifies a lower tax deduction certificate or even a Zero tax deduction certificate. There could be a profit in this year and you may still envisage a loss in the next year. That’s fine. Just that your CA should be able to justify the reasons.
0. Next year’s estimate. They will retain a copy in their records and use it to scrutinise when you’re filing your application next year possibly.
0. They need a list of all customers who you expect to transact with during the next year. Now this is where it becomes tricky. If you are a company where there are a humongous number of customers or there are a few but company can’t really predict who these will be, then you can’t be applying for this certificate.
0. So the lower deduction certificate only works best for B2B companies or B2SMB biz provided these are recurring customers.
0. You can also do part lower deduction. That means – if you have some customers who are recurring you can apply for those who are available and IT dept will allow a zero tax rate and for others they can stick to 10%.
0. Each time you raise an invoice you have to share the copy of the certificate and the annexure where the name of the customer is listed.

When giving the projections, while you need to ensure that it gives enough conviction to the IT officer that you deserve a lower deduction due to low profits or losses, do ensure that the projections are realistic.

It takes a few weeks of process to get this done.

If you have further questions feel free to reach out to me or

Start ups liquidity management post funding – Fixed Deposit (FD versus LF)

Largely due to demonetisation, banks are flushed with liquidity. Natural outcome of this – falling interest rates. This means that fixed deposit rates that banks offer shall be lowered. 

Implications for start ups 
Startups typically raise chunky amounts during their fund raise and plan is to deploy that over a period of 12-24 months. This means that, there could be considerable time between capital being raised and money being deployed. This idle money should be placed in liquid funds or Fixed deposits so that it earns interest.  And these can be meaningful returns. For a seed plus round of US$ 1 Mn that a young startup may have raised, the interest income over a one year period can be as high as ₹20-40 lakhs. This could well be a month of burn. 

Before I proceed, let me explain the above modes of parking of capital:

1. Fixed deposits (FD) – these are to be placed with larger banks only because smaller banks do have their issues and theoretically riskier than larger banks like SBI, ICICI, HDFC and the likes. 

2. Liquid funds (LF) – these are funds that primarily invest in money market instruments with low maturity period. Its a type of mutual fund that is aimed at bridging the liquidity gap between needs of large corporations and even government for their short term needs.

FD has a lower risk return profile vis a vis LF. It means – FDs are less riskier and have lower returns relative to LF. It’s about relative risk between the two. In absolute sense, FDs also have risk in case the bank that one has opted for, collapses. But credit to RBI and india’s banking system, such instances have been very rare. Nevertheless I would always opt for larger banks and not fall for smaller banks who offer slightly higher rates of interest. 

Between both the above options, I have always recommended that startups should consider investing their surplus liquidity with FDs and less with LF. 

Selling point of an LF is that it could deliver greater returns that range from 1-3% by and large and that they could end up being tax free. Also, if there is a sudden need for money, breaking of the FD attracts pre payment penalty which isn’t the case with LFs. 

For start ups – their interest income from FDs will be tax neutral because they can offset it with losses of their burn anyways. So technically interest on FD becomes tax free and you can claim refund of the TDS. And if you file a lower deduction certificate with Income tax department, you could even get the benefit of a near zero tax deduction on the FD.  Varun and his team from Constellation (@urConstellation) have helped a few of our portfolio companies obtain this certificate and can assist in this process. In fact, we have been taking this certificate for Blume each year. This is the right time to start thinking about this certificate for lower deduction of tax for Financial Year 2017-18

Coming back to FD versus LF argument…

There is a school of thought that LFs aren’t too risky. Fair point.  LFs are a money market instrument and have market risk and on paper it’s possible in some stray scenario that their value falls due to some money market developments and we loose money as we try to redeem the funds around the same time. This doesn’t happen most of the time but given the above tax neutrality of FD, why take additional risk is the only point in question.  Besides, for urgent needs of capital, bank FDs can be structured in such a way that one doesn’t loose much of penal charges. Again team at Constellation has been doing this for quite a few of our portfolio companies. Mitul’s team should be able to help in case needed. 
And finally, if you would like to invest into LFs only, make sure you do it with advise of expert who understands the risks and can help with a decision of choosing the fund accordingly.  Do reach out to Shriya at Constellation and she may be able to assist for this. 

Spending 10 minutes on liquidity management by one of the founders personally on a daily basis will go a long way in giving a startup the financial stability that could be well be a difference between a good start up and a great startup. 
Liquidity management is much more than just the decision of FD versus LF. It includes managing burn, receivables, payables, taxes, salaries etc. Will try and extend this in the next write up.