Best Legal Groundwork for Startups, From Incorporation to Funding Lawyer

Startups move fast, and legal work often gets pushed to "later". Later usually arrives at the worst time: an investor's due diligence finds that the code belongs to a freelance developer, a co-founder who left after four months still owns a third of the company, a key customer contract has no limitation of liability, or the company's name infringes someone else's trademark. Fixing these problems during a funding round is expensive and can derail the deal.

This page is for founders and early-stage companies. In short: choose the right entity, usually a private limited company if you plan to raise investment; sign a founders' agreement with vesting and IP assignment; register your trademark early; apply for DPIIT recognition if eligible; use proper employment, consultant and confidentiality documents; set up an ESOP plan when you start hiring key people; use clear customer and vendor contracts with dispute clauses; and get investor documents reviewed before signing the term sheet.

Getting the basics right costs little at the start and saves a great deal at the first funding round.

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Legal steps by stage

Choosing the entity

Most startups that plan to raise equity investment incorporate as a private limited company. Investors, especially venture capital funds, invest in shares, often compulsorily convertible preference shares, and expect the governance and exit options that a company structure offers. ESOPs are available for companies, and DPIIT recognition is open to private limited companies, LLPs and registered partnership firms that meet the criteria.

An LLP has lower compliance costs and flexible internal arrangements, and suits some service businesses that do not plan to raise outside equity. But foreign investment in LLPs is limited to sectors with 100% automatic route FDI and no performance conditions, LLPs cannot issue ESOPs in the same way, and converting later adds cost. For most startups planning to scale with investors, a private limited company is the safer choice.

How we support startups

Time and typical cost range

Our fees are agreed in writing at the start, stage by stage, and are not linked to the outcome. Fixed-fee packages are available for early-stage startups.

What we need

Common startup legal mistakes

IP: make sure the company owns it

A startup's value often lies in its code, designs, content and brand. Under the Copyright Act, the author of a work is generally its first owner. Works created by employees in the course of employment generally belong to the employer under Section 17, but works created by founders before the company existed, by freelancers, or by agencies usually belong to the creator unless assigned in writing under Section 19, which requires the assignment to identify the work and the rights assigned.

Get written IP assignments from every founder, freelancer, agency and early contributor, covering work done before and after incorporation. Register the trademark in the company's name, not a founder's. Check open-source licences used in the product, since some impose obligations if the code is distributed. These steps are routinely checked in due diligence.

DPIIT recognition

The Department for Promotion of Industry and Internal Trade (DPIIT) recognises eligible entities as startups under its notification, generally those incorporated within the last ten years, with turnover in every financial year within the limit set by the current notification (₹100 crore under the 2019 notification; check for any later revision), working towards innovation or improvement of products, processes or services, or with a scalable business model. Recognition is applied for online through the Startup India portal.

Recognised startups may be eligible for benefits such as self-certification under some labour and environmental laws, easier winding up, faster patent examination and reduced fees, and, subject to further approval, income tax benefits under the relevant provisions. Some state governments offer additional incentives. Check eligibility and apply early, since some benefits depend on the date of recognition.

Laws that apply

How we work

We are a litigation and advisory practice led by Advocate BK Singh, with offices in Dwarka (New Delhi) and Vaishali (Ghaziabad). This is what you can expect:

• Stage-appropriate advice: what you need now, and what can wait.
• Fixed-fee packages: predictable costs for early-stage work.
• Diligence-ready documents: prepared with investors' checks in mind.
• Dispute experience: drafting informed by what goes wrong.
• Written fee terms: agreed stage by stage, never linked to the outcome.

Startup legal checklist

ESOPs for startups

Unlisted companies can issue ESOPs under Section 62(1)(b) of the Companies Act and the Companies (Share Capital and Debentures) Rules, 2014, with a special resolution of shareholders and a minimum vesting period of one year. Options can be granted to employees and directors, but generally not to promoters, promoter group members or directors holding more than 10% of the shares. DPIIT-recognised startups have a relaxation allowing ESOPs to promoters and such directors for a period after incorporation.

An ESOP plan sets the pool size, eligibility, vesting schedule, exercise price, exercise period, treatment on leaving, and treatment on a sale of the company. Grant letters to each employee record the number of options and the terms. Tax on ESOPs arises at exercise and at sale, with a deferral for eligible startups. Explain these to employees clearly, since misunderstandings are common.

Customer contracts and terms of service

For B2B startups, the first enterprise customers often send their own contracts, drafted in their favour: unlimited liability, broad indemnities, long payment terms, IP ownership of everything the startup creates, and termination at will. Startups need to negotiate the key points: a cap on liability, mutual indemnities limited to specific risks, reasonable payment terms with interest on delay, retention of the startup's core IP with a licence to the customer, and a fair termination clause.

For B2C startups and platforms, terms of service and a privacy policy are needed, compliant with the Consumer Protection Act and, as its rules apply, the Digital Personal Data Protection Act. E-commerce businesses must comply with the Consumer Protection (E-Commerce) Rules, 2020, including disclosures and a grievance officer.

Fundraising documents

A typical seed or Series A round involves a term sheet, a share subscription agreement setting out the investment and conditions, a shareholders' agreement setting out ongoing rights, amended articles, board and shareholder resolutions, a valuation report, and filings with the Registrar and, for foreign investors, the RBI through the authorised dealer bank. Some early rounds use convertible notes, available to DPIIT-recognised startups under the Companies (Acceptance of Deposits) Rules subject to conditions, or compulsorily convertible preference shares.

The term sheet usually shapes the final documents, so negotiate it carefully. Key points include valuation and the option pool's effect on it, liquidation preference, anti-dilution, board composition, reserved matters, founder vesting and leaver terms, transfer restrictions and exit rights. See shareholders' agreement.

Employment and consultants

Early employees and consultants should have written agreements covering role, pay, confidentiality, IP assignment, notice and non-solicitation. For consultants and freelancers, the agreement should make clear that they are independent contractors, specify deliverables and payment, and assign IP in their work to the company. Misclassifying employees as consultants to avoid labour law obligations can create liabilities, especially under the labour codes now in force.

Non-compete clauses after employment are generally void under Section 27 of the Contract Act, so rely on confidentiality and IP assignment to protect the business, and on non-solicitation terms where reasonable.

Early disputes

Startups face disputes too: a co-founder who leaves and claims more equity; a customer who refuses to pay for delivered software; a vendor who does not deliver; an investor unhappy with performance. Many can be resolved through negotiation or mediation, guided by the founders' agreement or the relevant contract. Where they cannot, arbitration under the contract is usually the route, and for co-founder disputes involving company management, the NCLT may be involved.

The best protection is good documents from the start. When a dispute arises, act early: preserve evidence, read the contract's dispute clause, and take advice before sending angry e-mails that may be used later. See shareholder dispute arbitration.

Compliance basics

Even a small private company has ongoing compliance: appointment of the first auditor within 30 days of incorporation, board meetings at least twice a year for small companies and startups, annual general meetings, annual filings of financial statements and returns with the Registrar, maintenance of statutory registers, and income tax and GST filings. Missing these leads to penalties and can block filings needed during a funding round.

Set up a simple compliance calendar with your chartered accountant and company secretary, and keep minutes and registers up to date. Investors' due diligence will check them, and gaps are cheaper to fix early.

Trademark and naming

Before choosing a company or product name, search the Trade Marks Registry for identical and similar marks in the relevant classes, and check company names on the MCA portal and domain names. A name that is available as a company name may still infringe someone's trademark. File a trademark application early in the classes that cover your products and services; the filing date gives priority. Startups and small enterprises pay reduced official fees for trademark applications.

If a conflict appears later, after the brand has been built, rebranding is costly. A clearance search at the start is cheap insurance.

Foreign investors and startups

Startups raising money from foreign investors must comply with FEMA: the investment must be in permitted sectors, priced at or above fair value, and reported to the RBI through the authorised dealer bank in Form FC-GPR within 30 days of issue of shares. DPIIT-recognised startups can issue convertible notes to foreign investors under the rules, subject to conditions. Startups that have founders or parent entities abroad, or that are considering flipping to a foreign holding structure, need careful advice on FEMA and tax.

Angel tax and valuation

For several years, issue of shares by unlisted companies at a premium above fair value was taxed as income in the company's hands, commonly called angel tax, with exemptions for DPIIT-recognised startups. The levy was abolished for all classes of investors by the Finance (No. 2) Act, 2024, with effect from the 2024-25 financial year (assessment year 2025-26). Valuation reports are still needed under the Companies Act and FEMA, so keep them in order for each round.

Winding down

Not every startup succeeds. If the founders decide to close, there are several routes: striking off the company under Section 248 if it has no assets or liabilities, voluntary liquidation under Section 59 of the IBC if it is solvent, or, for eligible startups, the fast-track insolvency process. Settle employee dues, vendor payments and investor communications properly, and close tax registrations. A clean closure protects the founders' reputations and their ability to start again.