Blog Details

Author: Rashi Suri

Associate: Pradyun Chakravarty, Dikshita Damodaran, Anjana Sridharan

WHAT IS A STARTUP?

The term “startup” has become something of a buzzword in the recent past. But what is a startup, really? 

While there’s no legal definition for this term, a startup is generally used to refer to a company which is in its initial stage of operations, is started by one or more entrepreneurs wishing to develop a product or service that they believe is in demand. Startups often bring with them a high cost and limited revenue in the initial stages with an expectation of rapid and substantial growth. So founders of startups generally seek investors to inject capital into their startups. Enter stage right: angel investors!

WHO IS AN ANGEL INVESTOR?

Angel investors are usually individuals with high net worth (read: wealthy individuals), who are looking to invest their money in a potentially profitable venture, usually in exchange for convertible debt or ownership equity. 

In its initial stages, it’s not possible to accurately predict the success of a startup so the risk involved is high. While borrowing from a bank, the entrepreneur will be expected to pay back the loan even if the startup fails.  With angel investors, there’s no such expectation. They make profits if the startup fares well. Here the distribution of risk is heavier on the investor while the founder assumes very little risk. Angel investors also usually have years of business experience which is advantageous to those just starting out.

However, with angel investors, they also expect substantial ownership and stakes in the management of the startup company. The smartest thing to do here is to clearly outline the scope of control they have, moving forward, in the term sheet (a term sheet is what guides the final contract).

BENEFITS AVAILABLE TO STARTUPS:

The Startup India Initiative is a program launched by the Government of India in 2017 with a view to encourage entrepreneurship in order to generate employment and turn India from a country of “job seekers” to “job creators”.

Eligibility Criteria:

The startup must:

1. Be registered as a Private Company, Partnership Firm, or LLP. Note that One Person Companies are also eligible.
2. NOT be older than 10 years
3. NOT have an annual turnover that exceeds Rs. 100 Crores, in any of the Previous Financial Years.
4. NOT be a product of corporate restructuring
5. Work towards development or improvement of a product, process or service and/or have scalable business model with high potential for creation of wealth & employment (Novelty and scalability).

An entity that satisfies these five conditions can get recognised as a startup by the DPIIT (Department for Promotion of Industry and Internal Trade) and avail the benefits offered under this scheme. 

WHY SHOULD YOU GET CERTIFIED BY THE DPIIT?

This gives you regulatory, procedural and financial benefits which really eases up the process of running your startup. Here’s a peek at the gold at the end of this rainbow:

1. Reduced Regulatory Burden:
   Labour and Environmental Compliance is a time consuming process. This scheme allows startups to self-certify compliance under the required norms. No inspection with respect to labour will be carried out for three to five years. With respect to environmental compliance, the startup only random checks can be carried out and only after the startup self certifies.
2. Fast Track Patent Application and IPR Protection:
   The Patent Application is fast tracked for examination and approval. Further, the Central Government bears the entire fees of the facilitators for any number of patents, trademark or designs, and startups only bear the cost of the statutory fees payable.
   There is also an 80% rebate in patent filing fees (Reduced to INR 1600) and 50% rebate in Trademark filing fees (Reduced to INR 5000).
3. Income Tax Exemptions:
   1. Exemption to Startup (Section 80IAC):
      1. It is exempted from paying Income Tax for three consecutive years within the first ten years of incorporation.
      2. Only Private Companies and LLP’s are eligible for this exemption.
      3. The startup must have been incorporated after 1st April 2016.
   2. Exemption to Investor (Section 56(2)(VIIB):
      Entities investing in startups can avail tax benefits according to the provisions of this Section, with a few exceptions and conditions. This makes startups an attractive investment, easing up the process of hunting for capital.
4. Easier Government Funds:
   The Government has set aside INR 10,000 Cr. managed by SIDBI. This is in the Nature of Fund of Funds, which means that the Government participates in the capital of SEBI registered Venture Funds, who invest twice the amount in startups. 
5. Easy Exit:
   Startups can wind up all its operations within a mere 90 day window. Following this, an Insolvency Professional will be appointed who shall be in charge of liquidating its assets and paying its creditors within 6 months of filing an application.

Other Benefits (Benefits to MSME’s):

A number of Ministries have also notified a number of benefits to startups falling under them. The Ministry of Micro, Small and Medium Enterprises (MSME) is one of them.

Enterprises are categorised on the basis of their investment:

A few notable benefits include:

• Easy sanction of bank loans.
• Lower rates of interest: The rate of interest on loan offered to MSMEs is 1-1.5% lower compared to typical business loan interest.
• Excise exemption schemes
• Easy access to credit: Under the Mudhra Loan scheme, MSME’s can avail loans without collaters
• Quicker approvals from state and central government bodies: Business registered under MSME are given higher preference in terms of government license and certification.
• Tax rebates: MSME / SSI registered businesses enjoy multiple income taxes and capital gains tax subsidies from the government.
• Cheaper infrastructure: Charges are lower for MSME registered company for facilities such as electricity and VAT exemptions.
• Exclusive access to multiple government tenders.

Apart from this, the Startup India Scheme offers an arsenal of resources such as standardised contract formats and templates, web and app building services, cloud credits and cloud telephony services, platforms for networking, and other similar programs, free of cost!

Get started with your certification process here! 

1. Grant, M. (2020, March 10). Startup Definition. Retrieved from https://www.investopedia.com/terms/s/startup.asp
2. About Startup India. Retrieved from https://www.startupindia.gov.in/content/sih/en/about_us/about-us.html
3. DPIIT Recognition.Retrieved from https://www.startupindia.gov.in/content/sih/en/startup-scheme.html
4. Startup India Kit. (March, 2020). Retrieved from https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/Startup%20India%20Kit_March%202020.pdf
5. Sheth, S. (2018, October 28).  Understanding MSME Registration In India and Its Benefits. Retrieved from https://www.startupindia.gov.in/content/sih/en/bloglist/blogs/understanding_msme_registration_in_India.html
6. Benefits UNder MSME Registration That STartups SHould Not Miss Out On. (2017, October9). Retrieved from https://wazzeer.com/blog/benefits-msme-registration-startups-not-miss/