Formation

Taxation

Fundraising

START-UP Valuation

RELATED END TO END

SERVICES RENDERED BY CA Legal
CA Mira Shah

©McTechk Consulting - May 2023

 Valuation
START-UP BASICS
Statutory Requirements
Different Methods
Importance & Relevance
Definition under various Acts
& Recognition
Legal
As per DPIIT for ecosystem benefits
As per Income Tax Act for tax benefits Intellectual property
Contracts
Compliance with regulations
Tax Benefits Legal implication
Legal documentation
Direct - 80-IAC & 56(2)(viib)
Collab with legal professionals
Indirect - 79(1) & 54GB & 54EE

EXTRAS
Fundraising Proprietorship Firm
Various Methods Unregistered Partnership Firm
Platforms Limited Company
Government Schemes MSME / OPC
Subsidies Terms
Case studies

©McTechk Consulting - May 2023

 START UP
DPIIT - Definition

The entity should not be formed by splitting up or reconstruction of an existing business

Upto 10 years from Turnover since its innovation, development or

incorporation/registration incorporation/Registration improvement
Private Limited Co. INR <= 100 Crore of Products / Processes / Services or
Registered Partnership Firm a scalable = employment generation
or LLP potential or wealth creation

©McTechk Consulting - May 2023

 FORMATION OF START UP ENTITIES
Private Limited Companies as per Sec. 2(68) of the Companies Act, 2013
Partnership Firm as per the LLP Act, 2008
Partnership Firm registered as per Sec. 59 of the Partnership Act, 1932

Subscribers to MOA /
Decide as to entity structure Drafting Constitution Docs Partners
Private Limited company or MOA. AOA Advise relating to optimum
Partnership Partnership Deed structure of shareholders

Post incorporation compliances like First Meeting, Bank Account, Auditor Appointment, Share certificate &
Commencement of business certificate / registration with ROF within stipulated time limit from incorporation.

©McTechk Consulting - May 2023

 DILIGENT HANDHOLDING & LEGAL ASPECTS

Accounting & MIS Reporting /

Licences / Approvals
Annual Compliance with ROC

PAN, TAN, GST

Accounting Software
Shop & Establishment
Online / Offline
Professional tax
Weekly / Monthly
MSME Udyam

Payroll Management Sector specific Toolkits & Templates

System for paying employees, eg. Import Export Code Internal documentation templates for
depositing employment taxes and FSSAI easy deployment and standardized
maintaining records of the DGCA approval processes
transactions Intellectual Property eg. HR Toolkit, Contracts, NDNC

Begins our journey as Virtual CFO...

©McTechk Consulting - May 2023
 DPIIT REGISTRATION PROCESS
Time Frame: Link for application:
2-3 working days https://www.startupindia.gov.in/content/sih/en/startupgov/startup_recognition_page.html

'Start Up' Status received!

a copy of Certificate Write-Up about

of Incorporation or Registration innovation, development or
improvement / employment
or wealth creation

Other details required:

Details of Intellectual Property Right
Details of funding
Recognition received by the entity 86350
©McTechk Consulting - May 2023
 TAXATION ASPECTS

LLP/Partnership Firms 30%

Private Limited Company 25%

Section 80-IAC - Tax benefits for Eligible Start-ups

Deduction of 100% of the profits and gains derived from eligible business
For a block of 3 consecutive FYs out of the first 10 FYs from incorporation

Eligible start-up Eligible business

Company or an LLP in Eligible business fulfilling: Business by an eligible start-up engaged in innovation,
1. incorporated on or after 01-04-2016 but before 01-04-2024 development or improvement of products or processes or
2. Total Turnover does not exceed 100 crores in the previous year services or a scalable business model with a high potential of
3. Certified as eligible business by (IMB) Inter Ministerial Board employment generation or wealth creation.

©McTechk Consulting - May 2023

 Process for IMB Certification for 80-IAC Tax Exemption

Pre-requisites Process for 80-IAC Tax exemption

Eligible startup + Not formed by Apply at https://www.nsws.gov.in/
splitting up / Business transfer + (National Single Window System) or
Form 10CCB by CA one month https://www.startupindia.gov.in
before the due date of filing the
return.

Details - basic & Documents as below:

1. MOA scanned in case of a Private limited company or a LLP deed for LLP
2. Board resolution
3. CA Certified Balance sheet and P&L account of the entity for the immediately preceding 3 FYs
4. Income tax returns of the entity for the immediately preceding 3 financial years.
5. Start-up video link (As per guidelines)
Requirements 6. Pitch deck (As per guidelines)

©McTechk Consulting - May 2023

 Angel Tax Exemption Section 56(2)(viib)
Section 56 (2) (viib) -
Where a company, not being a company in which the public are substantially
interested, receives, in any previous year, from any person being a resident,
any consideration for issue of shares that exceeds the face value of such
shares, the aggregate consideration received for such shares as exceeds the
fair market value of the shares shall be deemed to be the income of the
concerned company chargeable to tax under the head IFOS for the relevant
FY.

Ensure that the paid-up share capital and share premium are less than Rs. 25 crores, after the fresh issue of shares.
Shares issued to a venture capital company or a venture capital fund not to be included in reckoning Rs. 25 Cr limit

Determination of FMV as per Rule 11UA(2) Discussed later in Valuation section

Benefits - Investments into eligible startups by the following shall be exempt:

Listed companies (NW>100 Cr or TO>250Cr),
Accredited Investors
AIFs (Category I)
Non-residents

©McTechk Consulting - May 2023

 PROCESS FOR IMB CERTIFICATION
For Section 56(2)(viib) Angel Tax Exemption
993

2. Form 56 - Filling 3. Upload Declaration

1. Start Up Recognition 4. Benefit
Fill out Form – 56. It is a Restriction over investing for 7
Get DPIIT recognition “Declaration by a Startup for years in specific assets like Even non-resident
exemption under Section 56 (2) house, jewellery, land & individuals covered
(viib) of the Income Tax Act, building, etc. Print on within the scope of
1961. You need to provide the letterhead and duly signed ‘angel tax’. Hence,
information while filing this form increased importance of
including DPIIT Registration angel tax exemption for
number Indian startups to attract
foreign funds.

©McTechk Consulting - May 2023

 OTHER BENEFITS OF DPIIT RECOGNITION

Self Certification IPR Application Public Procurement Winding Up Company

6 Labour Laws & To save cost and time and Making participation to reallocate capital and
3 Environmental Laws motivate to innovate easy and allow access resources to more
through Shram Fast-tracked application to potential market productive avenues &
Suvidha portal Facilitators Panel provide GeM listing encourage experiment
Labour laws - no general advisory Exemption from Prior innovative ideas
inspection CG bears entire facilitator cost Experience/Turnover - As per IBC - 90 days
Environment laws - for ALL patents demo
random checks Only statutory fees payable EMD Exemption
80% rebate
©McTechk Consulting - May 2023
 Sec. 79(1) - Carry forward and Set off of Losses

Closely held company being eligible start up-

Condition of shareholders holding >= 51% on last day of PY of set off = last day of year of loss OR
Shareholders should hold all those shares on last day of PY of set off = last day of year of loss
Loss - incurred during period of 10 years from incorporation - UAD

Sec. 54EE - Exemption in CG on investment in units of a SPECIFIED fund Notified?

Any Assessee-
Transfers any LTCA and invests CG in notified units/securities within 6 months from transfer
Amount of exemption: Capital Gain / Amount invested / Rs. 50 Lakh whichever is lower

Sec. 54GB - Exemption in CG from LTCA - Residential property if

Validity?
amount is invested in subscription of equity shares of StartUp

Individual/HUF-
Transfers any LTCA - Residential property to subscribe Equity in startup upto ROI filing date & within 1 year
subscription amount utilized in purchase of new P&M then proportionate exemption wrt to P&M cost
©McTechk Consulting - May 2023
 Why
Types
Sources at Stages
FUNDRAISING few examples of VC
of Credit & subsidy
our role
jargons
WHY
Prototype creation, product development, website / app development
Team hiring
Legal and consulting services for startup
Raw materials and equipment / Packaging / Working capital
Licenses and certifications
Marketing and Sales / admin expenses / Operational expenses
Capital expenditure for Machines / Computers / Office space, etc.

OUR ROLE
Understand the need & rationale & Gauge the amount to be raised
Milestone-based plan with clear timelines regarding what the startup wishes
to do in the next 2, 4, and 10 years
Prepare financial forecast
Identify stage appropriate funding sources and facilitation
Prepare Pitch Deck
Due Diligence for proposed investors
Advise Capital Structures like Convertible Instruments, ESOPs, etc.
Optimize shareholding and assist in Term Sheet

©McTechk Consulting - May 2023

 TYPES OF FUNDING
Characteristics Equity Debt Grant

Nature Selling a portion of a involves the borrowing of A grant is an award, usually

company's equity in money and paying it back with financial to incentivize performance
return for capital interest

Risk Financer: Investment Financer: No decision making Financer: Desired Goal achievement
StartUp: Ownership StartUp: Asset collateral StartUp: Non receipt of a portion

Investor Return Capital growth Interest Payments No return

Voting power -

Banks Central Government

Angel Investors
Sources State Governments
Self-financing Non-Banking Financial Institutions
Government Loan Schemes Corporate Challenges Grant Programs of
Family and Friends
Private Entities
Venture Capitalists
Crowd Funding
Incubators/Accelerators
©McTechk Consulting - May 2023
 FUNDING: STAGES & SOURCES

Steady growth
Impressive Track
record
IPO

Scaling - Large ticket

size
Venture Capital Funds Early traction
Private Equity or expand User base
Investment Firms Venture Capital Funds
Venture Debt Funds
Bank/NBFCs
TReDS

Startup Lifecycle
Ideation Stage
Proof of Concept -
Proof of Concept
Trials, test, teams Idea stage
Early traction Incubators Small amt
Scaling Govt Loan Schemes Bootstrapping
Steady Growth Angel Investors - individuals Friends/Family
Crowdfunding Pitching Events
- Grant Awards

©McTechk Consulting - May 2023

 STARTUP INDIA FUNDING SUPPORT

SIDBI Fund of Funds Scheme SFFS

The Government of India formed a Fund of Funds for StartUps (FFS)
fund of INR 10,000 Cr Aspire
Provides capital to SEBI-AIF India Aspiration Fund (IAF)
SIDBI given mandate to choose AIF
and disburse
Catalyzing private investments
3260 StartUps have been funded
Startup India Seed Fund Scheme
(SISFS)
created with an outlay of INR 945
Crore A DPIIT startup
Age <= 2 years
GOI SIDBI AIF StartUps For Proof of Concept
Has Business idea, crea
Disbursed to eligible startups through
innovative solutions
eligible incubators
As of 28th February, 2023 >=51% Indian promoter
SIDBI has committed to 103 AIF - INR 8295 Cr DPIIT --> EAC --> Incubators Should
--> not have receiv
SIDBI has distributed to 74 AIF - INR 3655 Cr StartUps lakh support from SG/C
AIFs have injected in 818 Startups - INR 14828 Cr Grant / Convertible / D

©McTechk Consulting - May 2023

 SOME JARGONS OF THE START UP ECOSYSTEM

Accelerator Acqui-hired Angel Investor Bootstrapping

Org offers short-term program A small (and likely failing) First individual to fund a startup. Self-funded - own savings
with mentorship, resources and business is purchased for its This person believes in the as well as money from
funding opportunities to help a workforce startup’s idea or solution friends and family
business grow quickly

Burn Rate Crowdfunding Unicorn Dragon

How quickly you are spending an alternative, accessible, A startup valued at $1 billion. Rare startup that raises $1
money compared to capital democratic form of funding - India had 105 Unicorns as per billion in a single round of
during a determined amount of sources capital from a wide media reports as at July 2022. funding eg. Uber
time range of investors and clients Decacorn=$10 billion valuation

Freemium Traction Pre Money Valuation Sweat Equity

Offering customers a restricted The degree to which a new idea, Value before funding Represents the labor and skills
version of a product or service for product etc. becomes popular or Post Money Valuation rather than financial investment.
free with advanced options more widely accepted After funding value = Individuals or team members who
available at extra cost Pre-money valuation contribute sweat equity may receive
+ Size of investment compensation in the form of
ownership or equity
©McTechk Consulting - May 2023
 VALUATION
WHY
Fundraising
Regulatory
Different Valuers - CA, Cat-I Merchant Banker or Registered Valuer
Income Tax, FEMA and Companies Act
Specific securities - Issue or Transfer & Resident or Non Resident
Important Sections / Rules thereof
eg. Income Tax Rule 11UA, FEM Rule 21 and Companies Act Section 247

SOME IMPORTANT ASPECTS

Integral new age businesses vital for strategic decision making
Prone to subjectivity
Maximize use of 'observable' inputs
If Valued less, dilution & if more, disinterest from potential investor - no funds raised
Complexity as nascent stage of start ups
eg. At proof of concept stage, future revenues visibility & external conditions
Choice of method of valuation and approaches

©McTechk Consulting - May 2023

 APPROACHES & METHODS

Market Approach Income Approach Cost Approach

Preferred if transactions have When Free cash flows can be reasonably Assets-based approach
happened in recent past in entities projected for future year(s) with Cost would be required to build the given
with similar business models and size reasonable certainty. asset / business or replace the asset /
as minimizes unobservable inputs by Then discounted using discount rate business with similar capacity with
factoring in market expectations derived after considering investment risk appropriate adjustments
vis-a-vis risk-free investment Used in extensive physical assets which are
Two methods: High subjectivity as assumption based integral to its operations or in case of
1. Comparable Public Co. method Instances of disputes between regulators entities looking to wind-down their
2. Precedent transactions and startups as actual performance operations
compared with forecasts Not very common for Start-Ups

©McTechk Consulting - May 2023

 OTHER SPECIFIC METHODS 2. Score Card method

Generally at pre-revenue stage

1. Exit Multiple / Venture Capital method Compared with others which are already funded
Assigning weights to different criteria
Generally used by VCs who invest for short to medium term in Criteria can be KPIs eg. strength of the team, size of the
Start-ups at early stage of their life, achieve milestone and exit market, competitive environment, need for additional
Method: investment, etc.
Step 1 - Derive the Terminal value of the business in the final Give Scores to criteria based on its relative performance
forecasted year by multiplying Earnings (E) into comparable PE Calculate factor
ratio Derive value of start up by multiplying valuation of the
Step 2 – Discount it by desired ROI comparable with the factor

Step 3 – Present value of terminal value shall be post money

valuation, and accordingly subtracting investment gives Pre Money
Valuation

Present value of Post Money Valuation

©McTechk Consulting - May 2023

 OTHER SPECIFIC METHODS 4. Risk Factor summation method

An estimated initial value is calculated using any of the other

3. Berkus method methods discussed
Post the same, adjustments are made (whether positive or
negative) for different types of business risks.
Generally used for valuation of Start-ups at pre-revenue stage.
Various types of business risks for which impact is evaluated
Named after American venture capitalist and angel investor Dave
Values a startup by taking into quantitative consideration all
Berkus.
associated risks that can affect the ROI.
Method:
Valued considering following five key success factors:
● Sound idea; ● Technology; ● Management team; ● Strategic
relationships; and ● Production and subsequent sales;
Then summation of above monetary gives Valuation.

©McTechk Consulting - May 2023

 INDIA'S BIGGEST UNICORNS

Are they burning cash?

FirstCry
Mamaearth
Zerodha
Xpressbees
InfraMarket
Dream11
Swiggy
Ofbusiness
Coinswitch Kuber ...

68
©McTechk Consulting - May 2023
 AUDITOR'S TAKE

Instances where the financial performance is inflated of StartUps for investors

Recording revenue of multiple periods in one: eg. Byju's auditor found it recognizing fees for a two-year course in one.
Consignment sales to related parties: Shipping products to an agent who is a related party.
Unsustainable performance marketing: D2C companies continue to run ads to boost sales, falsely categorizing ad spend as branding
expenses.
Recording sales before a purchase order: Some companies anticipate a sales order from a repeat customer and raise the invoice on
the last day of the previous month to meet sales targets.
Misclassification of revenue in marketplace businesses: Some falsely book the entire Gross Merchandise Value (GMV) as revenue
instead of commission from transactions.
One-time gain as an expense reduction: Deducting income from IT expenses instead of recording it separately.
Capitalizing normal expenses as fixed assets: Classifying repair and maintenance expenses and interest payments on loans as
capitalization into fixed assets.
Inclusion of rental incomes or interest income in revenues.
Artificially boosting profits by increasing the value of inventory: Increasing the value of closing inventory to show lower material
purchases and inflated profits.
Lending to own customers: Providing loans to customers to inflate sales without receiving actual money for it.

©McTechk Consulting - May 2023

 CONCLUSION

We as professionals can work in collaboration with legal professionals to ensure legal

compliance, implications and documentation to protect the interest of the startup.

While we can always serve those who approach us, however, to create opportunities, we can
motivate second generation clients by way of sharing ideas to create a problem solving startup.
Can be advised to business owners whose business has already reached Maturity stage or who is
looking for new endeavors to tread

Our contribution in terms of comprehensive support and expertise for end to end startup
services from formation to ongoing financial and legal management can not be
undermined.

©McTechk Consulting - May 2023

CA Mira Shah

Mc Techk IBF Consulting

[email protected]

+91 9586475800

https://www.linkedin.com/in/
miraculotus/