What is Seed Funding & How Startups in India Get It?
🌱 What is Seed Funding?
🔹 Definition:
Seed funding (or seed capital) is the initial capital raised by a startup to launch its operations, conduct product development, market research, build a prototype, or hire an initial team.
It is called "seed" because it is the first official money that helps a business germinate and grow.
🔹 Purpose:
Validate a business idea
Develop a Minimum Viable Product (MVP)
Run pilot tests
Understand the market fit
Set up legal and financial infrastructure
🔹 Seed Funding Sources:
Angel investors
Venture capital (VC) firms
Incubators/accelerators
Friends and family
Government grants and schemes (like Startup India Seed Fund Scheme)
Crowdfunding platforms
🏢 How Startups in India Get Seed Funding
🔹 1. Pitching to Angel Investors:
Angel investors are high-net-worth individuals (HNIs) who invest their personal money in early-stage startups.
Startups must prepare a strong pitch deck, a business plan, and a financial model.
Platforms like Indian Angel Network (IAN), Mumbai Angels, etc., help connect founders with investors.
🔹 2. Government Initiatives:
Startup India Seed Fund Scheme (SISFS):
Launched by DPIIT (Department for Promotion of Industry and Internal Trade).
Offers up to ₹20 lakhs as grants for validation of ideas and ₹50 lakhs as convertible debentures or debt-linked instruments.
Aimed at early-stage startups that haven't raised external funding.
🔹 3. Venture Capital Firms:
Some VCs have dedicated seed funds (like Sequoia’s Surge program).
They require equity in return for capital investment.
🔹 4. Incubators and Accelerators:
Provide seed capital along with mentorship, office space, and networking.
Examples: T-Hub (Hyderabad), NSRCEL (IIM Bangalore), CIIE (IIM Ahmedabad).
🔹 5. Bank Loans and NBFCs:
Traditional banks are usually risk-averse but may offer MUDRA loans or SIDBI schemes.
📑 Legal Framework for Seed Funding in India
✅ 1. Companies Act, 2013:
Startups must be incorporated as a Private Limited Company to raise equity seed funding.
Section 62(1)(c) governs issuance of shares to investors.
Valuation report under Rule 11UA of Income Tax Rules is required.
✅ 2. SEBI Regulations:
While SEBI (Securities and Exchange Board of India) governs public fundraising, it does not regulate private placements to angels or seed VCs.
However, SEBI AIF Regulations (Alternative Investment Fund) govern angel funds and seed-stage VCs.
✅ 3. Income Tax Act, 1961:
Section 56(2)(viib) is important:
Taxes "excess premium" paid by investors above fair market value.
Exemptions available to DPIIT-recognized startups.
🧑⚖️ Relevant Case Law and Judicial Commentary
🔹 1. Valyoo Technologies Pvt. Ltd. v. Union of India (Delhi HC, 2019)
Issue: Taxation of angel investment under Section 56(2)(viib).
Observation: The court held that startups fulfilling DPIIT norms should be protected from arbitrary tax demands under angel tax provisions.
Importance: Reinforced government’s pro-startup policy and discouraged harassment by tax authorities.
🔹 2. Makemytrip (India) Pvt. Ltd. v. Union of India (Delhi HC)
Though not purely about seed funding, this case dealt with valuation disputes during investment rounds.
The court recognized that valuation is a matter of investor confidence and business projections, not just immediate revenue or assets.
🔹 3. Flipkart India Pvt. Ltd. v. Income Tax Department (ITAT Bangalore)
Highlighted issues around valuation and funding premiums.
Tribunal held that investor-backed valuation cannot be arbitrarily rejected by tax authorities, especially for startups.
📌 Key Documents Required for Seed Funding
Pitch Deck
Business Plan
Financial Model
Company Incorporation Documents
Cap Table (Capitalization Table)
Valuation Certificate (from a registered valuer)
Term Sheet (non-binding agreement)
Shareholders Agreement (SHA)
Share Subscription Agreement (SSA)
🧠 Summary Table
| Feature | Explanation |
|---|---|
| Definition | Initial capital to start a business |
| Sources | Angels, VCs, Govt schemes, Incubators |
| Legal Structure | Preferably Private Ltd. Company |
| Applicable Laws | Companies Act, Income Tax Act, SEBI AIF Regs |
| Angel Tax | Section 56(2)(viib); exempted for DPIIT-recognized startups |
| Govt Scheme | Startup India Seed Fund Scheme (SISFS) |
| Relevant Case Law | Valyoo Technologies, Flipkart India, Makemytrip India |
✅ Conclusion
Seed funding is a crucial financial lifeline for startups to transform an idea into a viable business. In India, with an evolving legal ecosystem and government support through Startup India, early-stage founders have multiple avenues to access seed capital. The courts have also stepped in to ensure that valuation-based scrutiny does not stifle innovation, and compliance is streamlined for genuine startups.
RELATED Blog
0 comments