Funding, Valuation and India's Startup Policy
Two things are asked here. First, how a venture is funded — the ladder from a founder's own money to an institutional round, and the arithmetic of what each round costs in ownership. Dilution questions are the calculable ones and are worth learning properly, because a candidate who can do the arithmetic answers them while a candidate who has only read about funding guesses. Second, India's startup policy — which body recognises a startup, under which scheme, and what the recognition is for. The policy half rewards precision about names: the initiative, the department that runs it and the fund that finances it are three different things, and options are built by swapping them. Where a threshold has moved with a Finance Act, this chapter says so rather than printing a number that will be wrong next year.
Valuation and Dilution — the Arithmetic
- Pre-money and post-money. Post-money valuation = pre-money valuation + amount invested. If a startup is valued at ₹8 crore pre-money and raises ₹2 crore, the post-money valuation is ₹10 crore, and the investor owns 2 ÷ 10 = 20%. Dividing by the pre-money figure instead gives 25%, which is the standard wrong answer and the reason the two words exist.
- Dilution is proportional, and it is not a loss of value. Founders holding 100% of a ₹8 crore company who sell 20% hold 80% of a ₹10 crore company — that is ₹8 crore of value either way, with ₹2 crore of new cash inside the business. Dilution reduces the share, not necessarily the worth, and a question describing it as a loss is describing something else.
- ESOP — employee stock option plan. Employees are given the right to buy shares later at a price fixed today, and they gain if the company is worth more by then. Options vest over time, typically with a one-year cliff before anything vests at all, which is what makes them a retention instrument rather than a bonus.
- The documents, in the order they appear. A term sheet sets out the main terms and is mostly non-binding; due diligence is the investor checking the books, the contracts and the cap table; the shareholders' agreement is what actually binds. A cap table lists who owns what, and a convertible note is money now that becomes equity at a later round's price.
🧠 Two words decide the answer
In every dilution question, find "pre-money" or "post-money" before calculating anything. The arithmetic is one division; the whole difficulty is which denominator. If the question says only "valued at", read on — it will say which, because a paper-setter who omitted it would have no defensible answer.India's Startup Policy — the Names That Matter
| Name | What it is |
|---|---|
| Startup India | The flagship initiative, launched on 16 January 2016. An initiative, not a law and not a fund. |
| DPIIT | Department for Promotion of Industry and Internal Trade, under the Ministry of Commerce and Industry. It is DPIIT that recognises a startup, and "DPIIT-recognised" is the phrase that unlocks the benefits. |
| Fund of Funds for Startups (FFS) | Government money invested not into startups directly but into SEBI-registered venture funds, which then invest. Operated by SIDBI. The indirection is the point and is what questions test. |
| SIDBI | Small Industries Development Bank of India — the development finance institution for MSMEs, and the operating agency for FFS. |
| Udyam registration | The registration that makes an enterprise an MSME for the purposes of government schemes. A different thing from DPIIT startup recognition, and both can apply to one firm. |
| Incubator vs accelerator | An incubator supports very early ventures over a long, open-ended period, often with space. An accelerator runs a fixed-length cohort ending in a demo day, usually taking equity. Duration and the cohort are the distinguishing features. |
- What DPIIT recognition requires, structurally: an entity incorporated as a private limited company, an LLP or a registered partnership; within a stated number of years of incorporation; under a stated turnover ceiling in any financial year since incorporation; and working towards innovation or a scalable business model with potential for wealth creation. A firm formed by splitting an existing business is excluded. Learn the shape of the test — the number of years and the turnover ceiling have been revised by notification, so verify those two against the Startup India portal rather than a coaching sheet.
- What the recognition is for. Self-certification under several labour and environment laws, a faster and cheaper route for patent and trademark filing, easier public procurement norms, and eligibility for the income-tax exemption available to recognised startups on approval. The rates and thresholds of that exemption change with Finance Acts; the existence of the route does not.
Intellectual Property — Terms and Durations
| Right | Protects, and term |
|---|---|
| Patent | A new, useful, non-obvious invention. 20 years from the date of filing. |
| Trademark | A brand identifier — name, logo, mark. 10 years, renewable indefinitely. |
| Copyright | An original work — text, music, software, film. For literary works, the author’s lifetime plus 60 years. |
| Design | The appearance of an article, not how it works. 10 years, extendable by 5. |
| Geographical Indication | Goods with a quality owed to their origin — Darjeeling tea, Madhubani painting. 10 years, renewable. |
| Trade secret | Information kept confidential. No registration and no expiry — protection lasts exactly as long as the secret does. |
🧠 Patent vs design vs trademark, in one line
A patent protects how it works, a design protects how it looks, a trademark protects what it is called. Almost every IP question in this section is answered by that sentence, and the same product can carry all three at once.Key takeaways
- Post-money valuation = pre-money + amount raised, and the investor's share is the amount divided by the POST-money figure. Find which word the question used before dividing.
- Dilution cuts the percentage, not necessarily the value: 80% of a larger company can be worth exactly what 100% of the smaller one was.
- An angel invests their own money; a venture capitalist manages a fund raised from limited partners. Whose money it is, is the tested difference.
- Startup India is the initiative (16 January 2016), DPIIT is the department that recognises a startup, and the Fund of Funds is SIDBI-operated money that invests in venture funds rather than in startups.
- An incubator supports early ventures over an open-ended period; an accelerator runs a fixed-length cohort ending in a demo day and usually takes equity.
- A patent protects how it works (20 years from filing), a design how it looks (10 + 5), a trademark what it is called (10 years, renewable forever).
- A trade secret needs no registration and never expires — it lasts exactly as long as the information stays secret.
Practice questions (8)
Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.
A startup is valued at ₹8 crore pre-money and raises ₹2 crore. The investor's stake is:
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Answer: B — 20%
Post-money valuation is 8 + 2 = ₹10 crore, and the investor owns 2 ÷ 10 = 20%. Option A, 25%, divides by the pre-money figure of 8 — the single most common error here, and the reason both terms exist. Sanity check: the founders keep 80% of ₹10 crore, which is ₹8 crore, exactly what the company was worth before the round.In India, which body recognises an entity as a "startup" for the purposes of the Startup India benefits?
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Answer: B — DPIIT
The Department for Promotion of Industry and Internal Trade, under the Ministry of Commerce and Industry, issues the recognition — "DPIIT-recognised startup" is the exact phrase, and it is what unlocks self-certification, the faster IP route and the tax-exemption eligibility. The Registrar of Companies incorporates a company, which is a different act: a company exists from incorporation but is not a recognised startup until DPIIT says so. SEBI regulates securities markets; NITI Aayog is a policy think tank and runs the Atal Innovation Mission, but recognises no startup.The Fund of Funds for Startups (FFS) invests:
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Answer: B — Into SEBI-registered venture capital funds, which then invest in startups
FFS is a fund of funds, and the name is the answer: it commits capital to SEBI-registered Alternative Investment Funds, which make the actual investment decisions. It is operated by SIDBI. The indirection is deliberate — the government supplies capital without picking individual startups — and option A is the answer a candidate gives by reading the scheme's purpose instead of its structure.In India, the term of a patent is:
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Answer: B — 20 years from the date of filing
20 years from the date of filing, and it cannot be renewed beyond that — the bargain of the patent system is a temporary monopoly in exchange for public disclosure. Option A is the trademark term, option C is the copyright term for a literary work, and option D describes a trademark, which alone among these can be renewed indefinitely. The three are routinely offered together.A programme admits ten startups for a fixed three-month period, gives each a small investment for equity, and ends with a demo day for investors. This is:
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Answer: B — An accelerator
The fixed duration, the cohort of ten and the demo day are all signatures of an accelerator. An incubator typically supports a venture over an open-ended period, often mainly with space and mentoring and often without taking equity. Both words are used loosely in press coverage, which is why the exam tests the two structural features: cohort and fixed length.Which protects the APPEARANCE of a product rather than how it works?
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Answer: B — Registered design
A registered design protects the shape, configuration, pattern or ornament — how the article looks. A patent protects how it works; a trademark protects what it is called. One product can hold all three at once: a bottle can have a patented cap mechanism, a registered shape and a trademarked name, which is why the question has to be read for which aspect it names.Founders holding 100% of a company valued at ₹8 crore raise ₹2 crore, diluting to 80%. Their holding is now worth:
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Answer: B — ₹8 crore — the same as before
80% of the post-money ₹10 crore is ₹8 crore — exactly what 100% of the pre-money company was worth, with ₹2 crore of new cash now inside the business. Option A applies the 80% to the old ₹8 crore valuation, which is the mistake that makes dilution look like a loss. Dilution reduces the share, not the value; what changes the value is what the company does with the money.Which form of intellectual property requires no registration and has no expiry date?
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Answer: C — Trade secret
A trade secret is protected by being kept secret, so there is nothing to register and nothing to expire — and equally, nothing left the moment the information gets out. That trade-off is the point: a patent gives 20 years of protection in exchange for publishing the invention, while a secret can last forever and is lost completely if disclosed. Every other option on the list requires registration and carries a term.