MUMBAI SILICON VALLE Y BENG ALURU SING APORE NE W DELHI MUNICH / AMSTERDAM NE W YORK GIF T CIT Y

Research

Start-up
Governance
Essentials
From Start to Maturity

May 2024

© Nishith Desai Associates 2024 www.nishithdesai.com

 Research

Start-up
Governance
Essentials
From Start to Maturity

May 2024 May 2024

DMS Code: 26472.1

© Nishith Desai Associates 2024 www.nishithdesai.com

 Ranked as the ‘Most Innovative Indian Law Firm’ in the prestigious FT Innovative Lawyers Asia Pacific
Awards for multiple years. Also ranked amongst the ‘Most Innovative Asia Pacific Law Firm’ in these
elite Financial Times Innovation rankings.

© Nishith Desai Associates 2024 www.nishithdesai.com

 Start-up Governance Essentials — From Start to Maturity



Disclaimer

This report is a copyright of Nishith Desai Associates. No reader should act on the basis of any statement
contained herein without seeking professional advice. The authors and the firm expressly disclaim all and
any liability to any person who has read this report, or otherwise, in respect of anything, and of consequences
of anything done, or omitted to be done by any such person in reliance upon the contents of this report.

Contact

For any help or assistance please email us on [email protected]

or visit us at www.nishithdesai.com.

© Nishith Desai Associates 2024 Provided upon request only

 Start-up Governance Essentials — From Start to Maturity



Contents

Foreword by Mr. Nishith Desai i

Acknowledgment iii

Executive Summary 1

Introduction to Start-ups 2

A. Start-up India 3
B. DPIIT Start-up Recognition 4
C. Tax Incentives 5
D. Other Incentives 6
E. Stages of Start-up Funding up to the Exit 8

Start-ups Ecosystem – A Global Outlook 10

A. US Start-up Ecosystem 11
B. UK Start-up Ecosystem 12
C. Israel Start-up Ecosystem 13
D. Singapore Start-up Ecosystem 13
E. Chinese Start-up Ecosystem 13

Indian Start-up Ecosystem 15

The Essential Role of Governance in the Start-up Ecosystem 21

A. Instilling a Culture of Governance within a Start-up from an Early Stage 21

B. Self-regulation for a Founder 24
C. Responsible Business Leadership 25
D. Environmental Responsibility 25
E. Identifying Key Stakeholders in the Start-up Ecosystem and Their Roles in Governance 26
F. Tax Risk Management 28

Boardroom Basics: Early-Stage Start-up Governance ​

and Founder Duties    29

A. Roles and Responsibilities of Founders 29

B. Collective Duties of the Board of Directors 32
C. Best Practices for Structuring the Board and Committees 34
D. Board Meetings and Governance Protocols 35
E. Balancing Growth and Responsibility 36

Navigating Shareholder Relations and Effective Governance 37

A. Role of Venture Capital Investors in Good Governance 37

B. Shareholders’ Rights under Companies Act 2013 38
C. Understanding the Impact of Governance on Funding 39
D. Balancing the Interests of Investors and Other Stakeholders 40

© Nishith Desai Associates 2024 Provided upon request only

 Start-up Governance Essentials — From Start to Maturity



A Guide to Safeguarding your Start-up’s Intellectual Property 42

A. What Are the Different Forms of Intellectual Property? 42

B. Why Do Businesses Need to Protect Their Intellectual Property? 45
C. What Are the Steps that a Business Needs to Take to Protect Their Intellectual Property? 46

Technology: Understanding Your Role and Responsibilities 50

A. Role of Different Technology Service Providers

and Legal Compliances 50
B. Data Protection 56
C. Adoption of New technologies: AI 59
D. Cybersecurity Risks 60

Start-ups and CSR 63

A. Allocation of CSR Funds to technology incubators 63

B. Expanding the Scope of Eligible Incubators to Allow Social Business Incubators
to Receive CSR Funding    64
C. Allowing Traditional Non-profits and/or Foundations to Invest in Social and technology
Incubatees with tax Incentives    65

Governance Pillars 67

A. Role of Start-up Incubators and Accelerators 67

B. Role of Mentors and Advisors 68
C. Role of Government 68

Governance Challenges and Solutions 69

A. Common Governance Challenges Faced by Start-ups 69

B. Mitigating Risks related to Finances, Compliance, and Operations 72
C. Implementing Effective Crisis Management and Contingency Plans 75

Future of Governance in Start-ups 77

A. Start-up Governance Framework Model 77

B. Preparing for IPOs or Exit Strategies with Strong Governance 82
C. Future of Start-ups 84
D. Internalization – Reverse Flipping 86

Yes, Governance Matters! 89

© Nishith Desai Associates 2024 Provided upon request only

 Start-up Governance Essentials — From Start to Maturity

Foreword by Mr. Nishith Desai

In the fast-paced realm of India’s burgeoning economy, the trajectory of growth has been nothing short
of extraordinary. At the heart of this transformative journey lies the indomitable spirit of innovation and
entrepreneurship, led by the vibrant Indian Start-up ecosystem. This ecosystem has not only shaped the
present economic landscape but is also slated to play an important role in advancing financial inclusion
and propelling digital adoption across the economy. As India Inc. is pushing the needle towards achieving
the trillion-dollar digital economy goal and has evolved as a hotspot for varied Start-ups, it is imperative for
companies to understand the importance of corporate governance.

We at Nishith Desai Associates along with TiE Mumbai organised a Think Tank-styled conference at the
research centre Imaginarium AliGunjan, Alibaug on April 29, 2023, under the Indian presidency of the G20
2023. The exclusive think tank conference, supported by Start-up20 Engagement Group led by Dr. Chintan
Vaishnav was conducted under the guidance of Mr. Amitabh Kant, G20 Sherpa, Government of India.
The conference led to the formation of an independent Start-up Corporate Governance Committee to draft
a recommended corporate governance framework for Start-ups under the leadership of Start-up 20 Engagement
Group. The Committee comprised a team of 7 members (Ramanan Ramanathan, Harish Mehta, Apoorva Ranjan
Sharma, Pratekk Agarwaal, Karthik Reddy, Kritika Murugesan, Manish Taneja and the Legal Advisory Team consisting
of Nishith Desai, Sahil Kanuga and Maulin Salvi).

Think Tank Recommendations on Corporate Governance for Indian Start-ups 1 was officially released at the
Start-up20 Shikhar Summit meeting of the Start-up20 Engagement Group at Gurgaon on July 3, 2023 and was
endorsed by Shri Piyush Goyal, Cabinet Minister in the Government of India on July 4, 2023. The same is also
available on the website of Start-up20: www.startup20india2023.org.

We present “Start-Up Governance Essentials: From Start To Maturity”. This manual represents our earnest
endeavour to shed light on the importance of governance in the Start-up ecosystem. At Nishith Desai
Associates, we recognize that governance forms the bedrock upon which successful Start-ups build their
foundations. It is not merely a set of rules and regulations but a strategic framework that guides decision-
making, fosters transparency, and ensures the sustainability of entrepreneurial ventures.

In the pages that follow, we navigate through the intricacies of Start-up governance, dissecting the nuances
that govern their journey—from inception, where dreams take flight, to maturity, where enduring success
is measured. Governance is not an afterthought but a compass that steers Start-ups through the web of chal-
lenges, helping them navigate regulatory landscapes, attract investments, and build resilient structures.

As India’s premier legal and regulatory advisory firm, we have witnessed first-hand the evolution of the
Start-up ecosystem. We understand the critical role that governance plays in securing the trust of investors,
partners, and stakeholders. In an era where disruptive ideas fuel progress, the need for robust governance
cannot be overstated. We believe that by embracing sound governance principles, Start-ups not only fortify
their internal structures but also contribute to the overall health and dynamism of the larger business
environment.

1 https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Recommended-Governance-Framework-for-Start-ups.pdf.

© Nishith Desai Associates 2024 Provided upon request only i

 Start-up Governance Essentials — From Start to Maturity



We extend our gratitude to the dynamic and resilient Start-up community; whose spirit of innovation
continues to inspire us. It is our hope that “Start-Up Governance Essentials: From Start To Maturity” serves
as a valuable companion on your entrepreneurial journey, providing the guidance and insights needed
to navigate the challenges and seize the opportunities that lie ahead.

May this manual be a catalyst for positive change, fostering a culture of governance that propels Start-ups
toward enduring success and positions them as pillars of India’s economic future.

Nishith Desai
Founder, Nishith Desai Associates

© Nishith Desai Associates 2024 Provided upon request only ii

 Start-up Governance Essentials — From Start to Maturity

Acknowledgment

We extend our heartfelt appreciation to the esteemed contributors and collaborators who have played
an instrumental role in shaping the content of the manual, “Start-Up Governance Essentials: From Start
To Maturity”. Your valuable insights, expertise, and unwavering commitment have been indispensable
in creating a comprehensive resource for the Start-up community.

We would like to express our sincere gratitude to each member who dedicated their time and shared their
wealth of knowledge to enrich the manual. Your inputs have added depth and practical relevance, making
this manual a more robust guide for Start-ups navigating the intricate terrain of governance.

In the spirit of collaboration, we acknowledge the collective effort that went into crafting this resource. It is
through the synergy of diverse viewpoints and experiences that we have been able to address the multifaceted
aspects of Start-up governance.

As we present this manual to the Start-up community, we do so with a deep sense of gratitude for the
collaborative spirit that has made it possible. Your commitment to advancing the understanding and
practice of governance in Start-ups is a testament to the strength and unity of our community.

Our Team

Nishith Desai Sahil Kanuga Maulin Salvi Rahul Rishi

Founder, Co-Head — International Dispute Leader — Corporate Governance, Leader — Social Sector Practice,
Nishith Desai Associates Resolution & Investigations Practice, Nishith Desai Associates Nishith Desai Associates
Nishith Desai Associates

Hetal Pandya Afaan Arshad Rhythm Vijayvargiya

Leader — Corporate Law Practice, Leader — International Tax Practice, Member — Technology,
Nishith Desai Associates Nishith Desai Associates Media, and IP Laws Practice,
Nishith Desai Associates

We would like to thank Ahaan Raizada and Aparna Gaur for their contribution to the paper.

© Nishith Desai Associates 2024 Provided upon request only iii

 Start-up Governance Essentials — From Start to Maturity

Executive Summary

The “Start-up Governance Essentials: From Start to Maturity Manual” is a comprehensive guide that illuminates
the principles, frameworks, and best practices of governance for Start-ups. In today’s fast-paced business
landscape, where technological advancements are constant, the manual emphasizes the critical role of sound
governance practices in ensuring the sustainability and success of Start-ups. It offers practical insights to help
readers develop, implement, and refine governance strategies that align with organizational objectives while
promoting accountability, transparency, and risk management.

This Governance Manual has a clear objective: to provide founders, executives, and stakeholders with
the knowledge and tools necessary to establish robust governance practices from the inception of a Start-up.
Recognizing the unique challenges faced by Start-ups in India, it presents best practices to facilitate their
successful growth and sustainability through effective governance.

Governance is portrayed not merely as a regulatory requirement but as the bedrock that nurtures a Start-up’s
development. The manual underscores the importance of fostering a culture of governance from the early
stages, encouraging self-regulation among founders, and promoting responsible business leadership. It also
delves into topics of environmental responsibility and tax risk management, ensuring that Start-ups make
positive contributions to society while maintaining financial prudence.

This Governance Manual stands as an invaluable resource, providing Start-ups with the knowledge and tools
needed to establish robust governance practices, secure funding, protect intellectual property, and thrive
in the dynamic world of entrepreneurship. By implementing the insights and recommendations within,
Start-ups can position themselves for long-term success and sustainable growth. It is a guide for navigating
the complex journey of governance, from inception to maturity, and a blueprint for building strong,
responsible, and prosperous Start-ups.

© Nishith Desai Associates 2024 Provided upon request only 1

 Start-up Governance Essentials — From Start to Maturity

Introduction to Start-ups

India is currently a $3.75 trillion economy. To become ‘one trillion-dollar’ it took India 60 years post-indepeence.
The next trillion dollars were added in just 7 years and the third trillion were added in just 5 years. With
such a tremendous growth in the economy, it is expected that for the next 14–15 years India will consistently
add a trillion in its economy in an average span of two years. The Centre for Economics and Business Research
(CEBR) have forecasted that India will become a ten trillion-dollar economy by 2035. 1

The Start-up sector has been instrumental in shaping India’s current state and is poised to play a significant
part in enhancing financial accessibility and promoting digital integration within the economy.

In the ever-evolving landscape of business and entrepreneurship, the term “Start-up” has become increasingly
popular. It’s a buzzword that has captured the imagination of innovators, investors, and aspiring business
owners alike. But what exactly is a Start-up? Is it just a young company with a fresh idea, or does it encompass
something more profound? Let’s explore the essence of Start-ups, what sets them apart from traditional
businesses, and why they have become a vital force in today’s global economy.

A Start-up is, at its core, a fledgling company in its early stages of development. What distinguishes it from
more established businesses is the pursuit of innovation, scalability, and a substantial growth potential.
Start-ups often operate in uncharted territory, aiming to disrupt existing markets, create new ones, or bring
about transformative change through their products or services. It is a venture that is initiated by its founders
around an idea or a problem with a potential for significant business opportunity and impact. It is search
of an idea or a meaningful problem worth-solving and building a committed founding team who intends
to develop new innovations, share common vision to turn that idea into reality and converting the value
as created in the process of progress into an investable form and having an ambition to grow fast with
scalable business model for maximum impact.

Start-ups are not just small companies; they are the seeds of future industries and economic growth. Here’s
why they matter:

§ Economic Growth: Start-ups are engines of economic growth, creating jobs, stimulating innovation,
and attracting investment.

§ Technological Advancement: Many Start-ups are at the forefront of technological advancement, pushing
the boundaries of what’s possible and driving progress in various fields.

§ Market Competition: Start-ups introduce competition, which often leads to better products, services,
and pricing, benefiting consumers.

§ Global Influence: Start-ups can disrupt industries on a global scale, bringing change that extends far
beyond their local communities.

1 India’s growing strides towards 10 trillion-dollar economy (www.investindia.gov.in).

© Nishith Desai Associates 2024 Provided upon request only 2

 Start-up Governance Essentials — From Start to Maturity

Introduction to Start-ups

START-UP SCALE-UP

High Growth Ambition and

Very Scalable Business Model

Start-up Scale-up

A B

Unvalidated Market Validated

Business Model Business Model

Small Business

Low Growth Ambition and/or

Non Scalable Business

A. Start-up India 2

The Start-up India initiative was announced by Hon’ble Prime Minister of India, Shri Narendra Modi on
August 15, 2015 wherein he stated that“I see start-ups, technology, and innovation as exciting and effective instruments
for India’s transformation.”

Start-up India, launched in 2016, is a flagship initiative of the Government of India (“GoI”), intended
to catalyse Start-up culture and build a strong and inclusive ecosystem for innovation and entrepreneurship
in India that will drive sustainable economic growth and generate large scale employment opportunities.
Further to this, an Action Plan for Start-up India was unveiled by Prime Minister of India on January 16, 2016.
The Action Plan comprises of 19 action items spanning across areas such as “Simplification and handholding”,
“Funding support and incentives” and “Industry-academia partnership and incubation”. These initiative and various
related programs are managed by a dedicated Start-up India Team, which reports to the Department for
Promotion of Industry and Internal Trade (DPIIT).

2 https://dpiit.gov.in/startup-india/startup-india-initiative.

© Nishith Desai Associates 2024 Provided upon request only 3

 Start-up Governance Essentials — From Start to Maturity

Introduction to Start-ups

DPIIT is mandated to coordinate implementation of Start-up India initiative with other Government
Departments. Apart from DPIIT, the initiatives under Start-up India are driven primarily by five Government
Departments viz. (i) Department of Science and Technology (DST); (ii) Department of Bio-technology (DBT);
(iii) Ministry of Human Resource Development (MHRD); (iv) Ministry of Labour and Employment; and
(v) Ministry of Corporate Affairs (MCA) and NITI Aayog.

Recognising the importance of Start-ups in driving innovation and economic growth, various ministries
and departments have introduced schemes to provide financial, infrastructural, and regulatory support
to Start-ups. The listed schemes cover sectors like technology, manufacturing, agriculture, healthcare,
and more. A dedicated section on Central Government Schemes section has being hosted on the Start-up
India Portal which provides a list of all the schemes initiated by the Government of India to support and
promote Indian Start-ups from time to time and intends to acts as an integrated and one stop platform
for Start-ups community in India and foster its eco-system.

B. DPIIT Start-up Recognition

There are currently 99,380 DPITT recognised Start-ups. Pursuant to the Start-up India Action Plan, Start-ups
that meet the definition as prescribed under G.S.R. notification 127 (E) 3 are eligible to apply for recognition
under the program and as mentioned below.

Eligibility Criteria for Start-up Recognition by DPITT:

§ The Start-up should be incorporated as a private limited company or registered as a partnership firm
or a limited liability partnership.

§ Turnover should be less than Indian Rupees One Billion in any of the previous financial years.

§ An entity shall be considered as a Start-up up to 10 years from the date of its incorporation.

§ The Start-up should be working towards innovation/ improvement of existing products, services and
processes and should have the potential to generate employment/ create wealth. An entity formed by
splitting up or reconstruction of an existing business shall not be considered a “Start-up”.

3 https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf.

© Nishith Desai Associates 2024 Provided upon request only 4

 Start-up Governance Essentials — From Start to Maturity

Introduction to Start-ups

Company Age Company Type Annual Turnover

Period of existence and operations Incorporated as Private Limited Should have an annual turnover
should not be exceeding 10 years Company, a Regesterd Partnership not exceeding Rs. 100 crore for
from the Date of Incorporation. Firm or a Limited Liability any of the financial years since
Partnership. its Incorporation.

Original Entity Innovative and Scalable

Entity should not have been formed Should work towards development
by splitting up or reconstructing or improvement of a product,
an already existing business. process or service and/or have
scalable business model with high
potential for creation of wealth and
employment.

C. Tax Incentives
1. A recognised Start-up may apply for Tax exemption under section 80 IAC of the Income Tax Act.
Post clearance for Tax exemption, the Start-up can avail tax holiday for 3 consecutive financial years
out of its first ten years since incorporation.

Eligibility Criteria for applying to Income Tax Exemption (80IAC):

§ The entity should be a recognized Start-up.

§ Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under
Section 80IAC.

§ The Start-up should have been incorporated after April 1, 2016.

2. A recognised Start-up may also apply for Angel Tax Exemption under Section 56 of the Income Tax Act,
which is popularly known as “Angel Tax”.

Eligibility Criteria for Angel Tax Exemption under Section 56 of the Income Tax Act:
§ The entity should be a DPIIT recognized Start-up.

§ Aggregate amount of paid-up share capital and share premium of the Start-up after the proposed issue
of share, if any, does not exceed INR 25 Crore.

§ Certain other conditions in terms of permissible investments.

© Nishith Desai Associates 2024 Provided upon request only 5

 Start-up Governance Essentials — From Start to Maturity

Introduction to Start-ups

3. A recognised Start-up is eligible for certain other tax benefits including but not limited to:

§ Set-off of carried forward losses in case of change in ownership: generally, in case there is a change
in beneficial ownership of more than 51% (between the year in which loss was incurred and the year
in which those losses are to be set-off), the set-off of carried forward losses is not allowed. However,
recognized Start-ups are exempt from such a restriction, subject to satisfaction of other conditions
prescribed.

§ Deferral of ESOP tax: deferral of taxation on exercise of stock-options until the sale of the shares
acquired upon exercise.

§ Capital gains rollover benefits: tax exemptions to individuals / HUFs on investment of long-term
capital gain in equity shares of Start-ups.

D. Other Incentives 4

In addition to Tax exemptions, DPIIT recognised Start-ups can also get the following additional benefits
under the Start-up India Initiative.

1. Self-Certification:

§ With an intend to reduce the regulatory burden on Start-ups and allowing them to focus on their
core business and keep compliance costs low, Registered Start-ups shall be allowed to be self-certify
compliance for 6 Labour Laws and 3 Environmental Laws through a simple online procedure wherein
no inspections will be conducted for a period of 5 years in the case of labour laws and may be
inspected only on receipt of credible and verifiable complaint of violation, filed in writing and
approved by at least one level senior to the inspecting officer.

§ In the case of environment laws, Start-ups which fall under the ‘white category’ (as defined by the Central
Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would
be carried out in such cases.

2. IPR Fast Tracking:

§ With an intent to protect the innovative new ideas, products and process in form of registered patents
to be filed in a smooth and simplified manner and thereby encouraging the Start-ups to innovate
further and making their innovations financially viable, a Registered Start-ups can apply for patent
application which can be fast-tracked for examination so that their value can be realised sooner.

§ Further, the SIPP (Start-Ups Intellectual Property Protection) scheme is being made available to DPITT
recognised Start-ups, which provides financial and legal support to Start-ups for filing the patent
application for any number of patents, trademarks or designs that a Start-up may file, securing and
managing their intellectual property (IP) assets. Further, the scheme facilitated Start-ups in filing
and processing of their patent, design or trademark application through the assistance of IP Facilitators,
a significant increase in IP fillings by Start-ups the scheme was noted after successful implementation
of SIPP. 5

4 https://www.startupindia.gov.in/content/sih/en/startup-scheme.html.
5 https://www.pib.gov.in/PressReleasePage.aspx?PRID=1880465.

© Nishith Desai Associates 2024 Provided upon request only 6

 Start-up Governance Essentials — From Start to Maturity

Introduction to Start-ups

3. Simplified Public Procurement:

With an intent to make it easier for Start-ups to participate in the public procurement process and allow
them to access another potential market for their products, including Government organisations, DPIIT
Recognized Start-ups.

§ can register as Seller on Government e Marketplace (GeM), an online procurement platform and the
largest marketplace for Government Departments to procure products and services and can sell their
products and services directly to Government entities.

§ have been exempted from submitting Earnest Money Deposit (EMD) or bid security while filling
government tenders.

§ in the manufacturing sector are exempted from the criteria of “prior experience/ turnover” subject
to requisite and required capability to execute the project as per stated quality standards or technical
parameters and should have their own manufacturing facility in India.

4. Easier Winding-up Process:

With an intent to make it easier for Start-ups on winding-up their operations in event of any business
failure and allowing the entrepreneurs to re-allocate capital and resources to alternate productive areas
at a faster pace for innovation, DPIIT Recognized Start-ups having simple debt structures, or those
meeting certain income specified criteria can be wound up within 90 days of filing an application for
insolvency under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and an appointed insolvency
professional and liquidator shall be responsible for the swift closure of the business, sale of assets and
repayment of creditors in accordance with the distribution waterfall set out in the IBC validating the
concept of limited liability in a truer sense.

Self Parent Application and Income Tax

Certification IPR Protection Exemption

Easier Public Easy Winding up

Procuerment Norms of Company

© Nishith Desai Associates 2024 Provided upon request only 7

 Start-up Governance Essentials — From Start to Maturity

Introduction to Start-ups

E. Stages of Start-up Funding up to the Exit 6

A broad-brush, indicative understanding of the various stages in the evolutionary life cycle of a Start-up are
as under:

Pre-Seed Stage
§ Bootstrapping/Self-financing: Bootstrapping a Start-up means growing the business with little or no
venture capital or outside investment. It means relying on your savings and revenue to operate and expand.
This is the first recourse for most entrepreneurs as there is no pressure to pay back the funds or dilute
control of your Start-up.

§ Friends & Family: This is also a commonly utilized channel of funding by entrepreneurs still in the
early stages. The major benefit of this source of investment is that there is an inherent level of trust
between the entrepreneurs and the investors.

§ Business Plan/Pitching Events: This is the prize money/grants/financial benefits that are provided
by institutes or organizations that conduct business plan competitions and challenges. Even though
the quantum of money is not generally large, it is usually enough at the idea stage. What makes the
difference at these events is having a good business plan.

Seed Stage
§ Incubators: Incubators are organizations set up with the specific goal of assisting entrepreneurs with
building and launching their Start-ups. Not only do incubators offer a lot of value-added services
(office space, utilities, admin & legal assistance, etc.), they often also make grants/debt/equity investments.

§ Government Loan Schemes: The government has initiated a few loan schemes to provide collateral-free
debt to aspiring entrepreneurs and help them gain access to low-cost capital such as the Start-up India
Seed Fund Scheme and SIDBI Fund of Funds.

§ Angel Investors: Angel investors are individuals who invest their money into high-potential Start-ups
in return for equity. One can reach out to angel networks such as Indian Angel Network, Mumbai Angels,
Lead Angels, Chennai Angels, etc., or relevant industrialists for this.

§ Crowdfunding: Crowdfunding refers to raising money from a large number of people who each contribute
a relatively small amount. This is typically done via online crowdfunding platforms.

Series A Stage
§ Venture Capital Funds: Venture capital (VC) funds are professionally managed investment funds that
invest exclusively in high-growth Start-ups. Each VC fund has its investment thesis — preferred sectors,
stage of the Start-up, and funding amount — which should align with your Start-up. VCs take Start-up
equity in return for their investments and actively engage in the mentorship of their investee Start-ups.

6 https://www.startupindia.gov.in/content/sih/en/funding.html.

© Nishith Desai Associates 2024 Provided upon request only 8

 Start-up Governance Essentials — From Start to Maturity

Introduction to Start-ups

§ Banks/Non-Banking Financial Companies (NBFCs): Formal debt can be raised from banks and NBFCs
at this stage as the Start-up can show market traction and revenue to validate its ability to finance interest
payment obligations. This is especially applicable for working capital. Some entrepreneurs might prefer
debt over equity as debt funding does not dilute equity stake.

§ Venture Debt Funds: Venture Debt funds are private investment funds that invest money in Start-ups
primarily in the form of debt. Debt funds typically invest along with an angel or VC round.

Series B, C, D & E
§ Venture Capital Funds: VC funds with larger ticket sizes in their investment thesis provide funding
for late-stage Start-ups. It is recommended to approach these funds only after the Start-up has generated
significant market traction. A pool of VCs may come together and fund a Start-up as well.

§ Private Equity/Investment Firms: Private equity/Investment firms generally do not fund Start-ups.
However, lately some private equity and investment firms have been providing funds for fast-growing
late-stage Start-ups who have maintained a consistent growth record.

Exit Options
§ Mergers & Acquisitions: The investor may decide to sell the portfolio company to another company in the
market. In essence, it entails one company combining with another, either by acquiring it (or part of it)
or by being acquired (in whole or in part).

§ Initial Public Offering (IPO): IPO refers to the event where a Start-up lists on the stock market for the
first time. Since the public listing process is elaborate and replete with statutory formalities, it is generally
undertaken by Start-ups with an impressive track record of profits and who are growing at a steady pace.

§ Selling Shares: Investors may sell their equity or shares to other venture capital or private equity firms.

§ Buybacks: Founders of the Start-up may also buy back their shares from the fund/investors if they have
liquid assets to make the purchase and wish to regain control of their company.

© Nishith Desai Associates 2024 Provided upon request only 9

 Start-up Governance Essentials — From Start to Maturity

Start-ups Ecosystem – A Global Outlook

The global Start-up ecosystem continues to evolve and flourish as we move further into the 21st century.
Start-ups have become a driving force for innovation, job creation, and economic growth across the world.
With advancements in technology, increased access to funding, and a growing entrepreneurial spirit,
the outlook for Start-ups remains highly promising.

Many regions and countries are actively fostering their Start-up ecosystems through government initiatives,
business incubators, and accelerators, creating a conducive environment for new ventures to thrive.
Additionally, the COVID-19 pandemic accelerated digital transformation and remote work, further fuelling the
growth of tech Start-ups and digital solutions. As a result, the global Start-up landscape is more interconnected
and diverse than ever before, with Start-ups working on everything from sustainability and healthcare
to artificial intelligence and blockchain, poised to address the world’s most pressing challenges and shape
the future of various industries. In this dynamic and ever-expanding ecosystem, the potential for innovative
disruption and growth remains a constant, making it an exciting time for Start-ups worldwide.

The Start-up revolution has transcended its traditional confines within Silicon Valley or the United States.
It has evolved into a truly global phenomenon, with burgeoning innovation hubs spanning the globe. These
growth centres can be found in diverse locations, including Stockholm, Berlin, Bangalore, London, Helsinki,
Tel Aviv, Singapore, Beijing, and Tokyo. Notably, the Start-up culture is not limited to developed regions
alone; many emerging economies have also emerged as vibrant Start-up ecosystems. They host thriving
networks of incubators and accelerators, providing a rich breeding ground for a wide array of entrepreneurial ideas
to flourish.

Additionally, governance globally has paved the way for cross-border investments and collaborations,
enabling Start-ups to access diverse markets and funding sources. This interconnected global network has
opened opportunities for Start-ups to scale rapidly and has amplified the dissemination of ground-breaking
technologies and disruptive solutions. Further, global governance has created a more conducive environment
for Start-ups by promoting policies and regulations that streamline business operations, reduce bureaucratic
red tape, and facilitate international trade.

2021 was a benchmark year for tech Start-ups, with widespread global growth. The trend continued through
the first quarter of 2022, after which the impacts of global conflict, supply-chain disruptions, the European
energy crisis, rising inflation and interest rates led to uncertainty and unstable markets. However, midway
through 2023, inflation appears to be slowing, and economic growth appears to be holding up. 1

1 The Global Start-up Ecosystem Report 2023 released by Start-up Genome, accessed from: https://startupgenome.com/report/gser2023.

© Nishith Desai Associates 2024 Provided upon request only 10

 Start-up Governance Essentials — From Start to Maturity

Start-ups Ecosystem – A Global Outlook

Global Start-up Ecosystem Ranking 2023 2

SN Ecosystem Overall Ranking (2023)

1 Silicon Valley 1

2 New York City 2 (tied)

3 London 2 (tied)

4 Los Angeles 4

5 Tel Aviv 5

6 Boston 6

7 Beijing 7

8 Singapore 8

9 Shanghai 9

10 Seattle 10

11 Washington, D.C 11

12 Seoul 12

13 Berlin 13

14 Amsterdam-Delta 14

15 Tokyo 15

16 San Diego 16

17 Toronto-Waterloo 17

18 Paris 18

19 Chicago 19

20 Sydney 20 (tied)

21 Bengaluru-Karnataka 20 (tied)

22 Stockholm 22

23 Miami 23

24 Delhi 24

25 Austin 25

A. US Start-up Ecosystem

In a world marked by perpetual change and the occasional fluctuations in the global economic and
geopolitical landscape, one undeniable constant prevails: the enduring and substantial impact of the
United States’ Start-up ecosystem on a global scale. The US, when viewed through the lens of Start-ups,
continues to shine as the ultimate land of opportunity, serving as the epicentre of unparalleled innovation
and creative disruption in the realm of technology.

2 The Global Start-up Ecosystem Report 2023 released by Start-up Genome, accessed from: https://startupgenome.com/report/gser2023.

© Nishith Desai Associates 2024 Provided upon request only 11

 Start-up Governance Essentials — From Start to Maturity

Start-ups Ecosystem – A Global Outlook

Distinguishing itself on the global stage, the US has forged an open and expansive version of the internet,
in stark contrast to the more closed digital systems emerging in various parts of the world. This openness
has fostered an environment that attracts foreign entrepreneurs, who recognize that the United States
stands out as the premier destination for nurturing and expanding a global enterprise. This recognition
is founded on the conviction that the nation’s Start-up ecosystems provide the ideal launchpad for scaling
and growing a business with worldwide reach.

One way the United States encourages people to take big risks is through its flexible bankruptcy laws. These
laws make it easy for entrepreneurs to restart if their first attempt fails. In other countries, failing in business
can harm your finances and reputation, but in the US, it’s not as bad.

The top US Start-up ecosystems offers new companies everything they require: access to funding through
a large network of VCs, angel investors, and mentorship in high quality accelerators. 3

B. UK Start-up Ecosystem

The United Kingdom has positioned itself as a global leader in entrepreneurship and scientific innovation,
drawing top-tier talent to its primary Start-up hub, London. With world-class scientific infrastructure at
its disposal and the presence of renowned academic institutions like Oxford and Cambridge, the UK has
expanded its list of thriving Start-up ecosystems. These smaller university cities are now collaborating with
the highly prosperous fintech hub of London, resulting in a diverse and nationally distributed network of
top-tier Start-up environments. London, as one of the world’s most cosmopolitan and successful international
cities, holds a magnetic appeal for ambitious entrepreneurs seeking to establish their ventures on the global
stage. If the UK retains its ability to continue being the ecosystem of choice in Europe, and continues to
leverage its top-rated universities, pro-business environment, and cutting-edge innovation, the UK Start-up
ecosystem should continue to develop.

It is important not to underestimate the challenges presented in the aftermath of Brexit. The UK possesses
an exceptional Start-up ecosystem primarily because of its success in attracting foreign entrepreneurs, many
of whom come from Europe thanks to the ease of relocation and integration for English speakers. However,
Brexit has complicated the process of relocating for European entrepreneurs and resolving this potential
damage in the long run will require significant efforts from the government. 4

3 Global Start-up Ecosystem Index 2023, released on May 30, 2023: www.Start-upBlink.com.
4 Global Start-up Ecosystem Index 2023, released on May 30, 2023: www.Start-upBlink.com.

© Nishith Desai Associates 2024 Provided upon request only 12

 Start-up Governance Essentials — From Start to Maturity

Start-ups Ecosystem – A Global Outlook

C. Israel Start-up Ecosystem

Israel has earned its reputation as the “Start-up nation” for good reason. Despite being a small country,
it has managed to make a significant impact on the global Start-up ecosystem. Over the years, the Israeli
Start-up ecosystem has not only survived but thrived, even in the face of numerous external challenges.
These challenges have only served to enhance the potency and innovation capabilities of the Israeli ecosystem.
By cultivating a strong environment of creativity and innovation, Israel has achieved remarkable break-
throughs in areas such as internet security, big data, healthcare, agriculture, biotechnology, and water tech.
AI and cybersecurity are the top industries in Israel. It ranks third in the world by the number of AI and ML
Start-ups, whereas one in three cybersecurity unicorns in the world is an Israeli company. The success
in the Start-up field can be attributed to impressive investments in R&D, strong support from Government,
deep rooted entrepreneurial culture and strong connections with their overseas diaspora. 5

D. Singapore Start-up Ecosystem

Singapore serves as a remarkable model for innovation and is an excellent illustration of a relatively small
country that surpasses expectations. The country has emerged as a favoured destination for Start-ups
opeating in Asia, primarily due to its stable financial system, business-friendly approach, and favourable
tax policies. Given Singapore’s limited market and population, the growth of its ecosystem relies heavily
on expanding overseas. This unique characteristic grants the ecosystem a distinct regional perspective from
the very beginning. The nation’s ability to generate billion-dollar valuations attests to this success.

Several factors have contributed to the growth of vibrant Start-up ecosystem in Singapore. The city is able
to attract foreign Start-ups, foreign venture capital, and the research activities of foreign companies because
of its sound regulatory and legal environment. Rules and legal procedures provide clarity on business
establishment and ownership, corporate governance, shareholder rights, and bankruptcy. 6

The Singapore ecosystem boasts a growing number of accelerators and support networks. The country also
has a strong digital infrastructure and plenty of investment sources. On top of this, the country’s universities
are involved in the Start-up scene, not only by training a highly qualified workforce for the R&D sector,
but also in connecting programs to Start-ups and encouraging entrepreneurship on campuses. 7

E. Chinese Start-up Ecosystem

The progress China has made in transitioning from a low-tech developing nation to a cutting-edge techno-
logical powerhouse is truly inspiring. Technology development is a strategic priority for the country, and
the government invests heavily in establishing state-of-the-art tech hubs to position itself as a global leader.
China’s most notable unicorns are focused on automation and AI, with a strong presence of Hardware & IoT
in the impressive Shenzhen Start-up ecosystem.

5 Lessons from Tel Aviv: What Has Fueled Israel’s Start-up Ecosystem’s Growth accessed from: https://therecursive.com.
6 Singapore’s Ecosystem for Technology Start-ups and Lessons for its Neighbors by Nitin Pangarkar and Paul Vandenberg.
7 Global Start-up Ecosystem Index 2023, Released on May 30, 2023: www.Start-upBlink.com.

© Nishith Desai Associates 2024 Provided upon request only 13

 Start-up Governance Essentials — From Start to Maturity

Start-ups Ecosystem – A Global Outlook

However, China has made a deliberate decision to keep its ecosystems primarily focused on the domestic
market and has not opened up globally. Most Chinese Start-ups concentrate solely on the Chinese economy,
resulting in a limited international presence. Additionally, Chinese tech users are isolated from the global
internet by the Great Firewall, which regulates online traffic within China.

Despite these limitations, China’s ecosystems have achieved impressive growth and have been instrumental
in creating a remarkable number of Start-ups and unicorns, owing to the sheer size of the country’s economy.
However, the current inward trend restricts the ability of China’s Start-up ecosystem to explore other
technology markets and strive for global leadership status. Much of the growth potential of Chinese
ecosystems has already been realized, and this inward focus hinders their ability to expand into other
tech markets and achieve global dominance. In the Global Start-up Ecosystem Ranking 2023, two Chinese
cities featured in the top 30 global Start-up ecosystems namely Beijing and Shanghai at 7th and 9th position
respectively.

© Nishith Desai Associates 2024 Provided upon request only 14

 Start-up Governance Essentials — From Start to Maturity

Indian Start-up Ecosystem

India has recently surpassed China to become the most populous country in the world. With a current
population of over 1.4 billion and steadily growing, coupled with a high percentage of working-age individuals,
India boasts the largest talent pool globally. The country has emerged as a global leader in technology services
and experienced a significant rise in the number of unicorns in recent years. The remarkable growth
of India’s Start-up scene can primarily be attributed to the size of its domestic market and the thriving
IT industry. These Start-up ecosystems act as a driving force for the Indian economy, enhancing productivity
and bringing about transformative changes. 1

In addition to its population advantage, the Indian government has made significant investments in
infrastructure and implemented policies and reforms aimed at promoting growth and attracting investments.
This has transformed India into a prominent hub for manufacturing and technology. The national budget
for 2023 further intends to capitalize on this growth by incorporating measures to enhance entrepreneurial
success. These measures include simplifying the Know Your Customer (KYC) process, introducing a unified
filing system to improve the ease of doing business, providing tax benefits for eligible Start-ups, and
establishing 30 Skill India International Centres across the country. India had relatively relaxed COVID-19
policies, which helped the nation continue its rapid growth. Policies including the Start-up India (Government’s
flagship start-up initiative) as well as Make in India initiative further catalyse the Start-up scene. India’s
successful Start-ups and unicorns are focusing on the massive potential of the local market. However,
for India to achieve a status of a global tech hub, its Start-ups will have to focus more on regional and
global markets.

The talent of Indian entrepreneurs is evident through the presence of CEOs leading companies like Alphabet,
Adobe, and Microsoft. Though, this also highlights the significant issue of brain drain, as some of India’s top
talents are opting to relocate to the western countries. The scarcity of high-paying jobs, coupled with India’s
infrastructural problems, are contributing to entrepreneurial talent relocating overseas.

Over the last decade or so, the Start-up ecosystem has witnessed tremendous amount of activity in terms of
growth of new Start-ups, increased funding to Start-ups, influx of global investors, development of regulatory
regime, business friendly policies, global mergers and acquisitions, and internationalization. The Start-up
economy has transformed India has a global hub for innovation and entrepreneurship. These new age tech
Start-ups are not only developing innovative solutions and technologies but are generating large-scale
employment. Incubators and accelerators are playing a crucial role in India’s Start-up ecosystem by offering
Start-ups valuable resources and support, such as mentorship, funding, and networking opportunities.

In recent years, the Indian Start-up scene has witnessed a shift in focus towards digital solutions and fintech.
This shift has been driven by factors such as increased smartphone penetration, government initiatives,
and changing investor preferences. While success of ecommerce companies remains significant, fintech
Start-ups working on new banking models have attracted substantial investment and attention. The US
continues to be the biggest source of FDI for Indian Start-ups, further highlighting the global interest
in India’s fintech sector.

1 Global Start-up Ecosystem Index 2023, released on May 30, 2023: www.Start-upBlink.com.

© Nishith Desai Associates 2024 Provided upon request only 15

 Start-up Governance Essentials — From Start to Maturity

Indian Start-up Ecosystem

India has emerged as the 3rd largest ecosystem for Start-ups globally with over 99,380 DPIIT-recognized
Start-ups across 670 districts of the country as of September 26, 2023. 2 India ranks #2nd in innovation
quality with top positions in the quality of scientific publications and the quality of its universities among
middle-income economies. Not only is India the third largest Start-up ecosystem in the world, it also has
the third highest number of unicorns globally. This is testimony to India’s rise as a global Start-up and
innovation hub.

According to an Invest India report, 3 Indian Start-up Ecosystem has seen exponential growth in past
few years (2015-2022):

§ 15X increase in the total funding of Start-ups

§ 9X increase in the number of investors

§ 7X increase in the number of incubators

A major push from the Government came in the year 2016 with the launch of Start-up India initiative.
This flagship initiative was launched with the objective of building a strong eco-system for nurturing
innovation and Start-ups in the country, which would in turn drive sustainable economic growth and
generate large scale employment opportunities.

Since the inception of the initiative:

§ There are over 99000+ Start-ups recognized by the government of India as of May 2023

§ 49% of them having a base in Tier 2 - Tier 3 cities

§ These Start-ups are spread over 669 districts from 36 States and Union Territories of India

§ As of March 31, 2023, India is home to 108 unicorns with a total valuation of $ 340.80 Bn. Out of the total
number of unicorns, 44 unicorns with a total valuation of $ 93.00 Bn were born in 2021 and 21 unicorns
with a total valuation of $ 26.99 Bn were born in 2022

§ 57 Regulations have been simplified for Start-ups

Although significant growth has been observed in the Indian Start-up ecosystem, it is accompanied by various
challenges. Despite the overall positive narrative, India is currently facing a slowdown. In 2021, India
witnessed the creation of a record-breaking 36 unicorns and raised a total of USD 72 billion in exits. However,
in 2022, the number of unicorns decreased by 33% to 24, and exits declined to USD 5.5 billion. 4 Start-up
enterprises frequently encounter hindrances like regulatory intricacies, talent recruitment, scalability
issues, and market access limitations. Nevertheless, it’s important to note that these challenges also
double as opportunities for fostering innovation and entrepreneurial endeavours. By effectively tackling
these obstacles, Start-ups can unleash their full potential and play a pivotal role in advancing the overall
development of the ecosystem.

2 https://www.startupindia.gov.in.
3 https://www.investindia.gov.in/indian-unicorn-landscape.
4 The Global Start-up Ecosystem Report 2023 released by Start-up Genome, accessed from: https://startupgenome.com/report/gser2023.

© Nishith Desai Associates 2024 Provided upon request only 16

 Start-up Governance Essentials — From Start to Maturity

Indian Start-up Ecosystem

As the landscape of Start-ups undergoes ongoing transformation, it has become increasingly imperative to
give precedence to the development of sound governance principles. Sound governance assumes a pivotal
role in ensuring transparency, accountability, and ethical behaviour, thereby contributing to the enduring
sustainability and triumph of the industry. Embracing and putting into practice these tenets of proper
governance can further fortify the Start-up ecosystem and private capital sector in India as the favored
destination for investments. Furthermore, the adoption of robust governance practices can effectively
mitigate the risks associated with poor returns and enhance the likelihood of a Start-up’s triumph. Given
the continuous influx of capital into the Indian Start-up realm, there is a mounting concern regarding
the lack of adherence to corporate governance standards. Several recent incidents have brought corporate
governance violations into the limelight, underscoring the importance of instituting and enforcing strong
corporate governance practices to safeguard the rights and interests of all stakeholders involved.

Overall, the evolution of the Start-up ecosystem in India has been remarkable, and with continued support
from the government and investors, it is poised for further growth and success in the future.

Total Capital Inflow in Indian Start-ups Estimated to Touch $300Bn+ in 2030

In 2030, total cumulative capital invested in indian Start-ups will more than double from $150 Bn (2023)
to $308Bn (2030)

400

308
300
274
247
226
209
200 189
167
150
136
111
100
69
58
45
33
14 20

0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Cumulative Funding Amount ($BN)

Source: Inc42

Note: Data from calender year Q2-2023 to 2030 is estimated using time series analysis (exponential smoothing) based
on quarterly timestamp since Q1-2014.

© Nishith Desai Associates 2024 Provided upon request only 17

 Start-up Governance Essentials — From Start to Maturity

Indian Start-up Ecosystem

Indian Start-up Funding and Deals Landscape

Start-up Funding M&As & Exits Unicorns & Soonicorns

$141 BN + Total Funding 1.2K + Total Deal Count 108 Indian Unicorns

Unique Funded
5.3K + Start-ups 6 Bn + Spent on M&As 106 Indian Soonicorns

Total Seed Stage Total Combined Valuation

$5.7BN + Funding 18 Start-up IPOs $345BN + of Indian Unicorns

Total Growth Stage Upcoming Combined Valuation

$34BN + Funding 22 Start-up IPOs
$34BN + of Indian Soonicorns

Source: Inc42

Note: Based on Indian Start-up Funding Recorded between 1st January 2014 and May 2023.

Annual Investor Participation in Start-up Funding to Grow at 26%

20,000 18,871

CAGR: 26%
15,069
15,000
12,929

10,752
10,000 8,909
7,411

5,301
5,000 3,808

0
2023 2024 2025 2026 2027 2028 2029 2030

Annual Unique Investor Participation Count

Source: Inc42
Note: Values for all the calendar year mentioned are estimated.

© Nishith Desai Associates 2024 Provided upon request only 18

 Start-up Governance Essentials — From Start to Maturity

Indian Start-up Ecosystem

India to Have Over 1.8 Lakh Start-ups by 2030

The total number of tech Start-ups in india will grow 2.6x from 68k (2023) to 1.8L (2030)

2.0
1.8L

+2.6 x
1.5

1.2L

1.0

68K

0.5

0
2023 2025 2030

Cumulative Number of Start-ups Launched (in Lakhs)

Source: Inc42

Start-up Investors In India: An Overview (2014 to 2023)

Total Deal Start-ups Preferred Preferred

Number Participation Backed Sector Hub

VC/PE 2.5k 7.7k+ 4.4k+ Enterprisetech Bengaluru

Corporates
800+ 990+ 750+ Fintech Bengaluru
and CVCs

Accelerators
300+ 760+ 590+ Fintech Bengaluru
and Incubators

Family Offices 300+ 190+ 160+ Fintech Bengaluru

Angel Networks
125+ 540+ 470+ Enterprisetech Delhi NCR
and Syndicates

Government Entity 50+ 180+ 170+ Healthtech Bengaluru

Venture Debt 50+ 300+ 220+ Ecommerce Bengaluru

Source: Inc42

Note: The deal participation and Start-ups backed count are not mutually exclusive. Funding data (column 2 to 5)
is from 2014 to may 2023 and based on publicly disclosed deals.

© Nishith Desai Associates 2024 Provided upon request only 19

 Start-up Governance Essentials — From Start to Maturity

Indian Start-up Ecosystem

India Expected to Produce 280+ Unicorns by 2030

The Total Number of Unicorns is expected to increase 2.4 times by 2030 from 2023

300
280

200

151
134
118
108
100 87

43
25 31
8 11 13 14

0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2030

Cumulative Unicorn Count

Source: Inc42

© Nishith Desai Associates 2024 Provided upon request only 20

 Start-up Governance Essentials — From Start to Maturity

The Essential Role of Governance

in the Start-up Ecosystem
Good governance is of paramount importance in the Start-up ecosystem, serving as the bedrock upon
which the success and longevity of these innovative enterprises rest. Start-ups, by their very nature, are
often characterized by agility, creativity, and a propensity for risk-taking. However, as they grow and
mature, they must transition from a culture of flexibility to one rooted in governance principles. This
evolution necessitates a proactive approach in instilling a culture of responsible governance right from
the Start-up’s inception.

In the vibrant Start-up ecosystem, the involvement of private equity and venture capital firms is essential.
Nonetheless, divergent perspectives can occasionally surface among founders, executives, and investors.
Implementing sound governance practices serves as the cornerstone for Start-ups to improve communication,
streamline decision-making processes, and maintain robust and harmonious relationships with their
investors. This, in turn, fosters an ecosystem with lasting sustainability.

Promoting and nurturing good governance practices stands as a vital imperative for Start-ups in India,
contributing to the development of a resilient and sustainable business environment. By giving precedence
to responsible behaviour, transparency, and accountability, Start-ups can cultivate trust, attract investments,
and fuel their long-term growth prospects. It’s essential to acknowledge that while challenges persist on this
journey, Start-ups must fully grasp the significance of good governance and remain committed to diligently
adapting to evolving requirements.

One key aspect of governance in Start-ups is transparency. It ensures that stakeholders, including founders,
investors, and employees, are well-informed about the company’s operations, financial health, and decision
making processes. This transparency builds trust and confidence, attracting investors and customers who
value openness. Furthermore, good governance sets clear rules and guidelines for decision-making, risk
management, and compliance with legal and ethical standards. It not only helps Start-ups avoid costly legal
and reputational pitfalls but also aids in securing funding and partnerships. Overall, a commitment to good
governance promotes accountability, reduces risks, and enhances the Start-up’s credibility and attractiveness
in the eyes of potential investors and partners. As the Start-up sector continues to grow and evolve, governance
remains an indispensable tool for ensuring responsible growth and long-term success.

The finest Start-ups of the world embrace good governance practices as necessary condition for success!

A. Instilling a Culture of Governance within a Start-up

from an Early Stage

Governance should be woven into the fabric of a company, not just something that is stacked on at the end.
This means that companies need to integrate it into its investment and governance documents from
the start. 1

1 https://www.ringcentral.com/us/en/blog/esg-for-Start-ups.

© Nishith Desai Associates 2024 Provided upon request only 21

 Start-up Governance Essentials — From Start to Maturity

The Essential Role of Governance in the Start-up Ecosystem

With the chances of failure so high for Start-up companies, there is pressure for economic survival, and
governance or, compliance strategies is typically not something investors or founders are determining
as mandatory. Instead of having to strike a balance between the pressures of economic survival (such as
establishing product-market fit, acquiring initial customers, attracting talent and investors) and integrating
governance strategies, companies that initially embedded governance concerns into their mission, problem
statement, or business model are the ones who maintain the most developed governance strategies as they
expand. Good governance should be an integral part of a company’s core values and founding principles and
should never be viewed as mere marketing material or an additional corporate social responsibility (CSR)
initiative.

A founder should consider good governance as the cornerstone of its business operations. It encompasses
a multitude of crucial elements that define Start-up’s modus operandi – how it will be managed, how decisions
are reached, the prescribed processes, risk management strategies, and safeguards for its staff against
potential legal repercussions. Good governance essentially serves as the guiding compass for the entire
organization, outlining roles, work methodologies, and the collective aspirations of the business.

Essentially, good governance serves as the foundation for operating any business. Devoting time and
consideration to it right from the company’s inception yields several benefits. It not only provides a clearer
vision of the Start-up’s business objectives but also fosters belief and commitment among all those involved
in the venture

By laying down structured processes and implementing supportive measures, a founder can cultivate
a constructive culture and organizational behaviour. The Start-up becomes an attractive prospect for
potential employees who wish to join and contribute to its growth. Additionally, it becomes an appealing
investment opportunity for investors, thereby equipping the business with the resources it needs to flourish.
This, in turn, allows the founder to continue attracting top-tier talent as the business expands.

As torchbearer of these standards, founders must not only establish them but also exemplify them through
their conduct and leadership. Failing to do so can lead to the creation of a toxic work culture, significantly
impeding the Start-up’s progress and potentially culminating in business failure.

An institutional investor such as a venture capitalist typically conducts a financial and legal due diligence
on the Start-up in order to uncover the risks pertaining to the Start-up. Issues that come up often relate
to corporate including governance, labour law and foreign exchange law compliances. In order to keep the
Start-up’s valuation high, it is essential for the Start-up to ensure that the Start-up is managed in a manner
compliance with applicable laws from an early stage.

The due diligence process has become even more relevant in recent times as both investors, and financiers
have grown cognizant of potential risks involved in investing in a Start-up — many investors having
already suffered from issues in exiting their previous investments. It is therefore essential for any Start-up
anticipating investment to be financially and legally sound and to have the cleanest track record possible in
terms of corporate governance. 2

2 Research Paper of Nishith Desai Associates - ESG-The New Age Value Creator issued in June 2023.

© Nishith Desai Associates 2024 Provided upon request only 22

 Start-up Governance Essentials — From Start to Maturity

The Essential Role of Governance in the Start-up Ecosystem

Here are some ways in which founders can initiate the development of a governance culture in their
organization:

1. Establish a Diverse Mix of Board of Directors: Establishing a board with diversity in terms of industry
expertise, business acumen, and governance knowledge is essential. This diverse composition ensures
well-informed decision-making that benefits all stakeholders.

2. Formulate Governance Policies and Procedures: These policies should include aspects such as
risk management, financial reporting, and ethical conduct. Establishing clear guidelines helps the
organization stay on course and prevent potential legal or reputational risks. By adopting a values-
driven approach, companies can create a governance framework that not only contributes to financial
success but also addresses pressing global challenges.

3. Recruit Experienced Leaders: Start-ups can gain substantial advantages by bringing on board
experienced leaders with a proven track record in governance and business management. These leaders
play a essential role in fostering a culture of accountability, transparency, and ethical behaviour within
the organization. Top executives can stay informed about developments in the governance landscape
by acquainting themselves with fundamental concepts, standards, frameworks, and staying updated
on industry trends and updates.

4. Foster a Culture of Open Communication: Encouraging open communication within the organization
empowers employees to voice concerns when they notice actions misaligned with the company’s values
and policies. Creating a safe environment for dialogue enables the early identification and resolution of
potential issues.

5. Regularly Audit Governance Practices: Scheduled audits of governance policies and procedures are
essential for ensuring alignment with industry standards and best practices. These audits reveal areas
for enhancement and confirm the organization’s adherence to legal and regulatory requirements.

6. Respond to Investor Demand: There is a growing trend among investors to prioritize responsible
investments, leading many to invest in funds that consider governance factors when constructing their
portfolios. Issues like diversity and inclusion, human rights, climate change, business ethics, and
corporate governance have gained prominence among investors. They now insist that these factors
be integral to investment decision-making.

7. Ensuring Accountability and Transparency: Stakeholders, including investors, employees, customers,

and partners, need assurance that the company is managed ethically and responsibly. Implementing
governance mechanisms, such as regular financial reporting, internal controls, and compliance
frameworks, enhances transparency and builds trust. By establishing accountability, Start-ups can
attract funding, retain talent, and forge long-lasting relationships with key stakeholders.

8. Mitigating Risks and Enhancing Resilience: Start-ups operate in a high-risk environment where
uncertainty and volatility are constants. Effective governance helps identify and mitigate risks, protecting
the company from potential pitfalls. By implementing risk management frameworks, Start-ups can
anticipate challenges, develop contingency plans, and respond swiftly to market disruptions. Robust
governance structures enable Start-ups to adapt to changing circumstances, enhancing their resilience
and ensuring continuity during challenging times.

Thus, good governance should not be an afterthought but rather should occupy a central place in a founder’s
mindset and ethos as they embark on their Start-up journey.

© Nishith Desai Associates 2024 Provided upon request only 23

 Start-up Governance Essentials — From Start to Maturity

The Essential Role of Governance in the Start-up Ecosystem

B. Self-regulation for a Founder

Self-regulation entails organizations monitoring their own compliance with legal, ethical, and safety
standards, rather than relying on external entities like government regulators to oversee and enforce
these standards. In the context of Start-ups, self-regulation offers the adaptability and nimbleness required
to swiftly respond to market fluctuations and innovation cycles. It stands as an indispensable element
in cultivating a robust corporate governance culture within any nation.

It is a practice deeply ingrained in an organization’s ethos, infusing every decision with the core principles
of governance. Nonetheless, self-regulation extends beyond just flexibility; it cultivates a culture of
responsibility and transparency within the organization. By assuming ownership of their regulatory
obligations, Start-ups can establish credibility and trust among their stakeholders, including investors,
customers, and employees.

It is key to building a strong corporate governance culture because it allows companies to regulate their own
behaviour and operations, enabling them to set their own standards and guidelines for behaviour and
hold themselves accountable for meeting those standards. By doing so, such companies can build trust
with stakeholders and demonstrate their commitment to ethical and responsible behaviour.

However, the path to self-regulation is not without its obstacles. It necessitates a strong internal governance
framework, a comprehensive grasp of the regulatory landscape, and a commitment to ethical business
practices. Additionally, Start-ups must strike a balance between the imperative for agility and the duty
of self-governance.

The broader ecosystem also plays a role in supporting this transition towards self-regulation. This encompasses
investors who can promote self-regulation among Start-ups by integrating it into their investment criteria,
as well as industry associations that can offer guidance and resources to Start-ups navigating the self-​
regulation journey.

As we peer into the future, self-regulation may emerge as a crucial factor in the triumph and sustainability
of Start-ups in India. When Start-ups can effectively regulate themselves, the likelihood of unethical or illegal
behaviour decreases, reducing the need for government intervention. This, in turn, fosters a more streamlined
and efficient business environment, allowing them to operate without unnecessary regulatory burdens.

Lastly, in the words of Mr. Amitabh Kant, India’s G20 Sherpa “The government must remain at an arm’s length.
If the government gets into start-up regulations, they’ll finish off these start-ups … So founders must act towards being
self-regulating.” 3

3 https://www.bqprime.com/business/Start-ups-must-self-regulate-says-india-led-g20-group.

© Nishith Desai Associates 2024 Provided upon request only 24

 Start-up Governance Essentials — From Start to Maturity

The Essential Role of Governance in the Start-up Ecosystem

C. Responsible Business Leadership

Responsible Business Leadership goes beyond merely “doing good”; it’s an integral part of the core business
strategy. It encompasses the everyday work of the people, not just their actions when volunteering. It revolves
around the concept of leading in a manner that fosters both the growth of Start-ups and a positive societal
impact, all the while upholding the principles of the triple bottom line, which encompasses people, profits, and
the planet. This is achieved through the deliberate and consistent implementation of a world-class governance
framework, right from the inception of the Start-up. 4

Owning a company brings with it a multitude of responsibilities, extending far beyond the confines of one’s
business operations to influence the wider world. Whether it’s ensuring the well-being and livelihoods of
employees, the satisfaction and safety of customers, or the impact business has on the society and the
environment, corporate actions resonate far and wide. 5

As the world evolves, presenting new challenges and opportunities, the essential skill for future corporate
leaders will be the ability to manage their businesses responsibly and with social consciousness. Being
a responsible business starts with managing the business with ethics and integrity, guided by the organization’s
purpose and values. Ethical business leaders leverage rapidly advancing emerging technologies to drive
innovation, benefiting not only their shareholders but also their stakeholders, society, and the environment
as their Start-ups expand into prominent global, publicly traded companies. It is crucial to emphasize that
the integrity of good governance must never be compromised to facilitate growth, a lesson underscored
by numerous remarkable founder-leaders from India and across the globe.

As the Indian Start-up ecosystem continues to expand and thrive, it becomes imperative for entrepreneurs
to concentrate on constructing businesses that are both sustainable and capable of significant contributions
to the nation’s economic development.

D. Environmental Responsibility

The significance of “ESG” or “Environmental, Social, and Governance” as a prominent current market trend
cannot be underestimated. Businesses also have a social responsibility to the wider world. As companies grow,
their impact on people’s lives extends further. The concept of businesses being careful about and accountable
for their societal and environmental impact has gained substantial traction. This represents a modern iteration
of inclusive capitalism, acknowledging the value of generating sustainable benefits for all stakeholders,
in addition to delivering returns for shareholders.

Many companies are now adopting greener initiatives, not only to combat climate change but also to reduce
costs, enhance their brand image, and foster innovation. Corporate social responsibility (CSR), such as
implementing environmentally friendly policies, can have multiple benefits, both from an ethical and
pragmatic perspective.

4 Think Tank Recommendations on Corporate Governance for Indian Start-ups, available at: https://www.startup20india2023.org.
5 https://www.hult.edu/blog/responsible-leadership-and-its-role-in-business.

© Nishith Desai Associates 2024 Provided upon request only 25

 Start-up Governance Essentials — From Start to Maturity

The Essential Role of Governance in the Start-up Ecosystem

Every business, regardless of its size, leaves a carbon footprint. Efforts to reduce this footprint not only
save costs but also attract customers who appreciate a socially conscious philosophy. Although it takes
time, effort, and investment to see results, the collective actions of many businesses can lead to substantial
positive changes.

In an era marked by environmental challenges and a growing sense of urgency to address them, Start-ups
are emerging as crucial players in the quest for sustainability. While they may be small in size, the potential
impact of Start-ups on the environment is significant. Environmental governance by Start-ups is not just
a trend; it’s a necessity.

As Start-ups continue to innovate and grow, their commitment to environmental governance becomes
increasingly crucial. The small steps they take today can lead to giant leaps for the planet tomorrow.
In a world that urgently needs sustainable solutions, Start-ups can be the catalysts of change, leading
us toward a greener, more promising future.

E. Identifying Key Stakeholders in the Start-up Ecosystem

and Their Roles in Governance

A strong Start-up ecosystem has the potential to generate remarkable success stories, from unicorns to
massive corporations. A Start-up ecosystem is a complex network of various stakeholders who play distinct
roles in fostering the growth and sustainability of Start-ups. These stakeholders contribute to the governance
and development of the ecosystem in different ways. Here are some key stakeholders and their roles in Start-up
ecosystem governance:

1. Founders and Entrepreneurs: At the core of any Start-up are the founders and entrepreneurs who
initiate and drive the venture. Their role in governance is significant as they set the vision, values,
and culture of the Start-up. Founders are responsible for defining the company’s mission and goals
and establishing the framework for ethical and responsible business practices.

2. Investors: Investors, including venture capitalists, angel investors, private equity investors and crowd-
funding platforms are a critical part of the Start-up ecosystem, providing the necessary capital for
growth and development. Their role in governance involves ensuring the Start-up adheres to financial
and operational guidelines. Investors often sit on the board of directors, where they play a key role in
strategic decision-making and monitor the Start-up’s financial health.

3. Incubators and Accelerators: Incubators and accelerators are organizations designed to support early-
stage Start-ups. They provide resources, mentorship, and access to networks. Their role in governance
is to help Start-ups establish solid foundations, fostering responsible and sustainable growth from the
outset.

4. Mentors and Advisors: Mentors and advisors are experienced professionals who offer guidance and
support to Start-ups. They contribute to governance by providing valuable insights, industry knowledge,
and networking opportunities. Their role is to help Start-ups make informed decisions and avoid common
pitfalls.

5. Employees: Employees are the backbone of any Start-up. Their roles in governance include upholding the
company’s values, ethics, and standards in their day-to-day work. They often participate in decision-making
processes, ensuring that the Start-up maintains a healthy and responsible work environment.

© Nishith Desai Associates 2024 Provided upon request only 26

 Start-up Governance Essentials — From Start to Maturity

The Essential Role of Governance in the Start-up Ecosystem

6. Service Providers: Service providers, such as law firms, consulting firms, accounting firms, and
marketing agencies, offer their services to Start-ups. They help with legal and financial compliance,
branding, and marketing strategies.

7. Government and Regulatory Bodies: Governments and regulatory bodies create policies, regulations,
and incentives that affect Start-ups. They play a vital role in governing Start-ups by establishing legal
frameworks, protecting consumers, and ensuring fair competition. They create policies that Start-ups
must adhere to and provide assistance in navigating legal and regulatory challenges.

8. Educational Institutions: Universities and research institutions contribute to the Start-up ecosystem
by providing research, talent, and education. They may offer entrepreneurship programs, facilitate
technology transfer, and conduct research that benefits Start-ups.

9. Non-Governmental Organizations (NGOs): Certain Start-ups, particularly those in the social or

environmental sectors, collaborate with NGOs that focus on specific issues. These organizations
can provide guidance on responsible practices and help Start-ups integrate social or environmental
responsibility into their business models.

10. Customers and Users: Customers and users are key stakeholders in the governance of Start-ups, as their
feedback and preferences influence product development and market strategies. Start-ups must engage
with their customers and address their concerns responsibly to maintain trust and loyalty.

By recognizing the roles and responsibilities of each stakeholder, Start-ups can navigate the complex terrain
of the Start-up ecosystem while adhering to high standards of governance. The collaboration between these
stakeholders ensures that Start-ups are not only successful but also responsible and ethical contributors to
the broader business community and society as a whole. In a world that urgently needs sustainable solutions,
Start-ups can be the catalysts of change, leading us toward a greener, more promising future.

© Nishith Desai Associates 2024 Provided upon request only 27

 Start-up Governance Essentials — From Start to Maturity

The Essential Role of Governance in the Start-up Ecosystem

F. Tax Risk Management

Tax risk management is an integral part of good corporate governance. 6 Such tax risk management can be
achieved through a robust internal tax control mechanism, which includes (i) having a competent internal
tax team which oversees the tax risks and compliances, (ii) having a formal framework for assessing the tax
risks and compliances, (iii) continuous review and analysis of the tax risks of the company, (iv) robust
provisioning of due and contingent liabilities in accordance with applicable accounting standards etc.

Adopting a tax risk management framework is likely to provide various benefits including greater certainty
in meeting tax compliance obligations, reduced risk of scrutiny and litigation, stakeholder confidence etc. 7
The need for having a tax risk management system is being recognized globally, bearing testimony to which
is the fact that several countries have issues guidelines for robust and effective tax control mechanisms. 8

Lastly, the importance of tax risk management is felt now more than ever in light of the evolving nature
of businesses having cross-border elements. Start-ups having a multinational presence (even in terms of
operations) face greater tax challenges owing to competent tax claims by all the jurisdictions involved.
Hence, having internal tax control mechanisms which spread across all jurisidictions in which the Start-ups
have presence / operations has become the need of the hour.

6 Australian Tax Office (ATO) Tax risk management and governance review guide:
https://www.ato.gov.au/Business/Large-business/In-detail/Key-products-and-resources/Tax-risk-management-and-governance-review-guide.
7 https://www.ey.com/en_my/tax/how-tax-governance-can-help-businesses-manage-risks-today-and-beyond.
8 Malaysian Inland Revenue Board’s (IRB) Guidelines to Tax Corporate Governance Framework; Inland Revenue Authority of Singapore’s (IRAS)
Tax Governance Framework (TGF) and Tax Risk Management and Control Framework for Corporate Income Tax (CTRM); Australian Tax Office (ATO)
Tax Risk Management and Governance Review Guide; Organisation for Economic Co-operation and Development (OECD)’s Report on Co-operative
Tax Compliance: Building Better Tax Control Frameworks 2016.

© Nishith Desai Associates 2024 Provided upon request only 28

 Start-up Governance Essentials — From Start to Maturity

Boardroom Basics: Early-Stage Start-up

Governance a
​ nd Founder Duties   
In the dynamic world of Start-ups, the early stages of a company’s journey are often marked by enthusiasm,
innovation, and a relentless pursuit of success. Founders and their teams are fuelled by passion and a vision
for the future, driving them to take bold steps into uncharted territory. Yet, amidst the whirlwind of
opportunities and challenges, one aspect often overlooked is governance — the framework that defines
how a Start-up is directed, controlled, and held accountable.

The early-stage of a Start-up is an important time. It is a period of rapid learning, testing, and adapting.
Understanding the principles of governance and the essential duties of founders within this context is not
only a wise move but a fundamental one. So, let’s embark on a journey through the boardrooms of early-stage
Start-ups, exploring the intricacies of governance and the indispensable role founders play in steering their
ventures toward success.

A. Roles and Responsibilities of Founders

Visionary Leadership

The founder is the driving force behind the Start-up’s vision. It is their responsibility to define the company’s
mission and purpose, set its long-term goals, and establish a clear direction. This vision not only inspires the team
but also attracts investors, partners, and customers who believe in the founder’s ability to create something
meaningful.

Defining a clear ‘purpose’ is critical for Start-ups to identify the unique problem they are solving and the
strengths that set them apart from competitors. The purpose sums up the essential need that the Start-up
aims to address and the distinct value it provides to its customers. Purpose goes beyond branding and public
relations, and its importance lies in inspiring employees, guiding the company’s efforts, and helping it make
crucial decisions in challenging situations.

Emphasize Culture

Corporate culture has gained immense significance in today’s business landscape. A healthy culture not
only attracts and retains skilled employees but also minimizes the risks associated with a negative culture.
A culture that fosters lifelong learning and external orientation can be a powerful asset. Founders need
to ensure that management walks-the-talk on culture and values. Cultures can also change more rapidly
than Founders think. They sometimes underestimate the influence the Founders has on the culture.
The Founders’ behaviour is quickly copied throughout the organization.

© Nishith Desai Associates 2024 Provided upon request only 29

 Start-up Governance Essentials — From Start to Maturity

Boardroom Basics: Early-Stage Start-up Governance and Founder Duties    .

Founders should foster a culture of open communication that encourages employees to speak up when they
see something that doesn’t align with the company’s values or policies. By creating a safe space for dialogue,
the organization can identify and address potential issues before they become major problems.

Team Building

A founder is responsible for assembling and leading a capable and motivated team. They should hire
individuals who complement their skills and share their vision. Building a cohesive team is essential for
executing the business plan and navigating the inevitable challenges that come with Start-up life.

Creating a business is difficult, and no one can do it alone. The founders must invite trusted individuals
to join the team. A good team is one that can fill each other’s roles to develop the company.

Product Development

In the early stages, founders often wear many hats, and product development is a key responsibility. They must
guide the development of the product or service, ensuring it meets market needs, is scalable, and maintains
a high level of quality. This requires both a technical understanding and the ability to make strategic decisions
about product features and iterations. Founders need to closely oversee the product roadmap to ensure
it aligns with the Start-up’s vision.

Marketing and Sales

Founders play a central role in defining the Start-up’s marketing strategy and brand identity. They should
have a deep understanding of their target audience and how to reach them effectively. Additionally, they
often lead initial sales efforts, forging partnerships, and building the customer base. Further, the founders
must design and develop a comprehensive business plan for the company. A solid business plan is essential
for guiding the company’s efforts and helping employees understand how to achieve its objectives.

Additionally, founders should possess a deep understanding of the market they are entering. This includes
knowledge of competition, pricing, profitability, regulatory requirements, and market trends. By staying
informed and adaptable, founders can position their Start-up for success.

Financial Management

Managing the company’s finances is a fundamental responsibility. This includes budgeting, financial
forecasting, and maintaining accurate records. It’s crucial to ensure that the Start-up remains financially
viable and that resources are allocated wisely. Further, founders must diligently oversee their expenses to
guarantee the financial stability and endurance of their company. During the initial phases of a business,
revenue often remains limited while costs tend to escalate.

© Nishith Desai Associates 2024 Provided upon request only 30

 Start-up Governance Essentials — From Start to Maturity

Boardroom Basics: Early-Stage Start-up Governance and Founder Duties    .

To avert the risk of depleting funds, it is imperative to minimize overhead expenses and optimize revenue
generation. This approach not only supplies the necessary capital for prospective expansion but also
establishes a robust financial foundation, enabling the company to progress and evolve. Furthermore,
maximizing profitability enhances the Start-up’s attractiveness to potential investors, facilitating the
acquisition of additional funding.

Secure Funding

Funding is one of the most critical responsibilities for founders. Without adequate funding, most Start-ups
cannot grow past the early stages. Founders must seek out and engage with investors, whether they are angel
investors, venture capitalists, or through crowdfunding platforms. It’s the founder’s responsibility to present
the Start-up’s value proposition and convince investors to provide the necessary capital.

Governance and Compliance

Founders are expected to ensure that the Start-up complies with all relevant legal and regulatory requirements.
Thus, they need to navigate issues related to industry specific laws, tax, intellectual property, contracts,
regulatory compliance and more. Seeking legal counsel when necessary is important to protect the Start-up
from potential legal challenges. Founders must also take the lead in developing and implementing ethical
and compliance policies to guide the behaviour of employees and stakeholders.

Networking and Relationship Building

Building a network of industry contacts, mentors, and advisors can be instrumental in a Start-up’s success.
Founders should actively seek opportunities to connect with experienced entrepreneurs and experts who
can offer guidance and support. Further, interaction with potential investors, customers, suppliers, partners,
and industry leaders is vital for building the Start-up’s image, gaining recognition, and exploring uncharted
opportunities. Networking can open doors to partnerships and investments.

Focus on Key Performance Indicators (KPIs)

Identifying the right KPIs and regularly monitoring them is crucial for a founder. Key metrics drive
a company’s performance, and founders must continuously work to improve these indicators to ensure the
Start-up’s success. In the dynamic and competitive world of Start-ups, effective use of KPIs is integral
to achieving success. Founders play an important role in not only defining and monitoring these KPIs but also
in fostering a data-driven culture and using KPIs as a compass to navigate the challenges and opportunities
that come their way.

© Nishith Desai Associates 2024 Provided upon request only 31

 Start-up Governance Essentials — From Start to Maturity

Boardroom Basics: Early-Stage Start-up Governance and Founder Duties    .

Manage the Board of Directors

An experienced venture capital or private equity investor can bring significant benefit to the board of
a Start-up. It is common practice for an investor to appoint a nominee director on the board of the company
they are investing in, along with a set of negotiated control and voting rights. Managing a board of directors,
especially when it includes investor directors, is both a delicate and essential aspect of Start-up leadership.
Successful founders understand that they play a central role in aligning the interests of the board with the
company’s strategic goals. By effectively fulfilling these roles and responsibilities, founders can cultivate
a strong and supportive board, which, in turn, can greatly contribute to the success and growth of their
Start-up.

By understanding and embracing these roles and responsibilities, founders can position their Start-ups for
sustainable growth and success.

B. Collective Duties of the Board of Directors

In the context of good governance, the boardroom stands as the epicenter of decision-making for an
organization. The company’s board of directors, commonly referred to as “the Board”, is typically constituted
by a diverse assembly of individuals with varying backgrounds and expertise. Collectively, they guide
the company, making important decisions that hold the power to mold the company’s destiny.

Furthermore, board decisions often encompass critical matters such as corporate strategy, investments,
mergers, and financial oversight, all of which have far-reaching consequences. By leveraging the collective
wisdom of the board, a company can benefit from a more comprehensive evaluation of potential risks and
rewards. It also fosters transparency and accountability, instilling confidence in stakeholders, including
investors, employees, and customers, that decisions are made with the organization’s best interests in mind.

The decisions made by the board can be broadly classified into four key areas. To begin with, there are
decisions in the realm of Human Resources, which encompass pivotal matters like the selection of board
members and key managerial personnel, the structuring of compensation packages, and the development
of succession plans. Secondly, financial considerations hold a prominent position on the board’s agenda,
covering aspects such as capital budgeting, financial reporting and disclosure requirements, the formulation
of capital structure, and the establishment of various financial policies.

Thirdly, boards frequently engage in discussions pertaining to strategic considerations, which involve
decisions regarding business strategies, potential mergers and acquisitions, and the definition of the
organization’s mission, vision, and overall purpose. Lastly, governance-related decisions are of paramount
importance, focusing on areas such as the organizational structure, ESG initiatives, adherence to corporate
governance best practices, compliance with statutory and regulatory mandates, and the establishment
of decision-making protocols.

© Nishith Desai Associates 2024 Provided upon request only 32

 Start-up Governance Essentials — From Start to Maturity

Boardroom Basics: Early-Stage Start-up Governance and Founder Duties    .

The duties of a director have been prescribed under section 166 of the Companies Act, 2013 (“the Act”).
Some are:

§ Act in accordance with the articles of association of the company;

§ Act in good faith in order to promote the objects of the company for the benefit of its members as a whole
and in the best interests of the company, its employees, the shareholders, the community and for the
protection of the environment;

§ Exercise due and reasonable care, skill and diligence, and exercise independent judgment;

§ Avoid any conflict of interest;

§ Not to take unfair advantage of his office in order to obtain any undue advantage or gain;

§ Not to assign his office and any such assignment shall be void;

In addition to the above, few of the additional duties imposed under other provisions of the Act are as under:

§ To attend board meetings and provide their inputs for the growth of the business operations;

§ To disclose concern or interest in any other companies, firms etc. in form MBP 1;

§ To monitor the effectiveness of the company’s governance practices and make changes, if required;

§ To manage potential conflicts of interest between founders and investors including related party
transactions;

§ To ensure integrity of the company’s accounting and financial reporting systems;

While the duties of the board are vital, they come with their share of challenges. One common challenge
is balancing the interests of various stakeholders, including shareholders, employees, and the broader
community. This delicate equilibrium can be intricate to maintain, especially when competing interests
emerge. Additionally, the board must contend with the rapidly changing business landscape. Technological
advancements, global economic fluctuations, and evolving regulatory frameworks demand the board’s
adaptability and constant vigilance.

Another challenge lies in ensuring that board members possess the diverse expertise required to provide
effective oversight. Recruiting directors with a broad range of skills and backgrounds can be a daunting task.
Furthermore, board members must navigate the complexities of conflicts of interest and remain committed
to making impartial decisions in the company’s best interest.

Moreover, the board must maintain cohesion and unity while making difficult choices. Internal disputes
and disagreements among board members can hinder effective decision-making. Finally, boards must
grapple with an increased demand for transparency and accountability from investors and regulatory bodies.
This necessitates greater diligence in record-keeping, disclosure practices, and adherence to ethical and
governance standards.

Every board will encounter decision-making challenges. However, with some proactive measures, the board
can make optimal decisions for the cooperative without causing any issues. A unified board, functioning
as a team, can effectively manage tough decisions and conflicts. By incorporating effective team-building
practices into every board meeting, the board of directors can collaborate seamlessly and foster a prosperous
company.

© Nishith Desai Associates 2024 Provided upon request only 33

 Start-up Governance Essentials — From Start to Maturity

Boardroom Basics: Early-Stage Start-up Governance and Founder Duties    .

C. Best Practices for Structuring the Board and Committees

The composition and structure of a board of directors and its committees, to the extent applicable, are crucial
to the governance and success of any organization, whether it’s a Start-up, a well-established corporation,
or a non-profit. Structuring the board and committees effectively is essential to ensure the organization
operates efficiently, adheres to best practices, and makes sound decisions. Let us explore some of the best
practices for creating an effective board and committees.

1. Diverse Expertise: A board should have people with the right skills and knowledge to help lead
the organization. Seek out individuals with a wide range of expertise, including finance, technology,
marketing, and industry-specific experience. This diversity ensures that the board can provide
well-informed guidance on various aspects of the organization.

2. Define Clear Roles and Responsibilities: One of the fundamental principles of effective board and
committee structure is to define clear roles and responsibilities for each entity. This includes outlining
the specific duties, decision-making authority, and reporting lines for the board and its various
committees. A well-defined structure helps prevent overlap and confusion, ensuring that each group
operates efficiently.

3. Independence: Independence is a cornerstone of effective governance. It’s essential to have a balanced

mix of executive and non-executive directors on the board. Independent directors or nominee directors
can offer impartial advice and serve as valuable checks and balances.

4. Board Size: The size of the board matters. In the early stages of an organization, a smaller board can
make decisions swiftly and with agility. As the organization grows and becomes more complex, consider
expanding the board to accommodate increased responsibilities and diversity.

5. Committee Structure: Organize committees with specific roles and responsibilities. Key committees
often include an Audit Committee, Nomination and Remuneration Committee, Stakeholder Relationship
Committee, Risk Management Committee and Investment Committee. Each of these committees serves
a distinct purpose and provides focused oversight.

6. Effective Communication: Establish regular communication channels between the board, committees,
and the organization’s management team. Ensure that all stakeholders are informed and involved in
decision-making processes. Transparency and open lines of communication are essential for effective
governance.

7. Board Training: Invest in board orientation and training programs. New board members, in particular,
should receive comprehensive training to understand their roles and responsibilities. Training helps
ensure that all members are well-prepared to contribute effectively.

8. Regular Review: Periodically review the structure of the board and its committees to ensure they align
with the organization’s evolving needs and goals. Flexibility and adaptability are key, as the organization
and its industry may change over time.

A well-structured board ensures that the organization has access to diverse expertise, maintains independence,
and operates with transparency and accountability. By following these best practices, organizations can build
strong governance structures that guide them toward sustainable growth and success.

© Nishith Desai Associates 2024 Provided upon request only 34

 Start-up Governance Essentials — From Start to Maturity

Boardroom Basics: Early-Stage Start-up Governance and Founder Duties    .

D. Board Meetings and Governance Protocols

Conducting board meetings is a fundamental aspect of corporate governance which is crucial for each
founder and investor director in a Start-up. The principles guiding these meetings are firmly established in
legal frameworks, such as the Companies Act, 2013 (‘the Act’), and complemented by Secretarial Standards 1
(SS-1), which are issued by the Institute of Company Secretaries of India (ICSI) and endorsed by the Central
Government of India. These standards aim to offer additional clarity in situations where ambiguity arises
and to set benchmark standards that harmonize the diverse practices commonly employed.

When a board meeting is on the horizon, the responsibility of notifying and inviting directors falls upon
the company secretary or an authorized director. This notice is issued within the timeframe specified
in the Act and charter documents, ensuring compliance with legal requirements. The notice typically contains
critical details, including the meeting’s date, time, location, and provisions for directors to join electronically.
Alongside, an agenda is shared, comprehensively outlining the topics to be discussed and supplementing
materials to facilitate informed discussions. In some cases, key employees, officers, advisers, or external
professionals may also be invited to participate, enriching the deliberative process.

Meeting Proceedings

As the meeting convenes, the chairman of the board confirms the presence of the quorum, a minimum number
of directors required to validate the meeting. The agenda items are then addressed in the order stipulated, and
each director in attendance has the opportunity to express their perspectives, insights, and arguments
relevant to each item. Decisions are typically formalized through resolutions. Various types of resolutions
may be adopted, ranging from those determined by a simple majority to those requiring affirmative votes
from specific directors or unanimous consent.

Recording the Minutes

The outcome of these resolutions, as determined by the voting process, is meticulously recorded in the meeting
minutes. The minutes capture the essence of the discussions, deliberations, decisions, and the rationale
behind each resolution adopted by the board. Additionally, they meticulously document the voting results
for every item on the agenda. This detailed record of proceedings also considers any disclosures of conflicts
of interest made by directors. In cases where a director dissents on an agenda item, the minutes accurately
reflect this dissent along with the underlying reasons. The chairman of the meeting holds the authority
to exclude any content from the minutes that they believe to be defamatory, irrelevant, immaterial to the
proceedings, or detrimental to the company’s interests.

© Nishith Desai Associates 2024 Provided upon request only 35

 Start-up Governance Essentials — From Start to Maturity

Boardroom Basics: Early-Stage Start-up Governance and Founder Duties    .

Transparency and Accountability

At the heart of the decision-making process in board meetings is a commitment to transparency and
accountability. Board members are entrusted with the responsibility of acting in the best interests of the
company’s shareholders. To ensure this commitment to transparency, many companies go the extra mile by
disclosing major decisions and board resolutions to shareholders and the public through regulatory filings
and reports. In essence, formalizing board meetings is not only a legal requirement but also an indispensable
practice in ensuring that corporate governance remains robust, transparent, and accountable. By adhering
to established procedures and standards, companies can navigate the complexities of governance with grace
and efficiency

E. Balancing Growth and Responsibility

Start-ups have founders and investors serving as board members. These individuals may have a vested
interest in the Start-up’s success, with their primary responsibility being to protect their investments and
ensure the company’s value and growth potential remain high. While this focus on valuation is vital, it can
sometimes lead to shortcuts and questionable practices driven by a mix of promoters’ ambitions and
investors’ appetite for higher valuations.

Start-ups often grapple with prioritizing growth and profitability over governance concerns due to various
factors, including investor pressure, limited resources, short-term thinking, cultural values, and compliance
challenges. They are frequently driven by the need to achieve profitability quickly. This urgency can result
in decisions that prioritize short-term gains over long-term sustainability and governance. The desire for
rapid growth and capital often compels founders to take shortcuts and, on occasion, engage in unethical
practices. Unfortunately, this approach can lead to governance failures and, in extreme cases, the collapse
of the Start-ups and its promoters. In such instances, promoters and key management personnel may resort
to non-transparency and even falsify financial records to generate quick profits.

While the quest for a high valuation is critical for Start-ups, it should not come at the expense of good
governance practices and ethical conduct. Founders and investors play a crucial role in ensuring responsible
governance practices and holding management accountable for their actions. This oversight is essential to
secure the company’s long-term success and safeguard investments. Nevertheless, this pressure to perform
can sometimes push Start-ups toward prioritizing rapid growth at the cost of governance considerations.

While Start-ups have a distinct culture that thrives on risk-taking, innovation, and disruption, which are
all instrumental in driving growth, these values may not always align with governance considerations.
Thus, it is imperative for founders to acknowledge and address these challenges and make a concerted effort
to prioritize responsible governance practices, thereby ensuring the Start-ups long-term sustainability and
success. Balancing the need for rapid growth with ethical conduct is the key to navigating the dynamic
world of Start-ups.

© Nishith Desai Associates 2024 Provided upon request only 36

 Start-up Governance Essentials — From Start to Maturity

Navigating Shareholder Relations

and Effective Governance
There is an increasingly evident recognition of the crucial role investors can play in steering transformative
changes within the companies they choose to invest in. With the mounting importance of ESG metrics in the
investment landscape, investors are no longer focusing solely on assessing risks but are also actively seeking
to gauge the tangible real-world impacts, whether positive or negative, that corporate operations and future
investment opportunities can have. This shift in perspective reflects a broader agenda surrounding the
transition to a low-carbon economy, the pursuit of social equity, and various other objectives aligned with
the UN Sustainable Development Goals (SDGs).

Effective engagement between Start-ups and investors, as well as other stakeholders, emerges as a foundation
in nurturing enduring relationships. Such engagement involves an intricate exchange of information wherein
investors accurately scrutinize a company’s communications regarding its strategic outlook, governance
practices, and long-term goals. Simultaneously, they communicate their own expectations and engagement
policies. This dynamic interaction not only fosters a deeper understanding of a company’s governance
structure and long-term strategy, surpassing traditional financial metrics, but also serves to evaluate
whether the company boasts a thoughtful board, adheres to sound governance principles, and has a reasonable
long-term strategy in place.

Investors who are content with a company’s approach to governance and its long-term vision are more likely
to stand by the corporation when faced with short-term pressures. The overarching aim of this engagement
process is to surpass mere check-the-box governance mandates and quarterly financial metrics, leading
towards a more comprehensive understanding of a corporation’s long-term prospects.

A. Role of Venture Capital Investors in Good Governance

The world of venture capital is a dynamic ecosystem, with investors providing not only financial resources
but also strategic guidance to Start-ups and early-stage companies. The involvement of venture capital
investors has a profound impact on corporate governance. Let’s explore the various dimensions of this impact
and understand why companies backed by venture capital investors often have superior governance structures.

Active Participation in Start-up’s Development

One of the defining features of venture capital investors is their active involvement in the companies they
invest in. Unlike traditional shareholders, venture capitalists don’t merely sit on the sidelines and wait for
profits; they actively engage with the management team and board. This hands-on approach allows them
to provide valuable insights, mentorship, and guidance.

Venture capitalists work closely with the management team to develop and execute business strategies,
set milestones, and monitor progress. This active participation ensures that the company’s governance
is aligned with its strategic objectives, driving better decision-making processes.

© Nishith Desai Associates 2024 Provided upon request only 37

 Start-up Governance Essentials — From Start to Maturity

Navigating Shareholder Relations and Effective Governance

Preference for Independent Directors with Industry Experience

Venture capital investors are keen on assembling a board of directors that is not only diverse but also highly
experienced in the industry of the Start-up. This preference for independent directors with relevant industry
expertise contributes to better corporate governance. Independent directors bring an unbiased perspective
to the board, ensuring that decisions are made in the best interest of the company and its stakeholders.

Moreover, their industry experience equips them with the knowledge required to make informed decisions
and oversee the company’s strategic direction effectively. This preference for industry-savvy directors boosts
the company’s governance structure and helps in avoiding conflicts of interest.

Promotion of Networking and Strategic Alliances

Venture capital investors recognize the importance of strategic alliances and networking in the growth
of a Start-up. They actively encourage their portfolio companies to establish connections with industry
peers, potential partners, and mentors. This not only facilitates knowledge sharing but also opens doors
to potential capital-raising opportunities.

By connecting their investee companies with a broad network of experts and influencers, venture capital
investors enhance corporate governance. These connections often result in mentorship, access to new
markets, and increased resources, all of which contribute to better decision-making and governance practices.

Enhanced Governance Structures

It is no surprise that companies backed by venture capital investors tend to have superior governance
structures. The combination of active involvement, experienced independent directors, and networking
opportunities creates an environment where transparency, accountability, and ethical behaviour thrive.
This enhances the overall governance of the company, fostering investor and stakeholder trust.

B. Shareholders’ Rights under Companies Act 2013

Under the Companies Act, 2013, shareholders of a Start-up in India, like any other company, are granted
several rights to protect their interests and ensure transparency and accountability within the corporate
framework. These rights play a vital role in safeguarding the investments and ensuring fair treatment for
shareholders.

One of the fundamental rights accorded to shareholders is the right to receive financial information and
participate in decision-making. Shareholders have the right to access financial statements, annual reports,
and other essential documents that provide insights into the company’s performance and financial health.
This access empowers shareholders to make informed decisions about their investments and enables them
to hold the management accountable for their actions.

© Nishith Desai Associates 2024 Provided upon request only 38

 Start-up Governance Essentials — From Start to Maturity

Navigating Shareholder Relations and Effective Governance

Additionally, shareholders have the right to participate in annual general meetings (AGMs) and extra
ordinary general meetings (EGMs). AGMs serve as a platform for shareholders to voice their concerns, ask
questions, and vote on important matters such as the appointment of directors, dividend declarations, and
changes in the company’s capital structure. This participatory role ensures that shareholders have a say in the
governance and direction of the company, promoting transparency and good corporate governance practices.

Furthermore, the Companies Act, 2013, also grants minority shareholders certain protective rights, such as
the right to seek relief from oppression and mismanagement, ensuring that their interests are not overlooked
in favour of the majority shareholders. These rights collectively contribute to a robust legal framework that
safeguards the interests of shareholders in Indian companies and promotes corporate accountability and
fairness.

It is important to note that the specific rights of shareholders in a Start-up can vary depending on the
company’s constitution, shareholders’ agreement, and any other contracts or arrangements in place.
Additionally, Start-ups may have different classes of shares with varying rights, which can be defined
in the company’s articles of association.

Start-ups often adapt their governance and shareholder rights to align with their unique business models
and the expectations of their investors. It is crucial for shareholders to thoroughly review and understand
the company’s governing documents and any associated agreements to be fully aware of their rights and
responsibilities as investors in the Start-up.

C. Understanding the Impact of Governance on Funding

In the landscape of economic growth, Start-ups stand as catalysts, and their prosperity lies on securing the
right financial support. Funding from investors such as VCs, PE, angel investors etc has risen to prominence
as an essential funding stream for Start-ups, delivering not only the necessary financial capital but also
valuable strategic counsel. In the pursuit of these investments, Start-ups must recognize the paramount
importance of governance and accord it top priority.

Corporate governance principles serve as the cornerstone for companies to institute robust, ethical, and legally
compliant frameworks. These frameworks, in turn, foster long-term sustainability and bolster the Start-ups’
capacity to allure investment capital. By enhancing accountability and fortifying risk management, good
governance diminishes investment risks, rendering Start-ups more enticing to VCs, PE, angel investors etc.

Capital plays a key role in kickstarting a business for Start-ups. The absence of enough funding can hinder
their ability to introduce products and services, expand their customer base, and secure a lasting position
in the market. Fortunately, there exists a range of methods to secure capital for Start-ups. Access to capital
is an invaluable asset for Start-ups, often serving as the decisive factor that separates triumph from setback.
With a ready supply of capital, Start-ups can finance their day-to-day operations, expand their enterprises,
and capitalize on opportunities that might otherwise remain beyond their grasp.

© Nishith Desai Associates 2024 Provided upon request only 39

 Start-up Governance Essentials — From Start to Maturity

Navigating Shareholder Relations and Effective Governance

Fluctuations in interest rates, liquidity, and the global economic landscape have given rise to evolving
investor expectations. In the present landscape, the spotlight has shifted towards profitability and cash
flows, as opposed to the pursuit of growth at any cost. Start-ups equipped with a well-structured governance
framework are better positioned to meet these expectations and successfully secure the essential funding
they require. 1

Challenges for Start-ups without Access to Capital

One of the foremost hurdles emerging from a lack of access to capital is the constraint on available resources.
Start-ups often find themselves in a financial shortfall, impeding their ability to hire additional staff
or procure essential equipment and materials. Consequently, these limitations can force a company to rely
on its existing resources, which may prove insufficient or even counterproductive for their growth. Moreover,
while a Start-up may boast a compelling product or service, the scarcity of funds can impede their capacity
to effectively market it, resulting in a smaller customer base and reduced sales volume.

Another substantial challenge faced by Start-ups in the absence of access to capital is restricted growth. With
inadequate resources, Start-ups find themselves unable to expand their operations or seize new opportunities.
This stunted growth can lead to stagnation and hinder overall progress, which can have detrimental long-term
consequences for the business. Without access to capital, Start-ups may be precluded from entering new
markets or harnessing innovative technologies and advancements that could otherwise enhance their
operations.

Lastly, Start-ups devoid of access to capital may encounter obstacles in undertaking larger projects or investing
in research and development endeavours. This limitation can curtail a company’s potential for success as they
may lack the resources required to develop novel products or services that could attract new customers and
revenue streams. In the absence of capital access, Start-ups may grapple with keeping pace with industry
trends or find themselves ill-equipped to compete with larger, more established entities. 2

D. Balancing the Interests of Investors and Other Stakeholders

One of the most pressing challenges faced by companies is striking the delicate balance between the interests
of investors and the needs of other stakeholders. This group encompasses a diverse range of individuals
and entities, including employees, customers, suppliers, local communities, and regulatory bodies. This
equilibrium is vital for the long-term sustainability and success of an organization.

While investors typically focus on maximizing their returns, other stakeholders, such as employees,
customers, suppliers, and the broader community, have a more diversified set of concerns that extend
beyond financial gains. Their interests include aspects like job security, product quality, sustainability,
and adherence to ethical and environmental standards. Achieving this equilibrium is not only ethically
responsible but also fundamental to maintaining a healthy and productive corporate ecosystem.

1 https://inc42.com/resources/how-good-governance-in-funds-Start-ups-can-strengthen-indias-private-equity.
2 https://fastercapital.com/content/Why-Access-to-Capital-is-So-Important-for-Start-ups.html.

© Nishith Desai Associates 2024 Provided upon request only 40

 Start-up Governance Essentials — From Start to Maturity

Navigating Shareholder Relations and Effective Governance

The challenge arises from the inherent tension between these two groups. Investors often expect the company
to prioritize profit maximization, which can lead to decisions that may not always align with the broader
interests of other stakeholders. Conversely, if a company solely caters to the needs of other stakeholders, it may
neglect its fiduciary duty to investors. However, the governance perspective on this issue is clear: sustainable
success and responsible corporate behaviour demand a harmonious coexistence.

An intelligently structured board of directors, comprising representatives from diverse stakeholder

backgrounds, ensures that a comprehensive range of perspectives is considered, facilitating well-rounded
decision-making. Further, companies should practice candid disclosure regarding their objectives, strategies,
and challenges. This not only fosters trust but also enables stakeholders to comprehend the reasoning
behind specific choices.

Corporate leaders must wholeheartedly endorse ethical conduct, ensuring that investor returns, and stake-
holder well-being are accomplished through responsible and principled methods. Any inclination toward
unethical shortcuts or decisions that prioritize short-term gains over long-term sustainability is detrimental
to all parties involved. Lastly, incorporating social responsibility and sustainability into business models
can further strengthen the alignment of investor and stakeholder interests.

Balancing the interests of investors and other stakeholders is not an easy task. It is an art that requires
thoughtful governance, open communication, and a commitment to ethical business practices. Striking
this balance is a key driver of long-term success and resilience for any organization. By recognizing the
inter­dependence of these interests and making them complementary rather than conflicting, companies
can build a foundation for a thriving, sustainable, and responsible business that benefits all. In the end,
it’s not just about achieving financial prosperity for one group; it’s about creating a prosperous and equitable
future for all.

© Nishith Desai Associates 2024 Provided upon request only 41

 Start-up Governance Essentials — From Start to Maturity

A Guide to Safeguarding your Start-up’s

Intellectual Property
For businesses, specially Start-ups, protecting the intellectual property (“IP”) is of paramount importance
in order to preserve the ideas and innovations, encourage competitiveness, and in turn draw investors.
Maintaining IP contributes to a business’s market expansion, funding, maintaining a competitive advantage,
and revenue creation through licensing. Additionally, IP protection contributes highly towards strengthening
brand reputation and maintaining sustainability over the long run.

Hence, IP should be an essential element of a business’s success strategy right from the outset.

A. What Are the Different Forms of Intellectual Property?

IP in a business can take several forms, for instance, a tech company may patent a new and inventive software
algorithm that they have developed which is capable of industrial use, giving them exclusive rights to use
and license it for a certain period; and a business with a distinct name and/or logo may get trademark
registration for the same to protect their brand identity, preventing others from using a similar name or logo
in ways that could confuse customers. Below is a list of the kinds of IP that a business must focus on in order
to strengthen their brand value and safeguard their intellectual assets.

Trademarks

In India, trademarks are protected both under statutory law and common law. The Trade Marks Act, 1999
(“TM Act”) along with the Trademark Rules, 2017 (“TM Rules”) is the primary legislation for trademarks in
India. Notably, the TM Act in compliance with the obligations under Agreement on Trade Related Intellectual
Property Rights (“TRIPS”). India follows the NICE Classification of goods and services, which is incorporated
in the Schedule to the TM Rules.

Under the TM Act, the term ‘mark’ is defined to include ‘a device, brand, heading, label, ticket, name, signature,
word, letter, numeral, shape of goods, packaging or, combination of colors, or any combination thereof.’
Thus, the list of instances of marks is inclusive and not exhaustive. Any mark capable of being ‘graphically
represented’ 1 and indicative of a trade connection with the proprietor is entitled to get registered as a trade-
mark under the TM Act. This interpretation opens the scope of trademark protection to unconventional
trademarks like sound marks provided they satisfy the ‘graphical representation’ test and are not prohibited
under Section 9 and 11 of the Act.

A trademark when registered, can be used by the proprietor or registered user for ten years and such
registration renewable for a subsequent period of ten years. Nonrenewal leads to a lapse of registration.
However, there is a procedure whereby a lapsed registration can be restored. Additionally, the registered
proprietor, their heirs and the registered user(s) can sue for infringement of a trademark.

1 TM Rules define “graphical representation” as representation of a trademark for goods or services in paper form.2 Therefore, sound marks can
be represented on paper either in descriptive form e.g., kukelekuuuuu (registered as Dutch sound mark - onomatopoeia which sounds like the call
of a cock) or as traditional musical notations e.g., D#, E etc.

© Nishith Desai Associates 2024 Provided upon request only 42

 Start-up Governance Essentials — From Start to Maturity

A Guide to Safeguarding your Start-up’s Intellectual Property

Copyrights

The Copyright Act, 1957 (“Copyright Act”), supported by the Copyright Rules, 1958 (“Copyright Rules”),
is the governing law for copyright protection in India. The Copyright Act provides that a copyright subsists
in an original literary, dramatic, musical or artistic work, cinematograph films, and sound recordings.
However, no copyright subsists in a cinematograph film if a substantial part of the film is an infringement
of the copyright in any other work or in a sound recording, if in making the sound recording of a literary,
dramatic or musical work, copyright in such work is infringed.

A copyright grants protection to the creator and his representatives for the works and prevents such works
from being copied or reproduced without his/ their consent. The creator of a work can prohibit or authorize
anyone to: reproduce the work in any form, such as print, sound ,video, etc.; use the work for a public
performance, such as a play or a musical work; make copies/recordings of the work, such as via compact
discs, cassettes, etc.; broadcast it in various forms; or translate the same to other languages.

Under Indian law, registration is not a prerequisite for acquiring a copyright in a work. A copyright in a work
is created when the work is created and given a material form, provided it is original. The Copyright Act
provides for a copyright registration procedure. The term of copyright is, in most cases, the lifetime of the
author plus 60 years thereafter.

Patents

In India, the law governing patents is the Patents Act, 1970 (“Patents Act”). “Inventions,” which are patentable
within the definition of the Patents Act are defined as “a new product or process involving an inventive step
and capable of industrial application.” Thus, the traditional aspects of novelty, non-obviousness, and utility
have been specifically included in the definition of the term “invention”. If such invention was known or used
by any other person, or used or sold by the applicant to any person in India and/or outside India, then the
applicant would not be entitled to the grant of a patent. Although patent rights are essentially territorial
in nature, the criteria of novelty and non-obviousness are to be considered on/compared with prior arts on
a worldwide basis. Any earlier patent, earlier publication, document published in any country, earlier product
disclosing the same invention, or earlier disclosure or use by the inventor will prevent the granting of a patent
in India.

India grants patent right on a first-to-apply basis. The application can be made by either (i) the inventor or
(ii) the assignee 2 or legal representative 3 of the inventor. Additionally, foreign applicants are given national
treatment too.

Every patent granted under the Patents Act is protected for term of 20 years from the date of filling the patent
application in India, for all categories of patents in compliance with Article 33 of TRIPS. There is no provision
for an extension of the patent term. Further, the term of patent in case of applications filed under the PCT
designating India is twenty years from the international filling date.

2 Assignee includes an assignee of the assignee and the legal representative of the deceased assignee and references to the assignee of any person
include references to the assignee of the legal representative or assignee of that person.
3 Legal representative means a person who in law represents the estate of a deceased person.

© Nishith Desai Associates 2024 Provided upon request only 43

 Start-up Governance Essentials — From Start to Maturity

A Guide to Safeguarding your Start-up’s Intellectual Property

Designs

Industrial designs in India are protected under the Designs Act, 2000 (“Designs Act”) and the Designs Rules,
2001 (“Designs Rules”). The Designs Act incorporates the minimum standards for the protection of industrial
designs, in accordance with the TRIPS agreement. As per the Designs Act, “design” means only the features
of shape, configuration, pattern, ornament or composition of lines or colours applied to any “article” whether
in two dimensional or three dimensional or in both forms, by any industrial process or means, whether
manual mechanical or chemical, separate or combined, which in the finished article appeal to and are judged
solely by the eye. However, “design” does not include any mode or principle of construction, or anything
which is in substance a mere mechanical device, and does not include any trademark.

Any person claiming to be the “proprietor of any new or original design” not previously published in any
country and is not contrary to public order or morality can apply for the registration of the design. The
expressions “public order” or “morality” have not been defined in the Designs Act. The term “original,”
with respect to design, means a design originating from the author of such a design and includes the cases
that, although old in themselves, are new in their application. Absolute novelty is now the criterion for
registration.

Registration of a design confers upon the registered proprietor a “copyright” with respect to the design.
Under the Designs Act, the word “copyright” refers to the exclusive right to apply the design to any article
in any class in which the design has been registered. The first term of registration is ten years after which
it can be renewed for an additional five-year period.

Trade Secrets, Know How and Confidential Information

Confidential information and trade secrets are protected under the common law and there are no statutes that
specifically govern the protection of the same. In order to protect trade secrets and confidential information,
watertight agreements should be agreed upon, and they should be supported by sound policies and procedures.
An enterprise generating IP has a substantial amount of information in the nature of confidential information
and trade secrets. Any inadvertent disclosure of IP could jeopardize the IP owner’s claim to originality and
other related rights.

One needs to identify whether certain IP including trade secrets have fallen in the public domain. For instance,
if an entity develops a novel product or process, but discloses it to public, it may lose the opportunity to patent
or to protect it as a trade secret. This may become a deal breaker from a commercial perspective if the value
of the company was based on the novel product or process itself. Further, at times, in technology transfer
agreements know how or trade secrets shared are not clearly identified, hence, fact finding exercise is required
to ensure that none of them fall within public domain.

From a practical perspective, we have seen that transfer of trade secrets usually happen at the top executive
level, where the trade secret in recorded in a document / or a medium and passed in sealed envelope to maintain
confidentiality. There are strict confidentiality agreements to protect against disclosure.

© Nishith Desai Associates 2024 Provided upon request only 44

 Start-up Governance Essentials — From Start to Maturity

A Guide to Safeguarding your Start-up’s Intellectual Property

Other Kinds of IP
i) Geographical Indications: Geographical Indications (“GI”) are the kind of IP which identify a good
as originating in a place where a given quality, reputation, or other characteristic of the good is essentially
attributable to its geographical origin. The Geographical Indications of Goods (Registration and
Protection) Act, 1999 provides for the registration of a GI and the ‘authorized user’ thereof. Any person
claiming to be the producer of goods in respect of a registered GI can apply for registering him as an
authorized user. GI registration is valid for a period of ten years, and may be renewed thereafter from
time to time.

ii) Layout Design and Semiconductor Integrated Circuit: Layout design refers to a layout of transistors
and other circuitry elements and includes lead wires connecting such elements and expressed in any
manner in a semiconductor integrated circuit, and Semiconductor Integrated Circuit means a product
having transistors and other circuitry elements, which are inseparably formed on semiconductor
material or insulating material, or inside the semiconductor material, and designed to perform an
electronic circuitry function. The Semiconductor Integrated Circuits Layout Design Act, 2000 governs
the protection of this kind of IP, and the term of registration is for a period of ten years from the date
of filing an application for registration or from the date of its first commercial exploitation anywhere
in India or in any country, whichever is earlier.

iii) Plants and Varieties: The Protection of Plant and Varieties and Farmers Rights Act, 2001 governs
several aspects of protection of plant varieties, including protection of varieties developed through
public and private sector research; protection of varieties developed and conserved by farmers and
traditional communities, providing them with legal rights to save, use, sow, resow, exchange, share,
or sell their farm seed; encouraging plant breeders and researchers to develop new and improved
varieties; etc. The total period of validity of registration shall not exceed: 18 years, in case of trees and
vines; 15 years, in case of extant varieties; and 15 years, in any other case. The certificate of registration
issued under this Act is valid for 9 years in case of trees and vines and 6 years in case of other crops and
a registrant is required to renew the same for the remaining period of registration.

iv) Biological Diversity: Biological diversity means the variability among living organisms from all
sources and the ecological complexes of which they are part and includes diversity within species or
between species of eco-systems. The Biological Diversity Act, 2002 states that all foreign individuals,
associations and organizations would be required to seek the prior approval of the National Biodiversity
Authority to access any biological resource or the results of research occurring in India, for any use and
that all Indian citizens would have to seek the NBA’s prior approval to transfer the results of research
relating to any biological resource to foreigners. Additionally, the authority will have the power to impose
conditions to ensure a share in the benefits accruing from the acquisition of IPR.

B. Why Do Businesses Need to Protect Their Intellectual Property?

IP protection safeguards the unique ideas, innovations, and creative works that set a business apart from
competitors. This competitive advantage helps maintain market share and profitability. IP can be a significant
source of revenue through licensing or selling patents, trademarks, and copyrights. It can also enhance an
entity’s valuation, which is crucial for attracting investors or potential buyers. Additionally, IP protection
fosters innovation by providing creators with incentives to invest in research and development, in turn
encouraging the businesses to continually improve their products and services.

© Nishith Desai Associates 2024 Provided upon request only 45

 Start-up Governance Essentials — From Start to Maturity

A Guide to Safeguarding your Start-up’s Intellectual Property

IP protection also helps build and maintain a strong brand identity, at the same time promoting customer
trust and loyalty. Furthermore, IP protection prevents unauthorized use or reproduction of a business’s
assets, reducing the risk of reputation damage or market dilution. Overall, safeguarding IP is essential for
a business’s growth, competitiveness, and long-term sustainability. Please see the checklist in Table – 1 below
to check the nature of the IP owned by your business, and accordingly other nuances of the same.

C. What Are the Steps that a Business Needs to Take to Protect

Their Intellectual Property?

In order to protect the IP, businesses need to undertake certain steps. Some of these steps include:

Identification of IP

A business could be creating, and in turn be owning certain IP of different kinds in its day to day operations.
It is essential to identify such IP and subsequently take steps to protect the same. When the IP is registered
or applied for, it is easy to conduct a further due diligence to ascertain ownership, validity, strength of IP
and other related aspects. However, in case of unregistered IP, ascertaining all these aspects becomes an
issue. For instance, in India, it is not common to register copyrighted work (which may exist in source codes,
programmes, notes, algorithms, drawings etc.). In such a case, the IP in copyrighted work is generally identified
based on the documentation available with the seller entity and /or on the basis of representations given by the
seller entity.

Further, often the IP may be protected in some countries but not in the other. The fact that IP rights are
territorial in nature may not be fully appreciated. For example, a buyer may perceive value from a patented
product in the US in the Indian market. But if the patent protection is not available in India, this may be
a non-starter for the deal. Even if this situation is to be examined from a licensing agreement perspective,
then firstly it will not be proper to give a license to an IP in a jurisdiction where you don’t even own it.
Secondly, technically, no value could be assigned to licensing in jurisdictions where IP is in the public
domain, because it is open to use by all.

Registration

Registration of IP is not mandatory for copyrights, but registering the same give the proprietor additional
rights and make it easier for them to enforce the same. Trademarks and patents should be registered.
A business can own rights in a trademark without registration as well, if such a mark has been used by the
business. The process of registration of IP mainly includes identification and selection of IP, conducting
a public search to check for prior existing IP with confirmed or pending registration, filing of application,
examination of such application by the concerned IP Registry or Office, eradication of issues, if any are
pointed out by the IP Registry, and the confirmation of registration upon acceptance of the application. 4
The process of registration for each kind of IP may vary depending on the steps laid down in the respective
laws discussed above.

4 Please see our research paper titled “Intellectual Property Law in India”:
https://www.nishithdesai.com/Content/document/pdf/ResearchPapers/Intellectual_Property-Law_in_India-Web.pdf.

© Nishith Desai Associates 2024 Provided upon request only 46

 Start-up Governance Essentials — From Start to Maturity

A Guide to Safeguarding your Start-up’s Intellectual Property

Documentation

There must be proper and thorough documentation in case of licensing and assignment of IP to another party.
For instance, assignment of a copyright is not valid unless such assignment is in writing and signed by the
assignor; additionally, such an assignment must identify the work and the rights assigned, the territorial
extent (otherwise it is deemed to be India), and the duration of the assignment (otherwise it is deemed
to be 5 year). In addition, if the assigned rights are not exercised by the assignee within a period of one year
from the date of assignment, the assigned rights revert to the assignor unless the parties contract out of such
a provision. Similarly, for recording of the assignment with the Trademarks Registry, the deed of assignment
is required to be filed along with applicable form and in some cases, a separate trademark assignment
deed / agreement may be filed with the Trademarks Registry. In case of patents, a valid assignment under
the Patents Act requires the assignment to be in writing, to be contained in a document that embodies all
terms and conditions. Furthermore, under Indian laws, every instrument is required to be stamped as per
the applicable stamp laws, which are state specific. The instrument, which is not stamped cannot be admitted
as evidence in a court, expect in certain cases.

Timely Enforcement

As discussed above, IP protection safeguards an entity’s competitive advantage. Protecting IP also enables
businesses to legally establish and protect brand image and their products and/or services. This exclusivity
allows the entity to capitalize on their innovations and maintain a distinct market position, thereby ensuring
a sustainable competitive edge. IP protection also bolsters a business’s ability to attract investors and secure
financing. Investors are more willing to provide funding to businesses with well-protected IP because
it signifies a commitment to preserving and leveraging valuable assets. Furthermore, IP protection is crucial
for revenue generation and monetization. Businesses can license or sell their intellectual property rights to
other companies, generating additional income streams. Additionally, strong IP protection provides the legal
foundation for enforcing rights and pursuing legal action against infringing parties, potentially leading
to financial settlements or royalties.

In India, infringement and passing-off actions can be instituted by filing a suit in the appropriate court.
All IP laws state the appropriate court in which such suits can be instituted. For example, under the TM Act,
suits for trademark infringement or passing off can be filed in the district court within the local limits
of whose jurisdiction, at the time of the institution of the suit/other proceedings, the plaintiff/one of the
plaintiffs (for example, registered proprietor, registered user) actually and voluntarily resides or carries on
business or personally works for gain. Under the Copyright Act there is a similar provision as well. In India,
court cases often reach a final hearing after twelve to sixteen years from the date of their filing. Therefore,
obtaining an interim injunction becomes crucial for the plaintiffs, especially in intellectual property lawsuits.
The damages are awarded only after the final hearing. Indian courts also grant injunctions in a quia timet
(anticipatory) action if the plaintiff proves that defendant’s activities or proposed activities would lead
to violation of plaintiffs’ rights.

© Nishith Desai Associates 2024 Provided upon request only 47

 Start-up Governance Essentials — From Start to Maturity

A Guide to Safeguarding your Start-up’s Intellectual Property

Table 1

Intellectual Property

Confidential
Patents Trademarks Copyrights Designs
Information

Nature / Type of IP

Is the IP created In-house?

Do contracts exist to assign

the IP to the company?
a. with employees
b. with contractors

Is the IP acquired / licensed

by the company?

If IP is acquired, is there
a proper assignment
agreement in place?

If IP is licensed, is there
a proper license agreement
in place?

Are the IP assignment

/ license agreements
adequately stamped /
franked?

In case of a licensed IP, is the

IP used as per the terms of
the license?

Are there any restrictions

on the use of the IP?

Is there any joint

ownership of IP?

If yes, what is the nature of

rights the joint owners have
in the IP?

Is the IP registerable?

If Yes, is it registered?

© Nishith Desai Associates 2024 Provided upon request only 48

 Start-up Governance Essentials — From Start to Maturity

A Guide to Safeguarding your Start-up’s Intellectual Property

Intellectual Property

Confidential
Patents Trademarks Copyrights Designs
Information

What is the date of expiry

of IP?

If IP cannot be registered, is it
protected by confidentiality
agreements

Is the IP in use?

Where is the IP used?

Is the IP being commercially

exploited?

Who / Which department

is responsible for
IP protection?

Who / Which department

is responsible for its
management & enforcement?

Is there a robust and effective

IP protection, management
and enforcement plan in
place?

What is the current approx.

value of IP?

Is the IP subject to any lien,

encumbrances, third party
rights?

If IP violate/ infringe upon any

third party rights, then is the
matter at a litigation stage
or can be resolved through
mutual discussions

© Nishith Desai Associates 2024 Provided upon request only 49

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role

and Responsibilities
Leveraging cutting-edge technology can empower Start-ups to streamline operations, reach wider audiences,
and innovate at a pace previously unimaginable. However, amidst the whirlwind of technological advance-
ment, it’s crucial for Start-ups to recognize the importance of understanding the regulatory framework that
governs their operations. This dual perspective ensures not only swift growth but also compliance with laws
and regulations, safeguarding the long-term sustainability of the business.

A. Role of Different Technology Service Providers

and Legal Compliances

Start-ups are often and rightly focused on building the best product/service possible for their customers.
In a sea of endless competition, this remains the core focus for any Start-up. However, it is equally important
for Start-ups to be aware of the legal compliance landscape. This is also important for a Start-up’s branding,
as a brand is built on trust, and compliance with relevant laws increases a brand’s trustworthiness.

Several different technology-centric laws may be applicable to a company providing digital services.
Depending on the business model, the company may be an intermediary or a publisher as understood under
the Information Technology Act, 2000 (“IT Act”). Further, an entity providing any goods/services for a fee
may be considered an “e-commerce entity” under the Consumer Protection Act, 2019. Different compliances
are applicable to different types of entities. These laws are discussed in brief below:

Intermediaries in General

In India, intermediaries are governed under the IT Act, which defines an intermediary as “any person who on
behalf of another person receives, stores, or transmits that electronic record or provides any service with respect to that
record”. 1 This definition is very wide and covers a diverse set of service providers, ranging from telecom and
internet service providers, search engines, web hosting service providers, to e-commerce platforms or even
social media platforms.

Safe Harbour for Intermediaries

Intermediaries are granted a conditional safe harbour under the IT Act and the Information Technology
(Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“Intermediary Rules”).

1 Section 2(w), IT Act.

© Nishith Desai Associates 2024 Provided upon request only 50

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

Section 79 provides that an intermediary is not liable for any third-party information made available
or hosted by such intermediary when:

a. The function of the intermediary is limited to providing access to the system over which information
is made available by third parties or

b. The intermediary does not:

i. initiate the transmission,

ii. select the receiver of the transmission, and

iii. select or modify the information contained in the transmission and

c. The intermediary observes due diligence while discharging his duties under the Act, Intermediary
Rules or other guidelines prescribed by the government.

The Intermediary Rules provide for the kinds of due diligence/compliance all types of intermediaries
must observe while discharging their duties. These include:

4. Publishing user terms and privacy policies clearly and prominently 2 that inform the user not to display,
publish, upload, etc. certain categories of information. 3 Intermediaries are also expected to make
reasonable efforts to cause users not to publish such content. Furthermore, they are required to inform
users once a year of any change in the user terms 4 along with the fact that the intermediary may
(1) terminate access to its services; or (2) remove non-compliant information, or both, in case of non-​
compliance with the user terms by the user. 5

5. Taking down information on certain grounds within 36 hours 6 upon receiving actual knowledge
in the form of a court order, or upon being notified by the ‘Appropriate Government or its agency.’ 7

2 Rule 3(1)(a), Intermediary Rules.

3 Information which:
i) belongs to another person and to which the user does not have any right;
ii) is obscene, pornographic, paedophilic, invasive of another’s privacy including bodily privacy, insulting or harassing on the basis of gender,
racially or ethnically objectionable, relating or encouraging money laundering or gambling, or an online game that causes user harm, or
promoting enmity between different groups on the grounds of religion or caste with the intent to incite violence;
iii) is harmful to child;
iv) infringes any patent, trademark, copyright or other proprietary rights;
v) deceives or misleads the addressee about the origin of the message or knowingly and intentionally communicates any misinformation or infor-
mation which is patently false and untrue or misleading in nature, or, in respect of any business of the Central Government, is identified as fake
or false or misleading by such fact check unit of the Central Government as the Ministry may, by notification published in the Official Gazette,
specify;
vi) impersonates another person;
vii) threatens the unity, integrity, defence, security or sovereignty of India, friendly relations with foreign States, or public order, or causes
incitement to the commission of any cognisable offence or prevents investigation of any offence or is insulting other nation;
viii) contains software virus or any other computer code, file or program designed to interrupt, destroy or limit the functionality of any computer
resource;
ix) is in the nature of an online game that is not verified as a permissible online game;
x) is in the nature of advertisement or surrogate advertisement or promotion of an online game that is not a permissible online game, or of any
online gaming intermediary offering such an online game;
xi) violates any law for the time being in force.

Explanation: In this clause, “user harm” and “harm” mean any effect which is detrimental to a user or child, as the case may be; violates any law
for the time being in force;
4 Rule 3(1)(f), Intermediary Rules.
5 Rule 3(1)(c), Intermediary Rules.
6 Second Proviso to Rule 3(1)(d), Intermediary Rules.
7 Rule 3(1)(d), Intermediary Rules.

© Nishith Desai Associates 2024 Provided upon request only 51

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

These grounds include:

a. Interest of the sovereignty and integrity of India;

b. Security of the State;

c. Friendly relations with foreign States;

d. Public order; decency or morality;

e. In relation to contempt of court;

f. Defamation;

g. Incitement to an offence relating to the above, or

h. Any information which is prohibited under any law.

6. Disable access to content which is “prima facie in the nature of any material which exposes the private area
of an individual, shows an individual in full or partial nudity or shows or depicts an individual in any sexual act
or conduct, or is in the nature of impersonation in an electronic form, including artificially morphed images of an
individual” 8 within 24 hours from receipt of a complaint made by such individual or a person on their
behalf. Intermediaries must also implement a mechanism for users to provide details regarding the link
sought to be taken down. 9

7. Provide any information based on information requests made in relation to investigation, prosecution, etc.
of offences within 72 hours from receipt of such requests. 10 Furthermore, intermediaries are expected
to preserve the records of any information that has been taken down voluntarily due to violation of their
user terms, or pursuant to a user grievance complaining of obscene content about the user, for 180 days
or for longer if prescribed by the relevant court or Governmental authorities. 11

8. Report cyber security incidents and share related information with the Computer Emergency Response
Team (“CERT”) in accordance with the policies and procedures mentioned under the Information
Technology (The Indian Computer Emergency Response Team and Manner Of Performing Functions And Duties)
Rules, 2013. 12

9. Appoint a grievance officer to deal with user complaints/grievances and publish (1) the name and
contact details of the grievance officer, and (2) the procedure by which a user/victim may make
a complaint relating to violation of certain provisions of the IT Rules, or other matters, on its websites/
mobile application of the intermediary. 13

Social Media Intermediary and Significant Social Media Intermediaries

Social media intermediaries (“SMIs”) are defined as those intermediaries that primarily or solely enable
online interaction between two or more users and allow them to create, upload, share, disseminate, modify
or access information using their services. 14

8 Rule 3(2)(b), Intermediary Rules.

9 Rule 3(2)(c), Intermediary Rules.
10 Rule 3(1)(j), Intermediary Rules.
11 Rule 3(1)(g), Intermediary Rules.
12 Rule 3(1)(l), Intermediary Rules.
13 Rule 3(2), Intermediary Rules.
14 Rule 2(w), Intermediary Rules.

© Nishith Desai Associates 2024 Provided upon request only 52

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

SMIs are required to follow the due diligence/compliances applicable to intermediaries in general (as
discussed above). There are no additional compliances applicable to SMIs.

Significant social media intermediaries (“SSMIs”) are defined as those that social media intermediary
having number of registered users in India above such threshold as notified by the Central Government. 15
The Government has defined this threshold as 50 lakh registered users in India. 16

SSMIs have certain key additional compliances applicable to them such as:

1. Appointing key compliances persons being a chief compliance officer, nodal contact person and regional
grievance officer. 17

2. Publishing monthly compliance reports detailing complaints received and actions taken by the SSMI
in resolving those complaints. 18

3. Enabling the identification of first originator of information on their platforms as may be required
by a judicial order or Section 69 of the IT Act by a Competent Authority. 19

4. Ensuring that for any paid ad service content provided by the SSMI, such paid ad is clearly demarcated
as such and identifiable by the user. 20

5. Proactively identifying and removing certain kinds of information such as those depicting rape, child
sexual abuse or prohibited under any law for the time being in force in relation to the interest of the
(i) sovereignty and integrity of India, (ii) security of the State, (iii) friendly relations with foreign States,
(iv) public order; decency or morality, (v) in relation to contempt of court, (vi) defamation, (vii) incitement
to an offence relating to the above or (viii) any information which is prohibited under any law for the time
being in force. 21

Online Gaming Intermediaries

An online gaming intermediary (“OGI”) is defined as an intermediary who enables the users access to one
more online games. 22 OGIs are subject to the due diligences/compliances applicable to intermediaries
in general as discussed above. Furthermore, certain compliances applicable to SSMIs such as appointing key
compliance persons and publishing monthly compliance reports are applicable to OGIs as well.

Apart from the above, OGIs have certain key additional compliances exclusively applicable to them, such as:

1. Including mandatory terms in the user agreement and privacy policy pertaining to (i) withdrawal or
refund of the deposit made with the expectation of earning winnings, the manner of determination and
distribution of such winnings, and the fees and other charges payable by the user (ii) the know-your-
customer procedure followed by it for verifying the identity of the users of such online game (iii) the
measures taken for protection of deposit made by a user for such online game; and (iv) the framework
regarding verification of online real money games relating to such online game. 23

15 Rule 2(v), Intermediary Rules.

16 https://www.meity.gov.in/writereaddata/files/Gazette%20Significant%20social%20media%20threshold.pdf.
17 Rule 4(a), Intermediary Rules.
18 Rule 4(d), Intermediary Rules.
19 Rule 4(2), Intermediary Rules.
20 Rule 4(3)(a), Intermediary Rules.
21 Rule 4(4) read with 3(1)(d) read with 4(8), Intermediary Rules.
22 Rule 2(qb), Intermediary Rules.
23 Rule 4(11), Intermediary Rules.

© Nishith Desai Associates 2024 Provided upon request only 53

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

2. Ensuring that OGI does not itself finance by way of credit or enable financing to be offered by third
party to users for the purpose of playing online games. 24

3. Offering only those online games that are ‘permissible’ as stated by the online gaming self-regulatory
body. 25

Therefore, OGIs should ensure that any online real money games offered by them shall be in accordance with
the above. It is important to note that such compliances described above shall apply in the same way to any
notified online games,not just online real money games. 26

E-commerce Entities

E-commerce is defined under the Consumer Protection Act, 2019 (“CPA”) as buying or selling of goods or
services including digital products over digital or electronic network. 27 E-commerce entity is defined under
the Consumer Protection (E-Commerce) Rules, 2020 (“E-commerce Rules”) as any person who owns, operates
or manages digital or electronic facility or platform for electronic commerce, but does not include a seller
offering his goods or services for sale on a marketplace e-commerce entity. 28

There are primarily two models of e-commerce being:

i. Marketplace: an e-commerce entity which provides an information technology platform on a digital or

electronic network to facilitate transactions between buyers and sellers. 29

ii. Inventory: an e-commerce entity which owns the inventory of goods or services and sells such goods
or services directly to the consumers and shall include single brand retailers and multi-channel single
brand retailers. 30

The kinds of compliances applicable to e-commerce entities include general compliances and specific
compliances applicable to the model of e-commerce being operated.

General compliances include:

1. Displaying information relating to the (i) legal name of the e-commerce entity, (ii) principal geographic
address of its headquarters and all branches, (iii) name and details of its website; and (iv) contact details
like e-mail address, fax, landline and mobile numbers of customer care as well as of grievance officer,
clearly to users. 31

2. Not adopting any unfair trade practices. 32

3. Establishing an adequate grievance redressal mechanism and appointing a grievance officer for consumer
grievance redressal. 33 Furthermore, it shall ensure that the grievance officer acknowledges complaints
within 48 hours and resolves them within one month from date of receipt of the complaint. 34

24 Rule 4(13), Intermediary Rules.

25 Rule 4A(1), Intermediary Rules.
26 Rule 4C(2) , Intermediary Rules.
27 Section 2(16), CPA.
28 Rule 3(b), E-commerce Rules.
29 Rule 2(g), Ecommerce Rules.
30 Rule 2(f), Ecommerce Rules.
31 Rule 4(2), Ecommerce Rules.
32 Rule 4(3), Ecommerce Rules.
33 Rule 4(4), Ecommerce Rules.
34 Rule 4(5), Ecommerce Rules.

© Nishith Desai Associates 2024 Provided upon request only 54

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

4. Mention the name and details of any importer from whom it has purchased such goods or services,
or who may be a seller on its platform. 35

5. Record the consent of a consumer for the purchase of any good or service offered on its platform where
such consent is expressed through an explicit and affirmative action, and not record such consent
automatically, including in the form of pre-ticked checkboxes. 36

6. Effect all payments towards accepted refund requests of the consumers as prescribed by the Reserve
Bank of India or any other competent authority within a reasonable period of time. 37

7. Not manipulate the price of the goods or services offered on its platform so as to gain unreasonable
profit. 38

8. Not discriminate between consumers of the same class or make any arbitrary classification of consumers
affecting their rights under the CCPA. 39

Specific compliances include, but are not limited to:

i. For marketplace ecommerce entities:

1. Require sellers through an undertaking to ensure that descriptions, images, and other content
pertaining to goods or services on their platform is accurate and corresponds directly with the
appearance, nature, quality, purpose and other general features of such good or service. 40

2. Include in its terms and conditions generally governing its relationship with sellers on its platform,
a description of any differentiated treatment which it gives or might give between goods or services
or sellers of the same category. 41

3. Take reasonable efforts to maintain a record of relevant information allowing for the identification
of all sellers who have repeatedly offered goods or services that have previously been removed
or access to which has previously been disabled under the Copyright Act, 1957 (14 of 1957),
the Trademarks Act, 1999 (47 of 1999) or the Information Technology Act, 2000 (21 of 2000).

ii. For inventory ecommerce entities:

1. Shall not shall falsely represent itself as a consumer and post reviews about goods and services
or misrepresent the quality or the features of any goods or services. 42

2. Must ensure that the advertisements for marketing of goods or services are consistent with the
actual characteristics, access and usage conditions of such goods or services. 43

3. Shall not refuse to take back goods or withdraw or discontinue services purchased or agreed
to be purchased, or refuse to refund consideration, if paid, if such goods or services are defective,
deficient spurious, or if the goods or services are not of the characteristics or features as advertised
or as agreed to. 44

35 Rule 4(6), Ecommerce Rules.

36 Rule 4(9), Ecommerce Rules.
37 Rule 4(10), Ecommerce Rules.
38 Rule 11(a), Ecommerce Rules.
39 Rule 11(b), Ecommerce Rules.
40 Rule 5(2), Ecommerce Rules.
41 Rule 5(4), Ecommerce Rules.
42 Rule 7(2), Ecommerce Rules.
43 Rule 7(3), Ecommerce Rules.
44 Rule 7(4), Ecommerce Rules.

© Nishith Desai Associates 2024 Provided upon request only 55

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

B. Data Protection

With the advent of the Digital Personal Data Protection Act, 2023 (“DPDPA”), India now has a dedicated
standalone data protection legislation. The Indian Government has been in the process of introducing
such legislation since 2018. The provisions of the DPDPA as well as its rules have not been enacted. Once
enacted, they will replace the Information Technology (Reasonable security practices and procedures and sensitive
personal data or information) Rules, 2011.

The DPDPA applies to the processing 45 of digital personal data in India, where the personal data is either
(i) collected in digital form; or (ii) collected in a non-digitized format and subsequently digitized. 46
It also applies to the processing of digital personal data outside the territory of India, if such processing is
in connection with any activity related to offering of goods or services to Data Principals within the territory
of India. 47

Personal data has been broadly defined under the Act to include any data about an individual who is
identifiable by or in relation to such data. 48 The provisions of the DPDPA do not apply to (i) personal data
by an individual for personal or domestic purposes, and (ii) personal data that is made or caused to be made
publicly available by (a) the data principal to whom such personal data relates, or (b) any other person
who is under a legal obligation to make personal data publicly available. 49

The DPDPA introduces a several compliance requirements for collection and processing of personal data.
The compliances are to be implemented by Data Fiduciaries and Data Processors while processing the
personal data of Data Principals.

These are the key factors to which the DPDPA applies and are defined as follows:

1. Data Fiduciary is defined as any person who alone or in conjunction with other persons determines the
purpose and means of processing of personal data. 50

2. Data Processor is any person who processes personal data on behalf of a Data Fiduciary. 51

3. Data Principal is the individual to whom the personal data relates. Where such individual is a child, it
would include the parent or lawful guardian of the child. Where the individual is a person with disability,
it includes their lawful guardian acting on behalf of such individual. 52 Thus, it is clear that the DPDPA
covers personal data of natural individuals only.

4. Consent manager consent manager has been defined as a person registered with the Board and acts as
a single point of contact to enable a Data Principal to give, manage, review and withdraw their consent
through an accessible, transparent and interoperable platform. 53

45 Processing is defined under Section 2(x) of the DPDPA as wholly or partly automated operation or set of operations performed on digital personal
data, and may includes operations such as collection, recording, organisation, structuring, storage, adaptation, alteration, retrieval, use, alignment
or combination, indexing, sharing, disclosure by transmission, dissemination or otherwise making available, restriction, erasure or destruction.
46 Section 3(a), DPDPA.
47 Section 3(b), DPDPA.
48 Section 2(t), DPDPA.
49 Section 3(c), DPDPA
50 Section 2(i), DPDPA.
51 Section 2(k), DPDPA.
52 Section 2(j) DPDPA.
53 Section 2(g), DPDPA.

© Nishith Desai Associates 2024 Provided upon request only 56

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

At the moment, these provisions are open-ended, leaving much to be prescribed by the Central Government
in the rules to follow. Nonetheless, some of the key compliances introduced include:

1. Notice and consent: The DPDP Bill requires the data fiduciary to provide notice 54 and obtain consent 55
from the data principal on or before processing personal data. The notice accompanying a request
for consent must inform the data principal of: (i) the personal data to be processed and purpose for which
such data is to be processed; (ii) the manner in which she may exercise her rights under the DPDP Bill;
and (iii) the manner in which the data principal may make a complaint to the Board. The DPDP Bill
provides that such notice must be “in such a manner and as may be prescribed”.

The consent should be freely given, specific, informed and unambiguous, with clear affirmative action. 56
The consent should be limited to such personal data as is necessary for the specified purpose in the
request for consent. 57 Upon withdrawal of consent, the Data Principal is required to cease and cause
its data processors to cease processing of the personal data within “a reasonable time”. 58

2. Correction, completion, updation or erasure of personal data: The Data Fiduciary has the obligation
to ensure the accuracy, completeness, and consistency of the personal data when such personal data is
processed to make a decision that affects the data principal or if the personal data is likely to be disclosed
another data fiduciary. 59 Furthermore, the data principal has the right to request correction, completion,
updation and erasure of their personal data by the Data Fiduciary. 60

The Data Principal may also request erasure of their personal data. Upon such request, the Data Fiduciary
shall erase the personal data unless retention is necessary for a legal purpose. 61

3. Retention of personal data: The Data Fiduciary must erase and cause its data processor to erase the
personal data, (i) upon receipt of a withdrawal request, or (ii) as soon as it is reasonable to assume that
the specified purpose is no longer being served, whichever is earlier, unless retention is necessary for
compliance with any law in force. 62

4. Grievance redressal: Data Fiduciaries are mandated to stablish an effective mechanism to redress the
grievances of Data Principals. 63 This includes, inter alia, publishing the business contact information
of a Data Protection Officer (“DPO”), if applicable, or a person who is able to answer on behalf of the data
fiduciary, the data principal’s questions about the processing of their personal data. 64

Data Principals have the right to register their grievances with the Data Fiduciary or the consent
manager in respect of any act or omission of such Data Fiduciary or consent manager regarding the
performance of their obligations in relation to the personal data of such Data Principal or the exercise
of their rights under the DPDPA.

54 Section 5, DPDPA.
55 Section 6, DPDPA.
56 Section 6(1), DPDPA.
57 Section 6(1), DPDPA.
58 Section 6(6), DPDPA.
59 Section 8(3), DPDPA.
60 Section 12(1), DPDPA.
61 Section 12(3), DPDPA.
62 Section 8(7), DPDP Bill.
63 Section 8(10), DPDPA.
64 Section 8(9), DPDPA.

© Nishith Desai Associates 2024 Provided upon request only 57

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

5. Technical measures, security safeguards and notification of breach: The Data Fiduciary shall implement
appropriate technical and organizational measures to ensure effective adherence with the provisions
of the DPDPA. This includes the obligation of the Data Fiduciary to protect personal data in its possession
or under its control by taking reasonable security safeguards to prevent personal data breach. The DPDPA
does not yet prescribe or recommend the standards that should be implemented. Furthermore, in the
event of any personal data breach, the Data Fiduciary shall notify the Board and each affected Data
Principal in the form and manner as may be prescribed. 65

6. Transfer of cross-border data: The DPDPA empowers the Central Government to restrict the transfer
of personal data by a Data Fiduciary to notified countries or territories outside of India. 66 Hence, transfer
would be permissible to all countries until any of them are blacklisted by the government. However,
if any Indian law (especially sectoral laws) provides for a higher degree of protection or restriction on
transfer of personal data outside India, then such laws would continue to apply and will prevail over
the DPDPA. 67

7. Handling personal data of children and persons with disabilities: Data Fiduciaries are required to
obtain verifiable consent prior to processing the child’s personal data (from the parent), or personal data
of a person with disability (from the lawful guardian) who has a lawful guardian, in a form as may
be prescribed. 68 Under the DPDPA, a ‘child’ is an individual below eighteen years. 69

Data fiduciaries processing personal data of children have to comply with additional obligations:

i. Data fiduciaries are prohibited from undertaking processing of personal data of children which is
likely to cause detrimental effect to a child, as may be prescribed by the Central Government; 70

ii. Data fiduciaries are prohibited from, tracking and behaviorally monitoring children, and directing
targeted advertising at them. 71

Therefore, the DPDPA marks the beginning of an entire new data regime for India, and will be especially
important for Start-ups to comply with going forward.

65 Section 8(6), DPDPA.

66 Section 16(1), DPDPA.
67 Section 16(2), DPDPA.
68 Section 9(1), DPDP Bill.
69 Section 2(f), DPDP Bill.
70 Section 9(2), DPDP Bill.
71 Section 9(4), DPDP Bill.

© Nishith Desai Associates 2024 Provided upon request only 58

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

C. Adoption of New technologies: AI

AI has emerged as a powerful tool for content creation in the last few decades. AI is essentially the method
of making machines mimic human intelligence, and Generative AI (“GAI”) is its branch that uses machine
learning technology for the generation of new content. GenAI has been a disruptive technology that has
become commonplace for many businesses within just a year.

However, as with any new technological innovation, AI and GAI pose both opportunities and risks.
Some of these key risks and challenges include:

Veracity of Information and Fake News

There are serious concerns about its potential misuse for spreading fake news on a large scale. Such
misinformation can have serious ramifications, such as distorting public perceptions and eroding confidence
in societal structures and systems. GAI models can also be used to create fake social media accounts or bots
to spread false information making it challenging for individuals to find credible sources of information,
therefore, making it harder for people to engage in informed and constructive discussions. 72

However, GAI also has the capability to detect fake news 73 and thus its benefits and drawbacks will only
be more apparent over time.

Generative AI and Intellectual Property Rights

Ownership and IP rights in GAI produced works has been subject to heated debate. There are arguments
on both sides for granting copyright to GAI works based on human instruction. One of the issues pertaining
to the grant of copyright revolves around authorship. The Indian Copyright Act, 1957 (“Copyright Act”) is
unclear as to the ‘author’ of AI-created works under Indian copyright law. The Copyright Act recognizes that
computer-generated works have authors, i.e., the person who “causes” the work to be created, however,
it does not define computer-generated works or the extent of human involvement in such works, if any.

It is thus unclear which actor i.e., the AI software provider (e.g., ChatGPT), the user creating the prompt
or the original author of the work the AI model has been trained upon, is the author of outputs produced
using GAI.

Another issue pertains to the inputs used by GAI. GAI is trained on existing data in the form of text, images,
or sound recordings, all of which could potentially be copyright-protected works. Thus, whether the use
by GAI of existing copyrighted work amounts to infringement would be a case-wise analysis where
it would be important to ascertain if relevant copyright permissions have been taken for the training
of the GAI model.

72 See: https://www.analyticsinsight.net/chatgpt-can-be-used-to-disseminate-fake-news-on-a-large-scale, last visited on September 28, 2023.

73 See: https://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=9620068, last visited on September 28, 2023.

© Nishith Desai Associates 2024 Provided upon request only 59

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

D. Cybersecurity Risks

The fourth industrial revolution involves digitization in virtually every facet of our lives including the risks
and threats faced by us. Such threats include cyber threats, which make virtually everyone who has access
to the internet a potential victim. On the other side, a variety of actors are behind cyber threats including
terrorist organisations, criminal groups, hackers, malicious insiders and even hostile countries. 74

While there are several kinds of cybercrimes and threats, they are mainly classifiable into:

i. External Threats: these are by external actors, i.e., outside an organisation or entity.

ii. Internal Lapses / Unauthorized Access: this is by actors from within an organisation that might
exploit the organisation’s system in an unauthorised manner.

iii. Physical Security: in relation to compromise of physical locations of computer networks of the
company, including due to natural disasters, theft and terrorism.

The Government of India has recognized the new age cybersecurity threats and has been taking multiple
steps towards addressing these concerns. Institutions such as the Indian Computer Emergency Response
Team (“CERT-In”), the National Cyber Coordination Centre (“NCCC”) established by CERT-In, among
others, are involved in collection of information on and mitigation of cybersecurity incidents.

CERT-In is the national agency of India for performing various functions with respect to cybersecurity
in India, including for (i) collection, analysis and dissemination of information on cyber incidents; (ii) issuing
forecast and alerts of cyber security incidents; (iii) undertaking emergency measures for handling cyber
security incidents, etc. 75 CERT-In also has the power to call for information and give directions to service
providers, intermediaries, data centers, body corporate and any other person. 76

CERT-In has also issued certain directions on April 28, 2022 77 (“Directions”), which supplement the
Information Technology (The Indian Computer Emergency Response Team and Manner of Performing Functions
and Duties) Rules, 2013 (“CERT-In Rules”). CERT-In Rules contain additional compliance requirements for
service providers, intermediaries, data centres, body corporate and Government organisations (“Entities”).
The Ministry of Electronics and Information Technology (“MeitY”), on May 18, 2022, also issued a list of
frequently asked questions 78 (“FAQs”) on the Directions which provide clarifications on certain aspects
of the Directions.

74 Imperva team, Cyber security threats, Learning Center, Imperva (2021), available at:
https://www.imperva.com/learn/application-security/cybersecurity-threats, last accessed on September 28, 2023.
75 Section 70B, IT Act.
76 Section 70B (6), IT Act.
77 See: https://www.cert-in.org.in/PDF/CERT-In_Directions_70B_28.04.2022.pdf, last accessed on September 28, 2023.
78 See: https://www.cert-in.org.in/PDF/FAQs_on_CyberSecurityDirections_May2022.pdf, last accessed on September 28, 2023.

© Nishith Desai Associates 2024 Provided upon request only 60

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

The compliance requirements under the CERT-In Rules and Directions can be categorized into three broad
categories:

1. Mandatory Ongoing Compliances: these are applicable to (i) Entities having a computer, computer
system, or computer network (“Computer Infrastructure”) in India and (ii) Entities having Computer
Infrastructure outside India, if there is a high probability that any incident which affects such computer
infrastructure outside India also has an impact on any Computer Infrastructure in India (such as due to
the nature of connectivity between these Computer Infrastructure). 79

These compliances include designation of a PoC to interface with CERT-In 80, maintenance of all logs
for 180 days 81 , system clock synchronization with Network Time Protocol (NTP) Server of National
Informatics Centre (NIC) or National Physical Laboratory (NPL) 82 , etc.

2. Conditional Compliances: these are applicable to (i) all Entities having Computer Infrastructure
in India; and (ii) Entities which have Computer Infrastructure outside India, and such Computer
Infrastructure is impacted by an incident which (a) in turn impacts the Entity’s Computer Infrastructure
located within the Indian territorial jurisdiction; or (b) originated in India.

These compliances include mandatory reporting of cybersecurity incidents under Annexure I to the
Directions 83 and compliance with CERT-In Directions and provision of information/assistance.
Additionally, any incident stated in Annexure I meeting the following criteria should be reported within
6 hours of the relevant entity having noticed or having been brought to notice of such incident:

§ Cyber incidents and cybersecurity incidents of severe nature (such as denial of service, distributed
denial of service, intrusion, spread of computer contaminant including Ransomware) on any part
of the public information infrastructure including backbone network infrastructure;

§ Data breaches or data leaks;

§ Large-scale or most frequent incidents such as intrusion into computer resource, websites etc.;

§ Cyber incidents impacting safety of human beings.

3. KYC Requirements for Identified Service Providers: these are likely to be applicable to any identified
service provider which offers services to customers in India, irrespective of the location of the Computer
Infrastructure, or the impact or origination of any incident which affects such Computer Infrastructure.

These compliances include KYC requirements for specific entities such as data centres, cloud service
providers, virtual private network (VPN) service providers and virtual private server (VPS) providers
(“Identified Service Providers”). 84 The terms “data centres”, “cloud service providers”, “VPN service
providers” and “VPS providers” have not been defined under the Directions or CERT-In Rules.

79 There is no requirement for Entities outside India to comply with ongoing compliance requirements (such as appointment of a Point of Contact)
unless such Entity owns any Computer Infrastructure in India. However, if there is a high probability that an incident which impacts any Entity’s
Computer Infrastructure outside India also impacts Computer Infrastructure within India (for e.g., due to the nature of connectivity) the Entity which
owns such Infra should comply with the ongoing compliance requirements under the Directions and CERT-In Rules with respect to the relevant
Computer Infrastructure outside India. This is because such Entity may generally be aware of the possibility of such an incident and its impact
on Computer Infrastructure within India, irrespective of whether such an incident occurs or not.
80 Paragraph (iii) of the Directions.
81 Paragraph (iv) of the Directions.
82 Paragraph (i) of the Directions.
83 See: https://www.cert-in.org.in/PDF/CERT-In_Directions_70B_28.04.2022.pdf, last accessed on September 28, 2023.
84 Paragraph (v) of the Directions.

© Nishith Desai Associates 2024 Provided upon request only 61

 Start-up Governance Essentials — From Start to Maturity

Technology: Understanding Your Role and Responsibilities

If any Entity falls under the purview of Identified Service Providers, and provides services to customers
in India, such entity must register certain accurate information which must be maintained by them for
a period of 5 years or longer duration as mandated by the law after any cancellation or withdrawal of the
registration as the case may be:

§ Validated names of subscribers/customers hiring the services

§ Period of hire including dates § IPs allotted to / being used by the members

§ Email address and IP address and time stamp used at the time of registration / on-boarding

§ Purpose for hiring services

§ Validated address and contact numbers

§ Ownership pattern of the subscribers / customers hiring services

Additionally, the CERT-In Rules contain the following requirements with respect to various Entities:

1. Incident reporting: All individuals, organisations and corporate entities are mandatorily required to
report certain identified cybersecurity incidents 85 to CERT-In, as early as possible. Other cybersecurity
incidents may be voluntarily reported to CERT-In.

2. Appointment of Point of Contact: All service providers, intermediaries, data centres and body corporate
are required to designate a Point of Contact (“PoC”) to interface with CERT-In, and furnish information
relating to such PoC to CERT-In in the specified format.

3. Compliance with CERT-In directions and requests for information: All service providers, inter-
mediaries, data centres, body corporate and other persons are required to provide such information and
comply with directions as may be required by CERT-In. Contravention of the above provisions under
the CERT-In Rules may attract liability for compensation (payable to the person affected by such
contravention) / a penalty of up to INR 25,000 (approx. USD 320). 86

85 The Annexure to the CERT-In Rules identifies the following incidents to be mandatorily reported:
§ Targeted scanning/probing of critical networks/systems.
§ Compromise of critical systems/information.
§ Unauthorised access of IT systems/data.
§ Defacement of website or intrusion into a website and unauthorised changes such as inserting malicious code, links to external websites etc.
§ Malicious code attacks such as spreading of virus/worm/Trojan/Botnets/Spyware.
§ Attacks on servers such as Database, Mail and DNS and network devices such as Routers.
§ Identity Theft, spoofing and phishing attacks.
§ Denial of Service (DoS) and Distributed Denial of Service (DDoS) attacks.
§ Attacks on Critical infrastructure, SCADA Systems and Wireless networks.
§ Attacks on Applications such as E-Governance, E-Commerce etc.
86 Section 45, IT Act.

© Nishith Desai Associates 2024 Provided upon request only 62

 Start-up Governance Essentials — From Start to Maturity

Start-ups and CSR

A. Allocation of CSR Funds to technology incubators

The allocation of Corporate Social Responsibility (CSR) funds to Start-ups has sparked debates due to
uncertainties surrounding the actual societal impact of Start-ups and their ability to address social and
environmental issues. Notably, out of India’s total CSR spending of over ₹20,000 crore, less than ₹100 crore
is directed towards incubators, which can then channel funds to Start-ups. However, amidst the pressing
climate challenges disproportionately affecting economically vulnerable populations, CSR offers a beacon of
hope by supporting early-stage climate Start-ups focused on critical areas like water, waste management, and
agriculture, which require patient capital.

Corporate entities are allowed to invest their CSR funds in Start-ups through technology incubators. The
permission to invest in select technology incubators was granted in 2014 and further expanded in 2021 to
encompass all government-funded incubators. Nevertheless, incubators have struggled to attract CSR capital
for Start-ups in general, including climate and sustainability-based Start-ups (“CASS”), which constitute
a relatively new category.

CASS may represent an exception due to their capacity to address localized issues like improving access
to clean water and enhancing agricultural practices. These align with CSR budget objectives and can assist
corporations in achieving their sustainability targets.

India boasts a roster of over 2,000 CASS, spanning themes such as electric mobility, renewable energy,
agriculture, sustainable food, and WASH (Water, Hygiene, Sanitation). Many of these Start-ups face
financing challenges, especially in the early stages of product development when they are not yet ready
for venture capital or debt financing. Paradoxically, significant CSR funds, totalling over ₹1,500 crore, are
earmarked for various sustainability initiatives such as clean water provision, distribution of clean cooking
stoves, and agroforestry. However, these initiatives may experience linear growth, unlike Start-ups with the
potential for rapid expansion and large-scale impact.

In the context of corporate CSR spending, the primary objectives are visibility and goodwill generation.
Corporations aspire to have their CSR initiatives, such as donating ambulances, recognized, thereby
fostering a positive brand image. Simultaneously, they seek to deliver tangible benefits to local communities,
including improvements in education and healthcare in areas where they operate.

Nevertheless, corporations encounter challenges, including limited resources within their CSR teams for
evaluating trustworthy agencies and a lack of strategic alignment between CSR objectives and corporate
missions, often resulting in ad hoc spending. Conversely, most incubators are relatively young, less than five
years old, and may not have well-established relationships with corporate CSR teams. Fundraising from CSR
may not be their top priority, given the time and effort required to build relationships, submit proposals, and
the limited visibility they can offer to corporations.

Investing in CASS aligns well with CSR objectives of giving back to local communities. However, for
corporations to fully support CASS, a few of these need to achieve substantial success, showcasing their
impact and generating goodwill for the corporations. Currently, only a handful of incubators possess the
expertise required to identify and nurture CASS, underscoring the necessity to develop and enhance this
skill set.

© Nishith Desai Associates 2024 Provided upon request only 63

 Start-up Governance Essentials — From Start to Maturity

Start-ups and CSR

B. Expanding the Scope of Eligible Incubators to Allow Social Business

Incubators to Receive CSR Funding   

Previous regulations under the Companies Act, 2013 (“Companies Act”) included a provision in Schedule VII
that allowed companies to consider supporting technology incubators situated within accredited academic
institutions endorsed by the central government as an eligible activity within their Corporate Social
Responsibility (CSR) Policy.

Under the updated regulations, the previous provision limited support to technology incubators within
specific premises and excluded assistance to other incubators focused on technology and innovation outside
academic institutions. To expand the scope of Corporate Social Responsibility (CSR) and enhance funding
opportunities for incubators, the government recently announced that companies can allocate 2% of their
CSR funds to support incubators funded by the Central or State Government, public sector undertakings,
and make contributions to institutions like Indian Institutes of Technology (IITs), National Laboratories,
and various Autonomous Bodies. These organizations, which receive support from the Indian Council of
Agricultural Research (ICAR), publicly funded universities, Council of Scientific and Industrial Research
(CSIR), Indian Council of Medical Research (ICMR), Department of Atomic Energy (DAE), Department
of Science and Technology (DST), Defence Research and Development Organisation (DRDO), Department
of Biotechnology (DBT), and Ministry of Electronics and Information Technology (MeitY), are engaged
in research in the fields of science, engineering, technology, and medicine aimed at advancing Sustainable
Development Goals (SDGs).

Per Rule 17C of the Income-tax Rules, “incubatee” shall mean such incubatee as may be notified by the
Government of India in the Ministry of Science and Technology. Further, “incubator” shall mean such
Technology Business Incubator or Science and Technology Entrepreneurship Park as may be notified
by the Government of India in the Ministry of Science and Technology. Any incubator falling under
the aforementioned categories is qualified to receive donations from a qualifying corporation as part of the
corporation’s CSR Policy. However, this does not grant the same entitlement to the Start-ups being incubated
within these incubators. The government’s amendment is a positive development, as it facilitates increased
financial resources for the supported incubators to enhance their facilities and operations. It also enables
companies to allocate their funds to nurture new businesses that receive support and guidance from these
incubators. Furthermore, it empowers corporations to actively engage with Start-ups, offering mentorship
and monitoring to those that align with their strategic goals.

In order to leverage CSR funding, it is important that the definition of incubatee and incubator be further
expanded to allow social business incubators to receive CSR funding as well.

© Nishith Desai Associates 2024 Provided upon request only 64

 Start-up Governance Essentials — From Start to Maturity

Start-ups and CSR

C. Allowing Traditional Non-profits and/or Foundations to Invest

in Social and technology Incubatees with tax Incentives   

The worlds of technology, social entrepreneurship, and philanthropy are rapidly evolving. Traditional
non-profits and foundations have long played a pivotal role in addressing societal issues and supporting
charitable causes. However, in the digital age, innovative social and technology-driven solutions are
increasingly becoming the engines of positive change. To bridge these worlds and drive impactful progress,
it’s crucial to explore avenues that encourage non-profits and foundations to invest in social and technology
incubatees and businesses. One effective method to achieve this synergy is through offering tax incentives.

Section 11(5) of the Income Tax Act, 1961 (“ITA”) read with rule 17C of the Income Tax Rules, 1963 (“ITR”),
lays down the framework for investments out of the monies referred to in section 11(2)(b) of the ITA.
The permissible investments under section 11(2)(b) of ITA are as follows:

§ investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certif-
icates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government
under the Small Savings Schemes of that Government;

§ deposit in any account with the Post Office Savings Bank;

§ deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the
business of banking (including a co-operative land mortgage bank or a co-operative land development
bank).

§ investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963
(52 of 1963);

§ investment in any security for money created and issued by the Central Government or a State Government;

§ investment in debentures issued by, or on behalf of, any company or corporation both the principal
whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government
or by a State Government;

§ investment or deposit in any public-sector company in the manner mentioned in section 11(5)(vii)
of the ITA:

§ deposits with or investment in any bonds issued by a financial corporation which is engaged in
providing long-term finance for industrial development in India and which is eligible for deduction
under the provisions of the ITA;

§ deposits with or investment in any bonds issued by a public company formed and registered in India
with the main object of carrying on the business of providing long-term finance for construction or
purchase of houses in India for residential purposes and which is eligible for deduction under the
provisions of the ITA;

§ deposits with or investment in any bonds issued by a public company formed and registered in
India with the main object of carrying on the business of providing long-term finance for urban
infrastructure in India in the manner mentioned in section 11(5)(ixa) of the ITA.

§ investment in immovable property in the manner mentioned in section 11(5)(x) of the ITA.

§ deposits with the Industrial Development Bank of India established under the Industrial Development
Bank of India Act, 1964 (18 of 1964);

§ any other form or mode of investment or deposit as may be prescribed.

© Nishith Desai Associates 2024 Provided upon request only 65

 Start-up Governance Essentials — From Start to Maturity

Start-ups and CSR

§ Rule 17C of the Income Tax Rules, 1963 lays down further and other modes and forms of investments
and deposits of the monies mentioned under section 11(2)(b) of the ITA which are as follows:

§ Investments in units issued under any scheme of mutual fund referred to in section 10(23D) of the
ITA;

§ Any transfer of deposits to Public Account of India;

§ Deposits made with an authority constituted in India by or under any law enacted either for the
purpose of dealing with and satisfying the need for housing accommodation or for the purpose of
planning, development or improvement of cities, towns and villages, or for both;

§ Investment by way of acquiring equity shares of a ‘depository’;

§ Investment made, on or after 26-11-1999, by a recognized stock exchange referred to in clause (f) of
section 2 of the Securities Contracts (Regulation) Act, 1956 (hereafter referred to as “Investor”) in the
equity share capital of a company (hereafter referred to as “Investee”): (a) which is engaged in dealing
with securities or mainly associated with the securities market; (b) whose main object is to acquire
the membership of another recognized stock exchange for the sole purpose of facilitating the members
of the Investor to trade on the said stock exchange through the Investee in accordance with the
directions or guidelines issued under the Securities and Exchange Board of India Act, 1992 by
the Securities and Exchange Board of India established under section 3 of that Securities and Exchange
Board of India Act, 1992; and (c) in which at least fifty-one per cent of equity shares are held by the
Investor and the balance equity shares are held by members of such Investor;

§ Investment made on or after 1-3-2007 by way of acquiring equity shares of an incubatee by an incubator.
(The term ‘incubatee’ shall mean such incubatee as may be notified by the Government of India in the Ministry
of Science and Technology. The term ‘incubator’ shall mean such Technology Business Incubator or Science and
Technology Entrepreneurship Park as may be notified by the Government of India in the Ministry of Science
and Technology); and

§ Investment by way of acquiring shares of National Skill Development Corporation.

The ITA provisions should also allow for investments into climate and sustainability-based and social
business incubators and/or such similarly placed Start-ups directly by amending the provisions of Rule 17C
of the ITA. Further, it must be clarified that NGOs/foundations undertaking such investments should not
risk losing its tax-exempt status.

© Nishith Desai Associates 2024 Provided upon request only 66

 Start-up Governance Essentials — From Start to Maturity

Governance Pillars

The governance pillars of Start-ups are the foundation upon which their success is built. Incubators and
accelerators provide essential guidance and resources, while mentors and advisors play a critical role in
nurturing and guiding these budding ventures. Government support and a streamlined regulatory
environment are the cornerstones of a thriving Start-up ecosystem.

A. Role of Start-up Incubators and Accelerators

Business incubators support entrepreneurs in the early stages of business development, aiming to accelerate
the growth and success of Start-ups and early-stage companies. These organizations typically have expertise
in the business and technology sectors. Their support includes offering technological resources, initial
funding, networking opportunities, co-working spaces, mentorship, and advisory services. They often
serve as a pathway to funding from angel investors, government agencies, venture capitalists, and other
investors.

Incubators may have capital to invest in growing Start-ups or connections to potential funding sources.
They provide access to professional services such as legal and accounting expertise, along with invaluable
mentoring and networking opportunities.

As essential components of the Start-up ecosystem, incubators contribute to regional and national economic
development. Various types of incubators exist, including those affiliated with academic institutions,
non-profit organizations, for-profit ventures, venture capital firms, and combinations thereof.

Incubators may operate physically, fostering in-person networking, or virtually. Some may use the term
“accelerator” when focused on more advanced businesses.

On the other hand, Accelerators, on the other hand, focus on fast-tracking a Start-up’s growth by providing
intensive, time-bound programs that include mentorship, investment, and exposure to potential customers
and investors.

Accelerators expedite the early growth of Start-ups and businesses by compressing years’ worth of learning
into shorter time frames, as opposed to letting them navigate the learning curve from scratch. They often
also provide financial support to kickstart the growth process.

Accelerators, by nature, are typically led by well-established, profitable companies and are generally oriented
towards profit generation.

© Nishith Desai Associates 2024 Provided upon request only 67

 Start-up Governance Essentials — From Start to Maturity

Governance Pillars

B. Role of Mentors and Advisors

Start-up founders require a myriad of resources to kickstart their businesses, such as capital, connections,
and time. However, one often underestimated resource is the invaluable support of mentors and advisors,
who play a critical role in nurturing and guiding these nascent ventures as they progress.

Mentors contribute to Start-ups in various valuable ways, including imparting wisdom on business strategies,
aiding in the identification and evaluation of opportunities, and extending their support through challenging
phases. Advisors, on the other hand, play a vital role in connecting Start-ups with crucial resources and
networks, which are often indispensable for achieving growth.

While the contributions of mentors and advisors are undeniably significant, it is imperative to select them
judiciously. Start-ups should seek out mentors and advisors who possess industry-specific experience and
a proven track record of success. Furthermore, it is essential to establish a rapport with them and ensure
comfortable communication.

The involvement of mentors and advisors can prove instrumental in the success of Start-ups, furnishing
them with the guidance, counsel, and support required to navigate the complexities of establishing and
advancing a business. Therefore, when seeking a mentor or advisor, it is crucial to choose someone well-versed
in your particular industry and with a demonstrated history of achievement.

C. Role of Government

The government funding and initiatives play a crucial role in cultivating and enriching Start-up ecosystems
by offering essential financial support to empower early-stage Start-ups in surmounting financial hurdles and
pursuing innovative concepts. In addition to financial assistance, government programs encompass a wide
array of resources, including mentorship initiatives, networking opportunities, and access to specialized
infrastructure, all of which are invaluable for the triumph of Start-ups. The Indian government serves
as a captivating case study in this regard, having made substantial investments in various crucial domains
to bolster its Start-up ecosystem.

Through endeavours such as Start-up India, Atal Innovation Mission, and Meity Start-up Hubs, the Indian
government has strategically streamlined regulations, minimized bureaucratic impediments, and provided
financial aid, mentorship programs, and networking opportunities. These concerted endeavours have
positioned India as a prominent hub for innovative and technology-driven enterprises. Notably, India’s
remarkable advancement is underscored by its ascent to the 40th position in the Global Innovation Index
(GII Report 2023), a significant leap from its previous rank of 81st in just eight years. This accomplishment
highlights the profound influence of government investments in nurturing a thriving Start-up ecosystem.

Furthermore, the success stories of other thriving Start-up ecosystems in locations like Singapore, Israel,
and Barcelona underscore the essential role of government funding and initiatives in stimulating growth
and prosperity. The collaborative synergy between governments and Start-ups fosters an environment
conducive to entrepreneurship, attracting talent, and incubating ground-breaking innovation. This symbiotic
relationship contributes to economic expansion and aids in addressing intricate societal challenges.
Government funding and initiatives act as catalysts for the development of vibrant Start-up ecosystems,
propelling progress and enhancing society at large.

© Nishith Desai Associates 2024 Provided upon request only 68

 Start-up Governance Essentials — From Start to Maturity

Governance Challenges and Solutions

It is evident that a good governance lays down the foundation for effective management, aligns the interests
of all stakeholders, and promotes transparency and accountability in decision-making process at social and
institutional level.

In the last decade, many emerging markets, international bodies, governments, financial institutions,
public and private sector bodies have reformed their corporate governance systems and are encouraging
initiatives towards good corporate governance for companies, markets at global level. Better regulatory and
self-regulatory corporate governance frameworks and enforcement mechanisms are being implemented
through tougher legislations and corporate governance codes. Despite having known the tangible benefits
of good governance and its positive influence in company’s performance, it is worth noting that the list of
entities facing the corporate governance lapses is getting longer, making it more that evident that adhering
to governance norms should be a permanent corporate process and implementing it at highest level within
the organisation is need of the hour.

A. Common Governance Challenges Faced by Start-ups

Start-ups arguably face more challenges than any other business – particularly in the early stages of
development and face several obstacles, such as a capital funding, lack of skilled or experience workforce,
bureaucratic obstacles, access to relevant market for steady growth and stiff competition from existing or
established businesses. At times, they also face significant challenges on account of regulatory ambiguity
or oversight, the culture and pressure of rapid growth at any cost, inadequate infrastructure and issues
related to mentoring and scaling up of business operations in an organic way.

India has emerged as the third largest Start-up ecosystem just behind the China and United States. India’s
Start-up ecosystem continues to expand despite these obstacles, and several government initiatives aim
to support and encourage entrepreneurship in the nation. However, in recent times, the Start-up market has
not been receiving a very higher amount of funding from venture capital and private equity firms, possibly
due to the emerging and reported corporate governance lapses among the Start-ups.

Start-ups do face a unique set of challenges when it comes to corporate governance. Below listed are some of
the common governance challenges faced by Start-ups and fixing them requires assistance and participation
from all stakeholders and a multi-faceted approach involving regulatory reforms and its procedures,
enhanced transparency and accountability and strengthened oversight mechanisms within organisations.

Growth at the Speed of Thought

The Start-up ecosystem in India has been growing at a fast pace, with numerous new companies emerging in
various sectors. However, many of these Start-ups are formed by very young aged founders with negligible or
zero experience with limited business exposure / competence and they tend to have a limited understanding
on importance of having proper ethical systems and corporate governance in place for long-term business
growth and sustainability.

© Nishith Desai Associates 2024 Provided upon request only 69

 Start-up Governance Essentials — From Start to Maturity

Governance Challenges and Solutions

In their quest for rapid growth, innovation and cut-throat competition, their core focus is attracting
funding in initial stages for their innovative products or services and they knowingly or unknowingly tend
to neglect proper governance structures, compliances and procedures since inception, which is necessary
in the long-term perspective.

In most Start-ups, Board is generally guided by one major event ‘valuation’. Promoters look for faster growth
and capital and therefore, cut the edges, while non-promoter investors look for higher more valuations,
so as to multiply their investments and make a profitable exit. These instances of promoter greed and
investor appetites for higher valuation has been a major cause for governance failures and brought down
the companies and the promoters as well.

Proficorns over Unicorns

Many Start-ups are focused on achieving profitability quickly, which can lead to decisions that prioritize
short-term gains over long-term sustainability and governance. Promoters of Start-ups often seek faster
growth and capital, which can lead them to take shortcuts and engage in unethical practices. This approach
can lead to governance failures and, in some cases, bring down the company and its promoters. In such
scenarios, promoters and key management personnel may not be transparent and could resort to falsifying
books of accounts with fake bills and invoices to make a quick profit. While the focus on valuation is important
for Start-ups, it should not come at the expense of good governance practices and ethical conduct.

There is immense pressure on Start-ups receiving funds to demonstrate high and rapid growth on account
of unreasonable target-setting and excessive focus on profits to attract and retain investors leading to coin
the current buzz word “Proficorn”.

The pressure to grow at all costs often leads to shortcuts, lapses or compromises in governance practices and
process they may have set up for governance. Start-ups at times, prioritize short-term gains and aggressive
expansion instead of establishing robust governance systems by incorporating and implementing relevant
policies and procedures for scalability and holistic growth.

Regulatory Overload

While Indian government has being taking multiple initiatives on the dedicated regulatory framework
and Start-up-friendly policies and guidelines for the Start-up sector with various incentives in order to boost
the Indian economy, it is still evolving and the entrepreneurs have been provided an upper hand with
self-regulation instead of a dedicated or specifically tailored made robust regulations and guidelines for
Start-ups for governance norms . This limited regulatory oversight can create gaps and loopholes that some
Start-ups may exploit or neglect for their benefit, leading to governance lapses. In certain cases, founders may
engage in particular acts due to a lack of ethical standards or a general disregard for the law.

© Nishith Desai Associates 2024 Provided upon request only 70

 Start-up Governance Essentials — From Start to Maturity

Governance Challenges and Solutions

Lack of Transparency and Accountability

Transparency is an essential element and should be evident in communications, decision making process,
practices, policies, meetings, and other interactions of the organisation. Early Start-ups may have the
culture of secrecy and limited transparency. Founders and management teams may be hesitant to share
information or involve external stakeholders in decision-making processes. In absence of transparency,
it can be difficult to hold decision-makers accountable for their actions, leading to a lack of responsibility,
potential mismanagement and governance issues.

Hand-holding by Competent Legal, Compliance and Accounting Professionals

The Start-up ecosystem in India is highly competitive, and there is often a shortage of experienced and
competent legal, compliance and accounting professionals who understand the governance practices
and can hand-hold the Start-ups to formulate a robust internal control process and governance mechanism.
Start-ups may struggle to recruit qualified individuals to manage governance effectively as at times, it is either
ignored or considered as an unnecessary cost by the founders in a hurry to make the company look attractive
to the potential investor instead by laying over emphasis on innovation, value addition to the product/service
experience and demonstrating larger customer base for business scalability.

Intellectual Property Protection, Data Security and Privacy

Safeguarding intellectual property is critical for Start-ups. The processes of obtaining patents, trademarks,
or copyrights can be expensive and time-consuming. Without robust IP protection, Start-ups may risk losing
their innovations to competitors. India’s legal system faces delays and inefficiencies in processing patent and
trademark applications, making it difficult for Start-ups to safeguard their intellectual assets.

In today’s digital world, Start-ups handle a significant amount of sensitive customer data. Ensuring data
security and privacy compliance is a governance challenge that Start-ups must address to maintain trust
and protect their reputation. Further, the Indian government has introduced data protection legislation,
but many Start-ups lack the resources to comply with these regulations, resulting in governance challenges
related to data breaches and privacy violations

Talent Retention

Attracting and retaining top talent is vital for Start-ups, but they often struggle to compete with established
corporations when it comes to compensation and benefits. This challenge impacts governance as it can lead
to high employee turnover rates, destabilizing the company’s growth and performance.

© Nishith Desai Associates 2024 Provided upon request only 71

 Start-up Governance Essentials — From Start to Maturity

Governance Challenges and Solutions

B. Mitigating Risks related to Finances, Compliance, and Operations

Considering recent financial irregularity, investor community is more focused to scrutinise a Start-up’s
financial statements, revenue models, profitability and cash-flow projections. They insist to assess the
compliance of the business model with relevant laws and regulations. Hence, operational resilience,
governance, and financial metrics should be key areas of focus for Start-ups in order to attract funding and
therefore only, mitigating risks related to finances, compliance, and operations becomes a critical aspect
of corporate governance which requires a proactive and integrated approach involving various stakeholders,
including the board, management, employees, and external advisors.

Effective risk management helps organizations maintain their reputation, protect shareholder value, and
ensure long-term sustainability and regular monitoring and continuous improvement of risk management
practices are essential components of effective corporate governance. Here are some strategies to mitigate
these risks under corporate governance:

Financial Risk Mitigation:

Financial Reporting and Transparency:

§ prioritise maintaining well-organised books of accounts, adhering to proper accounting practices and
providing reliable projections.

§ Implement robust financial review, reconciliation and reporting processes, ensuring accurate and
transparent financial statements by adopting globally accepted accounting standards

§ Regularly communicate financial performance to shareholders and stakeholders through reports and
disclosures.

Internal Controls
§ Establish and maintain strong internal controls to prevent financial fraud/ errors or mismanagement
and to safeguard the company’s assets

§ Conduct regular internal audits to identify weaknesses and address them promptly.

Risk Assessment:
§ Perform regular risk assessments to identify potential financial risks.

§ Develop risk mitigation plans for identified financial risks and monitor their effectiveness.

Diversification:
§ Embrace the practice of revenue audit

§ Diversify revenue streams and investments to reduce financial dependency on a single source.

§ Create contingency funds for unexpected financial crises.

© Nishith Desai Associates 2024 Provided upon request only 72

 Start-up Governance Essentials — From Start to Maturity

Governance Challenges and Solutions

Compliance Risk Mitigation:

Compliance Programs:
§ Develop and maintain comprehensive compliance programs that align with relevant laws, regulations,
and industry standards related to the business and geography in which the Start-up operates with help
of external legal professionals as and when needed;

§ Regularly review and update compliance policies and procedures to adapt to changing legal requirements
and knowledge about growing compliances should be done proactively

§ Continuously assess and enhance the effectiveness of the corporate governance system. Regularly review
policies, procedures, and performance metrics to identify areas for improvement.

§ Seek feedback from board members, executives, investors, external professionals to gain insights and
perspectives.

§ Assign a compliance officer and form a competent and experienced in-house legal and secretarial team
to monitor adherence to regulations, reporting of key regulatory compliance requirements, conduct
internal audits, and address any compliance issues promptly.

Training and Education:

§ Provide ongoing compliance training programs and workshops to employees at all levels including
founders, executives and Board members at regular intervals

§ Create awareness about the benefits of strong governance, best practices of governance and compliance
principles relevant to business and industry and the potential consequences of lapses.

§ Ensure that employees are aware of changes their roles and responsibilities in maintaining compliance
thereby creating the culture of accountability.

Third-Party Due Diligence:

§ Conduct thorough due diligence on third-party vendors, partners, and suppliers to ensure their
compliance with regulations before on-boarding them.

§ Establish contractual agreements that require third parties to adhere to compliance standards.

Whistle-blower Protection:
§ Create a safe and confidential mechanism for employees and stakeholders to report any wrongdoing
or unethical behaviour within the organization.

§ Protect whistle-blowers from retaliation and ensure prompt investigation and resolution of reported
issues. This fosters a culture of accountability, trust, and transparency within the company and helps
in early detection and remediation of governance issues

© Nishith Desai Associates 2024 Provided upon request only 73

 Start-up Governance Essentials — From Start to Maturity

Governance Challenges and Solutions

Operational Risk Mitigation:

Business Continuity Planning:

§ Develop and regularly update business continuity plans to ensure operations can continue in the event
of disruptions.

§ Test these plans through simulations and exercises.

Supply Chain Management:

§ Diversify suppliers to reduce the risk of supply chain disruptions.

§ Create contingency plans for supply chain interruptions, including alternative sourcing.

Technology and Data Security:

§ Invest in robust cybersecurity measures to protect sensitive data and prevent cyberattacks.

§ Regularly update software and systems to address vulnerabilities.

Employee Training:
§ Train employees in safety protocols and emergency response procedures.

§ Foster a culture of safety and operational excellence.

Environmental and Sustainability Considerations:

§ Mitigate environmental and sustainability risks by adhering to relevant regulations and implementing
eco-friendly practices.

§ Monitor and report on environmental performance.

© Nishith Desai Associates 2024 Provided upon request only 74

 Start-up Governance Essentials — From Start to Maturity

Governance Challenges and Solutions

C. Implementing Effective Crisis Management and Contingency Plans

Contingency planning is the process of preparing for potential emergencies by identifying potential risks,
developing strategies to mitigate them, and creating a communication plan to inform stakeholders and the
public, while crisis management is the overall management of emergencies when they do occur.

Start-ups often face unique challenges due to their limited resources and rapid growth. Implementing
effective crisis management and contingency plans in a Start-up is crucial for ensuring the resilience and
survival of the business. Below are few of the steps that a Start-up can take and customise basis the business.

Effective crisis management and contingency planning are ongoing processes that require dedication and
proactive efforts. By taking these few of many steps, Start-up will be better prepared to navigate unexpected
challenges and emerge stronger from crises.

I. Identify Potential Crisis:

Start-ups can begin by conducting a thorough risk assessment to identify potential crisis that their
business could face. All the financial, operational, reputational, and external factors are required to
be considered in order to identify potential risks and related crisis. Seek feedback from the on-ground
technical teams, relevant employees, board members, executives, investors, external professionals
to gain insights and perspectives. Evaluate and analyse the crisis that may have being faced by competitors
already to identify and know what exactly not to be done during crisis to minimise the damage.

II. Form a Crisis Management Team on Standby Mode:

Establish a cross-functional crisis management team comprising key stakeholders, including founders,
key leaders and executives, legal counsels, public relations experts, and relevant department heads.

III. Develop a Crisis Communication Plan:

Create a crisis communication plan that outlines how the organisation will communicate with employees,
customers, investors, and the public during a crisis, providing them with clarity as well as relief to the
extent possible under relevant circumstances, thereby preventing the crisis from culminating into
a larger problem. Develop key messages and templates for various communication channels, including
press releases, social media, and internal communications.

IV. Trigger Points:

Identifying trigger points or specific events that would initiate the activation of crisis management plan
of the organisation. This might include financial losses, data breaches, or legal actions depending on the
nature of the business.

V. Create Contingency Plans:

Develop a contingency plan for each potential crisis scenario identified in the risk assessment, outlining
the detail steps to be taken to mitigate the crisis and minimize its impact.

© Nishith Desai Associates 2024 Provided upon request only 75

 Start-up Governance Essentials — From Start to Maturity

Governance Challenges and Solutions

VI. Continuously Update and Revise:

Understand that the business environment is dynamic and hence the risks may change over time. Hence,
crisis management and contingency plans needs to be reviewed and updated regularly for relevance.

VII. Legal and Compliance Considerations:

Ensure that Start-up complies with all relevant laws and regulations, as violations can lead to crisis
which could have being avoided in 1st place. Have a legal advisor on standby for legal emergencies.

VIII. Financial Resilience:

Maintain a financial cushion or access to emergency funds to help navigate financial crises without
endangering the core operations of the Start-up.

IX. Review and Learn:

After a crisis is resolved, conduct a thorough post-mortem analysis and take customer feedback to
identify what worked well and what could be improved. Use these insights to refine your crisis
management and contingency plans further.

© Nishith Desai Associates 2024 Provided upon request only 76

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

A. Start-up Governance Framework Model

A Start-up governance framework model outlines the principles, structures, and processes that guide
how a Start-up is governed and managed. The governance framework is required to establish a culture
of accountability, transparency, and ethical behaviour at all levels of Start-ups, thus enabling a self-regulating
world class Start-up ecosystem in India.

While the specific governance framework can vary based on the Start-up’s industry, size, and stage of
development, it is a comprehensive guide that provides a clear and practical approach to establishing effective
governance practices within a Start-up for the benefit of the Start-up and its founders.

The framework will help Start-up founders and entrepreneurs create a solid foundation for their businesses,
by establishing structures and processes that will support their growth and success. The framework
emphasizes the importance of transparency and accountability and provides guidance on how to establish
effective communication channels between stakeholders, including board members, investors, and employees.
It also highlights the need for Start-ups to establish a culture of compliance, by identifying and managing
risks and complying with regulatory requirements.

The framework is based on extensive research and consultation with experts in the field and is designed
to be flexible and scalable to accommodate the unique needs of each Start-up across various industries. It is
intended to be a living document that can and will be updated and refined as business evolves and maturity
level of Start-up.

In this Governance Framework 1, the Board of Directors being the key factor to good Corporate Governance
must function well and be well informed. For this, it was recommended that the Board should have a core
group of excellent, professionally acclaimed directors who understand their role of appreciating the issues
put forward by the management and discharge their duties and responsibilities towards the company’s
shareholders as well as creditors. While at first a promoter director may not be well versed with duties and
responsibilities as required under law, including best practices insofar as corporate governance is concerned,
with the passage of time, experience and good counsel, this is a skillset that is quickly acquired.

1 Think Tank Recommendations on Corporate Governance for Indian Start-ups, available at: https://www.startup20india2023.org.

© Nishith Desai Associates 2024 Provided upon request only 77

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

This Recommended Governance Framework is in the nature of guidelines and is suggested to be followed over
and above all the relevant laws, as may be applicable for a start-up. Under the said Framework, if the board
of a Start-up considers that some part of the Recommended Governance Framework is not appropriate to its
particular circumstances, it is entitled not to adopt it. If it does so, however, it should consider and explain why
it has not adopted the same – the “if not, why not” approach.

This approach ensures that all the relevant stakeholders receive an appropriate level of information about
the entity’s governance arrangements so that investors and other stakeholders can have a meaningful
dialogue with the board and management on governance matters and can factor the information provided
into their decision on whether or not to invest in the entity and how to vote on particular resolutions.

An “if not, why not” explanation a Start-up includes in its corporate governance statement setting out its
reasons for not following a recommendation should:

§ be reasonably detailed and informative so that the relevant stakeholders understand why it is that the
said Start-up has chosen not to follow that recommendation; and

§ disclose what, if any, alternative governance practices the Start-up may have adopted in lieu of those in
the recommendation, and explain why those practices are considered more appropriate for the entity than
the ones in the recommendation.

Level 1 Level 2 Level 3

SN Recommended Governance Framework 2 Inception Early Stage Growth Stage
to Early Stage to Growth Stage to IPO

A Voluntary commitment to adoption of ✓ ✓ ✓

Governance Framework and Code of Conduct

B Policies / Agreements

1 Disclosure Policy ✓ ✓ ✓

2 Risk Management Policy* ✓ ✓ ✓

(Required under law)

3 Budget Policies ✓ ✓ ✓

4 Non-disclosure agreements ✓ ✓ ✓

5 POSH Policy* ✓ ✓ ✓
(Required under law)

6 Cyber Security Policy ✓ ✓ ✓

2 Think Tank Recommendations on Corporate Governance for Indian Start-ups, available at: https://www.startup20india2023.org.

© Nishith Desai Associates 2024 Provided upon request only 78

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

Level 1 Level 2 Level 3

SN Recommended Governance Framework Inception Early Stage Growth Stage
to Early Stage to Growth Stage to IPO

7 ESOP Policy ✓ ✓ ✓

8 Intellectual property rights as well as ✓ ✓ ✓

assignment/ licensing agreements

9 HR Manuals / Employee Handbook ✓ ✓ ✓

10 Non-competition/non-solicitation agreements ✓ ✓ ✓

11 Diversity Policy ✓ ✓

12 Whistle blower Policy ✓ ✓

13 Code of conduct for directors, senior executives ✓ ✓

and employees

14 IT Policies including Data Governance and ✓ ✓

Information Security Policy

15 Customer Support / Grievance Policy ✓ ✓

C Board Composition

16 Right combination of executive and ✓ ✓

non-executive directors based on skills matrix
and business of the start-up

17 Diversity on board ✓ ✓

18 Process for selection of board members ✓ ✓

19 Written agreement setting out terms of their ✓ ✓ ✓

appointment

20 Chair of the Board should not be same as the ✓

CEO

21 Appointment of KMPs like CEO, CFO, COO and ✓ ✓

CS (as may be applicable).

22 Define role and responsibilities of Founder ✓ ✓

Directors

D Board Meeting Process

23 Sharing board reading material including notice ✓ ✓ ✓

and agenda ahead of board for member to be
prepared
(Required under law)

© Nishith Desai Associates 2024 Provided upon request only 79

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

Level 1 Level 2 Level 3

SN Recommended Governance Framework Inception Early Stage Growth Stage
to Early Stage to Growth Stage to IPO

24 Documenting board minutes ✓ ✓ ✓

(Required under law)

25 Recording board meeting electronically ✓ ✓

if possible

26 Board Meetings held at least once a quarter ✓ ✓ ✓

(Required under law)

27 To oversee the Board of subsidiaries is properly ✓ ✓

structured and governed

28 To oversee the Board of acquired entities are ✓ ✓

properly structured and governed

E Directors / Board Responsibilities

29 Define Role and Responsibility Matrix of Board ✓ ✓ ✓

(including the following):
§ Bank signatories
§ Making investments
§ Taking loans / debt
§ Appointing auditors
§ Approving related party transactions
§ Approving large expenses beyond certain
budget

30 Articulate vision and mission statement of the ✓ ✓

Company and inculcate purpose as well

31 Board oversight of related-party transactions ✓ ✓ ✓

(Required under law)

32 Defined Role of the Board Chair ✓ ✓

33 Promoting good governance by framing a policy ✓ ✓

34 Whether responsibilities are delegated ✓ ✓

to management

35 To have annual performance evaluation of board ✓ ✓

members and senior executives

36 Annual declaration and disclosures by directors ✓ ✓ ✓

(Required under law)

F Committees

37 Remuneration Committee ✓ ✓

© Nishith Desai Associates 2024 Provided upon request only 80

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

Level 1 Level 2 Level 3

SN Recommended Governance Framework Inception Early Stage Growth Stage
to Early Stage to Growth Stage to IPO

38 Audit Committee ✓ ✓

39 Risk Committee ✓ ✓

40 Whistle-blower Committee ✓ ✓

41 Prevention of Sexual Harassment Committee ✓ ✓ ✓

(POSH) Committee
(Required under law)

G Remuneration

42 Remuneration for executive directors / founders ✓ ✓ ✓

43 Remuneration for non-executive directors ✓ ✓

44 Disclosure of remuneration process and policy ✓ ✓

45 ESOP for all management and preferably ✓ ✓

all employees

46 Remuneration for Key Managerial Persons ✓ ✓

H Budget

47 Ensuring budgets are properly reviewed and ✓ ✓ ✓

approved by the Board

I Financial / Business Integrity

48 Appointment of Audit committee ✓ ✓

49 Defining responsibilities of auditors ✓ ✓

50 Check Independence of Auditor ✓

51 Circulation of Quarterly Financial Statements ✓ ✓

52 Internal audits ✓ ✓

53 Annual audits ✓ ✓ ✓
(Required under law)

© Nishith Desai Associates 2024 Provided upon request only 81

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

Level 1 Level 2 Level 3

SN Recommended Governance Framework Inception Early Stage Growth Stage
to Early Stage to Growth Stage to IPO

J Employees

54 Trainings on ethics, anti-harassment etc ✓ ✓

55 Creating a mechanism for employees to raise ✓ ✓

issues to management safely and anonymously

56 Employment / Consultancy Agreement ✓ ✓ ✓

57 Founders Agreement ✓ ✓ ✓

K Managing ESG Risks and Opportunities

58 Board ESG oversight ✓ ✓

59 ESG Disclosure ✓

60 Tax Practices ✓

61 Corporate Culture ✓

62 Workforce and human rights ✓

63 Climate Change ✓

B. Preparing for IPOs or Exit Strategies with Strong Governance

An exit strategy is a plan that a Start-up company develops to enable its founders and investors to realize
their investment and exit the company. An exit strategy is typically designed to maximize the value of the
company and generate a return on investment for its stakeholders.

The most common exit strategies for Start-ups include:

§ Acquisitions

§ Mergers

§ Initial Public Offering (“IPO”)

§ Management buyout

§ Liquidation

Preparing for exit strategies with strong governance is essential for maximizing the value of Start-up and
to ensure a smooth transition as it helps building investor confidence, ensures legal compliance, and enhances
the overall attractiveness of Start-up company to potential buyers or investors.

© Nishith Desai Associates 2024 Provided upon request only 82

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

Going public through an IPO is the most lucrative exit strategy and a transformative event for Start-ups as
it provides access to capital and new growth opportunities however, going public is challenging as it needs
to comply with stringent regulatory requirements, including financial reporting, disclosure, and governance
standards. Also, preparing a Start-up to be IPO-ready is a complex and multi-year process. It requires
meticulous planning, strong governance practices, and the right team of leaders and professionals to guide
through the intricacies of the IPO journey.

Hence, by diligently preparing for exit strategies with strong governance since start of its journey, likelihood
of a successful transition is high in less time and Start-up is well-positioned to achieve its objectives while
maintaining ethical and responsible business practices and still remaining attractive to investors.

Taking cue from the Start-up framework model, some of the steps that the Start-ups may undertake for
preparing itself can be as below:

§ Develop a robust governance framework that includes clear roles and responsibilities for founders,
executives, and the board of directors.

§ Define decision-making processes and procedures, including mechanisms for resolving disputes.

§ Ensure that the board of directors is composed of experienced individuals with a diverse range of skills
and industry expertise, independence, and governance experience to provide valuable insights and
impartial oversight.

§ Clarify the roles and responsibilities of the board and establish various committees (e.g., audit,
compensation) to enhance governance.

§ Draw down or update the corporate governance policies and procedures, including codes of conduct,
whistle-blower policies, anti-corruption measures and any other relevant policies and should ensure that
the company follows all governance-related laws and regulations.

§ Develop a robust system on financial review, reporting, internal controls and auditing to maintain
transparency and accuracy, prevent fraud and errors and to report and undertake necessary correction
steps wherever needed and on timely manner and proactively.

§ Conduct thorough due diligence to identify any financial or operational weaknesses that may need
to be addressed proactively.

§ Conduct a thorough legal and regulatory compliance review to ensure that the Start-up complies with
all relevant laws and industry regulations.

§ Undertake the necessary actions to address any outstanding legal issues, such as litigation or intellectual
property disputes.

§ Review and update employee stock option plans (ESOPs) and equity incentive programs to align with the
IPO or exit strategy and ensure that employees understand the potential impact on their equity holdings
and are motivated to contribute to a successful exit.

§ Develop a proper communication strategy with investors, employees, and other stakeholders for open and
transparent interaction with respect to organisation plans which may have potential impact on them.

§ assess the suitability of chosen exit strategy (IPO, acquisition, merger) based on market conditions and
the company’s growth trajectory and be flexible to adjusting the strategy as needed to maximize value
and returns on investment.

© Nishith Desai Associates 2024 Provided upon request only 83

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

C. Future of Start-ups

In recent years, the global Start-up ecosystem has been undergoing a profound transformation and they have
proven their capability to become one of most significant and influential forces in the business world. They
have disrupted industries, created entirely new markets and business models, and changed the way people
think about entrepreneurship globally. As the Start-up landscape continues to evolve, it is increasingly
important to anticipate and understand the future changes that shall be needed in terms of the governance
practices, which will be shaped by these evolving trends and the unique challenges of each industry and
market. It is evident that only those Start-ups who proactively embrace and adapt to these trends, will be better
positioned to navigate the changing governance landscape and succeed in the long run by contributing to build
a sustainable eco-system.

The landscape of Start-up governance is continuously evolving, driven by changes and advancement in tech-
nology, regulatory environments, investor expectations, shifting consumer behaviours market dynamics and
global trends. To stay competitive, resilient and thrive in such environment, Start-ups must adapt to these shifts
and anticipate future trends in governance. By having a clear vision, staying on top of new technologies, and
remaining agile, Start-ups can ensure that they are ready for whatever lies ahead in the ever-evolving Start-up
industry.

Below are few of the key aspects of the evolving landscape of Start-up governance to be considered in line
with future trends:

I. Evolving landscape of future trends in Start-ups

§ Sustainability and ESG Focus: Due to awareness on global crisis related to climate change, investors
and consumers are showing a growing interest in sustainable and socially responsible businesses and
products and services relevant for climate, change, healthcare, and poverty alleviation and other.
Hence, it is be imperative for Start-ups to prioritize Environmental, Social, and Governance (ESG)
principles in coming days soon, if not done yet.

§ Diversity and Inclusion: Start-ups will need to prioritize diversity in inclusive leadership and
decision-making roles to meet investor and societal expectations.

§ Clean Energy and Green Tech: Start-ups will play a crucial role in developing clean energy solutions,
sustainable materials, and technologies to combat climate change.

§ Cybersecurity and Privacy: The increasing frequency of cyberattacks and data breaches has identified
the need for robust cybersecurity solutions. Start-ups are exploring innovations in areas like zero-trust
security, identity protection, and data privacy.

§ Tech-Driven Industries: Technology will continue to be at the forefront of Start-ups. Emerging

technologies such as artificial intelligence (AI) and machine learning, blockchain, quantum
computing, edge computing will create new opportunities for innovation and will continue to
transform industries. The Web3 movement envisions a decentralized internet with new opportunities
for Start-ups in areas like decentralized applications (dApps), blockchain infrastructure, and
decentralized identity.

§ NFTs and Digital Ownership: Non-fungible tokens (NFTs) are revolutionizing digital ownership
and the art market. Start-ups are exploring NFT applications beyond art, including gaming,
collectibles, and virtual real estate.

© Nishith Desai Associates 2024 Provided upon request only 84

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

§ Food Innovation and Agriculture Technology 3 (AgriTech): As global food demands rise, Start-ups
will focus on AgriTech innovations solutions, including precision agriculture, Indoor vertical farming,
sustainable food production, Bee Vectoring, Livestock Farming Technology, Farm automation and
Management Software, water management technology etc.

§ Education Technology (EdTech): EdTech Start-ups will continue to provide online learning solutions,
personalized education and upskilling opportunities as remote and hybrid learning becomes more
common and accessible.

§ Fintech Innovation: The financial technology sector will see continued growth, with Start-ups
focusing on digital banking, decentralized finance (DeFi), and payment solutions powered by
blockchain and cryptocurrencies are disrupting traditional financial services.

§ HealthTech and Biotech: The pandemic accelerated the adoption of telehealth and digital health
solutions. The healthcare and biotechnology sectors will experience significant growth as Start-ups
focus on telemedicine, remote patient monitoring, personalized medicine, genomics, digital health
solutions and AI-driven diagnostics.

§ E-commerce Evolution: E-commerce will continue to evolve with advancements in augmented

reality (AR), virtual reality (VR), and 3D modeling, offering immersive online shopping experiences.

§ Metaverse and Virtual Reality (VR): The metaverse, a virtual shared space where users can interact
and create, is gaining traction. Start-ups are exploring opportunities in virtual reality, augmented
reality, and mixed reality, particularly in gaming, entertainment, and remote collaboration.

§ Supply Chain Resilience: Recent disruptions in supply chains on account of pandemic, have
highlighted the need for increased resilience. Start-ups are innovating in logistics, supply chain
management, and predictive analytics to enhance supply chain robustness.

§ Space Exploration and Commercialization: Start-ups are contributing to the commercial space
industry’s growth with opportunities in satellite technology, asteroid mining, lunar exploration, and
even Mars colonization.

II. Evolving Landscape of Future Governance in Start-ups

§ Increased Regulatory Scrutiny: In order to guide and shape the future of Start-ups, Governments
have a unique opportunity to provide the necessary support and dedicated regulations that will
help to ensure the success of Start-ups and enable them to reach their potential without stifling
innovations within the Start-up ecosystem.

Start-ups should expect tighter regulations around employee well-being, data privacy, cybersecurity,
antitrust concerns, compliance, risk and governance management and governance models that
prioritize stakeholder interests inclusive of employee, customers and communities in a holistic
manner.

3 https://masschallenge.org/articles/agriculture-innovation.

© Nishith Desai Associates 2024 Provided upon request only 85

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

§ Future Governance Models should be digitally transformed, progressive and adaptive in nature:
Future governance models shall need to be more progressive and adaptive to rapid changes
in technology and market conditions. Agile governance frameworks that can respond quickly
to emerging challenges will be valuable.

The use of technology for governance is increasing. Digital tools like board management software
and AI-driven governance platforms using blockchain technology are streamlining governance
processes and enhancing transparency. Further, the shift toward remote work and virtual meetings
may include a more permanent acceptance of virtual governance.

§ Cybersecurity, Data Ethics and AI Governance: Cybersecurity threats continue to evolve and
greater emphasis must be placed on data protection, and cybersecurity governance to safeguard
sensitive information and maintain customer trust. As Start-ups leverage AI and data-driven
technologies, ethical considerations and AI governance will become central to decision-making
and risk management. Decentralized governance models using blockchain technology are emerging,
allowing stakeholders to participate in decision-making.

§ ESG Focus with Long-Term Sustainability: ESG considerations are becoming integral to governance.
Investors and stakeholders increasingly expect Start-ups to address environmental and social issues,
along with maintaining sound governance practices. Governance practices will need to align with
sustainability and ESG goals.

§ Globalization Challenges: Start-ups with global ambitions will face complex governance challenges
related to differing regulations, separate jurisdictions, cultural norms, and geo-political issues.

D. Internalization – Reverse Flipping

‘Flipping’ refers to the process of transferring the entire ownership of an Indian entity to an entity incorporated
abroad, along with a transfer of the key assets such as intellectual property. The resultant structure is an Indian
company becoming a wholly owned subsidiary of a foreign company, with the day-to-day operations being
conducted in India. Effectively, the ownership of the entity is externalised abroad, whereas the value
of such entity may continue to vest with the Indian entity. 4

While flipping is generally considered to be easier at the initial stages of the life cycle of an entity, mature
structures have also flipped out of India in the last few years for a myriad of reasons. A predominant reason
for flipping has generally been the access to a global pool of investors, ease of listing on overseas exchanges,
higher valuations in stock exchanges abroad, broader customer base in new geographies, relatively easier
regulatory regimes, founder preferences and taxation benefits accruing to interested international investors
in their host jurisdictions. Estimates suggest that 56% of 108 Indian Unicorn Start-ups are domiciled in
offshore jurisdictions. United States of America, Singapore and United Kingdom are some of the most
popular examples of countries to which Indian entities have ‘flipped’.

4 NDA Hotline on Reverse Flipping: Time To ‘Internalise’ Into India Inc!, available on: https://www.nishithdesai.com/NewsDetails/9600.

© Nishith Desai Associates 2024 Provided upon request only 86

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

Pre-Flipping Post-Flipping

Resident Non-Resident Resident Non-Resident

Shareholders Shareholders Shareholders Shareholders

US/Singapore
Company

Indian Indian
Company Company

Source: Indian Economic Survey 2022-23

However, there is a marked rise in ‘reverse flipping’ into India recently. As the name suggests, reverse
flipping refers to the process of internalising through an integration of ownership and value of an entity
back into India. Thus, the shares of the foreign and Indian shareholders (that were originally held at the
foreign holding company level) are swapped for shares of the Indian company, pursuant to which the foreign
companies / offshore holdings are dissolved or merged into the Indian entity and all the shareholders
at the offshore level own the shares of the Indian entity. While this may have a few adverse implications
(including tax implications) on the investors, the general motivation for a reverse flip is the increased
certainty of an exit at a higher valuation in India

The Economic Survey 2022-23 5 has observed that there is a conducive environment for an increase in
internalisation into India due to various initiatives, reforms and schemes targeted towards Start-ups by the
Government of India, greater access to capital within the prevalent private equity and venture capital setup,
the growing maturity of Indian markets, and the recent changes in rules regarding round-tripping.

With various reforms and the recent liberalization of regulations, the Government of India has not only
enhanced the ease of doing business in India but has also reinstituted the lost faith of foreign institutional
investors in India. In addition, the Indian Government has taken steps for attracting companies to bring
ownership back to India including tax incentives offered in GIFT city and initiatives to provide a more
tax friendly environment to investors such as proposed exemption from angel tax for certain non-resident
investors and Start-ups alongwith host of other incentives to encourage reverse flipping of offshore holding
company /Indian Start-ups into GIFT IFSC and for that matter even to encourage greenfield investments
in holding companies to be setup directly into GIFT IFSC.

5 Box XI.5: ‘Flipping and Reverse Flipping: the recent developments in Start-ups”, Economic Survey 2022-23 (Government of India),
available at: https://www.indiabudget.gov.in/economicsurvey.

© Nishith Desai Associates 2024 Provided upon request only 87

 Start-up Governance Essentials — From Start to Maturity

Future of Governance in Start-ups

An important factor contributing to this trend also is the changing attitude of founders and the management,
who have begun acknowledging the value created, increased investment interest, brand relationships fostered
and strength of the customer base in India and its direct proportionality to attractiveness through a near-future
exit by way of an IPO.

While reverse flipping remains work in progress, established companies such as PhonePe and Pepperfry
have recently internalised into India — which only demonstrates the increasing popularity of resorting
to the process of internalisation.

© Nishith Desai Associates 2024 Provided upon request only 88

 Start-up Governance Essentials — From Start to Maturity

Yes, Governance Matters!

We at Nishith Desai Associates, have resolved to make it our responsibility

to spread awareness, through our newsletter “Yes, Governance Matters!” Scan here for articles
on the importance of governance and help formulate policies for compliance.

It is our mission to help you achieve your strategic objectives, guide you in complex high-stake transactions,
cross-border litigation and in crisis management. We do this by our thought leadership, academics, research,
innovations, advocacy, creativity, technology, organisational behavior and by better understanding the legal,
regulatory and political environment and industries in which you operate.

We strive to help you preserve and enhance the value of your business by keeping you abreast of the new
developments in the area of corporate governance and providing strategic legal guidance. We hope to delve
into and debate with you the ways to further improve governance standards of India Inc. through personal
interactions, private client memos, in-house webinars, teleconferences, panel discussions and more. Together,
we hope to develop “Next Practices” in governance because Yes, Governance Matters.

Let’s experience the joy of changing the world around us for the better — together.

Below, you’ll discover all our articles in the series titled “Yes, Governance Matters!”

1 Boeing Shareholder Vote: ESG in Action 18 Whose Director Are You Anyway?
2 SEBI’s Eye Opener for Independent Directors: 19 Financial Misconduct and Governance Lapses:
What to Look out For? Why it’s a Wake-Up Call for Indian Start-ups
3 Shouldering The Load: The Board Of Directors’ Joint 20 Steering the Ship: How Good Governance Drives
Accountability For Corporate Governance Performance
4 Whistleblowing Dynamics in India’s Governance Landscape 21 Accountability in the Accounting Profession: Holding
5 Forging a New Path: Corporate Governance Strategies Chartered Accountants Responsible for Their Actions
for 2024 22 ESG: Adherence to Internal Policy and Procedures
6 Demystifying AI Governance: A Guide for Boardroom 23 The Power of ESG-Issues to Blur Traditional Jurisdiction
Decision-Makers of Regulators
7 Building Trust in Financial Reporting: NFRA’s Role 24 ESG: When the Governed Speak up, Who Listens?
in Shaping the Future 25 SEC Imposes Largest Ever Penalty on EY
8 The Unseen Influencers: Shadow Directors 26 When the Watchdog is Caught Napping
9 Resilience and Reinstatement: Sam Altman Returns as 27 Shareholder Activism: An ESG Tool or a Founder’s Curse?
OpenAI CEO Amid Board Overhaul
28 ESG: Blasting EV’s Driven by a Moral Compass
10 OpenAI Saga: Candidness and Corporate Governance
29 ESG: Equality and Diversity in Corporate India
11 Venture Capitalism’s Evolution: The Rising Emphasis — Time to Walk the Talk
on Start-up Governance
30 ESG: Yogi of Dalal Street
12 Crisis Management by the Board: Navigating Turbulent
Waters 31 ESG: Wider Consequences of Management Behaviour
13 The Art of Collective Decision-Making: A Peek Inside 32 ESG: What Independent Directors must know about ESG
the Boardroom 33 The Indian Disposition on Whistleblowing
14 Why Venture Capitalists Should Invest in Start-up in a Private Company
Governance 34 ESG: The Increasing Importance of Stakeholder Engagement
15 How to Prioritise People: A Governance Approach 35 Institutional Shareholder Can no longer Be a Mute Spectator:
to Minimise Layoffs at Start-ups Stewardship Governance in india
16 Navigating Governance Challenges: Strengthening 36 Yes, Governance Matters! — Corporate Citizenry in the
Non-Profit Organizations in India Face of Corruption
17 Independent Directors: Steering the Governance Wheel

© Nishith Desai Associates 2024 Provided upon request only 89

© Nishith Desai Associates 2024 www.nishithdesai.com
About NDA

At Nishith Desai Associates, we have earned the reputation of being Asia’s most Innovative Law Firm — ​
and the go-to specialists for companies around the world, looking to conduct businesses in India and for
Indian companies considering business expansion abroad. In fact, we have conceptualized and created
a state-of-the-art Blue Sky Thinking and Research Campus, Imaginarium Aligunjan, an international
institution dedicated to designing a premeditated future with an embedded strategic foresight capability.

We are a research and strategy driven international firm with offices in Mumbai, Palo Alto (Silicon Valley),
Bengaluru, Singapore, New Delhi, Munich, and New York. Our team comprises of specialists who provide
strategic advice on legal, regulatory, and tax related matters in an integrated manner basis key insights
carefully culled from the allied industries.

As an active participant in shaping India’s regulatory environment, we at NDA, have the expertise and more
importantly — the VISION — to navigate its complexities. Our ongoing endeavors in conducting and
facilitating original research in emerging areas of law has helped us develop unparalleled proficiency to
anticipate legal obstacles, mitigate potential risks and identify new opportunities for our clients on a global
scale. Simply put, for conglomerates looking to conduct business in the subcontinent, NDA takes the uncer-
tainty out of new frontiers.

As a firm of doyens, we pride ourselves in working with select clients within select verticals on complex
matters. Our forte lies in providing innovative and strategic advice in futuristic areas of law such as those
relating to Blockchain and virtual currencies, Internet of Things (IOT), Aviation, Artificial Intelligence,
Privatization of Outer Space, Drones, Robotics, Virtual Reality, Ed-Tech, Med-Tech and Medical Devices and
Nanotechnology with our key clientele comprising of marquee Fortune 500 corporations.

The firm has been consistently ranked as one of the Most Innovative Law Firms, across the globe. In fact,
NDA has been the proud recipient of the Financial Times – RSG award 4 times in a row, (2014-2017) as the
Most Innovative Indian Law Firm.

We are a trust based, non-hierarchical, democratic organization that leverages research and knowledge to
deliver extraordinary value to our clients. Datum, our unique employer proposition has been developed
into a global case study, aptly titled ‘Management by Trust in a Democratic Enterprise,’ published by
John Wiley & Sons, USA.

© Nishith Desai Associates 2024 www.nishithdesai.com

Research@NDA

Research is the DNA of NDA. In early 1980s, our firm emerged from an extensive, and then pioneering,
research by Nishith M. Desai on the taxation of cross-border transactions. The research book written by him
provided the foundation for our international tax practice. Since then, we have relied upon research to be
the cornerstone of our practice development. Today, research is fully ingrained in the firm’s culture.

Over the years, we have produced some outstanding research papers, reports and articles. Almost on a daily
basis, we analyze and offer our perspective on latest legal developments through our “Hotlines”. These
Hotlines provide immediate awareness and quick reference, and have been eagerly received. We also provide
expanded commentary on issues through detailed articles for publication in newspapers and periodicals
for dissemination to wider audience. Our NDA Labs dissect and analyze a published, distinctive legal trans-
action using multiple lenses and offer various perspectives, including some even overlooked by the executors
of the transaction. We regularly write extensive research papers and disseminate them through our website.
Our ThinkTank discourses on Taxation of eCommerce, Arbitration, and Direct Tax Code have been widely
acknowledged.

As we continue to grow through our research-based approach, we now have established an exclusive four-
acre, state-of-the-art research center, just a 45-minute ferry ride from Mumbai but in the middle of verdant
hills of reclusive Alibaug-Raigadh district. Imaginarium AliGunjan is a platform for creative thinking; an
apolitical ecosystem that connects multi-disciplinary threads of ideas, innovation and imagination. Designed
to inspire ‘blue sky’ thinking, research, exploration and synthesis, reflections and communication, it aims
to bring in wholeness — that leads to answers to the biggest challenges of our time and beyond. It seeks to be
a bridge that connects the futuristic advancements of diverse disciplines. It offers a space, both virtually and
literally, for integration and synthesis of knowhow and innovation from various streams and serves as a dais
to internationally renowned professionals to share their expertise and experience with our associates and
select clients.

We would love to hear from you about any suggestions you may have on our research publications.
Please feel free to contact us at [email protected].

© Nishith Desai Associates 2024 [email protected]

Recent Research Papers

Extensive knowledge gained through our original research is a source of our expertise.

February 2024 February 2024 December 2023

Tracking NFTs Enforcement of Arbitral Awards Prevention of Sexual Harassment
from Code to Court and Decrees in India at the Workplace (POSH)
Legal Considerations and Disputes Domestic and Foreign India Legal & HR Considerations

December 2023 November 2023 October 2023

The Indian Defence Industry The Global Drone Revolution ESOPs and Other Benefits Plans
Redefining Frontiers Aerial Transport, Investments for Employees in India
and Make in India Opportunities Legal, Regulatory and Tax
Considerations

For more research papers click here.

© Nishith Desai Associates 2024 www.nishithdesai.com

MUMBAI SILICON VALLEY BENGALURU

93 B, Mittal Court, Nariman Point 220 S California Ave., Suite 201 Prestige Loka, G01, 7/1 Brunton Rd
Mumbai 400 021, India Palo Alto, California 94306, USA Bengaluru 560 025, India

Tel +91 22 6669 5000 Tel +1 650 325 7100 Tel +91 80 6693 5000

SINGAPORE MUMBAI BKC NEW DELHI

Level 24, CapitaGreen 3, North Avenue, Maker Maxity 13-H, Hansalaya Building, 15
138 Market St Bandra–Kurla Complex Barakhamba Road, Connaught Place
Singapore 048 946 Mumbai 400 051, India New Delhi 110 001, India

Tel +65 6550 9855 Tel +91 22 6159 5000 Tel +91 11 4906 5000

MUNICH / AMSTERDAM NEW YORK GIF T CIT Y

Maximilianstraße 13 1185 6th Avenue, Suite 326 408, 4th Floor, Pragya Towers
80539 Munich, Germany New York, NY 10036, USA GIFT City, Gandhinagar
Gujarat 382 355, India
Tel +49 89 203 006 268 Tel +1 212 464 7050

Start-up Governance Essentials

From Start to Maturity

© Nishith Desai Associates 2024 [email protected]