Before an investor decides whether they like your product, they look at who owns your company. Your capitalisation table, the record of every share, option, and convertible instrument outstanding, is the legal spine of the business you are asking them to fund. A messy cap table signals risk, and it can quietly kill an otherwise fundable round. Cleaning it up is cheap when you do it early and expensive when you do it under a live term sheet. This lesson shows what "clean" means in the Indian context and how to get there before you start pitching.
Put your own shares on a vesting schedule
First-time founders often assume vesting is only for employees. It is not. The market standard in India is founder vesting over four years with a one-year cliff, documented in a Founders' Agreement. In practice this is usually done through reverse vesting: you hold your shares from day one, but the company keeps the right to buy back the unvested portion at cost if you leave early. This protects the remaining founders from the classic failure where a co-founder walks away in month eight holding a large, frozen block of equity. Investors expect to see this. If you have not put vesting in place, they will often force it into the term sheet anyway, so do it on your own terms first.
Remove dead equity and informal promises
"Dead equity" is a stake held by someone who no longer contributes: a co-founder who left, an advisor who did one call, or a contractor paid in shares who has since disappeared. Every such block dilutes the people still building and makes the company harder to fund. Just as dangerous are undocumented promises. Equity offered over WhatsApp, email, or a handshake, for example "you will get 2 percent," is not a clean grant, but it is a real liability that can resurface during diligence. Convert genuine commitments into properly issued shares or options through your board and Registrar of Companies filings, and formally close out, in writing, the ones that are no longer valid, before you raise.
Clean up convertibles and set your option pool
If you raised early money on a convertible instrument, understand exactly what it converts into. Under FEMA, a convertible note can only be issued by a DPIIT-recognised startup, must be for at least Rs. 25 lakh from a single investor in a single tranche, and must convert or be repaid within ten years, with Form CN filed with the RBI within 30 days of issue. A US-style SAFE is not a recognised instrument under Indian company law or FEMA, so Indian rounds use an iSAFE structured to convert into compulsorily convertible preference shares (CCPS). Map every note and iSAFE to the shares it will become so there are no surprises on the post-money cap table. Decide your ESOP pool now too: 10 to 15 percent of fully diluted equity is typical, and creating it before the priced round keeps the dilution maths honest.
Why investors scrutinise this before wiring money
During due diligence, investors and their lawyers compare your internal cap table against your statutory filings at the Ministry of Corporate Affairs. Every allotment should have a Form PAS-3 filed within 30 days, share certificates issued within two months, and any foreign investment reported through Form FC-GPR within 30 days. If your spreadsheet says one thing and the ROC records say another, the deal stalls while lawyers reconcile it, and stalled deals often die. A clean, fully documented cap table that matches the public record tells an investor the company is well run and that their money will buy exactly the ownership the term sheet promises. Note that angel tax under Section 56(2)(viib) has been abolished, with the exemption applying from assessment year 2025-26 (financial year 2024-25), but you will still need a valuation report from an authorised valuer, typically a chartered accountant or SEBI-registered merchant banker, to justify the price of shares issued to foreign investors under FEMA.
Do this work before you send a single pitch deck. A founder who arrives with vesting in place, no dead equity, convertibles mapped, and filings reconciled is signalling exactly the discipline that makes an investor comfortable enough to wire the money.