Cap table management India: keep it clean

A cap table is a list of who owns what. At diligence it is also a test of whether you run a tidy company, because it is one of the few things an investor can verify independently against public filings. This is a plain guide for Indian consumer founders. It is not legal or tax advice, and the rules do change, so confirm the current position with your company secretary and counsel before you act on any of it.

Founder splits and vesting

Two decisions cause most founder disputes. The split, and whether it vests.

On the split, avoid the reflex of an exact equal division chosen to prevent an awkward conversation. Equal is fine when contributions really are equal. It is a problem when one founder is full time and another is not, or when one brings the capital and another brings four years of category experience. Have the awkward conversation once, in month one, rather than in year three when the company is worth something.

On vesting, the Indian market standard is four years with a one year cliff, documented in a founders agreement and reflected in the share subscription and shareholders agreement at the first priced round. Nothing vests in the first year. After twelve months the first quarter of the holding vests, then monthly or quarterly thereafter.

Founder vesting protects the founders who stay. Without it, a co-founder who leaves in month eight keeps a third of the company forever, and every future investor prices that dead equity into your round. Investors will impose vesting at the first institutional round anyway, so doing it at incorporation is cheaper and far less personal.

The ESOP pool and how it really dilutes

Most Indian consumer brands run a pool of 10 to 15 percent on a fully diluted basis before Series A. Size it off the hiring plan for the next eighteen months, not off a benchmark. Count the grants you actually intend to make for the roles you actually intend to hire.

The mechanic that catches founders out is timing. A pool created pre-money dilutes only the existing shareholders. A pool created post-money dilutes everyone including the incoming investor. Term sheets almost always specify pre-money, and the effect is real money. If you agree to a 20 percent round and then agree to top the pool up to 15 percent pre-money, the founders absorb that top-up entirely.

So negotiate pool size and pool timing together, as one item, with the hiring plan on the table as evidence. And remember that investors calculate their ownership on a fully diluted basis, which counts the whole pool whether or not it has been granted. If you have been discussing a term sheet against an issued shares cap table, the two of you are looking at different companies.

Track the pool properly too. Grants, vesting, exercises and options returned to the pool on exit. A pool used for three years with no lapse tracking is almost always wrong.

SAFEs, CCPS and notes in the Indian context

Indian early stage rounds use a small set of instruments, and the wrappers matter.

• Equity shares. Ordinary shares. Simple and rare in priced institutional rounds.
• CCPS, or compulsorily convertible preference shares. The workhorse of Indian venture rounds. They carry preference economics and protective rights, and they must convert into equity shares on defined triggers such as a qualifying round, a liquidity event or the end of the permitted tenure.
• CCDs, or compulsorily convertible debentures. Similar logic, debt shaped until conversion.
• Convertible notes. Available to DPIIT recognised startups, and excluded from the definition of a deposit under the Companies (Acceptance of Deposits) Rules, 2014 only if the conditions are met, including a minimum of 25 lakh rupees in a single tranche and conversion or repayment within ten years.
• iSAFE. An Indian adaptation of the SAFE, structured as CCPS or CCD. A bare US style SAFE is not a recognised security under the Companies Act, 2013, so it is not the right instrument on its own here.

Two things reliably create mess. First, conversion terms that were never modelled. Overlapping valuation caps, discounts and most favoured nation clauses across several instruments can produce a conversion outcome nobody anticipated. Build the conversion waterfall in a spreadsheet at the time you sign, not at the time you convert.

Second, pricing. Where a non-resident investor is involved, conversion pricing has to respect the applicable pricing guidelines and reporting requirements, and the relevant filings must be completed on time. This is exactly the kind of thing that looks like paperwork until it becomes a condition precedent to your next round closing. Take professional advice on the current requirements rather than copying what another founder did two years ago.

What a messy cap table costs at diligence

The cost is rarely a lower price. It is time, and time kills rounds and acquisitions.

The usual findings are dull and expensive. The internal spreadsheet does not tie to the MCA filings. A PAS-3 return for an allotment was never filed. A share transfer happened on a signed SH-4 that was never recorded in the register of members. Share certificates were never issued. Option grants exist in offer letters but were never approved by the board or reflected in any scheme. Old advisor equity was promised in an email and never documented.

Each item on its own is fixable. Twenty of them together mean four to eight weeks of legal reconstruction before a share purchase agreement can even be drafted, during which the market moves and the buyer reconsiders. It also shifts the tone of the whole deal. A buyer who finds three unrecorded transfers starts checking everything else, and the diligence list doubles.

The housekeeping that prevents a scramble

None of this is difficult. It is just unglamorous and easy to postpone.

• Hold one authoritative cap table. One file, one owner, version controlled. Not a founder laptop and three older copies in email.
• Reconcile against MCA filings every quarter. Allotments, transfers, charges, annual returns.
• Maintain the statutory registers and issue share certificates. These are legal requirements, not formalities.
• Keep a signed document for every line on the cap table, filed in one place, named consistently.
• Model the fully diluted position including every convertible instrument at its likely conversion, and refresh it after each round.
• Run a mock diligence once a year. Ask your company secretary to produce the pack a buyer would ask for and see what is missing while it is cheap to fix.

A clean cap table does not win you a round. A messy one can quietly cost you one, and you will never be told that was the reason.