Introduction

The Issue of Shares in Startup begins the first step in the journey to ownership, fundraising, control, compliance and other important factors. In 2025, due to changes in the legal frameworks for startups, the stakes for properly issuing shares and avoiding complications are higher than ever. Whether it’s onboarding investors, issuing employee equity, or bringing in co-founders, shares must be issued legally and in a controlled manner.

This blog by Lawfinity analyzes the Issue of Shares in Startup using a simple and contemporary step-by-step legal approach. We will also examine, from a compliance standpoint, the required documents, and the most frequent errors with a primary emphasis on the Startup Share Issuance Process and Share Allotment criteria for 2025.

WHAT IS SHARE ISSUANCE IN A STARTUP?

The issue of shares in a startup is when a company allocates and formalizes the creation of equity or different classes of shares and gives those shares to the founders, investors, and employees of a company. This can happen during funding rounds, incorporation, or when a company offers shares to employees under the Employee Stock Option program.

For a startup, it is more than simply acquiring capital. One must also consider the alignment of control, compliance, ownership structuring, and governance. An attentive Share Issuance Process in a startup assists in regulatory approval and trust of the investors for many years to come.

TYPES OF SHARES FOR STARTUPS (EQUITY, PREFERENCE, SWEAT EQUITY)

Startups usually make the following kinds of shares:

1. Equity Shares (Ordinary Shares): Primarily allotted to founders and investors, they come with voting rights and a share of profit.

2. Preference Shares: Holders of these shares get dividends and a share of assets first in a company, thus investors like these shares for protection.

3. Sweat Equity Shares: Issued to founders or employees who contribute non-cash resources, like know-how and IP.

A strategic and compliant Share Allotment in a startup depends on the right mix.

LEGAL REQUIREMENTS FOR ISSUING SHARES IN A STARTUP

A startup has to observe a few legal regulations for valid Issue of Shares in Startup, which include:

Companies Act, 2013 – Describes laws on the capital, allotment, and compliance of shares.
Startup Exemptions – Relaxations are offered to recognized startups, such as amplified periods for issuing sweat equity.
FEMA Regulations – Issuing shares to foreign investors.
Dematerialisation Mandate – All listed companies, certain class of unlisted public and private companies are obliged to issue shares in a demat form.
Valuation Compliance – During a Startup Share Allotment, shares are often required to be priced by a certified valuer.

Learning these laws makes for a seamless Startup Share Issuance Process.

STEP-BY-STEP PROCESS TO ISSUE SHARES IN A STARTUP

To complete the Issue of Shares in Startup legally, one must follow these steps:

1. Board Meeting & Resolution: Approve the terms of share issuance; price, number and type must be included.

2. Valuation Report: Shares, preference and sweat equity in particular, must be valued by a registered valuer.

3. Shareholder Approval (if required): If the Articles or the law set forth such a requirement, obtain the consent by way of special resolution.

4. Draft & Send Offer Letters: Send formal subscription or offer letters to the investors or the allotees.

5. Getting Payment or Consideration: Make sure to get any payment and any non-cash consideration you get like intellectual property.

6. Allotment of Shares: Schedule a board meeting and resolve on Startup Share Allotment.

7. Submitting with ROC (Form PAS-3): Complete and submit all needed forms within 15 days of allotment.

8. Issuing Share Certificates or Credit to Demat: Issue and send the share certificates or credit the demat accounts within the prescribed time.

9. Updating Registers: The Register of Members and Register of Share Allotments must be updated.

10. Post Allotment Compliance: Prepare and document compliance and the cap tables for the next rounds.

These steps in the Startup Share Issuance Process are meant to provide legality and to avoid skepticism from investors.

DOCUMENTS REQUIRED FOR SHARE ALLOTMENT

Prepare the following documents for the Issue of Shares in Startup.

Resolutions from the board and shareholders
Valuation report
Offer/subscription letters
Application forms and payment proofs
Form PAS-3, SH-7 filings
Share certificates or demat proof
Updated registers (members, allotments)
KYC documents of allottees
Agreements (if sweat equity or ESOPs are issued)
Shareholders’ agreements (if applicable)

Proper documentation will surely bring ease to your Startup Share Allotment.

COMPLIANCE WITH COMPANIES ACT, 2013 AND SEBI GUIDELINES

Important compliance for the year 2025 on:

PAS-3 & SH-7 Filings: Mandatory after allotment.
Sweat Equity Rule: Founders have the first 10 years to issue sweat equity over 50% of the capital.
Dematerialization: Most start-ups need to issue shares in the demat form.
Valuation Requirements: Registered valuers must evaluate for non-cash or preferential allotments.
FDI Compliance: For foreign investors, compliance with the RBI reporting and pricing norms is a must.
SEBI Guidelines: Relevant for startups considering IPOs or exit of investors.

This helps you to have a trouble-free Startup Share Issuance Process.

COMMON MISTAKES TO AVOID WHILE ISSUING SHARES

These are the common mistakes owners make in the Issue of Shares in Startups:

1. Not getting a valuation report

2. Late filing of PAS-3 or SH-7

3. Issuing physical shares when demat is required

4. Sweat equity limits exceeded

5. Not maintaining statutory registers

6. Ignoring FDI regulations pertaining to foreign investors

7. Not having lock-in or vesting terms

8. Badly constructed shareholder rights

9. No board or shareholder approvals

10. No legal advisor

These mistakes can compromise the compliance of your Startup Share Allotment.

HOW LAWFINITY CAN HELP YOU WITH SHARE ISSUANCE IN YOUR STARTUP

Lawfinity is able to provide complete legal assistance for the Share Issuance in Startups which includes:

Preparing the board and shareholders
Managing valuations with regulatory filings
Drafting and finalizing offer letters and agreements
Ensuring compliance with ROC and SEBI
Dematerialized shares coordination and documentation
Full guidance for the Startup Share Issuance Process

You will be able to issue shares in legally safe and compliant manner with assistance from our legal professionals.