India’s startup ecosystem is driven by speed. The number of DPIIT-recognised startups has grown from around 500 in 2016 to 1,59,157 as of January 15, 2025. (Source)
Build fast, fund faster that’s the mantra…
And somewhere in that rush, compliance takes a backseat…Mostly out of the belief that “we’ll fix it later.”
However, here’s the hard reality – what feels like a minor compliance miss today often becomes a major issue tomorrow… Many startups that once made headlines for their growth later face tough questions simply for ignoring basic legal, financial, and ethical responsibilities.
Let’s explore the cost of non-compliances, its consequences, and why compliance is not a tick-mark but a value driver.
When Startups Skip Compliance, What Happens?
When basic documentation is missing like board minutes, share certificates or statutory records investors start questioning not just the structure, but the intent.
In a recent case in late 2023, one of the startups admitted to inflating revenues via fake invoices. The result – investors pulled out, layoffs, and a damaged brand.
- Due Diligence Delays Kill Funding Momentum
Investors don’t just look at your growth metrics – they look at how you maintain your books, up-to-date cap table, board approved ESOPs policies and complete regulatory and tax filings.
The moment due diligence process uncovers the compliance gap, funding discussions/talks halt and frequently come to an end.
Often seen Startups get a term sheet but fail during diligence due to poor documentation or missing compliance records and once momentum breaks, it’s hard to rebuild.
- Regulators Catch Up – Eventually
Many founders assume that early-stage startups are largely overlooked by regulators. However, the recent shift is clear—SEBI, Income Tax, and GST departments are tightening their monitoring and administration efforts.
Example: In several instances, GST department flagged startups for mismatches in Input Tax Credit (ITC) claims due to vendor non-compliance or delayed return filing and thus directly affecting working capital and vendor relationships
Compliance neglect is silent at first, loud in consequence…
- Vendors and Clients Step Back –
B2B startups often find large clients unwilling to engage without:
- GST compliance
- Valid NDAs and MSAs
- Proper onboarding documentation
If you’re not compliant, even a closed deal can get delayed or cancelled.
e.g. If a business fails to file its GST returns, the GST portal may automatically block its GST number. This status is visible to suppliers and customers, who may then stop doing business with the company due to its non-compliance. It affects business reputation and disrupts the supply chain.”
As a SEBI-registered VC fund, Auxano doesn’t just ensure its own fund’s compliance – we also work closely with our investee companies to keep their governance and statutory obligations on track. We’ve seen firsthand how startups that embrace compliance early build stronger investor confidence, unlock faster funding, and avoid future liabilities. Our approach includes compliance check-ins as part of portfolio monitoring, because we see it not as bureaucracy, but as business hygiene.
So, What can Founders do Instead?
Rather than seeing compliance as a blocker, startups should embed it as part of their KPI—just like product or design.
Here’s a simple approach:
- Create a Compliance Tracker
Use an Excel sheet, or a SaaS tool to create a compliance dashboard:
- Annual RoC filings
- GST/TDS payment and filing timelines
- Board meetings
- Share issuance/allotment etc.
- Other applicable regulatory compliances.
- Maintain a Central Repository of Key Agreements
From your first vendor to your first employee, have basic documents in place:
- Offer letters
- NDAs
- Master Service agreements
- Founder Agreements/Share Holder Agreements (SHA/SSHA)
- Conduct regular Legal & Financial Health Check
Depending on your budget, engage a professional on a quarterly, bi-annually, or annually basis to review compliance health checks. Key areas to evaluate include –
- Are all statutory filings up to date?
- Financial Statement & Audit Readiness?
- Are there any pending or required registrations (e.g., PF, ESI, DPDPA, etc.)?
Compliance as ROI: Building Long Term Reputation
Many founders treat compliance as a checkbox or an expense, while It’s an investment in credibility that pays dividends over time.
The “return” on compliance shows up as:
- Faster funding rounds
- Higher valuation during exits
- Client and vendor trust
- Avoiding costly legal cleanups
Your business valuation increases not just with revenue, but with reputation. And reputation is built on consistency and transparency. Therefore, the ROI of compliance is Reputation.
Way Forward –
Startups don’t fail only due to bad business ideas – sometimes they get derailed due to compliance ignorance.
Founders who track growth metrics, can potentially miss statutory filing deadlines.
You can outsource compliance execution, but you can’t outsource its consequences. Accountability always lies with the founders and the team.
Get the basics right from day one. You’ll not only build a great product—you’ll build a business that investors, customers, and employees can trust.
Author
Rakesh Rana
