Fundraising Models: Investor Financials, Cap Table and Dilution
A fundraising model does two jobs. It has to show an investor that you understand your own business, and it has to tell you what the money costs in ownership. Those are different calculations and they are usually done in different files, which is how founders end up surprised at the third round.
- The financials behind a pitch, and what an investor actually reads
- Burn, runway and the round sizing arithmetic
- The cap table, and modelling dilution across rounds
- Convertible instruments under Indian exchange control
- Option pools and the tax that attaches to them
What is actually read, and in what order
An investor reads the unit economics first, because that is where a business either works or does not. What does it cost to acquire a customer, what does that customer contribute, and over what period. Everything downstream is a scaling of that relationship, and if it is unfavourable, growth makes the position worse rather than better.
Then the growth mechanism. Not the growth rate, the mechanism: what specifically produces the next hundred customers, and what does it cost. A model that shows revenue tripling with sales and marketing rising forty per cent is making a claim about efficiency that has to be visible somewhere in the drivers.
Then the use of funds, which should reconcile line by line to the model. If the ask is for eighteen months of runway plus a sales team, the model should show the sales team joining on dates and the runway ending where the ask says it does. A use of funds slide that cannot be traced into the model is the fastest way to lose an analyst's confidence.
The arithmetic that sizes the round
Net burn is the monthly cash decrease, which is not the same as the loss. It is operating cash flow after working capital movements, less capital expenditure, and in a business with growing receivables it can be far worse than the profit and loss account suggests. Runway is closing cash divided by forward net burn, and the word forward is doing the work: dividing by last month's burn while the team is doubling produces a comfortable number and a bad surprise.
Size the round against a milestone, not against a period. The question an investor is asking is what this money proves, and the answer has to be a state the business reaches, not an amount of time it survives. Then add the buffer for the raise itself, because a round takes months during which burn continues, and running a process with under six months of runway removes your ability to walk away from terms.
Modelling dilution across rounds, not one round at a time
A cap table model that handles one round is a calculator. What founders need is the path: what the ownership looks like after three more rounds on plausible terms, with the option pool topped up at each one. The single round view is what produces the familiar surprise, because each round looks acceptable in isolation while the compound effect is not.
Model it fully diluted, including the unissued option pool, because that is how every investor will model it. Model the pool top up as pre-money where the term sheet says pre-money, which is the usual position, and be clear that this means the existing shareholders bear it entirely. Carry preference terms explicitly: a liquidation preference and any participation right change the distribution of proceeds at exit far more than the headline ownership percentage suggests, and an exit waterfall is the only way to see it.
Reconcile the model to the statutory register. The cap table in a spreadsheet and the register of members are supposed to describe the same thing, and where they diverge it is nearly always the spreadsheet that is right about intention and the register that is right about law.
Convertible instruments, and what Indian exchange control does to them
If any part of the round comes from outside India, the instrument choice is constrained before commercial negotiation begins. Under the Reserve Bank's Master Direction on Foreign Investment in India, equity instruments are equity shares, convertible debentures, preference shares and share warrants. Debentures must be fully and mandatorily convertible, and preference shares must be fully and mandatorily convertible, to count as equity instruments at all. An optionally or partially convertible instrument is treated as debt, which brings it under the external commercial borrowing framework instead.
Pricing is also constrained. For an unlisted company, the price must be worked out under any internationally accepted pricing methodology on an arm's length basis, duly certified by a chartered accountant, a merchant banker registered with the Securities and Exchange Board of India, or a practising cost accountant. And for a convertible instrument, the price or the conversion formula must be determined upfront at the time of issue, with the conversion price never lower than the fair value worked out at issuance. This is the clause that constrains instrument design most, and it is the one most often overlooked in a term sheet drafted on a foreign template.
A bare United States style simple agreement for future equity is not an instrument through which an Indian company may receive foreign investment. It is not one of the prescribed equity instruments, and calling it a SAFE or booking it as an advance does not make it one. An uncapped SAFE fails separately on the clause above, because its conversion economics are left to a future round with no upfront formula and no compliant pricing floor.
But the economics are not the problem; the instrument is. It would be too broad to say that every arrangement described as SAFE-like is incompatible, and the distinction is worth drawing precisely because Indian term sheets increasingly use the label. Fully and compulsorily convertible preference shares or debentures can carry a valuation cap, a discount to the next qualified financing, a conversion trigger and the usual investor protections, provided the conversion formula is fixed upfront, the pricing floor is respected and the instrument is validly issued under the Companies Act. What cannot survive is an undefined contractual right to receive securities later.
For an eligible Indian start-up there is a closer statutory route: the convertible note. The non-resident must invest at least ₹25 lakh in a single tranche, the note must convert into equity shares or be repaid within ten years at the holder's option, conversion must meet the applicable entry route, sectoral cap, approval and pricing requirements, and receipt and transfer are reported in Form CN. It is not a SAFE: it is legally debt, it carries a repayment possibility and it has a statutory long stop. An optionally convertible or redeemable instrument is treated as debt for exchange control purposes and may fall under the external commercial borrowing framework instead.
The company law machinery sits alongside all of that and has its own deadlines.
| Requirement | The position |
|---|---|
| Identified persons | No more than 200 in aggregate in a financial year, counted separately for each kind of security. Qualified institutional buyers and employees receiving securities under an option scheme are excluded from the count. The board must identify the persons before the invitation. An offer beyond the permitted number is a public offer, whether or not money was received or securities allotted |
| Offer letter | A specifically addressed, serially numbered Form PAS-4, with no right of renunciation, and the record of offers kept in Form PAS-5. No public advertisement, no media or distribution channels, no general application form |
| Subscription money | From the subscriber's own bank account, through banking channels and not in cash, held in a separate scheduled bank account. Usable only on allotment once the return of allotment is filed, or for refund |
| Allotment | Within 60 days of receiving the application money. Otherwise refund within the following 15 days, after which interest runs at 12 per cent a year from the end of the 60 days |
| Return of allotment | Form PAS-3 within 15 days of allotment. The money should not be used before both allotment and that filing |
The valuation point is the one that catches firms out. For an unlisted company's preferential allotment, the Companies Act report must come from a registered valuer registered under section 247 and the Companies (Registered Valuers and Valuation) Rules 2017. A chartered accountant's certificate is not sufficient merely because the signatory is a chartered accountant; they must separately be registered as a valuer for the relevant asset class. Consideration other than cash must also be valued by a registered valuer, with the accounting treatment addressed in the explanatory statement.
For convertible securities the resultant share price may be fixed either upfront when the offer is made or at conversion under the prescribed mechanism, provided the method is chosen and disclosed at the time of the offer. A listed company must also meet the securities regulator's preferential issue pricing requirements, and a foreign investment may need its own exchange control valuation. None of those reports replaces the registered valuer report the Companies Act requires.
The pool, and the tax attached to it
An option pool is a dilution decision before it is a compensation decision. Size it against a hiring plan rather than a market percentage, model it as issued rather than reserved, and put the top up in the round it actually happens in.
The tax is where the surprises are, and it lands on the employee, not the company. Under the Income-tax Act, 1961, the exercise of an option is a perquisite under section 17(2)(vi): the difference between the fair market value of the securities on the date of exercise and the amount the employee paid, valued under Rule 3, with tax deducted at source under section 192. The employee has a tax liability at exercise on a gain that is not yet cash, which is the single fact most option holders learn too late. On a later sale the gain is a capital gain, the cost of acquisition is the fair market value used at exercise, and the holding period runs from the date of allotment of the securities, not from the date of exercise.
The start-up deferral, and its narrow gate
An eligible start-up as referred to in section 80-IAC of the 1961 Act can defer the deduction of tax at source on the exercise perquisite. Tax must be deducted within 14 days of the earliest of three events: the expiry of 48 months from the end of the assessment year in which the securities were allotted, the date the employee ceases to be an employee, or the date the securities are sold. The gate is narrow. The section 80-IAC conditions, as the Income Tax Department states them, are incorporation between 1 April 2016 and 31 March 2030, turnover not exceeding 100 crore rupees in any financial year since incorporation, and being a private limited company or a limited liability partnership. The turnover ceiling of 200 crore rupees introduced in February 2026 applies to recognition by the Department for Promotion of Industry and Internal Trade. It does not reach this benefit, and the cooperative societies added as eligible for recognition do not qualify here either.
From tax year 2026-27 the same architecture sits in the 2025 Act under different numbers, and the mapping is worth having in one place because the Board's own navigator does not carry rows for the sub-sections that matter.
| What it does | 1961 Act | 2025 Act |
|---|---|---|
| Charges the option perquisite | Section 17(2)(vi) | Section 17(1)(d) |
| Values it, market value at exercise less what was paid | Rule 3 | Section 17(4)(c) |
| Identifies the eligible start-up | Section 80-IAC | Section 140 |
| Defers the employer's withholding | Section 192(1C) | Section 392(3) |
| Carries the employee's direct-payment position | Section 191 | Section 391(2) |
| Treats it in the self-assessment computation | Section 140A | Section 266(2)(g) |
| Sets the deferral events and the payment deadline | Section 156(2) | Section 289(3) |
One change of substance is buried in that table. Section 289(3) makes the tax or interest payable within fourteen days after the earliest of the expiry of 60 months from the end of the relevant tax year, the sale of the security, or cessation of employment with the employer that allotted it. Under the 1961 Act the equivalent period was 48 months from the end of the assessment year. Section 392(3) imports the same timetable for the employer's withholding obligation, and the rates remain those for the tax year in which the security was allotted or transferred.
For the valuation that has to sit behind an option grant, and for the treatment of convertible instruments at a valuation level, see our guide to valuation for fundraising, convertibles and ESOPs.
Questions about fundraising models
How many years should an investor model run?
Five is conventional and roughly two more than anyone believes. The later years are not a forecast; they are a demonstration that you understand what the business becomes at scale. Build them at lower detail and say so.
Should the model show the investor's return?
Model it for yourself, certainly, because it tells you whether your ask is internally consistent with the exit you are describing. Whether to show it depends on the audience; an investor generally prefers to build their own.
What is the most common error in a cap table?
Treating the option pool as issued when it is reserved, or the reverse, and then mixing the two conventions between rounds. It is a small arithmetic point that compounds into a materially wrong ownership picture by the third round.
Where to go next
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Position as at 18 September 2026. Reviewed every six months.
This page is general information, not professional advice. A financial model is only as good as the rules it assumes will still be there when the forecast period arrives, and most of those rules moved recently. The Income-tax Act 2025 replaced the 1961 Act on 1 April 2026 and renumbered every section. The Reserve Bank's project finance regime was rewritten with effect from 1 October 2025. The external commercial borrowing framework was rewritten in February 2026. The treatment of a share buyback changed twice inside eighteen months. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.