How much equity do incubators take in India? The rules

Founders often ask an incubator one question before they ask anything else: how much of my company do you want? In India the honest answer is that the scheme behind the incubator shapes it more than the incubator's own appetite does.

This guide sets out what the public rules say about incubator equity, the forms a stake can take, what later investors look for, and how to write the stake down. It uses official policy texts only, not any incubator's private terms, and it is not legal advice.

How much equity do incubators take in India?

No law sets a single figure. The closest national benchmark is the Ministry of Education's 2019 startup policy, which says an institute may take 2% to 9.5% equity in return for services and facilities. It adds that institutes should normally take much less, unless their own faculty or staff hold substantial shares.

The National Innovation and Startup Policy 2019 ties the stake to what the institute gives: brand, faculty contribution, support, the use of its IP, space, infrastructure, mentoring, seed funds and help with accounts, legal work and patents. Its other limits:

• The cap: 9.5% is suggested so the institute carries no legal liability arising out of the startup.
• Staff startups: the institute takes no more than 20% of the shares a salaried faculty or staff founder holds, still within the 9.5% cap.
• IP licences: if inventors license institute IP to their own startup, the share is again 1% to 4%, or a royalty of up to 4% of sale price.
• Cooling period: under a compulsory equity model, the startup may get 3 months on a rental basis before deciding, and cannot be forced to issue equity on day one.

What do the Seed Fund Scheme rules say about equity?

The Seed Fund Scheme does not fund startups through incubator equity. It allows grants of up to Rs 20 lakh and convertible debentures, debt or debt-linked instruments of up to Rs 50 lakh. It also bars the incubator and its staff from charging any fee, in cash or kind, to startups it supports.

That fee rule, in para 8.9 of the scheme guidelines, covers selection, disbursement, incubation and monitoring. An incubator that asks a funded startup for shares in return for those services should take DPIIT's view, or a lawyer's, first.

Convertibles are a different matter. A convertible debenture may turn into shares on the terms agreed, so a scheme incubator can end up on the cap table that way. The scheme also scores incubators on investment agreements signed and startups invested in. Our guide to applying to the Seed Fund Scheme as an incubator covers the debt terms.

What do AIM and DST guidelines allow?

AIM actively encourages equity. Its guidelines say an Atal Incubation Centre's seed money exists partly to buy equity in incubatees and build a self-sustaining fund, with up to Rs 1 crore of the grant usable for seed support and up to Rs 12.5 lakh per startup, as debt, convertible debt or equity.

The November 2023 guidelines ask the centre's team to be trained in the equity model and to manage the pool for profitable exits. A seed support investment committee recommends each investment. Our explainer on the Atal Incubation Centre guidelines covers the rest of the grant.

DST's rules say less about the incubator's own stake. The NIDHI-TBI guidelines mention equity mainly as an incentive for the CEO and team. The NIDHI Seed Support Program lets incubators give a startup up to Rs 100 lakh and share in its success.

What forms does an incubator stake take?

An incubator stake usually takes one of four forms: shares issued for services, shares bought with seed money, a convertible instrument that becomes shares later, or a royalty or licence fee instead of shares. The form decides what the startup gives up now and what the next investor will see on the cap table.

1. Shares for services: equity in return for space, mentoring and support, as the 2019 policy describes.
2. Shares for seed money: an investment from a seed pool, as AIM encourages.
3. Convertibles: convertible debentures or notes that turn into shares at a future round; our note on CCPS and CCDs explains how each sits on the cap table.
4. Royalty or fees: payment without equity, which the 2019 policy allows for IP licences and rental support.

One structural point: the 2019 policy notes an institute may not be allowed by its statute to hold equity, so an SPV may hold shares on its behalf.

What do founders and later investors check in the cap table?

They check that the incubator's stake actually exists on paper, that its size is what everyone believes, and that it carries no rights that could block or slow a later round. A small, clean stake rarely worries an investor; an undocumented or rights-heavy one often does.

The paper trail comes from the Companies Act, 2013. Section 88 requires a register of members for each class of shares, and section 39 requires a return of allotment with the Registrar whenever shares are allotted. Investors then look for:

• Shares promised in an agreement but never allotted or filed.
• Convertibles left out of the fully diluted count.
• Veto rights, board seats or anti-dilution protection attached to a small stake.
• Who holds the shares: the institute, a society or an SPV.

An incubator stake that is not on the register of members does not exist, as far as the next investor is concerned.

Our checklist of cap table red flags shows how investors reconcile the register with company filings.

How should the stake be written into the incubation agreement?

Write the stake into the incubation agreement before the startup moves in, in plain terms: what it pays for, how much, which instrument, when shares are issued and at what valuation, what rights come with it, and what happens if the startup leaves early. AIM and NIDHI already require a written agreement with every incubatee.

A workable checklist for the clause:

• Consideration: the services, space and seed money the stake pays for, item by item.
• Size and instrument: the percentage, on a stated basis, and whether it is equity or a convertible.
• Timing: when shares are allotted, respecting any cooling period.
• Rights: information rights at most, unless the incubator invests real money.
• Exit: the residency period, exit policy and what happens to unissued shares if the startup leaves.

Have a lawyer draft the clause, and have the company secretary allot and file the shares once it is signed.

Questions

How much equity do incubators take in India?

No law sets one figure. The Ministry of Education's 2019 startup policy suggests 2% to 9.5% for institutes, based on brand, faculty contribution, support and IP, and says most should take much less. Scheme-funded incubators follow their scheme's rules on instruments and limits.

Can a Seed Fund Scheme incubator take equity?

The scheme funds startups through grants of up to Rs 20 lakh and convertible debentures or debt of up to Rs 50 lakh. It bars the incubator and its staff from charging any fee in cash or kind for selection, disbursement, incubation or monitoring, so check any stake with DPIIT or a lawyer first.

Why is 9.5% the suggested cap for college incubators?

The 2019 startup policy says a limit of 9.5% is suggested so that the institute has no legal liability arising out of the startup. It adds that the institute should normally take a much lower share unless its full-time faculty or staff hold substantial shares.

What should an incubation agreement say about equity?

It should state what the stake pays for, the percentage and instrument, when shares are issued, the valuation basis, any rights attached, and what happens if the startup leaves early. A lawyer should draft it, and the shares should be allotted and filed under the Companies Act.

Sources: Ministry of Education Innovation Cell, National Innovation and Startup Policy 2019, Sep 2019 · DPIIT, Guidelines for Startup India Seed Fund Scheme, Jan 2021 · Atal Innovation Mission, Guidelines for Atal Incubation Centres, Nov 2023 · DST, NIDHI-TBI guidelines and proposal proforma, Sep 2023 · DST, NIDHI Seed Support Program page · India Code, Companies Act, 2013, sections 39 and 88

For more on running an incubator in India, read the MyStartupValley blog or see MyStartupValley for incubators.