Debt vs Equity Financing Model Preparation: Structure, Dilution, Repayment Load

A lender and a lead investor will each test your funding structure against the same operating plan, and both will rebuild your numbers before they sign. Debt vs equity financing model preparation is what makes those numbers hold: one plan, two structures, and a clear read on ownership, cash and risk. A cost table cannot show that. A financing model can, because it carries each structure into the cap table at the next round and into the cash balance in every month of repayment. This article builds it tab by tab, with a worked example.

How do you prepare a debt vs equity financing model?

Build one financing tab with a scenario switch that runs the same operating plan through three outputs: a cap table showing dilution by round, a debt schedule showing interest and principal by month, and a cash line tested against a minimum cash floor. Compare structures on founder ownership after the next round, total cash cost of debt, and the month cash first breaches the floor.

What should debt vs equity financing model preparation answer?

It should answer three questions with numbers: how much of the company each structure costs you after the next round, how much cash each structure takes out of the plan month by month, and at what point the structure stops being survivable. Everything else, including the ask and the instrument terms, is an input to those three answers.

The model does not size the raise and does not compare instrument terms. Sizing sits in the funding requirement model, which finds the cash trough and sets the ask. Instrument terms such as interest bands, warrant coverage and covenants are compared in venture debt vs equity funding. The financing model takes both as inputs and shows their consequences.

Table 1: Where the financing model sits among related work

Artefact	Question it answers	Main output	Treelife guide
Funding requirement model	How much must we raise for this milestone?	The ask and the use of funds	Startup funding requirement model
Instrument comparison	What do debt and equity terms look like in India?	Cost bands, covenants, tax and regulatory framework	Venture debt vs equity funding
Financing model (this article)	What does each structure do to ownership and cash?	Dilution by round, debt schedule, runway, stress results	This article
Three statement model	What do the full statements look like under the chosen structure?	Profit and loss, balance sheet, cash flow	Three statement financial model services

How do you structure the financing model and its scenario switch?

Use six tabs: inputs, instrument stack, scenario engine, cap table, debt schedule with cash, and outputs. The inputs tab holds every assumption once. The instrument stack defines each instrument by amount, timing, price, rate and fees. One switch cell turns instruments on or off, and every output reads from the active scenario, never from a typed number.

Table 2: Financing model tab layout

Tab	Contents	Core logic	Check
Inputs	Capital need, valuations, round dates, rates, fees, cash floor, tax rate, exit value	One cell per assumption, named ranges	No typed number appears on any other tab
Instrument stack	Each instrument with type, amount, draw dates, price or rate, fees, warrants	Rows switched on or off by scenario code	Sources equal the capital need
Scenario engine	The switch cell and the active case	INDEX or CHOOSE on one cell	Changing the switch moves every output
Cap table	Share counts by holder and round	Shares issued equal the raise divided by price per share	Holdings sum to 100% after every round
Debt schedule and cash	Monthly draws, interest, principal, fees, cash balance	Interest on opening balance, principal after the moratorium	Closing debt reaches zero at maturity
Outputs	Founder ownership, cash cost, runway, floor breach month, stress results	Reads only from the active scenario	Outputs tie to the cap table and the schedule

Define the scenarios before you build. The worked example below uses two: all equity, and a blend of equity and venture debt sized at about 30% of the equity round, a ratio venture lenders commonly work within (market observation, estimate).

The equity round equals the capital need minus the debt switched on, so one flip resizes the equity round, the price per share and the cap table together. Both structures must run on the same operating plan: pairing an optimistic plan with the debt case and a cautious plan with the equity case decides the answer before it calculates it. Carry the equity side’s costs too, such as legal and valuation fees, stamp duty on issue and investor reporting time, or equity looks cheaper than it is.

Table 3: Inputs for the worked example (illustrative assumptions, replace with term sheet figures)

Input	Value	Basis
Total capital need	₹30 crore	Taken as given from the funding requirement model
Series A pre-money valuation	₹90 crore	Illustrative
Founder holding before the round	60% fully diluted	Illustrative
Net operating burn	₹1 crore a month, flat for 30 months	Illustrative
Venture debt in the blend	₹7 crore, drawn 60% in month 1 and 40% in month 4	Illustrative, about 30% of the ₹23 crore equity round
Interest rate	14% a year on opening balance	Illustrative, confirm in the term sheet
Tenor and moratorium	36 months, no principal for the first 6 months	Illustrative
Processing fee	1% of each amount drawn	Illustrative
Warrant coverage	1% of the loan, struck at the Series A post-money	Illustrative
Series B raise	₹60 crore for the plan plus any debt service the company cannot fund from operations	Model assumption
Series B pre-money	₹300 crore base case, tested from ₹120 crore to ₹450 crore	Illustrative
Lender minimum cash	₹3 crore, about three months of burn	Illustrative
Exit value for the founder test	₹1,000 crore	Illustrative

In a live model, replace each input with the term sheet figure and keep the clause reference beside the cell.

How do you model dilution in a debt vs equity comparison?

Model each round as new shares issued at a price that follows from the pre-money valuation, then carry every holder through the rounds with the same formula. Investor ownership is the raise divided by post-money. Founder ownership after the round is the earlier holding multiplied by one minus that percentage. Warrants, the option pool and convertibles enter as share counts, not footnotes.

Post-money equals pre-money plus the equity raised. A warrant covering a rupee amount of shares at the Series A price converts to a percentage by dividing that amount by the Series A post-money. Build these in the cap table tab on share counts so that a change in price per share flows to every holder.

Two items change founder ownership before the investor arrives. A pool top-up in the pre-money is absorbed by founders, so add the option pool top-up as its own line in both scenarios. Any convertible instrument that converts at the round adds shares at its own price, and because it also accrues interest and must be repaid if it does not convert, it needs a share row and a schedule row.

Table 4: Worked example, round level results (illustrative)

Metric	All equity	₹7 crore debt blend	Difference
Series A investor ownership	25.00%	20.35%	4.65 points less
Founder ownership after Series A	45.00%	47.76%	2.76 points more
Series B raise needed	₹60.0 crore	₹68.6 crore	₹8.6 crore more
Founder ownership after Series B (₹300 crore pre-money)	37.50%	38.86%	1.36 points more
Founder value at a ₹1,000 crore exit	₹375.0 crore	₹388.6 crore	₹13.6 crore more
Series A investor value at a ₹1,000 crore exit	₹208.3 crore	₹165.6 crore	₹42.7 crore less
Series A investor multiple on cost	6.94x	7.20x	0.26x more
Cash cost of debt (interest plus fee)	Nil	₹1.65 crore	₹1.65 crore more

The Series A column flatters debt. Founders hold 2.76 points more after Series A, but only 1.36 points more after Series B. The gap narrows because the company must raise ₹8.6 crore more at Series B to pay the debt service its operations cannot fund. Debt moved dilution from Series A to Series B. It did not remove it.

The Series A investor puts in ₹7 crore less and earns a higher multiple in the blend, 7.20x against 6.94x at a ₹1,000 crore exit. Debt is not a transfer from investor to founder, which is the argument to make when the shareholders agreement requires consent for new debt.

Does venture debt reduce the funding requirement?

No. The capital need is the same ₹30 crore under both structures. Debt changes who supplies it and when it is paid back, so the repayment is a later use of cash and the next round must cover it.

When does debt stop helping on ownership?

In this example the blend leaves founders ahead whenever the Series B pre-money is above about ₹82 crore, well below the Series A post-money of ₹113 crore. The ownership case for debt fails only in a deep down round.

Table 5: Founder ownership after Series B by Series B pre-money (illustrative)

Series B pre-money	All equity	₹7 crore debt blend	Advantage of blend
₹120 crore	30.00%	30.38%	0.38 points
₹150 crore	32.14%	32.76%	0.62 points
₹200 crore	34.62%	35.55%	0.94 points
₹300 crore	37.50%	38.86%	1.36 points
₹450 crore	39.71%	41.44%	1.73 points

How do you compare two venture debt offers in the model?

Compare offers on all-in cost at several exit values, not on the headline rate. All-in cost adds the warrant gain to cash interest and fees. Put each offer in the instrument stack and switch one on at a time.

Table 6: Two ₹7 crore offers compared (illustrative terms, warrants struck at the Series A post-money of ₹113 crore)

Item	Offer A	Offer B
Headline interest rate	14%	12%
Processing fee	1%	2%
Warrant coverage	1% of loan	2.5% of loan
Effective cash cost with fee	14.8% a year	13.5% a year
Warrant gain at a ₹1,000 crore exit	₹0.55 crore	₹1.37 crore
All-in cost at a ₹300 crore exit	15.6% a year	15.5% a year
All-in cost at a ₹1,000 crore exit	18.1% a year	21.7% a year
All-in cost at a ₹2,000 crore exit	21.4% a year	28.7% a year
Peak monthly service	₹31.5 lakh	₹28.0 lakh

Offer B is cheaper on every cash measure but cheaper all-in only if the exit stays near ₹300 crore. Above that, its warrants cost founders more than Offer A’s higher rate. All-in cost is own calculation and ignores later dilution of the warrant block.

What happens at a downside exit?

At a low sale price, debt ranks ahead of equity and preferences decide who is paid first, so the model needs a waterfall. Deduct debt outstanding from the sale value, let the Series A investor take the higher of a 1x preference and its converted share, and split the rest among the other holders.

Table 7: Founder proceeds in a sale at month 24 (₹ crore, illustrative)

Sale value	All equity	₹7 crore debt blend	Blend minus all equity
₹20 crore	0.0	0.0	0.0
₹40 crore	6.0	8.5	2.5
₹60 crore	18.0	20.5	2.5
₹113 crore	49.8	52.3	2.5
₹300 crore	135.0	141.9	6.9

The assumptions are one Series A investor with a 1x non-participating preference, ₹2.8 crore of debt outstanding at month 24 in the blend, and no other preference holders. Under these terms the blend leaves founders ₹2.5 crore better off between ₹40 crore and ₹113 crore, because the investor’s preference is ₹7 crore smaller and outweighs the ₹2.8 crore of debt. Rebuild the waterfall from the actual shareholders agreement.

How do you model the debt repayment schedule and repayment load?

Build a monthly schedule that reads drawdowns, applies the interest rate to the opening balance, holds principal during the moratorium, then amortises, and feed total debt service into the cash line. Repayment load is debt service as a percentage of monthly burn. The covenant test is the first month cash falls below the lender’s floor.

Draw at month end and charge interest on the opening balance, which removes the circular reference that average balance interest creates. Treat the moratorium as a pause on principal only, because interest runs from the first drawdown. Put the processing fee in the drawdown month and add a prepayment fee row, since an early Series B makes prepayment live. Take the amortisation shape from the term sheet (equal principal, equal instalment, bullet or sculpted as a percentage row by month) and model net proceeds: the draw less the fee and any cash the lender requires you to hold.

Table 8: Debt schedule extract, ₹7 crore facility (₹ lakh, illustrative)

Month	Opening balance	Interest	Principal	Debt service	Closing balance
2	420.0	4.9	0.0	4.9	420.0
5	700.0	8.2	0.0	8.2	700.0
7	700.0	8.2	23.3	31.5	676.7
12	583.3	6.8	23.3	30.1	560.0
24	303.3	3.5	23.3	26.9	280.0
36	23.3	0.3	23.3	23.6	0.0

Total interest is ₹1.58 crore and the fee ₹7 lakh, an effective annual cost of about 14.8% (own calculation). The peak is month 7, when principal starts: ₹31.5 lakh of service against ₹1 crore of burn.

Feed monthly debt service and fees into the same cash row that carries burn. The working capital and cash flow model feeds the burn line, and the burn and runway calculation reads the result.

Table 9: Sensitivity to the amount of debt (illustrative)

Debt	Debt as share of equity round	Cash cost (interest plus fee)	Peak service as share of burn	Cash lasts through month	First breach of ₹3 crore floor	Founder after Series B
Nil	Not applicable	Nil	0.0%	30	Month 28	37.50%
₹3 crore	11.1%	₹0.71 crore	13.5%	27	Month 25	38.06%
₹7 crore	30.4%	₹1.65 crore	31.5%	24	Month 22	38.86%
₹10 crore	50.0%	₹2.35 crore	45.0%	22	Month 21	39.52%

Each extra ₹1 crore of debt buys roughly 0.2 points of founder ownership after Series B and costs 0.7 to 1 month of runway. The ₹10 crore row sits at 50% of the equity round, above what lenders commonly offer (market observation, estimate), so treat it as a stress input.

How much debt can the plan carry?

Solve for the debt amount instead of choosing it. Fix the month by which the floor must still hold, the latest date the Series B can close, then find the largest facility that keeps cash above the floor under each burn case.

Table 10: Largest facility that keeps cash above the ₹3 crore floor (₹ crore, illustrative)

Floor must hold through month	Base burn	Burn 15% higher	Burn 25% higher
18	18.9	14.1	10.9
20	13.1	8.4	5.3
22	8.7	4.1	1.1
24	5.2	0.7	None

None means even a plan with no debt breaches the floor before that month. The ₹7 crore facility fits only if the Series B can close by month 22 at base burn. Holding the floor through month 24 under a 15% overrun cuts capacity to ₹0.7 crore. The lender’s ratio caps the answer in the early rows and the stress caps it in the later ones.

What does the minimum cash covenant do to the model?

It ends runway when cash reaches the floor, not zero. In the blend, cash lasts through month 24 but falls below ₹3 crore in month 22, so the Series B must close, with usable money, before then. Show the floor on the cash chart and flag the first breach month in the outputs. Covenant reporting after the round is covered in MIS setup after a funding round.

Which coverage test fits your stage?

A debt service coverage ratio divides cash flow available for debt service by interest plus principal, and below 1.0x operating cash cannot meet that period’s service. A company that burns cash has negative cash flow available, so the ratio is meaningless and the floor and runway tests carry the weight.

Table 11: Coverage tests by stage

Company stage	Test that fits	Formula in the model	Where the threshold comes from
Pre-profit, venture backed	Minimum cash floor and service against burn	First month cash is below the floor; monthly debt service divided by net burn	Lender’s minimum cash clause
Early revenue	Debt against recurring revenue, plus the floor	Debt outstanding divided by annualised recurring revenue	Sizing basis in the term sheet
Operating cash positive	Debt service coverage ratio	Cash flow available for debt service divided by interest plus principal	Covenant in the term sheet
Profitable	Interest cover and debt to EBITDA	EBITDA divided by interest; debt divided by EBITDA	Covenant in the term sheet
All stages	Debt to equity	Borrowings divided by shareholders’ funds	Covenant or board policy

How does the financing module post to the three statements?

Each financing event touches all three statements and must post the same way every month. Test the rules with three checks: the balance sheet balances, closing cash equals the cash line, and interest in the profit and loss equals interest in the schedule.

Table 12: Posting rules for financing events

Event	Profit and loss	Balance sheet	Cash flow statement
Debt drawdown	None	Borrowings up, cash up	Financing inflow
Interest	Finance cost for the month	Accrued interest if unpaid	Interest paid, classified per accounting policy
Principal repayment	None	Borrowings down, cash down	Financing outflow
Processing fee	Finance cost, spread or expensed per the accounting framework	Prepaid or netted against borrowings per the framework	Financing outflow in the draw month

This module feeds the three statement financial model and stays the single source for interest, principal and fees.

How do tax and borrowing rules change the model inputs?

Tax changes the cost of debt only in years with taxable profit, and borrowing rules limit the tenor, dates and approvals the schedule can assume. Show pre-tax cost in loss years, post-tax cost only in profitable ones, and a check cell for every rule that limits tenor or timing.

How does tax change the post-tax cost of debt?

Interest reduces tax only after losses brought forward are used up. At the 25.17% effective rate (22% plus 10% surcharge plus 4% cess), the 14.8% effective cost in the example falls to about 11.1% in a year with taxable profit. In a loss year it stays at 14.8%, and the interest adds to the loss carried forward for use later.

Table 13: Tax lines for the debt tab

Item	Rule	Model treatment	Source
Interest deduction	Interest on capital borrowed for business is deductible	Interest line deducted only against taxable profit	Section 36(1)(iii), Income-tax Act 1961. Section 32(b), Income-tax Act 2025 from tax year 2026-27
Loss carry forward	Business losses carry forward for eight assessment years	Interest in loss years adds to the carried forward balance, shield used when profit arrives	Section 72, Income-tax Act 1961. Section 112, Income-tax Act 2025 from tax year 2026-27
Startup tax holiday	A DPIIT recognised startup that claims the holiday has no taxable profit in those years	Interest shield is nil in holiday years, so show pre-tax cost	Section 80-IAC, 1961 Act. Section 140, Income-tax Act 2025 from tax year 2026-27. Incorporation window extended to before 01/04/2030 by the Finance Act 2025
Interest limitation	Interest above ₹1 crore to a non-resident associated enterprise is capped at 30% of EBITDA	Check cell when any lender is a related party abroad	Section 94B, 1961 Act. Section 177, Income-tax Act 2025 (Chapter X), as amended by the Finance Act 2026. Excess interest carries forward for eight tax years
TDS on interest	Resident lender: tax deducted at source on interest	Cash line for the TDS deposit and a due date row	Section 194A to 31/03/2026. Section 393(1), Income-tax Act 2025 from 01/04/2026, confirm rate and threshold on the Income Tax Department site

The 2025 Act applies to income from 01/04/2026. Earlier income stays under the 1961 Act, so a model spanning both needs both references. The 25.17% rate comes from Section 115BAA (Section 200 of the 2025 Act).

Which borrowing and filing rules need a cell in the model?

Only rules that change a number or a date: who can authorise the borrowing, when security must be registered, what average maturity a foreign lender must accept, and which filings follow foreign equity.

Table 14: Rules that become model inputs

Rule	Source	Model treatment
Board authority to borrow	Section 179(3)(d), Companies Act 2013. Section 180(1)(c) needs a special resolution above paid-up capital, free reserves and securities premium; private companies not in filing default are exempt (MCA notification dated 05/06/2015), so confirm against the articles	Check cell: facility within the authorised limit, approval date row
Creation of security	Section 77, Companies Act 2013: register a charge within 30 days of creation	Compliance date row 30 days after the security documents are signed
Convertible debentures	Section 71(1), Companies Act 2013: special resolution for debentures with an option to convert into shares	Approval step before the instrument date
Foreign lender	RBI notification FEMA 3(R)(5)/2026-RB dated 09/02/2026, effective 16/02/2026: minimum average maturity of 3 years, no cost ceiling at 3 years or more; earlier Loan Registration Numbers stay under the old framework; Forms ECB 1 and ECB 2 revised by circular of 18/02/2026	Tenor check, foreign exchange row, reporting dates
Foreign equity investor	Form FC-GPR within 30 days of issue under the FEMA reporting regulations 2019 on the RBI FIRMS portal (Master Direction on Reporting updated 30/03/2026)	Compliance date row linked to the round date
Credit guarantee	Credit Guarantee Scheme for Startups: cover up to ₹20 crore per borrower, 85% of default up to ₹10 crore and 75% above, for DPIIT recognised startups (DPIIT notification of 08/05/2025)	Guarantee fee row if the lender uses the scheme

The foreign lender row changes the schedule. The 3 year minimum average maturity is computed under Annex I to the regulations. The schedule in Table 8 averages about 1.6 years (own calculation), so a foreign lender would need a longer tail or a bullet, unless the manufacturing exception applies (one to three years, capped at USD 150 million). Domestic lenders do not carry this test.

Whether a compulsorily convertible preference share or debenture sits in equity or liabilities depends on the accounting framework (Accounting Standards or Ind AS), so flag each instrument and confirm with the auditor.

How do you stress test a debt vs equity financing model?

Run three stresses: higher burn, a delayed or flat next round, and the lender’s covenant floor. A structure is fit for the board only if it survives where cash is lowest. Debt that wins on ownership but breaches the floor under a 15% burn overrun is not the better structure.

Table 15: Burn stress, all equity against the ₹7 crore blend (illustrative)

Case	All equity: cash lasts through month	All equity: first floor breach	Blend: cash lasts through month	Blend: first floor breach
Base, ₹1.00 crore a month	30	Month 28	24	Month 22
Burn 10% higher	27	Month 25	22	Month 21
Burn 15% higher	26	Month 24	21	Month 20
Burn 25% higher	24	Month 22	20	Month 19

Debt shortens the window to raise Series B by four to six months at every burn level, in exchange for 1.36 points of founder ownership at a ₹300 crore Series B pre-money. The runway cost decides whether the structure is safe.

At a flat Series B pre-money of ₹120 crore, founders still hold 30.38% in the blend against 30.00% all equity. Timing matters more than price: a slow Series B hurts the blend because the covenant floor arrives before the money does. If the real risk is a delayed round, see how a bridge round compares with a priced round before choosing the structure.

In the example, ₹7 crore of debt buys 1.36 points of founder ownership and ₹13.6 crore of founder value at a ₹1,000 crore exit, and costs ₹1.65 crore in cash and six months of runway. Take the blend only if the plan still reaches its Series B milestone under a 15% burn overrun. Otherwise reduce the debt or accept the dilution.

Common mistakes that cost founders time and money

1. Comparing cost of capital instead of founder outcomes

A cost of capital table looks rigorous but hides runway, covenant breaches and the repayment funded at Series B. Compare founder ownership, exit value, cash cost and runway instead.

2. Showing debt as a reduction in the funding requirement

The equity round shrinks on the page and the repayment drops out. In the example that understates Series B by ₹8.6 crore. Put debt service in the cash line.

3. Using average balance interest with a circular reference

It looks precise but breaks when a tranche date moves. Use opening balance interest with month end drawdowns and state the convention.

4. Applying the tax shield to a loss-making company

The post-tax rate is the usual headline. In the example it overstates the benefit by 3.7 points a year (14.8% against 11.1%) in every loss year. Link the shield to taxable income after losses.

5. Building a schedule the lender or the regulator cannot accept

Tenor is typed in without a check. A foreign lender’s 36 month amortising facility fails the 3 year average maturity test. Put the checks in cells and have an independent model review test them before the model goes to the investor.

Debt vs equity financing model preparation checklist before you send the model

Send the model only when every item passes.

1. One scenario switch drives the equity round, the cap table, the debt schedule and every output, and both structures run on the same operating plan.
2. Sources equal the capital need in every scenario, and the capital need ties to the funding requirement model.
3. Holdings sum to 100% after every round, with the option pool and warrants as share counts.
4. Interest runs on opening balance, the moratorium pauses principal only, and fees sit in the drawdown month.
5. Debt service is inside the cash line, the Series B covers what operations cannot, and the floor and first breach month show in the outputs.
6. The tax tab applies the shield only against taxable profit.
7. Tenor, approvals, security registration and foreign exchange rows each have a check cell and a source, and lender offers are compared on all-in cost at three exit values.
8. A downside waterfall uses the actual preference terms, and the balance sheet balances after every financing event.
9. The tax and borrowing references match the investor pitch financial projections in the same data room.

Debt vs equity financing model preparation is finished when a stranger can change one cell and watch ownership, cash and covenant headroom move together. Until then it is a comparison table, not a model.l.

FAQ’s on debt vs equity financing model preparation

Q: Is interest on venture debt tax deductible in a financing model? 
A: Yes, but it reduces tax only in years with taxable profit. Interest on capital borrowed for business is deductible under Section 36(1)(iii) of the Income-tax Act 1961, and Section 32(b) of the Income-tax Act 2025 applies from 01/04/2026. Business losses carry forward under Section 72 (Section 112 of the 2025 Act), so interest in a loss year adds to the loss balance. At the 25.17% effective rate under Section 115BAA, a 14.8% pre-tax cost is about 11.1% in a profitable year.

Q: What costs besides interest should the debt schedule carry? 
A: Processing fees, prepayment fees, security and charge registration costs, any guarantee fee, and the tax deducted at source on interest. The example uses a 1% processing fee. Charge registration is due within 30 days of creation under Section 77 of the Companies Act 2013. Add a row for GST on lender fees and confirm the rate and credit eligibility with your tax adviser.

Q: How long does debt vs equity financing model preparation take? 
A: About one to two weeks for a financing module on top of an existing operating plan and six months of clean MIS (Treelife estimate, not a published benchmark). It takes longer if the plan has to be built first. Build the plan before the financing tab, because the financing tab reads from it.

Q: What documents do you need to build the model? 
A: The equity term sheet, the debt term sheet, the current cap table, the shareholders agreement, the operating plan, the last six months of MIS and any security terms. The shareholders agreement matters because its protective provisions can cap new debt. The debt term sheet matters because moratorium, amortisation shape and fees decide the schedule.

Q: How does a foreign lender change the model? A: It adds a tenor test, foreign exchange risk and reporting dates. Under the RBI notification FEMA 3(R)(5)/2026-RB dated 09/02/2026, effective 16/02/2026, an external commercial borrowing needs a minimum average maturity of 3 years, and the cost ceiling no longer applies where maturity is 3 years or more. Reporting runs through Forms ECB 1 and ECB 2 via an authorised dealer bank, and facilities registered before 16/02/2026 stay under the earlier framework. Domestic lenders do not carry the maturity test.

Q: How should co-founder holdings and share pledges appear in the model? 
A: Give each founder a separate row and apply the same dilution formula to each. A pledge over promoter shares does not dilute anyone, but it limits what a founder can do with the shares, so record it in a control note beside the debt schedule. Show founder value at exit per founder, not as one combined figure.

Q: Does DPIIT recognition change the financing model? 
A: It changes access to credit guarantee cover, not the interest deduction. The Credit Guarantee Scheme for Startups covers DPIIT recognised startups up to ₹20 crore per borrower, with 85% of default covered up to ₹10 crore and 75% above (DPIIT notification of 08/05/2025). If the lender uses the scheme, add the guarantee fee row and remove any collateral assumption.

Q: What happens to the model if the equity round slips after the debt is drawn? 
A: Debt service starts from the draw date whether or not the equity arrives. Link the first drawdown to the equity close date so the schedule moves with the round, and run a delay stress that shows the first covenant breach.

Q: How will the lead investor read the debt in my model? 
A: As a senior claim and a possible consent item. Protective provisions in many shareholders agreements limit new debt above a stated amount, and an investor will compare the facility size with that limit first. Show the facility next to the consent threshold and show the repayment inside the cash line.

Q: How do ESOP holders and the option pool enter the dilution tab? 
A: As share counts in the fully diluted base. A pool top-up required in the pre-money dilutes founders before the new investor does, so model it as its own line in both scenarios. Employees dilute with everyone else in later rounds on the granted and unissued pool.

Q: Should warrants be modelled at issue or at exit? 
A: Both. At issue, convert the coverage amount to a percentage by dividing it by the Series A post-money. At exit, multiply that percentage by exit value. In the example, 1% coverage on ₹7 crore is 0.062% of the company, worth about ₹62 lakh at a ₹1,000 crore exit before later dilution.

Q: Can a bullet repayment replace amortisation in the model? 
A: Yes. A bullet removes monthly principal and puts the full balance at maturity, so the cash line is lighter until that month and then takes one large outflow. The interest cost is similar. Add a refinancing row for the bullet month and check that the Series B is expected to close before it.

Q: Does debt reduce the funding requirement? 
A: No. The capital need is the same, and debt changes the mix and the timing. In the example the equity round falls from ₹30.0 crore to ₹23.0 crore, and the Series B rises from ₹60.0 crore to ₹68.6 crore to pay the debt service. Size the next round with the repayment inside it.

Q: How do I compare two venture debt offers in the model? 
A: Put each offer in the instrument stack and switch one on at a time. Compare effective cash cost, peak monthly service and all-in cost at three exit values, because warrant coverage changes the ranking as the exit grows. In the example, the 12% offer with 2.5% warrants costs 21.7% a year all-in at a ₹1,000 crore exit, against 18.1% for the 14% offer with 1% warrants.

Q: Which coverage ratio should a pre-profit company use? 
A: The minimum cash floor and debt service as a share of net burn. A debt service coverage ratio divides operating cash flow available for debt service by interest plus principal, and it is not usable when operating cash flow is negative. Take thresholds from the term sheet.

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Regulatory references

• Companies Act, 2013: Section 71(1) (debentures convertible into shares, special resolution), Section 77 (registration of charges, within 30 days of creation), Section 179(3)(d) (board power to borrow), Section 180(1)(c) (borrowing above paid-up capital, free reserves and securities premium, special resolution; private companies shown as exempt by MCA notification dated 05/06/2015)
• Income-tax Act, 1961 (income of FY 2025-26 and earlier): Section 36(1)(iii) (interest on borrowed capital), Section 72 (carry forward of business losses), Section 80-IAC (startup deduction), Section 94B (limitation on interest deduction), Section 115BAA (optional concessional rate for domestic companies), Section 194A (tax deducted at source on interest)
• Income-tax Act, 2025, in force from 01/04/2026 and amended by the Finance Act 2026: Section 32(b) (interest on borrowed capital), Section 112 (carry forward of business losses), Section 140 (startup deduction), Section 177 (limitation on interest deduction), Section 200 (optional concessional rate), Section 393(1) (tax deducted at source on interest)
• Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026: RBI notification FEMA 3(R)(5)/2026-RB dated 09/02/2026, effective 16/02/2026
• Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019: Form FC-GPR within 30 days of issue
• Credit Guarantee Scheme for Startups: DPIIT notification of 08/05/2025 (guarantee ceiling ₹20 crore per borrower; 85% of default up to ₹10 crore, 75% above)