# Raising Funds from Friends and Family(F&F) – Early-Stage Startups

Published: 20 Jun 2025  |  Last updated: 22 Jul 2025
Author: Treelife
Practice area: Startups
Tags: F&F, Friends and Family
Source: https://treelife.in/startups/raising-funds-from-friends-and-family/

## Summary

- Friends and family funding rounds for early-stage startups are informal in structure but remain fully subject to Indian corporate law, particularly the Companies Act, 2013.
- Shares issued under private placement must be priced at Fair Market Value, and a valuation report from a Registered Valuer is mandatory under the Companies Act, 2013 to justify this pricing.
- If the investment comes from non-resident investors, FEMA requires the valuation report to be issued by a SEBI-registered Merchant Banker or a Chartered Accountant instead of a Registered Valuer.
- Pricing shares below or above Fair Market Value without a proper valuation report can trigger tax implications and create obstacles in subsequent funding rounds.
- Form SH-7 must be filed to increase the company's authorised share capital before any additional shares can be issued to friends and family investors.
- Form MGT-14 must be filed with the Registrar of Companies once the private placement is approved, and it must include the Offer Letter issued to investors.
- Form PAS-4, the Offer Letter for private placement, must be issued to every prospective investor and retained in the company's records.
- Form PAS-3 must be filed with the Registrar of Companies after share allotment, and funds received cannot be utilised by the company until this filing is completed.
- A formal Investment Agreement should be executed even among friends and family, covering the nature of investment, equity structure, voting rights, exit mechanisms, dispute resolution, and transfer restrictions to prevent future disputes.

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Blog Content Overview

- [1 Valuation Reports](#Valuation_Reports)
[1.1 Key Legal Requirements:](#Key_Legal_Requirements)

- [2 Secretarial Compliance](#Secretarial_Compliance)
[2.1 Mandatory Filings and Documents:](#Mandatory_Filings_and_Documents)

- [3 Investment Agreements](#Investment_Agreements)
[3.1 What Should the Agreement Cover?](#What_Should_the_Agreement_Cover)

- [4 Ensure Your Startup’s Legal and Compliance Readiness](#Ensure_Your_Startups_Legal_and_Compliance_Readiness)

[Raising funds](https://treelife.in/services/legal-support/fundraising-mergers-acquisitions/) from friends and family is a common strategy for early-stage startups, particularly during the initial or pre-revenue phase. These funding rounds, although informal in nature, are subject to legal and regulatory frameworks under Indian corporate law.

To help founders navigate this process seamlessly, we’ve outlined some key legal considerations and compliance steps you should follow to raise capital responsibly and avoid future complications.

## **Valuation Reports**

When raising funds through **private placement**, one of the most crucial aspects is **determining and justifying the price** at which shares are being offered. This price must reflect the **Fair Market Value (FMV)** of the shares.

### **Key Legal Requirements:**

- Under the **Companies Act, 2013**, a **valuation report from a Registered Valuer** is required to justify the pricing of shares during private placement.

- If funds are being raised from **non-resident investors**, compliance with **FEMA (Foreign Exchange Management Act)** mandates that the valuation report be issued by a **SEBI-registered Merchant Banker** or a **Chartered Accountant**.

**Why this matters:
** Issuing shares below or above FMV without proper valuation can result in tax implications, non-compliance with regulatory norms, and challenges in future funding rounds.

## **Secretarial Compliance**

Raising capital through private placement is governed by a set of specific secretarial compliance obligations that must be met to maintain the legality of the transaction.

### **Mandatory Filings and Documents:**

- **𝐅𝐨𝐫𝐦 𝐒𝐇-7
** To be filed when increasing the authorized share capital of the company—a necessary step before issuing additional shares.

- **𝐌𝐆𝐓-14 Filing
**This form must be filed with the **Registrar of Companies (RoC)** when a private placement is approved. It provides legal backing to the offer and includes the Offer Letter to investors.

- **𝐏𝐀𝐒-4
** This is the **Offer Letter** for private placement and must be provided to all prospective investors. It includes the terms of the offer and is required to be maintained in company records.

- **𝐏𝐀𝐒-3
**Once shares are allotted, this form is filed to inform the RoC of the allotment. It is critical to note that **funds received through private placement cannot be utilized until PAS-3 is filed**, ensuring transparency in the flow of investment.

**Why this matters:
** Missing or delaying these filings can invalidate the funding round, attract penalties, and disrupt future compliance and audit processes.

## **Investment Agreements**

When raising capital from friends and family, it is easy to assume that formal agreements are unnecessary. However, this is a **common pitfall** that can lead to misunderstandings or legal disputes.

### **What Should the Agreement Cover?**

A well-structured **Investment Agreement** must clearly articulate:

- Terms and nature of the investment (e.g., equity, preference shares)

- Equity distribution and shareholding structure

- Voting rights and investor protections

- Exit mechanisms and timelines

- Dispute resolution clauses and jurisdiction

- Restrictions on share transfer or dilution

**Why this matters:****
**Documenting these terms helps establish clear expectations and protects both the founder and investors, especially as the company grows or brings in institutional investors.

Raising funds from friends and family is a valuable and often necessary step for early-stage startups. However, even these seemingly informal transactions must comply with legal frameworks to ensure smooth growth and investor confidence.

## **Ensure Your Startup’s Legal and Compliance Readiness**

Avoid costly mistakes and ensure your startup is legally sound. If you’re unsure about your current compliance status or need assistance in addressing legal oversights, our experts are here to help. **Get in touch with us today** to ensure your startup is fully compliant and prepared for growth and investment.

[**Contact Us Now**](https://calendly.com/consulttreelife?utm_source=blogtreelife)

### Related posts:

- [10 things Startups should Include in their Investment Pitch Deck](https://treelife.in/startups/10-things-startups-should-to-include-in-their-investment-pitch-deck/)

- [B2B SaaS – How Sales can be driven efficiently?](https://treelife.in/startups/b2b-saas-how-sales-can-be-driven-efficiently/)

- [Foreign Direct Investment (FDI) in India’s Manufacturing Sector: A Comprehensive Guide](https://treelife.in/startups/foreign-direct-investment-fdi-in-indias-manufacturing-sector/)

- [Common Legal and Compliance Oversights for Startups in Due Diligence](https://treelife.in/startups/common-legal-and-compliance-oversights-for-startups-in-due-diligence/)

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This is informational content from Treelife. For advice specific to your situation, contact support@treelife.in