Founder loans to a startup: meaning, how they work in India

A founder loan is debt that the company owes to a founder. The founder puts in money, the company records a liability, and the money is later repaid, sometimes with interest. This is different from buying shares, which gives ownership and is not repaid.

Founders use loans when the company needs cash quickly, when a funding round is late, or when they want to avoid giving up equity. In early startups it is common to see a founder fund salaries or rent this way for a few months.

This is the first legal question, because a company in India cannot freely take deposits from the public. Under the Companies (Acceptance of Deposits) Rules, 2014, Rule 2(1)(c)(viii), money received from a person who is a director of the company at the time is not counted as a deposit, as long as conditions are met.

The main condition is a written declaration from the director that the money is not funded by borrowing or by taking loans or deposits from others. The company should keep that declaration on file. Law-firm summaries describe other conditions around reporting, and say they differ for relatives of directors, so the current text of the rule is the place to check.

Practical note: the declaration should be signed and dated before or at the time the money is received, not months later, and the bank statement should show the transfer from the director to the company.

The company should keep a loan agreement or a simple letter that states the amount, the interest if any, the repayment date and whether the loan is secured. Summaries of the rules say the amount received from directors must also be disclosed in the board's report and in the annual return filed on e-Form DPT-3, which is the form used for returns of deposits and money not treated as deposits.

Each deposit rule has details that change, so a company secretary or chartered accountant should confirm the current steps. A missing declaration is a common reason a director loan is questioned later by an auditor or a regulator.

It appears on the balance sheet as a liability, usually under borrowings, with the lender shown as a director or related party. Interest on it is an expense in the profit and loss account. The balance sheet shows how much the company owes the founder at year end.

Because the lender is a director, the transaction is a related-party transaction, and accounting standards require the company to disclose it in the notes. Investors read this note to see how much the founders lent, how much they were repaid and on what terms.

An unpaid founder loan that stays on the books for years can also draw questions from auditors, who may ask whether it is really working capital the founder does not expect back.

• Balance sheet: a liability, shown against the director.
• Profit and loss: interest, if charged, is an expense.
• Notes: details of related-party dealings.
• Cash flow: inflow when lent, outflow when repaid.

Under the Income-tax Act, 1961, a loan of ₹20,000 or more cannot be taken in cash and must go through a bank or other prescribed route (Section 269SS). Section 68 treats an unexplained credit as income, so the company should be able to show where the founder got the money. The Income-tax Act, 2025, which applies from 1 April 2026, re-numbers the provisions, so the sections in force now carry new numbers.

If the company pays interest to the founder, the company may need to deduct tax at source and the founder reports the interest as income. A loan with no interest has no such tax. A tax professional should confirm the current rule and rates, because they differ by the amount and the type of lender.

A loan keeps the cap table clean and can be repaid, but it adds debt and the repayment date is a pressure on the company. Equity does not need to be repaid, but it dilutes the other owners and needs a valuation of the shares.

Many founders choose a middle path in which a loan is later converted into shares, often at the next round. Investors then check the price and the approvals. A guide on bootstrapping vs raising explains why founders weigh these paths.

The most common mistake is paying in money without any paper. Without a signed agreement or a note in the board's records, it can later be unclear whether the amount was a loan, a gift or a share purchase, and that argument is hard to settle once investors are involved.

Another mistake is lending money that the founder borrowed from a bank, a friend or a card, and then treating it as their own. The declaration to the company would be wrong, and the exemption from the deposit rules may be lost. A third mistake is repaying the founder in a hurry when new money arrives, which can breach the shareholders' agreement. Keeping a ledger of every amount lent and repaid avoids most of these problems.

Investors accept a small founder loan as a sign of commitment, and they often ask for it to be subordinated, which means it is repaid only after investors or lenders are paid. They are wary of a large loan that the founder expects to take back early from the new money raised.

A new investor may ask the founder to convert the loan to equity or to waive repayment, or may restrict repayment in the shareholders' agreement. A clause that stops the company from repaying founders without investor consent is a common term. See also why startups raise debt.

A headline about a founder funding the company from their own pocket does not say whether it was a loan or equity. The difference matters, because a loan will be repaid and equity will not. Check also whether the report refers to a director loan or to a loan from a relative.

This guide is general information. Any founder planning to lend money to their company should check the current rules with a company secretary, chartered accountant or lawyer.