Why founders should think about their cap table and share structure before an IPO.
Bonus shares for startups can look like a technical cap-table decision. But if there is even a remote possibility that your company could eventually pursue an IPO or SME IPO, the way you structure your shares today can become surprisingly important later.
A startup might begin with ₹1 lakh or ₹10 lakh of paid-up capital and a relatively simple founder-heavy cap table. A few funding rounds later, that same company could have multiple investors, ESOPs, new shareholders and a completely different share structure.
The interesting part?
Founders often start thinking about this only when an IPO is already on the horizon.
I think that’s too late.
What Are Bonus Shares?
A bonus issue is, broadly, an issue of additional shares to existing shareholders by capitalising eligible reserves. The shareholder receives additional shares without paying for those shares as part of the bonus issue.
The important thing to understand is that a bonus issue does not, by itself, create new economic value for shareholders.
Suppose a founder owns:
| Before bonus issue | |
|---|---|
| Shares owned | 10,000 |
| Total company shares | 10,000 |
| Ownership | 100% |
Now imagine the company makes a 1:1 bonus issue.
| After 1:1 bonus issue | |
|---|---|
| Shares owned | 20,000 |
| Total company shares | 20,000 |
| Ownership | 100% |
The number of shares has doubled, but the founder’s percentage ownership has not changed.
This distinction matters because founders sometimes look at a larger number of shares and assume they have somehow created additional value.
They haven’t.
What has changed is the number of shares representing the company’s existing equity.
Why Bonus Shares for Startups Matter
This is where bonus shares for startups become more interesting.
In the early stages of a company, share capital can be tiny compared with the company’s actual business value.
A founder may initially incorporate a company with shares having a face value of ₹10 each. Years later, the company could have raised several rounds of capital and built a business worth tens or hundreds of crores.
The business has changed dramatically.
But the original share structure may not have evolved with the same level of strategic thinking.
That can create questions around:
- the number of shares outstanding
- founder ownership
- investor ownership
- ESOP pools
- future fundraising
- share price
- valuation
- promoter contribution
- IPO disclosures
- tax treatment
- future corporate actions
None of this means a startup should automatically issue bonus shares.
It means founders should understand their capital structure before making decisions that can become difficult to unwind later.
A Simple Example of How the Cap Table Changes
Imagine a startup begins with:
1,00,000 shares × ₹10 face value = ₹10 lakh paid-up capital
The founders own all 1,00,000 shares.
Three years later, the company has raised capital from investors and issued additional shares.
The company now has:
10,00,000 shares outstanding
The founders still own 6,00,000 shares.
Their ownership is therefore:
60%
Now imagine the company makes a 1:1 bonus issue.
The total number of shares doubles to:
20,00,000 shares
The founders receive another 6,00,000 bonus shares.
They now hold:
12,00,000 shares
Their ownership remains:
60%
The percentage has not changed.
What has changed is the number of shares representing that ownership.
That distinction becomes important when founders start thinking about valuation, future issuances and eventual public-market requirements.
Bonus Shares and IPOs: Where It Gets Interesting
If an IPO is somewhere on a founder’s long-term roadmap, share structure deserves attention much earlier than most founders realise.
This isn’t because bonus shares are an automatic IPO requirement.
They aren’t.
The more important point is that IPO preparation involves detailed scrutiny of the company’s capital structure and the history of shares issued to promoters and other shareholders.
SEBI’s disclosure framework requires information about promoters’ contribution and lock-in, including the nature of allotment such as rights, bonus and preferential issues.
That means the company’s share history isn’t simply an internal accounting detail.
It can become part of the story that has to be documented and explained when the company enters the public markets.
And that’s why bonus shares for startups should be thought about as part of a broader capital-structure conversation, not as a standalone accounting exercise.
A Real IPO Example
This becomes easier to understand when you look at actual IPO documentation.
SEBI-filed offer documents can separately identify shares acquired by promoters through bonus issues when presenting promoter contribution and lock-in information. SEBI’s framework specifically requires the nature of promoter allotments, including bonus issues, to be disclosed separately.
In other words, a bonus issue doesn’t simply disappear into the cap table.
Its history can matter later.
This is one reason founders should maintain a clean record of:
- when shares were issued
- who received them
- why they were issued
- whether they were founder shares, investor shares, ESOPs or bonus shares
- the applicable face value
- consideration, where relevant
- changes in capital structure
- board and shareholder approvals
- statutory filings
Good cap-table hygiene is boring until it suddenly isn’t.
What Happens to the Share Price After a Bonus Issue?
Here’s another common misunderstanding.
A bonus issue increases the number of shares.
It does not automatically increase the company’s total value.
Imagine a company has:
10 lakh shares
and a hypothetical value of:
₹100 crore
That implies a theoretical value of:
₹1,000 per share
Now imagine a 1:1 bonus issue.
The company has:
20 lakh shares
If everything else remained constant, the theoretical value represented by each share would adjust accordingly.
The company has not suddenly become worth ₹200 crore merely because it now has twice as many shares.
The same principle is why founders should think about capital structure and ownership percentages separately from the headline number of shares.
Bonus Shares vs Stock Split vs Rights Issue
These concepts are often mixed together.
| Corporate action | What changes? | Does ownership percentage automatically change? |
|---|---|---|
| Bonus issue | Number of shares increases through capitalisation of eligible reserves | No |
| Stock split | Existing shares are divided into smaller face-value units | No |
| Rights issue | New shares are offered to existing shareholders, generally for consideration | It depends on participation |
| Preferential issue | Shares are issued to identified persons/investors subject to applicable rules | Existing shareholders can be diluted |
The commercial and legal mechanics are different.
So when someone says, “We should increase the number of shares before an IPO,” the next question should be:
Why?
Is the objective to restructure the share capital?
Improve the practicality of the per-share price?
Accommodate future issuances?
Address an existing capital-structure issue?
Prepare for a particular transaction?
Or is it simply because someone said companies do this before IPOs?
That last reason isn’t enough.
The Tax Angle Founders Should Understand
Tax is another reason not to treat bonus shares for startups as a simple cap-table exercise.
The Income Tax Department states that, for bonus shares allotted without payment, the period of holding is reckoned from the date of allotment of the bonus shares. It also states that bonus shares issued on or after 1 April 2001 generally have a nil cost of acquisition for capital-gains purposes.
That matters because the tax treatment can become relevant when those shares are eventually transferred.
The broader tax calculation also depends on factors such as:
- whether the shares are listed or unlisted
- the date of transfer
- the holding period
- the applicable capital-gains provisions
- the taxpayer’s circumstances
- the transaction structure
So founders should not look at a bonus issue purely through the lens of “more shares at no cost.”
There can be tax consequences later.
For any actual restructuring, founders should have their CA and CS/legal adviser review the specific facts before proceeding.
Do Bonus Shares for Startups Always Make Sense?
No.
This is probably the most important qualification in the entire discussion.
There is no universal rule that says:
Startup + possible IPO = issue bonus shares immediately.
The right structure depends on the company’s circumstances.
For example, a founder may need to consider:
Existing capital structure
How many shares are currently outstanding?
Founder ownership
How is ownership divided between founders?
Investor holdings
What securities have already been issued to investors?
ESOP pool
How large is the employee option pool and how is it structured?
Future fundraising
Will additional equity be issued soon?
Corporate records
Are historical allotments, transfers and filings properly documented?
Potential IPO
Is an IPO genuinely part of the long-term strategy, or is it simply a distant possibility?
Tax
What tax implications could arise for the shareholders?
Regulatory requirements
Could the proposed structure interact with applicable Companies Act, SEBI or IPO requirements?
That is why the better question isn’t:
“Should we issue bonus shares?”
It is:
“Does our current share structure make sense for where we expect the company to go?”
A Founder’s Cap Table Checklist
If you’re building a startup today, I’d want these questions answered clearly:
1. How many shares exist today?
Not just the paid-up capital. Know the actual number of issued shares.
2. Who owns them?
Founders, investors, employees and other shareholders should all be clearly mapped.
3. What securities have been issued?
Equity shares, options, convertible instruments and other securities can all affect the fully diluted picture.
4. What is the ESOP position?
Don’t wait until a major fundraising round to understand your employee equity pool.
5. What has happened historically?
Every allotment, transfer, split, bonus issue, conversion and other capital event should have a clean documentary trail.
6. What happens after the next fundraise?
Model the cap table before the round, not after signing the documents.
7. What happens if the company eventually goes public?
You don’t need to run an IPO process today.
But you should understand what the capital structure could look like if that becomes the destination.
Think Three to Five Years Ahead
One thing I’ve started noticing around startups is that founders are usually very good at thinking about the next milestone.
The next fundraise.
The next 10 employees.
The next ₹1 crore in revenue.
The next product launch.
But some corporate decisions don’t work on a 90-day timeline.
Share structure is one of them.
A decision that looks insignificant when a company has five shareholders can become considerably more complicated when there are 50 shareholders, multiple funding rounds, an ESOP pool and institutional investors.
That is why I think founders should periodically ask:
“If this company becomes 10x bigger, will our current structure still make sense?”
You don’t need to predict the future perfectly.
You just need to avoid making today’s structure unnecessarily difficult for tomorrow.
Why I’m Thinking About This at The Founder Nation
The more time I spend around founders, fundraising conversations and the startup ecosystem, the more I notice that some of the biggest founder problems aren’t caused by a lack of ambition.
They’re caused by things founders simply didn’t think would matter yet.
Cap tables.
Shareholder agreements.
Compliance.
ESOP documentation.
IP ownership.
Financial records.
Corporate filings.
These aren’t the most exciting parts of building a company.
But eventually, they become part of the company’s story.
And that’s one of the reasons I’m building The Brief within The Founder Nation.
The LinkedIn post is often where I share the observation.
The Brief is where I slow down, research it, add the context and unpack what it actually means for founders.
The Compliance Layer
There is also a practical lesson here.
When a company starts growing, corporate compliance shouldn’t be treated as something to clean up immediately before a fundraise or IPO.
It should become part of the company’s operating system.
For founders dealing with share issuances, corporate records, regulatory requirements or broader compliance questions, professional support from a CA, CS or qualified legal adviser can be valuable.
For businesses looking for structured compliance support, ComplyHQ is another resource within the broader ecosystem I’m building.
The important thing is not which provider you use.
The important thing is to deal with these questions before they become urgent.
The Takeaway
The real lesson isn’t:
“Issue bonus shares today.”
It is:
Don’t wait until an IPO is around the corner to understand your cap table.
Bonus shares may make sense in some circumstances and may not make sense in others.
The decision should come from the company’s capital structure, future plans, regulatory position, tax implications and professional advice, not from an assumption that every startup should restructure its shares before an IPO.
If you’re building a company that you genuinely believe could become much larger, start thinking about the structure that future company will need.
Build for today’s reality. But don’t make tomorrow unnecessarily difficult.
Frequently Asked Questions
What are bonus shares for startups?
Bonus shares are additional shares issued to existing shareholders by capitalising eligible reserves, subject to the applicable legal and corporate requirements. They increase the number of shares without automatically changing each shareholder’s percentage ownership.
Why would a startup issue bonus shares?
A company may consider a bonus issue for reasons related to its share-capital structure. Whether it makes sense depends on the company’s circumstances, reserves, ownership structure, future plans and applicable legal and tax considerations.
Do bonus shares change a founder’s ownership percentage?
A bonus issue generally does not change the shareholder’s percentage ownership because the additional shares are issued proportionately to existing holdings.
Are bonus shares useful before an IPO?
They can be relevant to a company’s capital structure, but there is no universal rule that startups should issue bonus shares before an IPO. IPO planning involves much broader considerations, including promoter contribution, disclosures, lock-ins and the company’s share history.
What happens to the share price after a bonus issue?
A bonus issue increases the number of shares. Assuming all other factors remain constant, the value represented by each share adjusts proportionately. A bonus issue does not, by itself, create additional company value.
Are bonus shares taxable in India?
Tax treatment depends on the circumstances. The Income Tax Department states that bonus shares allotted without payment have a holding period reckoned from their date of allotment and that bonus shares issued on or after 1 April 2001 generally have a nil cost of acquisition.
What is the difference between bonus shares and a stock split?
A bonus issue generally increases the number of shares through capitalisation of eligible reserves, while a stock split divides existing shares into shares of a lower face value. Both can increase the number of shares without automatically changing the shareholder’s percentage ownership.
Should every startup issue bonus shares before an IPO?
No. The decision should be evaluated based on the company’s actual capital structure, future fundraising plans, shareholder position, regulatory requirements, tax implications and professional advice.
About The Brief
The Brief by Rajyavardhan Bhandari is a personal editorial series on The Founder Nation, where I go deeper into the ideas, observations and conversations I come across while working around founders, startups, funding, technology and India’s startup ecosystem.
The LinkedIn post is often the thought.
The Brief is where I unpack it.
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Sources & Further Reading
SEBI: IPO disclosure and promoter contribution framework, including treatment/disclosure of bonus allotments.
Income Tax Department: Tax treatment, holding period and cost of acquisition for shares and bonus shares.
Google Search Central: People-first content and SEO guidance.
Google Search Central: Article structured-data guidance for author, headline, dates and images.
Disclaimer: This article is for general informational purposes and is not legal, tax, accounting or investment advice. Companies and shareholders should consult their CA, CS and/or qualified legal adviser before taking action based on their specific circumstances.
