Valuation, Funding & ESOP Friction: 7 Startup Issues Budget 2026 Must Address

As India approaches the presentation of the Union Budget 2026 on February 1, the country’s startup ecosystem finds itself at a critical inflection point. After a prolonged funding correction, rising scrutiny around compliance, and renewed focus on sustainable growth, founders and investors are now looking beyond headline incentives toward structural clarity and policy stability.

While the government has already addressed some long-standing concerns—most notably the abolition of Angel Tax—several friction points continue to influence how startups raise capital, reward talent, and plan exits. Ahead of the Budget, ecosystem stakeholders are closely tracking whether policymakers will address these unresolved issues.

Budget for Startups: What do they want!

1. ESOP taxation continues to weigh on startup talent

Employee Stock Ownership Plans remain a key tool for startups to attract and retain skilled professionals, particularly in early and growth-stage companies. However, taxation timelines and treatment continue to create uncertainty for employees, especially when tax liabilities arise before actual liquidity events.

Founders argue that a clearer, liquidity-linked taxation framework would reduce financial stress for employees and strengthen startup hiring, particularly in technology-led sectors.

2. Valuation scrutiny and compliance friction persist

Although Angel Tax has been abolished, valuation-related scrutiny during fundraising rounds remains a concern for startups and investors. Subjective assessments and procedural delays continue to impact deal timelines.

Industry participants are seeking clearer valuation guidelines and reduced interpretational ambiguity to ensure smoother capital raises without unnecessary regulatory friction.

3. Exit taxation and capital gains clarity remain critical

As more startups move toward IPOs, mergers, and secondary exits, the tax treatment of capital gains has come into sharper focus. Investors continue to seek predictable and globally competitive exit taxation structures that incentivise long-term capital commitment.

Clarity in this area is seen as essential to attracting patient domestic and foreign capital into the startup ecosystem.

4. Buyback and secondary sale taxation challenges

Buybacks and secondary share sales are increasingly important liquidity avenues for founders, early employees, and angel investors. However, the current tax framework governing these transactions remains complex and often discourages participation.

Simplification and alignment with global practices are among the key expectations from the upcoming Budget.

5. Cross-border funding and structuring ambiguities

India’s startups are increasingly global in outlook, with many raising capital from overseas investors or operating across jurisdictions. Despite progress, regulatory overlaps and tax ambiguities continue to complicate cross-border fundraising and structuring decisions.

Founders are seeking better coordination between tax regulations, foreign exchange rules, and startup recognition frameworks.

6. MAT and early-stage cash flow pressures

Minimum Alternate Tax continues to place pressure on startups that are capital-intensive but not yet profitable. In a cautious funding environment, startups argue that early-stage cash flow preservation is critical for long-term viability.

Industry stakeholders expect rationalisation measures that recognise the unique financial realities of innovation-led companies.

7. Sector-specific support for deeptech and AI startups

Deeptech, artificial intelligence, climate tech, and advanced manufacturing startups require long-term policy support due to extended development cycles and high R&D costs. Budget 2026 is expected to signal the government’s priorities in these strategic sectors.

Startups are closely watching for policy measures that go beyond short-term incentives and focus on building global competitiveness.

As February 1 approaches, the startup ecosystem is not seeking sweeping policy overhauls. Instead, the focus is on incremental, well-calibrated reforms that improve predictability, reduce friction, and support sustainable scale.

Budget 2026 will be closely evaluated not for what it announces, but for how effectively it addresses these structural issues shaping India’s next phase of startup growth.