Related-party transactions and why to disclose them first

Broader than founders expect. A related party generally includes founders and directors, their relatives, and entities any of them control or significantly influence. The transaction does not have to be large or improper to be reportable.

Typical examples in an early-stage Indian company:

• Office space rented from a founder or a family member
• Services bought from a company a co-founder also owns
• A loan from a director, or to one
• A relative on payroll
• Equipment bought from or sold to a founder’s other business
• A founder personally guaranteeing a company borrowing

Most of these are entirely ordinary and several are how early companies survive. The issue is never their existence.

Three independent routes, and you cannot close all of them:

1. The audited financials. Related-party transactions are a required disclosure, so your own auditor has probably already listed them.
2. The bank statements. Recurring payments to a name that also appears on your cap table or your board is a pattern counsel notices quickly.
3. Public registry data. Directorships and shareholdings of your founders are searchable. An investor can see what else they are involved in.

Disclosed: a line item with an explanation. “We rent from a founder’s family at a rate benchmarked to two local quotes, board-approved, terminable on three months.” An investor may ask it be put on arm’s-length terms or unwound before closing. That is a task.

Discovered: the investor now assumes the disclosure set is incomplete and widens diligence to find the rest. You spend weeks demonstrating absence, which is far harder than demonstrating a fact. In the worst case it reads as concealment, and that is priced into terms or ends the conversation.

The asymmetry is extreme and it runs entirely one way. There is no version where withholding helps you.

Beyond disclosure, related-party transactions generally need proper authorisation. Board approval, and in some cases shareholder approval, with interested parties not voting. The common failure is not the transaction but the missing minute.

If an arrangement has been running informally for two years, the fix is usually ratification and documentation rather than unwinding. Start that before diligence, because during it the same work happens under a deadline.

• A related-party schedule you wrote: party, relationship, nature, value per year, terms, how the price was set, and the approval reference
• The underlying agreements, even informal ones
• Board or shareholder resolutions approving each
• Any benchmarking that supports the pricing
• Where an arrangement has ended, the date and how

Write the schedule yourself rather than waiting to be asked. It is the clearest available signal that you know what diligence looks for, and it moves the conversation from “what is this payment” to “are these terms reasonable”, a far better question to be answering.

Where it belongs in the wider set: the data room checklist. What else gets asked: diligence questions.

A practical summary, not legal or accounting advice. What constitutes a related party, and which approvals and disclosures apply, depend on your facts and current rules; take advice on your own situation.