India’s artificial intelligence and deep technology ecosystem is attracting interest from international venture capital funds, strategic investors and corporate innovation teams. However, Deep Tech Investment involves legal and commercial considerations beyond those associated with conventional software startups. Businesses developing AI models, robotics, semiconductor technology, quantum computing, biotechnology and advanced materials often require substantial capital, long research cycles and carefully protected intellectual property.

Foreign investors must therefore structure investments around ownership, regulatory eligibility, technology rights, governance and future funding needs. A well designed investment should protect the investor’s commercial interests while allowing the Indian startup to continue developing its technology and accessing global markets.

1. Understand the Startup’s Technology and Investment Stage

The first step is to identify what the startup is developing and how it expects to commercialise its technology. An AI company selling software subscriptions presents a different investment profile from a semiconductor venture developing proprietary chip designs or a robotics company manufacturing specialised hardware.

Investors should understand the technology’s maturity, research requirements, development costs and route to market. They should distinguish between demonstrated technical performance and projected commercial potential. A prototype may establish technical feasibility, but it does not necessarily prove scalability, customer demand or freedom to operate.

Due diligence should examine research milestones, technical validation, customer pilots, development partnerships and dependencies on universities or external laboratories. Investors should also assess how much additional funding the company may require before generating sustainable revenue.

India’s National Deep Tech Startup Policy framework recognises the distinctive needs of research intensive businesses, including long development timelines, technical uncertainty and substantial capital requirements. Investors should account for these characteristics when setting valuation milestones, funding commitments and performance expectations.

2. Check Foreign Investment Eligibility Before Choosing a Structure

Foreign direct investment in an Indian startup is governed by the applicable foreign investment policy, the Foreign Exchange Management Act, 1999, and the Foreign Exchange Management (Non Debt Instruments) Rules, 2019, as amended.

Many technology activities permit foreign investment under the automatic route. However, investors should not assume every AI or deep tech business qualifies simply because it operates in the technology sector. The applicable conditions depend on the startup’s activities, the relevant sectoral rules and the investor’s ownership structure.

A company developing general purpose enterprise software may face a different regulatory assessment from a business involved in defence technology, space activities, telecommunications infrastructure or other strategically sensitive areas. Where the startup has several business lines, each relevant activity should be assessed separately.

Investors should also examine the nationality and beneficial ownership of the proposed investor. India's rules concerning investments from countries sharing a land border with India can require government approval in circumstances covered by the applicable policy. The ownership chain should be reviewed carefully, particularly where investment is routed through an overseas fund, holding company or special purpose vehicle.

The Department for Promotion of Industry and Internal Trade publishes the applicable foreign investment policy and related amendments. Investors should verify the current rules and their effective dates before committing to a transaction.

3. Choose the Appropriate Investment Instrument

The investment instrument should reflect the startup’s stage, valuation uncertainty, funding requirements and anticipated exit route.

For an early stage startup, equity may provide a straightforward way to establish ownership and governance rights. However, pricing a company with limited commercial revenue can be difficult, particularly where its value depends on research that may take years to commercialise.

Equity financing should therefore be supported by a defensible valuation and a clear understanding of the rights attached to the shares. Investors may negotiate board representation, information rights, reserved matters, pre emption rights and protections against certain forms of dilution.

Convertible instruments may offer an alternative where the parties cannot agree on an immediate valuation. However, not every instrument commonly used in overseas startup markets is automatically available to a foreign investor in India. The parties must check whether the proposed instrument is permitted under Indian company law and foreign exchange regulations, including applicable pricing, conversion and reporting requirements.

External commercial borrowings may also be considered in suitable circumstances, but they operate under a separate regulatory framework. They should not be treated as an unrestricted substitute for equity financing.

The investment documents should explain how the instrument converts, how future funding affects ownership and what happens if a financing round, commercial milestone or planned exit does not occur.

4. Protect Intellectual Property and Research Ownership

Intellectual property is often the central asset in an AI or deep tech startup. Its value may depend on source code, algorithms, training methods, patents, technical drawings, proprietary datasets, manufacturing processes or scientific discoveries.

Investors should establish whether the startup owns the intellectual property it claims to control. Review founder agreements, employee invention assignments, contractor contracts, university collaboration agreements, patent applications, software licences and records of technology transfers.

This is particularly important where founders developed the technology before incorporation or while working at a university, research institution or previous employer. An inventor’s involvement does not automatically establish that the startup owns every relevant right.

AI businesses require additional scrutiny. Investors should investigate the provenance and permitted use of training data, third party models, open source software and externally licensed datasets. The company should understand the conditions governing commercial use, redistribution, modification and model deployment.

Where the startup uses third party foundation models, its business may depend on changing prices, usage restrictions or access conditions. These dependencies should be reflected in the commercial risk assessment.

Investment documents should contain appropriate intellectual property warranties and obligations to correct identified ownership gaps. Where technology is jointly developed with a research institution or overseas partner, the parties should define ownership, licensing, commercialisation rights and rights to improvements.

5. Structure Governance Without Restricting Innovation

AI and deep tech ventures need capital and commercial discipline, but excessive investor control can slow technical decisions and research partnerships. Governance arrangements should balance oversight with operational flexibility.

Investors may seek board representation, periodic financial reporting, access to technical updates and approval rights over major decisions. Reserved matters could cover significant borrowing, related party transactions, material asset sales, new share issues and transfers of core intellectual property.

However, investors should distinguish between major strategic decisions and routine research activities. Requiring investor approval for every technical adjustment or ordinary research expenditure may make the business difficult to operate.

Founders should also agree on the treatment of future funding rounds, employee equity incentives and changes to the business plan. Deadlock provisions are particularly important where an investor and founder have different views on whether to continue research, license technology or pursue commercial deployment.

For investors researching how to invest in startups, governance should be evaluated alongside the headline valuation. A smaller stake with meaningful information and consent rights may provide a different risk profile from a larger stake with limited protection.

The shareholders’ agreement, share subscription agreement and company’s constitutional documents should work together. Rights should be drafted consistently and remain subject to applicable Indian law.

6. Assess Data Protection, Cybersecurity and Sector Specific Regulation

AI companies may process personal information, confidential commercial records, biometric information or data obtained from connected devices. Deep tech ventures may also operate in regulated fields such as healthcare, financial services, telecommunications, defence or space.

Investors should identify the laws and regulatory permissions relevant to the startup’s actual activities. A medical AI platform, for example, may need to address requirements concerning medical devices, clinical validation, health data and product liability, depending on its intended use. A defence technology venture may face additional restrictions relating to foreign investment, procurement, security and technology transfers.

Data protection due diligence should cover the lawful collection and use of personal data, privacy notices, data sharing arrangements, security controls, retention practices and incident response. India's Digital Personal Data Protection Act, 2023, together with applicable rules and commencement notifications, should be assessed according to the provisions in force and their implementation timelines.

Cybersecurity is equally important where the startup handles sensitive datasets, operates connected hardware or relies on cloud infrastructure. Investors should examine access controls, vulnerability management, incident history, disaster recovery and third party security arrangements.

Where technology is transferred between countries, the parties should assess applicable export controls, sanctions, confidentiality obligations and restrictions on transferring controlled technology. Cross border collaboration should be structured before sensitive technology or data is shared.

7. Plan Funding, Commercialisation and Exit Rights

Deep tech startups often require several funding rounds before they generate substantial revenue. An investment structure should account for future capital needs rather than focus only on the first cheque.

Investors should review the proposed research budget, manufacturing expenditure, hiring plans and commercialisation milestones. They should assess whether future capital is expected from venture funds, strategic investors, government programmes, commercial customers or licensing revenue.

The documents should establish whether follow on investment is optional or committed, how additional funding will be approved and what happens if a planned round does not materialise. Any funding commitment should be sufficiently clear to avoid disputes over the parties’ obligations.

Exit planning requires equal attention. Potential routes may include a sale to a strategic buyer, a secondary share sale, a merger or a public offering where feasible. However, a long development cycle, specialised intellectual property or regulatory restrictions may reduce the number of realistic buyers.

Transfer restrictions, tag along rights, drag along rights and pre emption rights should be negotiated with these possibilities in mind. Foreign investment rules and applicable pricing requirements may affect transfers and exit proceeds. Investors should not rely on a guaranteed return or assume an exit will occur by a fixed date.

Where the founders intend to start a company in India before receiving foreign capital, the proposed corporate structure, shareholding, intellectual property ownership and eligibility for relevant startup recognition should be established early. Restructuring an existing business later may create avoidable tax, regulatory and ownership complications.

8. Build Due Diligence Findings into the Transaction Documents

Legal due diligence should lead to practical protections rather than a report which sits apart from the transaction.

If the review identifies incomplete intellectual property assignments, missing approvals, unresolved tax liabilities or weak data governance, the investor should decide whether each issue must be resolved before completion or can be managed through contractual protection and a post completion plan.

The investment agreement should address representations and warranties, disclosure obligations, indemnities where appropriate, conditions precedent and the consequences of a material breach. The parties should allocate responsibility for regulatory filings and agree who will provide supporting information.

Investors should also consider whether technical milestones can be measured objectively. Milestone based funding may be useful, but milestones should reflect verifiable deliverables rather than vague promises of commercial success. The agreement should specify how completion is assessed and how disagreements are resolved.

A practical investment structure aligns the company’s technical roadmap with the investor’s rights, regulatory obligations and capital allocation strategy.

Conclusion

Structuring a Deep Tech Investment in India requires a coordinated approach to foreign investment rules, funding instruments, intellectual property, governance, data protection and commercialisation. Investors should evaluate the legal ownership of the technology, confirm the permitted investment route and establish realistic funding and exit expectations.

The strongest structures protect the investor without undermining the startup’s ability to research, innovate and commercialise its work. Because deep tech businesses differ significantly in their technology and regulatory exposure, transaction documents should be tailored to the company rather than copied from a conventional software investment

Frequently Asked Questions

Can foreign investors invest in Indian AI startups?

Yes, foreign investment may be permitted in Indian AI startups, subject to the applicable foreign investment policy, sector specific restrictions, investor eligibility and any required approvals. The startup’s actual activities should be assessed before investment.

Is government approval required for every deep tech investment?

No. Many technology activities may qualify for the automatic route. Government approval can be required in specified sectors or circumstances, including certain investments connected with countries sharing a land border with India.

What is the biggest legal risk when investing in a deep tech startup?

A major risk is uncertainty over ownership or commercial use of the underlying technology. Investors should also assess foreign investment eligibility, regulatory permissions, data rights, cybersecurity and the startup’s ability to raise further capital.

Can foreign investors use convertible instruments to fund Indian startups?

Potentially, but the instrument must be permitted under the applicable Indian legal and foreign exchange framework. Its terms, conversion mechanics, pricing and reporting obligations should be reviewed before signing.

How can investors protect their investment in an AI startup?

Investors can use appropriate due diligence, intellectual property protections, governance rights, information rights, warranties, indemnities and clearly drafted funding and exit provisions. The protections should reflect the startup’s specific technology and regulatory risks.

This update was released on 26 Nov 2026.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
T: +91 22 40565252
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