6 key legal aspects Entrepreneurs should remember while starting-up
The feel good factor and euphoria of having an idea that not only plugs a demand in the market which was hitherto un-served, but also holds the potential of being scaled up economically, can evaporate just as quickly if certain fundamental legal aspects are not addressed. So if you want your business to get to the next level and be the best you need to take care of these key legal aspects first.
1. The Composition of the A-Team
It is absolutely crucial to bear in mind that the person(s) you choose to start up with, is not just another employee. In fact, that person is going to be standing next to you in what will hopefully be a long and fruitful relationship. The inter-se relationship between the founders needs to be absolutely solid and there cannot be any grey area on the topic of the founders’ role, their duties and obligations, what they bring to the start-up etc.The dynamics between the founders is often a determining factor in whether an investor opts to invest into a particular start-up. No matter how good the idea is, if the investor does not have faith in the founding team, the investment is a no-go.
Personal Experience: Do not rush into a relationship where you have not had the chance to work with or know the other co-founder(s). It cannot be a marriage for the sake of convenience and the ownership of the start-up is not just based on what one co-founder has brought to the table but future role as well. If you are unsure of your co-founder(s) commitment to the project at hand, you need to give it more time. Regulating the inter-se relationship through an agreement may also be needed in certain cases.
2. Type of Playhouse
You have an idea and you are on the path to investing a substantial amount of money in the hope of realising your dream. Be smart and think a few steps ahead. What if the plan does not work? Are you sufficiently protected? Are you about to possibly incur huge liabilities? If it does work, have you thought of the best way of limiting your tax liabilities? This is where you need to step back and think which legal structure best suits your needs.
Sole proprietorships, partnerships, limited liability partnerships (LLP), companies etc. provide a start-up with different options with each having its pros and cons. While your personal liability is limited in a company or an LLP, the convenience and flexibility of a sole proprietorship and partnership is unmatched. Raising additional capital is easier for a company than the others.
Personal Experience: It may seem like an unnecessary expenditure, but consult a lawyer who can advise you on the pros and cons of each legal structure and which is best advised to your modus operandi. Also, there is no need to jump the gun and get started with a company right away. You can always work with one structure and then migrate to another.
3. Do your Homework
Imagine a scenario where you start-up, you have managed to attract investors, you are seeing increasing traction in the market and your start-up has really managed to carve a niche in the market with its brand, name, logo etc. Then you receive a legal notice saying that someone else had been using your brand, name, logo etc. prior to you and asking you to cease and desist immediately, lest they approach the courts.
Monetary losses and damages which the claimant may seek is merely one component of this imbroglio. The greater loss is the effort of re-branding your company. All the resources you spent on creating a brand and increasing its retentive value are completely wiped out. In this fickle world where fads are momentary, it is hard enough to attain customer loyalty, let alone explain to customers how the name or logo is different but the product is the same.
Personal Experience: Always, always and always, do a comprehensive public search before finalising the name of your company, your logo, etc. Once you have created the intellectual property, apply for its trade mark to give you greater rights over its usage. And finally, pick up domain names (eg: google.com, gooogle.com) and domain extensions (.in, .com, etc.) pertaining to your start-up. Cybersquatting is an increasing menace you want to avoid.
4. Keeping the Cogs Oiled
The early phase of any start-upis primarily milestone related with the founders chasing landmarks in order to move on to the next phase of development. In all the hullaballoo of tight deadlines, (i) the founders often put in capital from their personal accounts till the start-up manages its own funding, but fail to keep track of the expenses and the bills and (ii) employees are hired with no contract being executed. No doubt that in the early phases, it is imperative that the capital and the employees (i.e. cogs) are readily available, but it is also crucial to regulate and keep a track of the same.
Personal Experience: With respect to capital and funding infused by the founders, maintaining books of account or at least a organized record of expense serves two purposes; (i) it shows prospective investors that the start-up is systematic and the money put in by them will be utilised efficiently, and (ii) investors usually like to pay out the founders with respect to the advances they have made and expenses incurred on behalf of the company in order to start with a clean slate. On the other hand, the failure to maintain such records, could delay, if not discourage the investors from investing.
Regulating employees is important as well since the employment contract needs to have crucial clauses such as non-compete, ownership over the products/services provided by the employee, confidentiality etc. in order to avoid future legal tangles and more importantly, protect the start-up. There is no harm in creating a standard agreement for majority of the employees, which while being fair is a little in the organisation’s favour and drawing up fresh ones for key managerial positions.
5. Share the Cookie
Attracting and retaining talent on a shoe-string budget is not easy. Start-ups often fail to bring in the expertise they need because they cannot offer the pay packages the expert may command in the market. This is the perfect scenario to implement Employee Stock Options (ESOPs) which a lot of start-ups fail to recognise. ESOP is a benefit given as an option to employees of the company to purchase and subscribe to shares of the company at a future date at a pre-determined price.
Personal Experience: ESOPs are fairly easy to implement but from an employees’ perspective, the formulation of the ESOP scheme along with its documentation and certain clauses such as exit mechanism need special consideration. ESOPs while a wager for the employee since there is no guarantee that the start-up will make it big, does indeed help in retaining employees as well as incentivise them to work hard since employees themselves have an ownership component in the company.
6. Rest In Peace
From a practical aspect, the founders need to keep in mind that at the end of the day, only about one in ten start-ups actually can be considered successful. While that does not mean, you do not give it your all, some thought should be spared for the situation wherein the start-up fails to take off. Alternatively, even if the start-up has not failed, the founders may want to move on and follow other pursuits. Therefore, it is important to have a mechanism in which the venture can be shut down without too much of a hassle.
Personal Experience: While legal structures can be shut down after complying with the procedure laid down under law, inter-se agreements and specifically in relation to the termination clause, need to address this situation.