The legal issues faced by startups

WHAT IS A Start-Up?

Start-Up Company is a newly formed business entity or a young company which is formed by one or more entrepreneurs with an objective to develop a new product to bring into the market. It is an entrepreneurial venture with an intention to grow rapidly as a result of offering services or products that addresses a particular market group. According to the latest update, Department for Promotion of Industry and Internal Trade (DPIIT) has released a gazette notification and widen the definition of Start-Up from the earlier definition under ‘Start-Up India, Stand-up India’ scheme according to which an entity would be considered as Start-Up up to 10 years from its date of incorporation/registration instead of the existing period of 7 years. 

An entity shall be considered a Start-Up if its turnover for any of the financial years since its incorporation/registration hasn’t exceeded Rs 100 crore instead of the existing Rs 25 crore.

WHAT ARE THE LEGAL ISSUES FACED BY Start-Up?

The law has a major impact on the stable business and Start-Ups. Even after having a basic understanding of legal aspects, there are unforeseen pitfalls and issues which new and young Business Companies are not able to foresee and these issues can become more coercive and pose serious threats on Start-Ups, resulting in the failure of a good business. We are going to explain the major issues faced by the Start-Ups :

- ABSENCE OF FOUNDERS’ AGREEMENT

Founders Agreement is an agreement which describes the position of the founders and the terms and conditions which they need to adhere to. This defines the role, responsibility and liabilities of each founder of the Company. A founders’ agreement is a baseline for how co-founder relations will work in the future, how a business is structured, and what each owner brings into the business which is not being covered in the Company’s operating Agreements. The absence of this agreement results in mismanagement within the founders. 

- ABSENCE OF EMPLOYMENT DOCUMENTATION

In many Start-Ups, employment documentation is considered a very trivial formality and is ignored by the business, this results in various unanticipated problems. Employment documentation sets out to be a relationship between Employer and Employee. The Documentation will provide both the Employer and the Employee aware of their rights and liabilities in the Company and make both the parties bound with the laws of the Company. Employment documentation include

1. Employee Stock option plan documents

2. “At-Will” employment offer letter

3. Employment agreement

4. Non- Disclosure Agreements

- BY-LAWS

In order to ensure that a Start-Up operates with simplicity and ease, founders should plan strong by-laws off the bat. By-laws should establish rules within the Company like dispute settlement, rights and powers of shareholders and select leadership.

- LACK OF LEGAL PROTECTION FOR INTELLECTUAL PROPERTY ASSETS

Inaccurate and improper protection of Intellectual property leads to grave financial repercussions. There must be a security of the expressed ideas, products or the logo and brand of the company in order to protect their misuse by the competitors. Trademark rights must be used with respect to the logo or the brand name; similarly, copyright law must be used to obtain right over the original work.

- IMPROPER LICENCING

Every business deals for every particular goods or service needs licences and compulsory permission from different Authorities to have for the proper functioning of the business. Many Start-Ups, because of lack of legal awareness fail to comply with these rules and this leads to financial losses and hefty penalties.

- IMPROPER DUE-DILIGENCE BEFORE FUND-RAISING

A Start-Up goes through various fund-raising steps which include self-funding, seed capital, etc. so a proper due diligence exercise must be conducted at the time of these procedures for the presence of sufficient funds in the business.

- ABSENCE OF NON-DISCLOSURE AGREEMENTS

Whenever a Start-Up discusses a critical matter or making any agreements with other companies or people outside the business or non- employees then a Non-disclosure agreement must be signed by the parties in the discussion. This agreement promotes secrecy of the information between the parties.

CONCLUSION

It is a known fact that Start-Ups work on tight budgets and have even tighter monetary limits to spare on the numerous compliances required by the law. However, it is crucial for such business models to understand the importance of ensuring proper legal compliances before venturing into expansion, a one-time investment in the area of legal compliance and due diligence shall save them from being shut down in the future once the company grows or payment of hefty fines. Further, drafting a valid and watertight employment agreement shall save the company from numerous litigations pertaining to employment and labour issues. It is henceforth important that the Start-Ups’ research and make themselves aware of all the necessary due diligence processes and compliance requirements at the time of incorporation as a precautionary measure against any future legal issues.

The Indian government has been very vigilant and welcoming towards the Startup culture, especially in the area of tax formalities and has consequently introduced many reforms to provide less stringent and complicated policies for easy incorporations and rapid growth for such ventures. Hence, it would be a wise business move for the Startups to take advantage of such friendly policies in our country and save themselves from any future losses, shutdowns, litigations or any other unexpected problem which can arise due to lack of compliance.

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