Starting Up: How to do it ‘legally’

Launching and running a startup comes with its own challenges - starting with nurturing the seed of the business idea, identifying the market need for the services or products on offer, raising funding and capital, having a infrastructure and a team and of course, get going with your first client.Amidst so many persistent issues, there’s one critical aspect that needs foremost consideration - legal issues pertaining to the startup.

Usually, entrepreneurs think that legal issues are to be handled and paid heed to when the venture becomes sustainable and grows big. But ignoring and not handling legal issues since the inception of the start-up can be a tricky and costly affair for the latter days.

Issues can be in the form of a dispute between the founders, employee related, relating to funding or pertaining to critical regulatory approvals and also, IP issues in terms of trademarks, patents and copyrights.

We are herein drawing a checklist of the basic legal issues, which the startups should keep in mind while launching.

Incorporation of the Entity

Structure of the company is a critical aspect, which needs attention since the start of the venture. Structure of the company decides the liabilities of the directors, tax implications, benefits, and statutory compliances required under the said structure and also the ability to raise funds.

In India, one can register a company as a private limited, proprietorship, partnership or as LLP. Every structure has its own pro and cons. Like in a sole proprietorship, the sole owner is personally liable for all the risks the company takes.

Registering a sole proprietorship is a quicker and inexpensive process. Whereas, in a private limited company, the process can take a time period of upto six weeks and also costs a higher amount for incorporation of the same.

To avoid incorporation hassles of a private limited company, many start-ups in the beginning go for a sole proprietorship structure and later change to a private limited entity. While deciding the structure of the entity one has to also look into the target market and the nature of product and services offered. Many entities go for a US incorporation depending upon their needs.

Legal Support

Startups have their own challenges and needs and similarly, have peculiar legal needs as well. Therefore, identifying and choosing the right lawyer for a startup is very critical to the success of the startup. A lawyer not adept and having experience working with entrepreneurs and startups would concentrate on the wrong things and is likely to miss on the critical and important issues.

It’s important to have all the agreements in place and work under the same. Get all the documents and agreements in order with employees, vendors, and clients for all the deals and transactions. One should have all the agreements related to employment with all the employees to avoid any legal hassles in case an employee quits the company.

Agreements with employees should incorporate clauses related to IP, non-compete business, early exit from the company, confidentiality and non-disclosure.

Creation and protection of IPR

For any venture like tangible assets, intangible assets are also highly valuable and hold a lot of value in the venture. Therefore, maintaining and protecting the IP of the company is very important and needs to be done since the inception of the company.

Owners usually neglect the value of IP thinking that IP can be protected in the later stages when the venture passes a certain stage and becomes sustainable. It’s very critical and important to secure all the IP rights since the beginning only as for many cases getting the IP rights in the latter stages is not possible and also in some cases protection is not granted as well.

For example, if a startup does not secure the trademark rights of their name in the beginning and meanwhile, someone else secures the same name for their company, then it would be difficult for the startup to have right over the said trade-name and can also become difficult to work under the said name.

Also, in the case of patents, disclosing the same in the public domain without first securing the rights for the same would restrain one for having protection for the invention in the later stage. Right IP management can create a lot of value for the company.

Good IP is also a basis for attracting funding, gives competitive advantage in the marketplace through precluding others from utilizing the IP and also generates interest by other companies. Few of the considerations to be taken into account are registration of trademarks, patents and copyright, identifying the market for the products and services offered and appropriately securing protection in the said jurisdictions.

In case the product has an international market, securing IP rights in that jurisdiction becomes important. It’s always good to have a watch on others and competitors IP to ensure their IP do not prevent your company from carrying out its business objectives and also restraining them from using your IP.

This is the first article in a series of guest pieces being authored by Ritambhara Agrawal, Managing Partner, Intelligere. You can get in touch with her by writing to ritambhara[at]intelligere[dot in. Also, do share with us your thoughts and views on this story by writing to us at [email protected].