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Are start ups and founders adequately protected against legal action?

Start-ups have their share of enthusiasm and energy among the founders 

Are start ups and founders adequately protected against legal action?

Tuesday March 28, 2017,

5 min Read

Start-ups have their share of enthusiasm and energy among the founders. Often their entire focus is on developing, nurturing, and ensuring thegrowth of the baby business concern. Though it may sound like the best and the only thing to do, risk management plays a major role in their success.

Risk management is involved in thesafe conduct of our lives on a daily basis, whether it’s a small trip to pick up your child from school or running a multi-million-dollar business.

Risk Management for Startups

Start-ups need to follow an objective approach towards risk management, to keep the costs low and still enjoy adequate safety from threats that can derail the business before it picks up the pace. This approach will involve the following three steps:

1. Identify the areas of threat

2. Understand the magnitude and frequency of risks

3. Find out if these risks can be transferred

Therefore, for a 360o umbrella, you need to identify all areas of responsibility from where a claim against your business and founders may arise.

The Areas of Concern

Depending on the type of activity, you may come across various dimensions where you will need to plan, mitigate, or manage the financial and legal risks. Some of the prominent and common areas are as follows:

• Employment policies

This is perhaps the most important of them all. Even if you are starting up in a low regulation environment, high paying, and flexible activity, human needs remain the same. Consistent human resource policies help, but at times, exceptions are needed, and fast-growing start-ups are prone to such human resource errors in the absence of a uniform policy.

The risks you can face here is:

 Legal suit for unethical conduct (Sexual harassment, etc.)

 Unlawful dismissal of employee

 Pay related issues

 Employee dishonesty, etc.

• Service Delivery& Customers

Service firms, consultants, and even the medical professions face the risks associated with their decisions made while providing the services. Often it may take some time for the claim to arise, which means even after the service period is over, a claim may be made on the provider.

Such possibilities can be covered by the Service Level Agreement (SLA) with the client, but not entirely. Your SLA can still be challenged under common law, with the claim as you as an expert in the field will always know better than the client.

The best way is to communicate with the client, especially about anything that seems ambiguous, and keep most of these on written channels. However, caution can only reduce the chance of loss, it does not mitigate the loss.

• Engagement of Vendors & Consultants

Vendors and consultants to your business are another category of stakeholders with interest in your business and expectation of a fair deal. Despite all the arrangements and your better judgements, misunderstandings may happen.

Some recent cases also point towards criminal intent of these vendors at times, which may drag your business to the court and cause irreparable damage to it.

Once again you will need more than systems and process checks to cover this side of risk for your fledgling start-up.

• Lenders and shareholders

Lenders and shareholders are perhaps the least risky category when it comes to your business, as their interests are directly aligned with the growth of your business activity. However, misunderstandings, disassociation of vision, lack of confidence in the operations of the start-up by the financiers can be the cause of concern.

Once again, proper communication of the vision and strategy of the business is important, but it may only reduce the chances of an untimely pull-out or litigation against the founders running the business.

• Tax and govt. regulations

This should be one of the greatest concerns of today’s Indian start-ups. Not because their activities are out of thelegal code of conduct, but because the laws are changing fast. Regulations for tax, financial reporting, acorporate code of conduct, etc. have regularly been made at par with the international standards, and a lax in these can cost the founders, not just the business but also a major chunk of their professional image.

It is recommended that utmost caution is taken to avoid any such contingency or, as we call it “brush with the law.” However, you will need a last resort financial cushion to rely on in case you end up in the fray.

Are You Adequately Protected?

Adequate protection refers to the financial cover available to you in thecase of an expense or claim arising on your business or founder members.Though there is no ‘particular’ formula to arrive at a definite amount, based on the legal processes and previous judgements, the financial liability should be dependent on the financial capacity of the business.

This capacity is determined as the annual turnover of the business by most insurers. Also, before we can call that we are 100% covered, let’s have a look at what is covered by indemnity insurance for business and founders (directors and officers):

 Shareholder/stakeholder claims

 Sexual harassment, discrimination allegations, and other employment practice violations

 Regulatory investigations

 Accounting irregularities

 Exposures relating to Mergers & Acquisitions (M&A)

 Corporate Governance requirements

 Compliance with various legal statutes

 Advancement of Defence costs

Anything more, you will need to retain; i.e. create a pool of funds dedicated to contingencies.

Seek Expert Help?

It can be understood that your core expertise is your business, not risk management. Therefore, it is better to connect with the experts in risk management to better understand and plan your protection. Online insurance advisors like SecureNow can offer you everything you may need in the form of advisory and insurance for managing and covering all the loopholes for better survival of your start-up.

These advisors are equipped not just with knowledge from their experience but can provide multiple choices for the insurance your firm will need. They also offer policy management and 24x7 customer support for claim related issues and other queries.