We provide legal help in investments in early and growth-stage startups and ensures they understand the intricacies of the agreements.
The corporate is a venture-focused boutique observe that provides cost-effective, skilled and dependable legal advice in addition to personalized enterprise solutions.
Our goal is to create a ‘one-stop support system’ of services for entrepreneurs and traders. On this article, We provide 10 legal suggestions that Indian founders ought to consider when creating their startup.
1. Select the appropriate legal structure for your startup
Selecting an applicable legal structure is without doubt one of the most important selections for any startup.
The choice needs to be taken based on individual circumstances and a bunch of things, such as:
- nature/sector of enterprise operation
- enterprise trajectory
- regulatory and tax issues
- prices of formation and ongoing administration
- exterior capital requirement and kind of funding sought
- the extent of authorized legal responsibility safety required
- variety of stakeholders
- steadiness required between possession and administration
- proposed mechanism for revenue sharing or distribution amongst stakeholders and many others.
The popular entity constructions for startups in India are restricted legal responsibility partnership and personal restricted firm.
2. Registrations and Enterprise Licenses
Put up the incorporation of a enterprise entity in India, some necessary registrations are required and mandated by law.
Some examples are Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), VAT Registration, Service Tax Registration and many others.
Enterprise licenses are permits issued by a government authority that allows startups to start out/conduct/continue to operate a particular enterprise inside its territorial jurisdiction lawfully.
The character of business activity determines most license requirements. Other determining factors may include the number of workers, location of the enterprise and the type of enterprise possession.
Some examples are Meals security license, Well being/Commerce license, Outlets & Institution License and many others.
3. Intellectual Property Safety
Intellectual Property Rights are a very important asset class for a startup. Developing and protecting intellectual property with proper registration may help startups achieve a aggressive advantage.
It’s important to acquire trademark registration for the enterprise title/trade title under the Trademarks Act. Registration of an organization or enterprise in India doesn’t by itself give safety towards others who may begin utilizing an identical or comparable mark.
A trademark search needs to be carried out earlier than deciding on these enterprise title/ commerce names to stop any points in future together with potential infringement.
All Intellectual Property (including trademark, copyright, design, trade secrets, innovations, patents, and many others.) needs to be registered within the title of the entity and never within the title of the promoters/founders of the startup.
4. Founder Equity – Split and Vesting
Founder equity needs to be split amongst founders based on the nature of the position performed by every founder along with their time, effort and capital contribution to the startup.
Splitting founder equity equally by default and not using a thorough dialogue on expectations and contribution generally leads to pressure and unhappiness amongst founding teams because the startup matures. Founder Shares needs to be at all times topic to a vesting schedule – sometimes over a period of three to 4 years.
When vesting is imposed on founder equity, the unvested shares held by the founder turn out to be topic to a contractual right to repurchase/transfer usually at nominal value if one of many founders is terminated or voluntarily leaves the startup. This is essential to make sure the longer term viability of the business.
5. Founder Agreements
The Founders Agreement is the most useful tool to ascertain the connection between the founders of a startup. The settlement ought to represent a clear understanding of the founders on all key points associated to the startup.
Founder agreements should clearly mention the roles and responsibilities of the founders and have clauses detailing the choice-making and operating structure of the startup, founder equity split with vesting (defined above), assignment of all intellectual property in favour of the startup, termination of a promoter and exit process and so on.
6. Employment Contracts
Startups should guarantee to enter into clear employment contracts detailing phrases and circumstances of employment with their workers.
While employment contracts are actually priceless to the employees as it particulars terms regarding the description of job profile, compensation and other associated benefits, various clauses could also be inserted to safeguard and defend the interest of the startup, such as:
- stopping workers from organising competing entities (non-compete clause)
- poaching other workers/clients/customer (non-solicitation clause)
- stopping workers from claiming any intellectual property right on the work done/developed during the course of employment (assignment of intellectual property rights).
7. Employee Stock Option Pool (ESOP)
ESOP’s are incentives given to employees/directors of an organization to attract talent and retain staff by rewarding them. ESOPs create a way of ownership amongst employees.
It is important to observe that ESOPs do not share. They are structured in a way that they are the option to buy shares at a reduced worth and will be exercised only after a certain vesting period which is decided by the corporation granting the ESOPs.
In India, we sometimes see a pool of 10% to 15% allocation in direction of an ESOP Pool.
8. Third Party Agreements
Previous to getting into right into a third-party agreement and whereas negotiating the phrases, it’s advisable to execute a non-disclosure agreement.
If creation or development of the intellectual property is a part of such a 3rd party agreement, it should clearly state that all right to the intellectual property rights shall vest and be owned by the startup and the third-party shall not stake any claim on the same and will do all acts to make sure the safety of the intellectual property.
Clauses related to breach, termination and dispute decision needs to be effectively negotiated and captured in all third-party agreements.
9. Investment Structuring
Some of the difficult and time-consuming aspects of working a startup are to raise capital for working capital requirement and development.
In India, Investors (HNIs/Angels/Funds) put money into early and progress stage firms in several structures and on varied terms.
It’s crucial for startups to seek proper legal advice whereas negotiating the deal terms for funding and the rights of the investors.
Sometimes, as a process, an intention document detailing the structure of the transaction called the Term sheet is executed followed by due diligence of the startup and execution of investment-related definitive agreements.
10. Compliance Management
Compliance and its importance are often overlooked by many startups. There are a number of legal guidelines relevant to particular entity structures under which separate event-based and annual compliance is mandated.
It is extremely important for the sustainable development of any enterprise that the startup is in compliance with authorized, secretarial, accounting, taxation, employee-related and other related compliances.
The results of non-compliance is usually a levy of punitive fines on the startup.
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