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11 point on Legal Considerations for a Startup

Key terms of a Co-Founder’s Agreement

A Co-Founder Agreement allows you to set out the equity ownership, initial investments, and responsibilities of each Co-Founder.

The purpose of the agreement is to make the understanding the co-founders have regarding the functioning of their company and the relationship and obligation between co-founders legally binding through a formal written agreement.

The formation of such an agreement requires an open discussion between the partners regarding their apprehensions, fears, outlook, aspirations, and all arrangements involving the start-up.

The objective of the agreement is to minimize the possibility of debilitating surprises in the future when the company is functional in terms of inter co-founder relationship.

Choice of Entity for a Startup – Company, Partnership, or Proprietorship?

In India, one can choose from five different types of legal entities to conduct business. These include Sole Proprietorship, Partnership Firm, Limited Liability Partnership, Private Limited Company, and Public Limited Company.

The choice of the business entity is dependent on various factors such as taxation, owner liability, compliance burden, investment, and funding and exit strategy.

Protecting your Startup Brand – Trademark Issues

Trademarks are at the crux of any business: from the name of your enterprise to the names of specific products, services, and logos- any particular term or design that is unique to your business can be understood as a part of its trademark.

These characteristics are key to building your brand identity and carving a unique niche for your business. And so, legally protecting these aspects of your business identity and making sure nobody else misappropriates them is intrinsic to running a successful business.

SEE THIS: Benefits of Startup India initiative for Companies in India

Getting Angel Investments Termsheets Right

A term sheet, or letter of intent, is a statement of the proposed terms and conditions in connection with a proposed investment. It generally runs about one to five pages in length.

In the case of angel investments, the term sheet can be prepared by the start-up or the angels. Most of the terms are non-binding, with the exception of certain confidentiality provisions and, if applicable, exclusivity rights.

Splitting Equity Between Co-Founders

One of the toughest challenges for founders of a young company is deciding how to split the equity among the founders and early hires.

This is especially complex when cofounders are inexperienced or have a friendship as well as a business partnership. Putting a value on each partner’s role can get personal and it is best done not in one late-night session, but more methodically, over a period of time, and with advice.

Understanding ESOP and Sweat Equity

The start-ups which are in the early stages of their businesses lack the ability to pay competitive and high salaries to their employees which established businesses or large corporations can afford to pay, although the former requires a good share of human capital because of them facing resource constraints, and unstable cash flow.

SEE ALSO: Startup Recognition & Tax Exemption

Start-ups and other established companies often require motivated employees who can over-perform and exceed their expectations. Therefore, with an aim to retain and incentivize employees, companies come up with rewarding performance bonuses, revenue shares, stock options, or a stake in the company.

Legal Mistakes that Hurt Startups

Legal mistakes can be incredibly costly for startups. Some of the mistakes that the Startup make are: –

[tie_list type=”starlist”]

  • Not negotiating a co-founder’s agreement;
  • Not starting the business as a company;
  • Not evaluating regulatory issues in your business;
  • Not considering intellectual property related issues;
  • Not having a privacy policy and effective terms of use; and
  • Not choosing the right legal counsel. [/tie_list]

Protecting Intellectual Property in Software

It is essential for every Software Developer/Company to have a firm grasp of intellectual property rights and how they apply to the Software Industry. Software developers/Companies need a solid understanding of their rights to develop and protect a brand, ensure exclusive ownership of their creations, and keep their work confidential to create and maintain an advantage in this competitive market.

Privacy Policy and Website Terms

Many startups do not recognize that having a privacy policy is mandated by the law if they are collecting sensitive personal information. This video elaborates on the need for a privacy policy and briefly discusses the need for comprehensive website terms, specifically in the context of intermediaries.

Is having too many Angel Investors a bad idea?

Are you syndicating your angel investment round with ten or fifteen or more investors? Is it a good idea?

Here is the reasons :

[tie_list type=”starlist”]

  • Your incentives are misaligned on amount and time of return
  • You’re not in control
  • You won’t have access to the best deal flow [/tie_list]

To know more wait till my next article.

Choosing the right Legal Counsel

You are about to embark on the adventure of a lifetime. Don’t underestimate the importance of your relationship with your startup’s lawyer.

Sometimes, the best lawyer you ever hire is the one you pick at the very beginning. Other times, your company pivots, your business develops and something happens to make you realize you aren’t partnered with someone who can help your business grow to the next level.

Your need for strong counsel starts well before you first present your idea to potential co-founders, investors, and customers.

Will your company’s intellectual property be protected?

Have you filed a provisional patent application?

Do you need a trademark or copyright?

What sort of trade secret protections do you need?

When should you put these protections in place?

What sort of entity should you create? Where should you incorporate it?

LLP, Pvt Ltd, partnership, sole proprietorship: what is right for you?

You will need a lawyer in your corner when you set up the capitalization of the company. What you do at the outset may well determine the reckoning when you go to sell your company?

What are the terms of your security?

What are the relative rights between you and your co-founders and angel investors?

Your venture capital investors? How much stock should you grant for a CTO or a CEO? How much for a CFO?

How much for a new head of sales? How you set up your capital structure will matter more as time goes on.

With each round of capital that you raise, you are diluted, and the stakes get higher.

There are many types of lawyers, so here are some thoughts about identifying the lawyer who fits best with you.

[tie_list type=”starlist”]

  • Experience
  • Industry expertise
  • Network
  • Knows how to work with companies of your size and stage
  • Bandwidth
  • Availability
  • Recognition[/tie_list]

Vikas Sharmahttp://taxclue.in
A writer by passion. Reading and traveling in my free time enhances my creativity in work. I enjoy exploring my creative side, and so I keep myself engaged in learning new skills.

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