Starting up your own company is exciting. You are finally in control of your life and you have the reins to your career in your hands.
It also comes with a lot of responsibility and some hassles that you never even thought about before.
One of the biggest headaches that most startups face is navigating the Indian Legal System.
Here are 10 top legal tips for startups in India that will make sure your business is on the right legal footing.
#1. Choose the right business structure
Choosing the right business structure is a very important decision for any start-up. This is the first thing that you need to do amongst anything else.
There are many businesses structure in India. You must choose one considering your needs and wants not just current but your future needs as well.
When deciding on the best business structure, keep in mind that your decision will have legal implications on your business.
You may be tempted to choose the easiest option, but as a startup, you must consider the consequences.
The most Ideal option is Private Limited Company. PLC offers flexible taxation while keeping your personal assets protected.
Here are other types of business structures:
- Sole Proprietorship: it is easiest to start with, but liability is unlimited
- Simple Partnership: it is simple to start, must be owned by two or more people, but liability is unlimited
- Limited Liability Partnership: LLP offers limited liability to the partners but raising funds and offering equity is quite difficult.
#2. Registrations and Licenses
Apart from incorporation of the company, some necessary registrations and licenses are required which depends upon the location, scale, and nature of the business.
#3 Intellectual Property Protection
Startups are filled with unique ideas, products and breakthrough innovations. You are highly vulnerable to theft and security issues if you do not have adequate protection. Keep in mind that ideas, products, and concepts can all be stolen and imitated.
For those startups who have developed a unique Algorithm or Process, then it is advised to get it patented.
#4 Founders/Co-founders Agreement
The Founders Agreement is the most effective tool for determining the relationship between a startup's founders. The agreement should reflect the founders' complete understanding of all key aspects of the startup.
Co-founders agreement should clearly mention the roles and responsibilities of each founder, as well as clauses outlining the startup's decision-making and operational structure.
#5 Founder Equity – Split and Vesting
Founder equity must be divided among founders based on the nature of each founder's role, as well as their time, effort, and capital contributions to the startup.
As the startup matures, dividing founder equity equally by default and failing to have a thorough conversation about expectations and contributions leads to pressure and dissatisfaction among founding teams.
#6 Employment Contracts
Startups should make sure that they enter into a clear employment contract with their employees.
The contract should cover important points such as
- Preventing employees from forming competing businesses (Non-Compete Clause)
- Poaching other workers/clients/customer
- Preventing employees from claiming intellectual property rights over work done or developed while on the job (Intellectual Property Rights)
- Non-Disclosure Clause
#7 Get Insurance Coverage
You don't have an overflowing bank account as a startup business to cover unexpected costs and liabilities. Profit must still be earned, and your company's reputation must be built.
On the road of success if you meet any unforeseen expenditure and face legal issues, they will surely hurt not just your finances but your reputation as well.
It is advised to have business insurance to protect your company from anything that could jeopardize its performance.
#8 Make sure your operations are Legal
Different terms and conditions apply to your business depending on the industry. Always follow the rules and regulations of your trade, no matter what business you're in.
Practice in accordance with standards and protocols, and ensure that all legal principles are adhered to. Obtain a permit if one is required, a license if one is required, and certificates if one is required.
Engage the services of an attorney and seek legal counsel to review your operations. Correct mistakes early in the business to avoid a run-in with the law.
Operating illegally will cost a lot of money in terms of fines and penalties.
#9 Employee Stock Option Plan (ESOP)
Employee stock ownership plans (ESOPs) are financial incentives given to employees/directors of a company in order to attract and retain employees. Employees gain a sense of ownership through ESOPs.
Most of the startups in India retain 10%-15% share allocation in direction of ESOP pool. It is a good practice to offer ESOPs to the talented employees and retain them.
#10 Business Contracts
You will enter into various contracts with other businesses either written or oral. It is important to get it in writing, Oral contracts are harder to enforce in court.
Contracts can be unfair but not illegal, so think carefully before entering into one. If required the contract vetted from your lawyer. He/she will help you with the legalities included in it.
#11 Investment Structuring
Whatever method you use to raise funds, make sure to keep accurate records. Even gifts from family and supporters can help you save money on taxes.
When negotiating the terms of a funding deal and the rights of investors, it is critical for startups to seek proper legal advice.
Term sheets, which detail the structure of the transaction, are sometimes executed as part of the process, followed by due diligence of the startup and the execution of investment-related definitive agreements.
#12 Compliance Management
Many startups overlook compliance and its consequences. There are a number of legal guidelines applicable to specific entity structures that require separate event-based and annual compliance.
It is critical for the long-term development of any enterprise that the startup follows to secretarial, accounting, taxation, employee-related, and other related compliances.
We hope you enjoyed our post on the top 12 legal tips for startups in India. We know that legal aspects of business operations can be confusing, and we aim to help you navigate them with ease. If you have any further questions about obtaining legal assistance for your startup, please contact us anytime at email@example.com. We are always available to help!