Essential Legal Tips for Startups

Avik Chakravorty
Essential Legal Tips for Startups
A comprehensive and informative blog discussing the legal tips that are essential for start-ups. T

It's all too common for startups to undergo the struggle of sorts. The focus invariably is on one’s product and marketing it. However, the nagging startup laws are a hindrance. 

There are so many things to consider including employment contracts, shares, terms, and conditions, so on and so forth that one can be easily overwhelmed. The question is how does one ensure that things are perfect for one’s startup?

It does not necessarily have to be that difficult at all. As a matter of fact, with proper advice through start-up legal services, it is seamless. Hence the legal tips from experts for startups.


1. Get startup legal help from professionals

 In an effort to cut costs gone haywire start-ups often engage start-up legal services with very little experience. Instead of hiring a competent and experienced corporate lawyer in India, often founders tend to hire legal counsel from within their friends’ circle, relations or someone else who may be offering a discount on a hefty fee. In so doing, the founders are unable to avail the expertise of experienced lawyers who can advise the owners on avoiding legal issues. It's advisable that founders interview among corporate lawyer in India or a law firm and ascertain as to whether or not they have the acumen in at least some of the legal areas as follows:

  • Corporation, commercial, and securities law
  • Contract law
  • Employment law
  • Intellectual property laws
  • Real estate laws
  • Tax laws
  • Franchise laws

While it's not necessarily the case that the independent lawyer or start-up legal services that the founder may have retained are experienced in the foregoing areas of corporate litigations every lawyer have a few areas of specialization. Therefore certain client issues are “farmed out” to a corporate lawyer in India or a law firm with the expertise in those specific areas.

Oftentimes it has proven beneficial for startups if the founders engage a law firm or a lawyer with the expertise of handling a few of the foregoing areas of startup law ensuring the founders and their advocates are connected at all times.

2. Obtain a founder’s agreement

As and when a venture is rolled out a clear founder’s agreement outlining the founding team’s roles and responsibilities, equity and vesting ownership, and IP ownership assignments ought to be ascertained and the importance of it cannot be emphasized enough. If securing the viability of one’s new venture is vital then it's critical that the key issues are defined. Frequently, this agreement is overlooked by entrepreneurs while partnering with friends to start a venture.

Entrepreneurs tend to have the mindset that a founder’s agreement’ is not required or is unnecessary but actually a founder's agreement is absolutely essential. A clear agreement between friends ensures further cementing of the friendship regardless of whether there are disagreements resulting in the dissolution of the venture. Should everything go without a hitch, one need not refer to the founder’s agreement at all. On the flip side though, if things go haywire, one would require the founder's agreement to ensure that there is no crack in the friendship even if the venture hits a dead end.

3. Choose the business structure

Choosing one's business structure or business model is probably one of the most vital decisions one would make and in the future, it may have significant legal consequences.  If one is serious about one’s Startup then registering the business as either a corporation or a limited company would be the way to go as any corporate lawyer in India would advise. Typically businesses start out as sole proprietorship but sole proprietorship in the case of a startup, it isn’t a brilliant idea at all. If a startup is registered as a corporation or a limited company then the personal assets of the owner would be protected and moreover, in the event of consumer disputes, legal protection available would be far greater. 

4. Ensure the licenses are prim and proper

 One ought to ensure that one has the proper license and isn’t violating any law in matters of corporate litigations. The upshot of the faltering in-house legal team is far-reaching and expensive. A startup for mobile commerce was penalized a staggering hefty amount for carrying on their operations sans a license for transmitting funds. What's worse than being fined, though, is the damage that one has to endure as one’s reputation in handling customers is tarnished. The dire need for keeping up with competition and diversifying into newer markets may seem overwhelming, but if cutting corners results in losing brand equity or if one is liable to be put behind bars then it's definitely not worth it. Working with a trustworthy legal advisor in the initial stages would be reassuring that one is operating legally.

5. Take care of your term sheet

 One ought to ensure that one is not too giving with incentives offered to customers as that may backfire by clients in increasing numbers expecting more. As the returns diminish, people generally tend to expect more. If at the outset people get friendly terms because of friendship as is often the case; the vast majority of investors early on tend to be friends and family that will eventually cause further damage. What's right for the company isn’t right for the investor and therefore both are mutually exclusive and hence both have to be separated so that a fair and a reasonable return structure is formed.

6. Relying on standard online agreements is a no-no

 Cost-cutting in the startup phase is achievable by relying on online documents or on the previous engagements of the founder. Nevertheless, if this happens to be the chosen route then one ought to proceed with caution. For background research in regards, the competitor’s published terms and conditions, the internet is the go-to for online research. 

Standard agreements of companies found online should not be copied and pasted on one’s website as they ought to be unique for each website. Simply replacement of name and address may result in issues wherein one may unintentionally adopt verbiage that either cannot be applied to one’s own business or one may overlook a critical aspect of one’s own business. Ensuring employment and consulting agreements fits the needs of one’s business is vital. Although the vast majority are essentially similar, they are not generic.

7. Don’t let go of your co-founders

It’s highly likely that co-founders would be entitled to a timescale for investing their shares; in other words, co-founders are the supposed owners of the shares but either they don’t necessarily get them or they get them but the company reserves the right of recalling the shares until specific milestones or timelines are reached or crossed. Ideally, there is a one-year cliff involved as well as a vesting period of four years.

A cliff essentially means the Co-founder is not entitled to get shares until a first major milestone has been reached. Vesting period essentially means that the shares leftover would be proportionately apportioned for the remaining three years.

Cliffs and vesting periods are helpful in aligning interest for a certain timescale. Once vesting is over one would most likely know where the company is headed. From time to time a certain portion of the equity is aligned or mapped to certain milestones like achieving a goal. Companies may consider doling ‘refresher’ shares to valued employees reaching the end of vesting timescale as an incentive for staying on.  

 8. Get intellectual property rights established

.It’s absolutely vital that founders and investors are confident that the company is the owner of intellectual property rights for founders and investors to be able to operate. The valuation of a company is often based on its IPR. To secure funding or to sell one’s company IPR is crucial as well.

If employees develop IPR on agreeable terms, then making sure the company is the owner is rather simple. However, if key technology is developed by founders or anyone else prior to the formation of the company or if contractors and consultants without proper engagement terms create IPR, then IPR is questionable which would put the valuation of the company at risk.

It’s absolutely vital and indeed the requirement is that anyone developing IPR on behalf of the company ensure that the IPR is the company. There are relevant documents doing this, like a deed of assignment, or a similar document. This is an issue that is vital as well when dealing in trademarks and patents and a much wider array of IPR considerations.

9. Register and trademark the company name and logo

 The comprehensive definition of trademark includes a word, phrase, logo, or any other graphic symbol that a company may use to make its product or service distinct from others. A unique word isn’t necessarily required for validation of a trademark. Identification is the key to serving the purpose of the trademark. With the registration of the trademark, others cannot copy the trademark.  

Registration of trademarks can be done prior to using them and doing this is beneficial 1) so that someone else can be prevented from getting the trademark registered 2) preventing any inadvertent infringement on the trademark of another entity and 3) make one’s position stronger if in case an issue of infringement of trademark arises.

10. Routinely housekeep

Maintaining an in-house filing system, ensuring official registers and bookkeeping are up-to-date and accurate, and archiving board meetings minutes may be comparatively menial tasks but no less important and ought to get high ranking in one’s priority list.  However, the execution of these tasks would result in compliance and adherence with one’s statutory obligations. Prospective investors would expect all pertinent records to be collated and compiled.

11. Legal cost allocation – surplus or deficit

Legal costs ought to be integrated into one’s budget. There’s a good chance of all legal expenses of start-up companies either being within one’s legal budget or exceeding the budget. What causes this scenario is the fact that the owners underestimate their legal requirements or are unable to fathom how complex their businesses actually are. Therefore, to avoid unpleasant surprises optimal allocation towards attorney fee even if unanticipated would be prudent. 

Besides budgeting for engaging a corporate lawyer in India, one ought to bear in mind insurance costs, licensing and bonds. Although on the face of it this may appear to be a minor matter, one would be amazed knowing the sheer number of businesses that find themselves in hot water as they neglected to plan for costs of this nature. In other words, they did not see it coming.  

12 Carefully hire Independent Contractors

People working for a company are usually classified as employees. A select few of those who qualify as independent contractors are the ones passing challenging and demanding legal exams. The general requirement is that the independent contractor ought to own an independent and established business, freedom of working for anyone, not be paid on a salary or hourly basis, work unsupervised without the employer controlling, use their own tools and workspace, so on and so forth.

 If the person pursuing or aspiring to be an independent contractor fails to qualify then by default the person would be an employee with legal validation. As an employee, the person would qualify for benefits, overtime, worker’s comp, and the works. This type of error on the part of the company may prove to be very costly.  

13. Employment contracts

 CEOs and founders of startups ought to ensure that there is clarity on employment contracts and offer letters. Both the contract and the offer letter ought to be unambiguous without any vagueness; all in all the contract ought to be transparent. The legal documents are key to ensuring employees are aware of what they need to deliver according to expectations.

14. Take care of user-generated content

If third-party copyright material including music, video or text is used without a valid license, one would be at risk of copyright infringement. Whether its website or an app, user-generated content can give a good look and feel as well as user experience.

However, there are quite a few related risks including third party copyright matter, be illegal or downright defamatory and last but not the least as someone using the website or the app one could be liable for copyright infringement even though one may not be responsible for posting the content.

Prior to permitting the posting of user-generated content, there, ought to be terms and conditions prohibiting uploading content that may be infringing, illegal or defamatory and it ought to be clearly conveyed in no uncertain terms that one reserves the right and indeed it's one’s discretion to delete inappropriate content. There ought to be a procedure in place whereby anyone objecting to content may request its deletion. 

15. The clarity in terms and conditions

If the terms and conditions are drafted well by a corporate lawyer in India or by corporate legal services then it can be likened to a procedure manual or a cookery book or a guide to running a business with total clarity on how one should react in any given circumstances. They ought to spell out what terms have been agreed upon between parties and of greater importance is what might happen should things go haywire or a party discontinues. Terms and conditions are a money saver as all issues are addressed in the beginning. Therefore disputes related to the agreement can be avoided later on.

For further consultation, there are registered lawyers with whom you can connect with at Vidhikarya.


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