Why is Legal Advisory Necessary for Startups?


India has considered as the hub for entrepreneurs wherein new businesses start every now and then. In spite of so many businesses starting up only a few of them can manage to sustain.

Reasons behind the same may vary but the core remains the same i.e. legal advice. One needs to understand that it is equally important for a startup to take legal advice as it for some developed company. But everybody isn’t aware of the same. Because of which a lot of issues are being faced by entrepreneurs leading to shut down of the business.

This shut down not only breaks them financially but also emotionally.

Here in the following article, we will be enlightening on what legal advice structure startups can follow:

Adopting a Legitimate Legal Structure

There is some fix in’s on which legal structure of every company depends on. It is crucial for startups to focus on this legal aspect. The decision must depend on certain factors:

  1. Nature/Sector of Business Operation
  2. Business Trajectory
  3. Regulatory and Tax Considerations
  4. Costs of Formation and Ongoing Administration
  5. External Capital Requirement and Type of Funding Sought
  6. Extent of Legal Liability Protection Required
  7. Number of Stakeholders
  8. Balance Required between Ownership and Management
  9. Proposed Mechanism for Profit Sharing or Distribution Amongst Stakeholders etc.

License for Registration and Compliance

Once incorporation is done there are necessary registrations that are also required namely Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), and Services Tax (GST) Registration etc.

The business license is issued by the Government authority which allows startups to start/conduct/continue to operate the business within its areal jurisdiction lawfully.

Intellectual Property Protection

It is a must for a startup to obtain trademark registration under the Trademarks Act. It helps startups to gain a vying advantage. It should be conducted before deciding the business/trade names to avoid any future issues.

Splitting and Vesting the Founder Equity

Founder’s equity must be based on the amount of workload handled by each founder including their time, effort and capital contribution to the startup.

One must keep in mind that share of the founders must be subjected to a vesting schedule.

In case of vesting, if anyone the founder leaves or is terminated, the unvested shares held by the founder become subject to a contractual right to repurchase/transfer at alleged value.

Founder’s Agreement

It is necessary that relationship between the founders must be prescribed by an agreement.

The agreement must clearly mention all the roles and responsibility of the founders and clauses in detail the decision making and operating structure of the startup, founder equity split with vesting, assignment of all intellectual property in favor of the startup, termination of a promoter and exit process etc.

Certificate for the Employees

When it comes to employees, contracts are definitely valuable for employees as it handles the description of job profile, compensation, and other associated benefits, a number of clauses to safeguard and protect the interest of the startup.

Investment Structure

We must agree to the fact startups need proper legal advice keeping in mind right of the investors.

Usually, a document is drafted keeping in mind the structure of the transaction called Term Sheet. This is followed by due diligence of the startup and execution of investment-related definitive agreements.

Compliance Management

The foremost step for a startup is to comply with legal, secretarial, accounting, taxation, employee-related and other associated compliances. It helps in growth of the startup or any business.

In case of non-compliance of any startup, it is supposed to pay penalty.

Note – Please note that the above article is for education purpose only. This is based on our interpretation of laws which may differ person to person. Readers are expected to verify the facts and laws.

Leave a Reply

Your email address will not be published. Required fields are marked *