Priyasha Sen Gupta, Flywork.io Team, Flywork.io.
Law has a huge impact on stable companies and startups. Even with a basic understanding of law, there are unforeseen pitfalls and problems that new and young businesses cannot foresee. These problems can become more compelling and pose serious threats in startups, which could lead to the failure of a good company. Some of the common issues faced by startups and the reasons for the same are as follows
Absence of Founder’s Agreement
A founder’s agreement is an agreement that describes the position of the founders and the conditions they must comply with, and defines the role, responsibilities and duties of each founder of the company. A founding agreement is a basis for how the co-founding relationships will work in the future, how a company is structured and what each owner brings to the company that is not included in the company's operating agreements. The absence of this agreement leads to mismanagement within the founders.
Absence of Employment Documentation
In many startups, the employment documentation is considered a very trivial formality and is ignored by the company, this leads to various unforeseen and unanticipated problems. The employment documentation is established as a relationship between the employer and the employee. The documentation is made available to the employer and employees of their rights and obligations in the company and binds both parties to the company's laws. Employment documentation includes:
• Employee Stock Option Plan Documents
• At-Will Job Offer Letter
• Employment Contract
• Confidentiality Agreements
In order for startups to run smoothly and easily, founders need to plan strong by-laws from the beginning. The By-Laws must stipulate the company's internal rules, such as dispute resolution, shareholder rights and powers, and management choices.
Lack of legal protection for intellectual property
Inaccurate and inadequate protection of intellectual property rights can have serious financial implications. Ideas, products or company logos and brands must be protected to prevent them from being misused by competitors. Trademark rights must be related to logos or trademarks; similarly, copyright should be used to obtain rights to the original work.
Any commercial transaction of any particular product or service needs to obtain the licenses and compulsory licenses of various departments in order to make the enterprise operate normally. Many startups fail to comply with these rules due to a lack of legal awareness, resulting in financial and major losses including hefty penalties.
Insufficient due diligence before fundraising
A start-up goes through several fundraising steps, self-financing, start-up capital, etc. so a proper due diligence exercise should be conducted at the time of those procedures for the presence of ample funds within the business.
Lack of confidentiality agreement
Whenever a startup company discusses an important topic or reaches an agreement with other companies or people outside the business or non-employees, the interlocutor must sign a confidentiality agreement. This agreement is used to maintain the confidentiality of the information of both parties. A lack of the said agreement could lead to a plethora of problems.
It is a famed and indisputable fact that startups work on tight budgets and have even tighter financial limits to spare on the various compliances needed by the law. However, it's crucial for such business models to know the importance of guaranteeing correct legal compliances before venturing into growth. A one-time investment within the space of legal compliance and due diligence shall save them from being closed up in the future once the company grows. Further, drafting a legitimate and watertight employment contract shall save the corporate from various litigations concerning employment and labour problems. It is henceforward necessary that the startups analyse and stay alert to all the mandatory due diligence processes and compliance needs at the time of incorporation as a preventive measure against any future legal problems.
The Indian government has been very attentive and accommodating to the startup culture, especially in the area of tax formalities, and has therefore implemented many reforms to provide less strict and complicated guidelines for easy onboarding and rapid growth for such companies. Hence, it is a smart business move for startups to benefit from such friendly policies in our country and protect themselves from future losses, closings, litigation or other unexpected issues that may arise due to non-compliance.