9 Legal Checklist items for Indian Startups

Asia’s third largest economy i.e. India, now has between 4,200 and 4,400 startups, 110 incubators, 292 active angel investors and 156 active venture capital and private equity investors, according to Nasscom. India also saw its highest surge in terms of funding deals and amount of funding in March, 2015 wherein about 42 funding deals fetched above $800 million (about 50,000 crores).

India is a hotbed for startups and the political climate is in favor of mushrooming startups. To allow the business of the startup to flourish, following checklist is a must-to-follow. Start-ups are so passionate about scaling their venture that they forget to take care of certain issues which really bite them in the coming future; one can’t blame this tech wizards. This article is authored to provide insight to the Start-ups to keep the following points in mind from the seed stage to scaling up their venture-:

1. Signing the co-founder agreement: In a startup, if two or more co-founders are involved, it is necessary to sign a co-founder agreement, clearly defining the equity share, roles and responsibilities etc. It can be a simple agreement where roles, responsibilities, equity and other arrangements are clearly defined which reduces the friction between the co-founders to the minimal extent possible, at a later stage. It ensures the protection of the co-founders regarding their vesting equity and long-term involvement of the co-founders with the start-up, especially as the technology handlers tend to overlook the same because they are more concerned about the products/services rather than legal intricacies.
2. Registering the startup: It may seem like an unnecessary step for a startup to incorporate their start-up during the initial stages, but it is always advisable to follow this step. A start-up can resort to various different structures of incorporation like proprietorship, limited liability partnership, partnership, private limited company etc. However, amongst all these incorporating as a private limited company is the best option as one of the objective of a start-up is to get funding which can only happen in a private limited company. Also, it is to ensure that the startup’s name is not already used by any other company otherwise they need to go back on the drawing board thinking for a different name and all the marketing and SEO is wasted. The financial expenses, liabilities and tax relaxations can also be better managed in a company.
3. Maintain proper books of accounts: It is always advisable to maintain proper books of accounts from the initial startup stage itself. It is to ensure that later on, with the growth of business and at the time of approaching any investor for funding, your finances are in order.
4. Protecting intellectual property: A startup’s most valuable asset is its intellectual property and thus, it is required to be safeguarded to the best extent possible.
   - Trademarks including company logo, company name and any other brand names should be compulsorily registered.
   - Copyright registration is not compulsory but recommended
   - Earlier Patents in India could only be obtained for scientific inventions but recently on 21st August, 2015 India Patent office has issued new guidelines wherein certain software can also be patented. It is one of the recent development which leaves a huge impact on/upon the start-up ecosystem in a positive manner.
5. Compliance with labor laws and employment agreements: A startup needs to ensure that the labor laws applicable in the geographical area, where it is located, is complied with and employees are made to sign an employment agreement, irrespective of the size of startup. Some of the labor laws are PF, ESI, Gratuity, sexual harassment etc. Agreements with the employees/consultants/freelancers must be executed keeping in mind the following clauses:
   - term of employment
   - probation period if any
   - Intellectual property safeguard
   - no poaching
   - non solicitation
   - terms of termination, including standard and immediate termination
   - Contract of service or for service clause
6. Incorporation of Terms & Condition and Privacy Policy of Websites: If the startup has an app or a website, it is imperative that a customized and streamlined terms & condition and privacy policy is put in place. These T&C and privacy policy should cover all aspects of your product/service and protect you against any claim/dispute in the future.
7. Service tax/ VAT/PAN registration: Registering of PAN of the co-founders/directors/Company is the most basic requirement to a start-up. The Service tax and VAT registration comes into play when a start-up has crossed gross receipt of Rs. 10,00,000/- in a financial year, if it is a services based start- up, and Rs. 20,00,000/- if goods are sold by the start-up. It is pertinent to understand that even if you are a marketplace then the amount of commissions received from the vendors, shipping charges or any other value added charges also attracts levy of service tax. There are certain services which are exempt from service tax and certain goods which are exempt from levy of VAT as well. The start-up needs to know if they fall in any of the exempt list or not.
8. Compliance with Information Technology laws: We are living in a technologically advanced era where things like e-contracts, cloud computing, digital signatures, securing confidential data from hackers, protecting your privacy are not only very common but extremely important too. Also, most of the start- ups provide web-based or app based product/services and there are various IT Laws which are required to be followed by such technology based start-ups to ensure that they do not fall into hot soup with the government authorities, in future. Some of the start-ups dealing in online wallet, financial services, bitcoins etc. need to adhere to certain specific laws otherwise their whole start-up may be jeopardized by government agencies.
9. Funds raised from Family members/friends: This is one of the most common practice which is adopted by the start-ups in early seed stage funding wherein they raise money from their relatives/friends either through a loan method or by share of equity. The start-ups do not put these terms into writing which leads to anger feud arguments/disagreement with their relatives/friends, at a later stage. If the start-up flourishes then the relatives/friends claim equity in the start-up an if they fail they ask return of the money as if it was a loan. The terms need to be clear and binding, even if long exhaustive agreements are not entered into and short but legal document is signed.

CONCLUSION

Spending money on the compliances and legal documentation is last on the mind of a start-up as it is the product which needs to grow wings at first and that is what the start-ups are passionate about. All compliances or legal documentation are not to be adhered to from the initial stage but right action at right time is the key factor

About the Author

This article has been contributed by our guest author:
Kanishk Agarwal, Founder of CriTaxCorp, a legal firm who is also founder of a legal start-up named “Indian Bare Acts Pack”.