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STARTING OUT? Read this first.

First things first, let’s admit - starting-out is bold. While all of us have heard that most of the start-ups fail with varying percentages in different jurisdictions, there is always hope that your start-up won’t follow suit. As lawyers, this is what we hope for, for you. But before taking this step, let’s consider the following:

A start-up relies on the ground-breaking idea that will help the company hit the ground running as well as sustain themselves in the long run. Along with a great idea, a start-up needs an equally enthusiastic in-house team of legal professionals, tax consultants and a financial advisory team. Additionally, the most important support team - the coffee machine which is equally invested in your idea even if they don’t ‘espresso’ it too often. The ground work should look something like this:

 

Understanding the legal form of the company

Most jurisdictions have different requirements for licensing and legal form of the company. For instance, if a company was to be incorporated in the UAE, the first step is to identify whether it is a free zone or mainland firm. Furthermore, the founders will need to learn the appropriate licenses to be procured for the incorporation which require identifying the nature and scope of the business. The company may be penalized for not complying with the legal requirements before starting, read added expenses.

One’s biggest concern than the seed funds and angel investments should be the terms of agreements between the co-founders. Deriving our learnings from ‘The Social Network’, we’ve all understood the value of ideas and the importance of securing them early in a start-up. Starting a company with your roommate might seem easy but it poses its challenges under the law as there are no exceptions. Some of the fundamentals to be thought about are:

  1. the shareholding percentage of the partners;
  2. the rights, roles and responsibilities of the partners;
  3. salaries, benefits and dividends to be drawn by the partners;
  4. contingencies related to non-performing partner; liquidation, sale of shares etc.
  5. overall goal and the vision of the company.

A significant part of the costs is likely to arise from hiring of employees. For instance, in the UAE apart from the basic salary, the employer is also responsible to bear the cost of insurance, visa and yearly air tickets amongst other things for the employee. Additionally, depending on the nature of the contract and employment, additional obligations like end-of-service benefits, compensation of unused leaves and gratuity come in play. Therefore, start-ups must understand and ensure that they are in no way in breach of the local labour laws, which are likely to give rise to multi-fold responsibilities on the employer.

Most start-ups are a by-product of an idea that is likely to be unique and innovative. Everything from one’s ideas, to products and processes, to the company name and logo can be intellectual property that the start-up should protect. Similarly, in the case where disclosures must be made about your project, it is essential to enter into correct and adequate non-disclosure agreements before revealing the details of your project to anyone. At the same time, the start-up must also ensure to provide its investors with adequate disclosures to meet the obligations under the law. In such a situation, one must always seek appropriate legal advice to ensure that it’s legally compliant and secured at the same time.

The most important and essential aspect of any start-up is to assess its relationship with the angel investors. As prolific as the investment may sound, a start-up must not promise too much in return for a seed funding or angel investment. So take a cue from the re-runs of ‘Shark Tank’ and ensure that the exit strategy for your early-stage investors is legally sound.

Lastly, while no amount of awareness can promise you a smooth run while starting-up, sound advice can almost always save you from an unnecessary hassle which can pretty much be avoided courtesy - bespoke contracts. So, look to your right → Your help might be a click away.

 

Role of Startups in Economic Prosperity

 

Authors: Kokila Alagh (Founder), Akshata Namjoshi (Senior Associate)

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