"Legal issues for start ups business"
A Webinar conducted by
Salman Waris, Head - Technology, Media and Telecom Practice at HSA Advocates
When starting up a business, there are some important legal matters that you’ll have to deal with, no matter how much you’d love to just dive in and get started. However, if you neglect these legal steps, you’re going to find that maintaining the business down the road becomes much more difficult, and in some cases, impossible. It’s in your best interest to take these legal aspects seriously and get them sorted out as soon as possible when starting a business.
This session will cover 4 Key Legal Topics :
1. Address Legal Restrictions/Requirements
2. Select Entity Type
3. Protect Intellectual Capital
4. Develop Basic Legal Documents
2. Start-Up is a Vital Time to Consider Legal Issues
Four Key Legal Topics to Address
1. Address Legal Restrictions/Requirements
2. Select Entity Type
3. Protect Intellectual Capital
4. Develop Basic Legal Documents
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4. Select Entity Type
Sole-Proprietorship
Pros - Easy/cheap to start
• Tax advantages
• Management flexibility
Cons - No limit of liability
• Lack of continuity/transferability
• Limits ability to raise capital
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5. Select Entity Type
General Partnership
Pros - Easy/cheap to start
• Tax advantages
• Management flexibility
Cons - No limit of liability (for partner, too)
• Lack of continuity/transferability
• Limits ability to raise capital
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6. Select Entity Type
Company
Pros - Limited Liability
• Continuity/transferability
• Greater ability to raise capital
Cons - More formality/expense required
• Management flexibility more limited
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7. Private Company vs. Public Company
Description Private Public
Shareholders Minimum 2, maximum 50 Minimum 7, no limit on maximum
Director Minimum 2 Minimum 3
Paid-up capital Minimum Rs 100,000 Minimum Rs 500,000
Public deposits Restriction on public deposits No restriction
Restricted as per Articles of
Transfer of shares No restriction
Association
Compliance
Lesser in number More in number
requirements
Possible only after getting
Commencement of Possible on obtaining certificate commencement of business certificate
business of incorporation within six months of getting certificate of
incorporation
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8. Registration process
Procedure Time to complete Cost to complete (Rs.)
1 Obtain director identification number (DIN) online 1 day 100
2 Obtain digital signature certificate online 1-6 days 400-2,650
3 Reserve the company name with the Registrar of
2-3 days 500
Companies (ROC) online
4 Memorandum and Articles of Association vetted and Has to be done within six months of name
Nil
printed approval
5 Stamp the company documents either at the
1 day Charges vary from state to state
superintendent’s or an authorized bank
6 Get the Memorandum and Articles signed by at least two
1 day Nil
subscribers
4,000 for a company with authorized capital of Rs 1 lakh
7 Get the certificate of incorporation 3-7 days
(Fee keep on reducing successively in slabs after this)
8 Make a seal 1 day 350
9 Obtain a Permanent Account Number (PAN) from UTI
15 days 66 for fee and 5 for application form (if not downloaded)
or NSDL
10 Obtain a tax account number (TAN) for income taxes
15 days, simultaneously with procedure 9 55
deducted at source from the Assessing Office
11 Register for VAT with the sales tax officer 12 days simultaneously with procedure 10 5,000 (registration) + 100 (stamp duty)
12 Register with Employees’ Provident Fund Organization 2 days, simultaneous with procedure 11 Nil
13 Register with ESIC (medical insurance) 1 day, simultaneously with procedure 11 Nil
14 Filing for government approval before RBI/FIPB for
15 days Nil
foreigners and NRIs 8
10. Develop Basic Legal Documents
Common Forms You May Need:
- Purchase/Services Agreement
- Terms & Conditions
- Employment Agreements
- IP-related agreements
- Employment Manual & Policies
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11. TERM SHEETS
A Term Sheet
- document outlining an agreement between two or more parties
before the agreement is finalized.
- “Agreement to Agree” on the main points of a deal.
-Referred also as a memorandum of understanding (MOU), or
Letter of Intent (LOI).
-Resemble written contracts, but shorter and not binding upon
the parties in their entirety.
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12. TERM SHEETS
The purposes of a Term Sheet may be:
• to clarify the key points of a complex transaction for the
convenience of the parties
• to declare officially that the parties are currently negotiating, as
in a merger, acquisition, divestiture, joint venture (JV), or
strategic alliance proposal
• to provide safeguards in case a deal collapses during
negotiation
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13. TERM SHEETS
Term Sheets, may contain binding provisions, such as:
– non-disclosure agreements,
– a covenant to negotiate in good faith, or
– a "stand-still" or "no-shop" provision promising exclusive
rights to negotiate.
The term sheet is the first step in the process leading to
definitive agreements that will reflect the terms of the venture
capital or other private equity transaction.
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14. Negotiating Term Sheets
• Valuation. Valuation refers to the value of your company before
the investment, and determines the price of new money coming
in. The lower the value that is placed on a company, the higher
the cost of investment money since the ownership of the
company will be diluted to a greater extent.
• Preferential Shares. Investors normally want preferential
shares in the Company as opposed to normal shares.
• Dividends. This is an annual return on the preferred stock,
which can range from 5% to 15% (payable in either stock or
cash, which is usually at the option of the company).
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15. Negotiating Term Sheets
• Protective Provisions. Receive special voting rights that permit
them to block certain actions or events.
• Reverse Vesting. With reverse vesting, the founders set aside
their common shares and then earn them over time (the
standard is four years). Investors want to make sure the
founders stay around and want to ensure that founders have
contributed sufficient value to justify a proposed investment and
are incentivized to stay with the company at least until certain
milestones are achieved.
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16. Negotiating Term Sheets
• Board Composition. Investors want at least one or more seat
on the board depending on the amount invested, the number of
investors and the level of control sought.
• Redemption. Investors may want the right to require the
company to repurchase their stock at some point in the future.
This makes an investment similar to debt in many respects.
• Drag-Along Rights. This means that minority shareholders
must agree to a sale or liquidation of a company.
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17. Negotiating Term Sheets
• Anti-dilution. Investors will require protection against dilutive
Share issuances in the future i.e. adjustments to the price at
which preferred shares converts into normal shares, meaning
that the investor may ultimately be entitled to receive a larger
piece of the company.
• Legal fees. Investors require company to pay for all the attorney
fees.
• No shop. Investors want to lock in the company and not have to
deal with renegotiations—or even losing the deal. This prevents
Companies from actively seeking new investors.
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19. Legal Services Intellectual Property&Technology, Media and Communications
Technology, Media and Communications
Salman Waris
salman.waris@hsalegal.com
[0] 9891427685
HSA Advocates
81/1 Adchini
Sri Aurbindo Marg
New Delhi