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Legal issues for start ups business

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"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

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Legal Issues for Start-Ups Business 1
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 2
Address Legal Restrictions/Limits Government/Regulatory - Permits - Registrations - Licenses Private - Non-compete Agreements 3
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 4
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 5
Select Entity Type Company Pros - Limited Liability • Continuity/transferability • Greater ability to raise capital Cons - More formality/expense required • Management flexibility more limited 6
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 7
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
Protect Intellectual Capital Intellectual Property (IP) Includes: Trademarks / Trade Names / Trade Dress - Searches & Registration Patents - Registration Required Copyrights and Trade Secrets - No Registration Required Non-Disclosure/Non-Compete 9
Develop Basic Legal Documents Common Forms You May Need: - Purchase/Services Agreement - Terms & Conditions - Employment Agreements - IP-related agreements - Employment Manual & Policies 10
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. 11
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 12
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. 13
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). 14
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. 15
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. 16
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. 17
Any questions? 18
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

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Legal issues for start ups business

  • 1. Legal Issues for Start-Ups Business 1
  • 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 2
  • 3. Address Legal Restrictions/Limits Government/Regulatory - Permits - Registrations - Licenses Private - Non-compete Agreements 3
  • 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 4
  • 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 5
  • 6. Select Entity Type Company Pros - Limited Liability • Continuity/transferability • Greater ability to raise capital Cons - More formality/expense required • Management flexibility more limited 6
  • 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 7
  • 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
  • 9. Protect Intellectual Capital Intellectual Property (IP) Includes: Trademarks / Trade Names / Trade Dress - Searches & Registration Patents - Registration Required Copyrights and Trade Secrets - No Registration Required Non-Disclosure/Non-Compete 9
  • 10. Develop Basic Legal Documents Common Forms You May Need: - Purchase/Services Agreement - Terms & Conditions - Employment Agreements - IP-related agreements - Employment Manual & Policies 10
  • 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. 11
  • 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 12
  • 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. 13
  • 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). 14
  • 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. 15
  • 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. 16
  • 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. 17
  • 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

Editor's Notes

  1. © 2007. Rodney D. Ryder. All rights reserved.
  2. © 2007. Rodney D. Ryder. All rights reserved.