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Startups – Things to consider and common mistakes

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Startups – Things to consider and common mistakes

May 15, 2021

In this article, we have tried to break down things to consider and common mistakes which startups generally tend to make and should avoid:

  • Making a Deal with the Co-Founder through Founders’ Agreement: A founders’ agreement  is a contract that is executed between all the co-founders of a startup / company. The Agreement sets forth the ownership, rights, responsibilities, dispute resolution, and other terms to be executed between the founders and the startups / company. A founders’ agreement can help in avoiding any conflict that might arise among co-founders in the future.
  • Choice of Structure: At the point when entrepreneurs start their new business, there is typical disarray between which type of entity they should choose which will be best suited for their business. One must have basic information on what are the pros and cons of these organizations. It is suggested to incorporate a private limited company or a limited liability partnership as compared to traditional partnerships or sole proprietorship.
  • Choice of name & IP protection: While choosing the name of the startup /company and the trademark for the business, it is advisable to do proper and thorough due diligence on the name and the trademark to avoid any kind of infringement or domain name problems and to ensure that the name you choose is available to use.
  • Startup Indian Registration & Income Tax Exemption: Startup India campaign is based on an action plan aimed at promoting bank financing for start-up ventures to boost entrepreneurship and encourage start-ups with job creation. Under the Startup India Action Plan, start-ups that meet the definition as prescribed under G.S.R. notification 127 (E) are eligible to apply for recognition under the program. Further, post getting recognition a Startup may apply for Tax exemption under section 80 IAC and other tax benefits under the Income Tax Act. Further, post getting clearance for tax exemption, the Startup can avail of tax holiday for 3 consecutive financial years out of its first ten years since incorporation. Eligibility Criteria for applying to Income Tax exemption (80 IAC).

a)    The entity should be a recognized Startup.

b)    Only Private limited or a Limited Liability Partnership is eligible for tax exemption under Section 80IAC.

c)    The Startup should have been incorporated after 1st April 2016.

Further for registered start-ups, the government has exempted the tax being levied on investments above the fair market value. Such investments include investments made by resident angel investors, family or funds that are not registered as venture capital funds.

  • Employee Contracts: An employment agreement is a legally binding contract that lays down the terms and conditions of employment and establishes an employer-employee relationship. An employment agreement details the roles, responsibilities, and obligations of the employer and the employee along with various other terms and conditions. The labor laws do not explicitly mandate the issuance of appointment letters or the entering into of employment agreements but the Shops & Establishment Acts of a few states in India such as Karnataka mandate that an employer shall issue an appointment letter. As a matter of practice, most employers issue employment/appointment letters and execute employment contracts capturing the terms and conditions of the employment in detail. Further, if proper employment agreements are not maintained it can become problematic when the startups pursues financing or M&A activity or is involved in claims or litigation with an employee.
  • Failure to obtain all necessary licenses and permits: Failing to obtain all necessary licenses and permits right from the beginning is one of the most common mistakes new entrepreneurs make. Failure to obtain and renew the correct business licenses and permits can result in fines, notices, and forced closure of your business. Further, if a company fails to obtain license and permits it can become problematic when the company pursues financing or M&A activity.
  • Non-compliance with securities laws: In general, due to the urgency of funds, start-up tend to issue stocks to angel investors, family, and friends without complying with the securities laws which expose it to legal issues at a later stage. This will also bring in title issues for the holder of the stocks. It is advisable to hire a good legal advisor to handle the process.
  • Non-execution of Non-Disclosure Agreement while discussing business: This agreement is drafted to ensure that the confidential information of the entity is not misused and handled with due care. Since NDA is a legal document, it is of immense importance for any conflict that might arise in the future. Any party infringing the agreement would be legally liable to compensate for damages.

Author: Prashant Jain, Co-Founder & Partner

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at prashant@samistilegal.in.

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