Running a start-up comes with several challenges, be it spotting the right opportunity, executing a bright idea or raising the capital to do so. Something that rarely gets discussed—at start-up forums or venture capital (VC) seminars—is the legal aspect of starting and scaling a company. A start-up may be on to the next big thing, but if its founders cannot protect it legally, it could lead to a lot of time and money wasted on litigation.
Such risk could emerge in the form of a dispute between founders, legal manholes at the time of funding or even simple but critical regulatory approvals. In the past, Mint has written on what VCs look for in start-ups and how to find the right VC for your business. This time, we draw up a check-list of 10 legal points a start-up should keep in mind.
1) Whose IP is it anyway?
Legalities could creep in even before you begin. When you quit that job to start something on your own, make sure the IP (short for intellectual property) belongs to you. If you have worked on the idea at your previous employer’s office using its resources, or utilized parts of an office project to build your own plan, you could leave yourself open to questions later. Companies have been sued for “idea theft” before. Social networking site Facebook Inc.’s founder Mark Zuckerberg was sued by ConnectU Llc. in 2004. ConnectU’s founders alleged Zuckerberg had stolen their idea and code to start Facebook when he briefly worked with them as a consultant in 2003. The case was dismissed last year, but ConnectU has filed again and the case continues. Generally, such charges don’t stick but time and money on litigation can dilute your focus on your business.
2) Start right
How and where you register your company could make a lot of difference. In India, you could register a company as a private limited, proprietorship or partnership. The last two, however, are not fundable models. VCs want stock in a company, which cannot be given under a proprietorship or partnership. Vendor and customer companies also prefer dealing with a company that has limited stock. In a proprietorship, the sole owner is personally liable for risks the company takes. Registering a proprietorship is quicker and inexpensive, while a limited stock registration could take up to six weeks and cost between Rs12,000 and Rs20,000 for a company with Rs1-1.5 lakh paid-up capital. For this reason, many start out as a proprietorship but change later. A Bangalore-based Internet start-up, which did not want to be named, has operated as a proprietorship for more than a year and plans to change before being funded.