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Why Startups Should Take Legal Formalities Seriously

Why Startups Should Take Legal Formalities Seriously

In the advent of a digital and startup centric India, there have been multiple startups cropping up across the country. These companies, for obvious reasons, tend to start out with small teams, which directly result in the founders becoming highly occupied with smaller tasks, modifying their products and innovating ways to scale up their business, all at the same time!

This then pushes them to leave legal factors till the very the end. This is one of the main reasons that about 80% of start-ups fail within the first three years, when these early stage startups are unable to build a strong legal foundation, this directly results in serious long-term consequences and indirectly, to the de-motivation of budding entrepreneurs.

Here are some of the reasons why startups should seriously take care of their legal formalities at the very outset of the business.

As is evident in India, court proceedings move very slowly. More often than not, the focus of a company is shifted from building the business to petty and personal matters. Due to the enormous amount of effort that goes into filing multiple legal documents, building the right team and especially into find the right person to handle legal documentation. Typically entrepreneurs are unaware of the complex details of legal aspects in their industry and a lot of time is spent on completing each task one by one and setting them in place, rather than sorting out most of these tasks at the same time. A common misconception is that the founder must have a deep knowledge of these matters and have to get into every detail. This is not the whole truth, since while they should know these factors; they must first and foremost know the legal implications of what is and what is not to be done.

As entrepreneurs, we get caught up in the sheer excitement of launching the business that to create an expensive and elaborate website, for the right brand image, is the main priority. Although this does gain traction for the brand and this innovative product captures the market, what is left out is the value of this idea. These ideas need legal protection through receiving the appropriate patents, trademarks and copyright registrations. In particular, trademarks and copyrights, apply to all businesses. When this is not given the requisite attention, soon what is found is that there is a near perfect copy of this idea and product in the market, thereby leaving room for an increasing amount of unwanted competition in the market.

Another matter that must be given serious thought is the workforce. Depending on the kind of role and product, startups have varying hiring policies. While it is important to foster a healthy and comfortable work environment, it is equally important to ensure that there is always a degree of professionalism maintained between all the members of the team. Employees should sign an employment contract upon joining the company, regardless of the size of the business or the type of employment, be it an intern part-time or a full-time employee. This contract works out in a very mutually beneficial manner; since it ensures that a process is followed when an employee will no longer work at the company, or to settle any other disputes. Today it is even okay to incorporate non-disclosure agreements within this contract, which then acts as a re-usable template, so that valuable time and money isn’t spent on the same process.

Lastly, the harsh truth is that, at the start, the actual product’s monetary value is not given too much thought when co-founders deal with each other. This is because; usually there is already a friendship that has been fostered between the co-founders. This friendship makes it difficult to hash out money matters. While this approach is relaxed, it is sometimes the least effective one. When these details are not openly discussed, sometimes it may be on one person’s mind and not on the others, so it is extremely important to clarify all the details of the amount of equity, the key roles and responsibilities, and the general long-term company vision amongst a host of other matters that may be included in a founders’ agreement.

The upside is that a lot of documentation may be created both pre- and post-incorporation, but usually are most effective after the registration of the company. The downside is that legal costs can be quite high. This issue though, may be circumvented through some of the newer innovations in the market, like the methods of payments available and the actual requirement to physically visit and consult a lawyer, as there are very trustworthy legal solution platforms online. Every entrepreneur needs legal advice for help in settling a disagreement and essentially to understand the legal consequences of the initial product, the innovations and developments made to it as time passes or just to understand the legal business of the business completely.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.