This article has been written by Charishma. K.S pursuing the Introductory Course: Legal Writing For Blogging, Paid Internships, Knowledge Management, Research and Editing Jobs from LawSikho. This article has been edited by Zigishu Singh (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
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Generally, a start-up means an entity, incorporated and registered in India. In layman terms, start-up means a ‘ young company’ that is just beginning to develop, such as seeds are sown and sprouted either because the founder of that startup came up with a unique idea about a product or service to solve a complicated problem that exists in the society. The startup may succeed, few may fail, why do certain startups succeed when others fail? Whenever we start a new venture, we must ensure that they don’t end up in a legal soup by ignoring any vital legal documents for start-ups that are much required and are mandatory for registration and get recognition. So, what is the procedure to register a start-up in India and what are all the documents required to do registration? This article clarifies basic yet significant questions regarding startups in India.
Evolution of startups in India
In India, the concept of the startup hasn’t evolved overnight, it evolved over a gradual period. It was in 2008, when the first start-up revolution started to take form after a global financial crisis hit the world. The crisis caused businesses to reallocate their resources which also increased unemployment, especially in the Information Technology Sector. The fear of losing jobs along with an unquenchable aspiration to prove one’s determination shook the young country. In India, startups are known for their late-night parties, flexible work culture, and unbiased and transparent work environment. The young entrepreneurs of India never exhaust themselves by being innovative with their remarkable skills. According to Inc42, India boasts more than 6,000 startups and prime minister Narendra Modi is confident that 44 percent of these startups are based in tier II and tier III cities. Currently, India is the second-largest startup ecosystem in the world. The Startup India was initiated by the Government of India in January 2016. This initiative was started by the government of India to improve the ecosystem for benefiting innovative startups in India. Through this scheme, the government is expecting to accelerate sustainable economic development and enhance employment opportunities in India.
Certain startups succeed, certain fail
Certain startups work and some do not, the success of a specific startup depends on its innovation, its ability to bring the best employees, ability to anticipate future trends and adapting as quickly to the advancement of technology and rapidly changing business environment, having a good mentor to guide them through the hard situations is always beneficial, developing a workplace that values purpose before profits. on the other hand, the cause for the failure of a start-up is lack of persistence, conceiving incorrect belief about the market, wrong pricing, being unpunctual on picking up and late in executing ideas, fear of taking risks, experimenting, improper work ethic, running out of money and inability to adapt to the rapid changes in the business environment. These are all the reasons behind the success and unsuccessful.
What’s the eligibility criteria to start a startup?
According to the start-up India action plan, 2016, the following conditions are required to be fulfilled to be an eligible start-up.
- The established company must be a private limited company or limited liability partnership
- The annual turnover of the company should not exceed Rs.100 crores and it should be a new firm i.e not older than 10 years.
- The firm should be approved by the department of industrial policy and promotion (DIPP), it must obtain funds from an angel fund or private equity fund and an incubation fund to get approval from DIPP.
- Requirement of patron guarantee from the Indian patent and trademark office.
- A recommendation letter from incubation is required.
- The firm should provide innovative and customer-centric schemes of products and services
- The Angel fund, incubation fund, accelerators, private equity fund, angel network must be registered with SEBI.
Requirement of legal documents for startups
Having a well-managed team, innovative strategies and good investors would also sink the start-up in a day without prior alarm if you didn’t register legally in India. Several startups forgot to fill the process of legal structure and faced lump issues in mere time. Hence, it is essential to have all the legal documents to begin a start-up. Here we have provided a list of document that is mandatory,
- Trademark registration.
- A Non-Disclosure Agreement.
- Employment contract and offer letters.
- Shareholders agreement.
- Intellectual property.
- Founders agreement.
- Business plan document.
In general, startups should register trademarks for just those goods (referred to as “marks”) that are anticipated to have a long shelf life. Startups can complete trademark protection in two way
- under the common law (that is, through use).
- under statute (through government registrations).
Incorporation / Articles Of Association
The Articles of Association (AOA) of a corporation is a key declaration of the corporation’s nature, purpose, and goals that, along with the Memorandum of Association, make up the corporation’s constitution. These documents must be presented with the incorporation application. They spill forth the board of directors’ tasks, the type of business to be conducted, and how shareholders might exert influence over the board of directors
All startups must have a standard NDA that protects proprietary information about their company and confidential information about growing a company for example, Employment contract and offer letters. An offer letter/employment agreement is one in every primary written document that any startup has got to prepare. A proposal letter is sometimes provided to a prospective candidate during the interview and choice process, describing the terms of the offer for employment with the Company.
Many entrepreneurs draft a shareholders’ agreement with shareholders of the company to ensure clarification of what parties originally intended. If any dispute arises this written agreement can help resolve issues by serving as a reference point. Entrepreneurs may also want to define who can be a shareholder, what happens if a shareholder didn’t receive his shares (e.g. becomes disabled, passes away,), and who is eligible to be a board member of the company etc.
Every startup calls for hard and fast operating guidelines or standards to change the business environment. Bylaws are the guidelines that manage the association. They make sure that each startup operates effectively and correctly, and that they supply everybody worried withinside the startup’s operations a choice.
Intellectual Property Agreement
Startups also incline intellectual property as their portfolio assessment is what sells the company to credible investors. The ownership of a startup’s IPs is extremely important. There are two types of IP agreements
- Technology Assignment Agreement
This agreement assigns a startup any intellectual property before startup from the company.
The founder(s) may maintain individual intellectual property rights under unavoidable situations. Hence, they may even trade the rights to others for equity or cash.
- Invention Assignment Agreement
This assigns new company ownership of any relevant intellectual property created by employees. The agreement includes the founder(s) and employees as signatories. Hence, they become parties to a confidentiality agreement and an invention assignment agreement.
The founder’s agreement is an authorized contract or a legal agreement executed between the prime supporters of the startups while setting up a business. This understanding Clarifies the jobs, privileges and obligations, proprietorship, liabilities, and speculation extent of each founder. At least two accomplices together can go into the founder’s agreement called co-founders/parties. All co-founders will go into the agreement precisely while integrating the business or organization. The object of the founder’s agreement is to keep away from debates regarding the business which might emerge over the long run between fellow benefactors. This agreement set out the system of the founders, who should act inside the ambit and ought to follow the obligatory arrangements laid on.
Use of Terms Agreement
Business plan document
Having a business plan provides a chance to start up in raising capital for a startup company. No banks or investors will provide funds if a startup doesn’t have a strong business plan. A business plan document outlines ideas and strategies for launching, managing, and eventually exiting a new venture. A well-constructed business plan is important for the success of any entrepreneurial endeavor.
Documents required for registration of startups In India
1. Certificate of Incorporation / Registration Certificate and PAN.
2. Email ID and Mobile number.
3. Company Details ( Industry, Sector, Category, Regd. Office Address etc).
4. Directors/Partners Details ( Name, Photo, Gender, Mobile No. Email ID, Full Address).
5. Details of Authorised Representative ( Name, Designation, Mobile No. Email ID).
6. A Brief about business and products/services and notes on innovations.
7. Revenue model and Uniqueness of the Product.
8. Website/Pitch Deck/Video/Patent ( anyone).
Points to remember
The Benefits for recognised ‘Start-up’ under DIPP gets the following benefits:
- Self-Certification For Compliance under 9 environmental & labour laws.
- Tax Exemption: Income Tax exemption for 3 consecutive years and exemptions on capital gains & investments above Fair Market Value.
- Easy winding up of company: Within 90 days under insolvency & Bankruptcy code 2016.
- Startup Patent Application and IPR protection: Fast track & up to 80% rebate in filing patents.
- Easier Public Procurement Norms: Exemption on EMD and minimum requirements. Get listed as a seller.
- SIDBI Fund of Funds: Funds for investment into startups through Alternate Investment Funds.
Ensure that you have all the legal documents required to build up and establish a startup that can sustain itself in this competitive market. The startup’s legal documents also play a vital role in its success.
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