This article has been written by Jui Shekhar Kadam pursuing the Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho. This article has been edited by Tanmaya Sharma (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
Table of Contents
What is a start-up?
“A startup is a cohesion of entrepreneurial talent, involved in developing new inventions in two ways i.e. identifiable & investable form, in progress to validate & capture the worth of and to grow in a fast manner with a scalable business plan for the paramount impact.” Startups are usually small growing companies founded by one or more entrepreneurs who wish to carry out business and are at their initial stages of operation with a limited amount of capital and experience. Startups are involved in innovation, working on shortcomings of existing products or creating a new set of goods and services. Most of the startups are technology-oriented and well-focused on growth potential. To name a few there is Udan, Ola, Razorpay, Pharm Easy, CRED, etc. which are the latest startups in India.
Are you aware of the mechanism of a startup?
Usually, a startup begins with an individual or a small group of people who share a common idea that would fulfil a specific need. Most of the time, startups have been compared to the working of companies, but what distinguishes a startup from a company is its way of working. For instance, a restaurant owner may franchise an existing company which means that they work from an existing template of how business should work. However, a startup focuses on creating an entirely new template. This also indicates another key factor that distinguishes startups from other companies: speed and growth. Startups aim to build on ideas very quickly. Startups follow a process called iteration in which they continuously improve products through feedback and wage data. Often, it can begin with a product called Minimal Viable Product [MVP] that will test and revise control of and ready to be presented in the market. While they are working on the products they also need to rapidly increase their customer bases. This aids them in helping expand their market share which in turn lets them raise more money and which can help them in the growth of their products and audience even more.
A quick note on how startups are funded?
One has to make a plan on how to raise funds for a startup because they are of paramount importance. One has to think from all angles before raising funds for a startup. Generally, they raise money through several rounds of funding.
- Bootstrapping: It’s a preliminary round where the founders, friends and family invest in the business.
- Seed Funding: Seed funding from so popularly known as “Angel Investors”, high net worth individuals who invest in the early stages of set-up.
- Next comes Series A, B, C, D funding rounds which are primarily led by venture capital firms that invest tens to hundreds of millions of dollars into companies.
- Lastly, if the Startup desires to expand i.e. to become a public company and open itself up to outside money via Initial Public Offer [IPO] an acquisition by Special Purpose Acquisition Company [SPAC] or go for a direct listing on Stock Exchange. Anybody can invest in a public company and the founders of startups and early backers can tell that stakes to realize a big return on investment.
Legal challenges faced by startups
- Taxation: Compliance with taxation laws is a sine qua non. Startups have to be clear about their tax liabilities towards the Government to avoid further legal complications faced by them in India. Vivid sectors attract vivid taxes. Therefore, startups must make sure that they are aware of new taxes, their liabilities and the impact on the business. Further, the Government of India has launched certain schemes for Startups that could provide them exemption if certain conditions are fulfilled.
- Listing Necessities: If a Startup decides to get listed on Stock Exchange then it has to fulfil the conditions of listing and SEBI regulations. These regulations throw light on how a Startup can make compliance and adherence with respect to listing procedures. Therefore, updates about such things can prove helpful for a Startup if they wish to get listed on Stock Exchange.
- Licensing: Licensing is of paramount importance when it comes to running a business evenly. Several licenses are required and for that necessary permit is also required. For instance for food business licenses related to food safety adulteration health are to be procured. A Startup has to follow the conditions mentioned in the license otherwise it will have to face legal consequences.
- Intellectual Property Rights: As Startups expand, the need to protect their Intellectual property increases which include research findings, logos, designs, algorithms, codes, etc. Most of the Startups are innocent about their protection of Intellectual Property i.e. patent filing, how a Trademark is registered, protection of copyright. Knowledge about these things would avoid further challenges.
- Corporate Governance: This is the common challenge faced by every Startup. The problem that Startups face in building Corporate Governance is the blueprint that corresponds with every stage of maturity of Startups. The importance of Corporate Governance may not be realized in the initial stage but missing a filing deadline or registration can have adverse consequences. The Central Government not only instructs about the filing of tax schemes and filing of other statutory returns but also it is an effective tool to diminish hurdles faced by Startups and maximize output.
- Lack of Proper Documentation: In many Startups, employment documentation is considered a trivial thing and is mostly ignored by many Startups. Documentation is a relationship between employer and employee. This employee documentation describes the rights and obligations of both the parties and binds them to the laws of the company. It includes employee policies, performance improvement plans, initial job offers, Employment Contracts.
- Non-disclosure Agreements: Whenever a business is carried on there are some confidential matters which have to be kept confidential and it can include anything confidential information about a company. This comes into the picture when a Startup thinks to merge or start a Joint Venture with another company. Therefore, one must be aware of its company’s information and draft a Non-Disclosure or Confidentiality Agreement with another company. With a lack of said Agreement, a Startup will get into a plethora of troubles.
So above mentioned are the legal challenges faced by Startups in India. But, on the other hand, in order to face these challenges and also encourage Startups, the Government of India analyzed the situation of Startups and launched a few schemes for Startups.
Schemes for startups
- Startup India Initiative: This scheme was launched by Prime Minister Shri Narendra Modi on the 16th of January, 2014 with the motive of generating employment and wealth creation in the country. The goal of Startup is to develop the innovation of products as well as services increasing the employment rate in India. Usually, Startups benefit from this Scheme a lot as it provides financial assistance, the nature of simplified work, Government tenders, etc. Startups usually get a lot of tax benefits, the Department of Industrial Policy and Promotion is maintaining this initiative and working on it for a long term basis. It is considered one of the best government-sponsored schemes as it provides several concessions.
- MUDRA Bank: This scheme was launched on 8th April 2015. Micro Clients Development Refinance Agency [MUDRA] as the name suggests this scheme usually plays more emphasis on promoting small business in rural areas. In 2015 INR 1,00,000 crores were allocated to promote Startups culture in India. These MUDRA banks issue INR 10 lakhs to small startups desiring to start a business that is non-corporate and non-farm small/micro-enterprises. In this scheme, there is an absence of collateral security and it is categorized into Tarun, Kishore and Shishu loans.
- Support for International Patent: Patent Protection and Information Technology [SIP-EIT] as listed above is one of the legal challenges faced by Startups. Many Startups owners are innocent about Patent filing and other Intellectual Property Rights. The Government of India acknowledged this challenge and designed a scheme for Startups that can aid Startups in their Patent filing. Apart from this financial assistance is also provided for International filing in the information communication technologies sector. There is a reimbursement limit of a maximum INR of Rupees 15 lakhs per invention or 50% of total charges incurred in filing patent application whichever is lesser and it can be applied at any stage of international patent filing by the applicant.
- Credit Guarantee Fund Trust for Micro & Small Enterprises [CGTMSE]: The Credit Guarantee Fund Trust for Micro & Small Enterprises, was set up in India on 1st Jan 2000 to provide business loans to micro-level Startups, small scale industries & even Startups with zero collateral. It grants loans for Startups at highly subsidized rates. Government. Government works along with SIDBI and provides a maximum of up to INR 100 lakhs under this Scheme for promoting new Startups as well as rehabilitation of the existing ones.
- Stand up India Schemes: It is a notable scheme of the Government for financing SC/ST and/or women entrepreneurs. In this scheme, the loan is granted of INR 10 lakhs to 1cr which can be borrowed by at least one member of SC/ST and at least one woman per bank to set up Greenfield enterprise. It can be based out of the manufacturing, services or trading sector. As per this scheme, it is mandatory to have 51% of the shareholding and controlling takes for SC/ST or women entrepreneurs.
- New Generation Innovation & Entrepreneurship Development Centre: The National Science &Tech Entrepreneurship Development Board [NSTEDB] Department of Science and Technology. The government of India launched the New Generation Innovation and Entrepreneurship Development Centre. Through this scheme, many of the challenges which are faced at the initial stages of startups can be solved. Basically, this scheme whips up a ray of hope and spirit of Innovation and Entrepreneurship in youths and assists them in creating or forming a Startup. Some of the academic institutions are also involved in program implementation which will boost students’ confidence in planning a Startup and motivate them to pursue new initiatives that have the potential to be commercialized.
Right from what is a Startup to what are the schemes, their working mechanisms have been studied in this Article. We have studied what kind of challenges a Startup has to face in its initial years of business. But, the Government of India did acknowledge the hurdles of Startups and designed various schemes for Startups. So these schemes are super helpful for Startups who are still busy finding their way on how to develop a Startup. Founders of Startups should make use of these schemes listed down by the Government as it will pave a way for them on how to work on the expansion of a Startup into a company with the help of various schemes. This can also help them narrow down or work upon the legal challenges which they face while starting up a business.
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