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How to avoid discounting to investors for the “faded wallpapers”. Legal basics for startups.

How to avoid discounting to investors for the “faded wallpapers”. Legal basics for startups.

25 Nov 2019

What are the peculiarities of preparing documents to enter the HTP (Belarus High-Tech Park — Startup Jedi)? To hire a lawyer on payroll or to outsource all legal issues? When is it possible not to pay “Google tax”? Why should you be well prepared for Due Diligence?

Startup Jedi

We talk to startups and investors, you get the value.

A startupper has more juristic “what and how” questions than a child has questioned about how the world works. And if one does not know something, the cost of a mistake is way higher. We have talked to Alexandr Bondar, a partner of juridical firm “Law offices «Sysouev, Bondar and partners SBH», about important juridical nuances, which every startup faces.

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When startup will need an in-house lawer

A lawyer will be useful on all of the five main bloacks of startup development.

Block one: idea

There is no legal entity, and founders are only thinking over what and how to do. Even now, it is important to define and officially stipulate the conditions for further work. Not everybody knows this, but the agreement between the future owners can be signed even before processing the legal entity. Such kind of a document fixes the mutual rights and obligations, specifies the share allocation policy and area of responsibility in the project of each of the partners.

Block two: registration of the legal entity

At this stage, a lawyer will have a lot of work to do:

• to structure a company in the right way. In which judicial field? One legal entity or several? What is the connection to be between them? What is the optimal ownership structure in your situation?

• to prepare agreements and arrangements. It includes both share(stock) division and the algorithm of making decisions. A corporate structure is built at this stage.

• to think over and fix the management structure. How to make difficult decisions? Who will be the CEO? What powers will CEO have?

Block three: registration of intellectual property rights

Usually, the main value of IT-startups is the intellectual property on the product developed and the staff. The rights on the products that were created have to belong to startup founders, but not to the ordinary employees or the third-party developers. And the rights have to be described in the according set of documents.

Block four: arrangements with employees

Skillful professionals in the team are of great value, and the success of a startup depends on them to a great extent. Therefore, it is important to correctly document all aspects of the employment relationships: a contract, works made for hire, internal regulations, the Code of Labour Conduct.

Block five: securing the information

From the securement of work files and documents to the customers’ personal data security. This stage goes along with a startup’s development and is naturally integrated in its work.

A startup will also need a lawyer to process investment deals, to break the contact with some of the founders in a civilized way, to process an exit, and dozens of other important questions.

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When to officially register a startup

It is necessary to register a company or sole proprietorship from the moment when the project begins to receive at least some revenue or plans to receive it just about. It is important to work in the legal framework: if a person regularly receives revenue without registering a legal entity, the law defines this as an illegal entrepreneurial activity. This is a criminal offence — in the future, if this startup attracts investments, such a legal history may scare investors away. The risks are much higher than the costs of opening and maintaining a sole proprietorship.

If a startup’s founder has ambitions to walk the way of the classic venture, then sooner or later he will be forced to open Limited Liability Company. Moreover, when a project has several partners/co-founders from the beginning, it is better to open LLC from the start. However, if you work alone, and just test the hypotheses, then it is possible to work as a sole proprietor.

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Why is it a bad idea to copy a typical document from the Internet and to replace someone else’s requisites with yours

There are no typical documents in the jurisprudence in general. Also, there are no “typical situations” or “typical startups”. If all the companies did the same thing on similar markets, then, perhaps, it would be possible to create universal “typical” documents. But all startups do different things, they have different business models, different number of employees and contractors. That is why it is impossible to use any “standard” document applicable to a startup.

For example, a contract, which you will take from the Internet, can be written in favor of one of the sides. If you don’t know for sure what kind of contract it is, you can use it for your own good.

A package of “clean” documents from a law firm is the best solution but, in any case, you will need to customize them for a specific project.

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How to protect: idea, software and hardware

Idea

It is hard to protect it juridically until it is not presented by something: it can be soft, a physical object, any object of intellectual property, trademark — something that intermediates or embodies this idea. Till this very moment, it is pretty hard to protect simple thoughts.

This is why, from the one side, startups are right, when they do not want to talk around their ideas. On the other side, they are wrong, as if they do not share the information about their idea, they won’t receive any financing or pieces of advice.

The information can be revealed in portions, having secured yourself by a non-disclosure agreement, NDA and etc.

Software

In this case, protection of your rights starts from the correct processing of labor management relations with employees, who are creating this soft.Those are a contract, work task, precise metrics of the result evaluation. When the program/application is ready, you have to correctly process your rights on it and to register it.

If all these are done in time and without mistakes, then it will be easy to prove your rights on the program. However, any kind of software is like a song. There are only 7 notes in music. You composed a masterpiece with their help. Another person also used the similar 7 notes — you cannot accuse somebody in plagiarism regarding this fact. The same goes here, in similar inventions of different companies there can be used software programming languages of the same kind, similar technical solutions or design elements.

If “a song” of another composer is way too similar to yours, then there are tools for expertise and conformity assessment. They allow defining whether your competitor uses your remastered product or not.

Hardware

When you state ownership on a program, it is enough to register copyrights on a creation. Your hardware can be a technological know-how, which you can patent.

Of course, it does not save you from the piracy: often, after Kickstarter crowd-campaigns, product copies appear on AliExpress. Most likely, they are not of good quality but cheaper. What to do in this case? You have to estimate the cost of inquiry and its relevance. If in order to find the offender, challenge his actions and recover money from him, you need to initiate a lot of legal proceedings in China, then this may be totally impractical.

International corporations can afford to have representatives and lawyers in the countries around the world, who can effectively cut off such violations. A startup cannot afford this. But on the further stages of business development, budget and suitability may appear to fight against copying your business.

Faced with unfair competition in your own or another accessible market? You can contact the Ministry of Antimonopoly Regulation and Trade — it conducts inspections on the facts of unfair competition. You will need the help of lawyers to protect your rights in the court: lawyers will understand the essence of the violation, assess the prospects of the case, build and implement a defenсe strategy.

Portrait

In-house lawyer or outsource

I vote for the adequate combinations of these options. It is a bad idea to hire an in-house lawyer right away and this is why:

1. It is expensive. In the early stages, an in-house lawyer would be more expensive than services on the outsource. Besides salary and working space, the in-house lawyer needs to have access to all the necessary infrastructure — databases, special tools. In the end, expenses exceed the fixed salary of a specialist.

2. There is no enough workload. In the early stage, you will not be able to give a lot of tasks to your in-house lawyer — most of the time, he will just do nothing.

3. Bad quality. Startup cannot afford a decent in-house lawyer. Most likely, it will be a graduate of the law faculty or a specialist with a little working experience. He will not be able to handle difficult tasks like processing a transaction of converted loan.

We recommend our clients to hire an in-house lawyer when they have enough cases that need operative intervention. It is “routine” which consists of processing the labor agreements with employees, setting technical tasks, creating contracts with counterparties and etc.

You should contact lawyers on the outsource once you have a non-standard task that experts have already performed many times. Suppose the preparation of the option or shareholder agreements, support of investment deals. An ordinary in-house lawyer does not perform such tasks or faces them once in a lifetime.

Choosing a lawyer, pay attention to the experience which is proven by cases, recommendations from colleagues and international law firm ratings.

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Is it obligatory to pay “Google tax”

In everyday life, it is a name for a non-resident income tax. If you pay somebody abroad, then the tax office lays a claim to receive a foreign income tax into the budget. It is not a Belarusian “jam” — many countries around the world have a non-residents income tax, and residents pay it.

The order of payment depends on the country in which your counterparty is located. Each state has agreements with several countries on the prevention of double taxation. And if your counterparty is a resident of such a country, you will not have to pay tax for it. Therefore, when you pay to a non-resident, check out with your tax consultant or lawyer if this tax is subject to withholding in your country. If not, then request the necessary documents from the counterparty and get an exemption from this tax.

This is fair for advertising on Google and Facebook, and for paying for freelancers, and for buying access to various services. In turn, you can pay not directly to the counterparty, but through an intermediary — a company that provides a payment service. And the main question here is not what you pay to Google, but who and where you pay for its services.

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What are the nuances when applying to HTP and further attracting investments

The most important that you have to take into consideration developing a business plan is the fact that the scope of activities, stated in the application to HTP, has to correlate with the scope of activities in the framework of which your startup will gain income.

You have to choose these activities considering prospects: if in the future a startup starts to do something else, which was not stated in a business plan and application, then it will not have privileges for this very activity. What is more, while preparing a business plan, you have to plan your future work, describe all possible variants of your business.

The ratio should be optimal, you should not limit yourself to a narrow list, but you also do not need to add everything “just in case”.

Later, when you will be drafting contracts for working with contractors, it is advisable to use precisely these formulations of activities that appear in the business plan and application for joining the HTP. In the form, content and text, they must correspond to each other.

Convertible loan deals can already be concluded in Belarus, but only with HTP residents. It happens that startups submit a document for entry into the Park when a consent is received from investors on investing money. It turns out to be a kind of a “targeted entry” for investments. In this case, the motive is unimportant: the HTP is interested in the fulfillment of the business plan. If a startup can fulfill the plan, thanks to these investments, then this is the point: the interests of all participants in the process coincide.

If non-residents invest in the HTP resident, a transaction can be made in different legal fields: both according to the Belarusian legislation with the elements of English law, and according to the international law. In Belarus in general, and in our corporate practice in particular, there is an experience of conducting transactions with all possible options of the legal structures.

Which law to use? It is personal and depends on the wishes of investors and on the economic rationale of the deal. Everything is taken into account: where does the loan come from, where does it go, how should it be repaid, will the parties have additional taxes that can be legally avoided? That is why a convertible loan agreement cannot be typical — every deal has its own structure and plan.

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Due Diligence

Before investing, dutiful business angels and funds conduct Due Diligence. In the process of Due Diligence, they look at legal, administrative, tax, financial, technical issues — all aspects should be alright. It is done so that the investor could understand exactly which company he is investing in and cauld minimize his risks.

A startup is evaluated in every detail: for example, juridical Due Diligence primarily checks a corporate history, as the investor, entering a project, takes a share. And by doing this, he has to be sure, that everything was made according to the law from the very beginning, and previous share or livestock sales were conducted properly.

The next important aspect is a management structure: who is at the head of the company, what are the powers of a CEO. This is important for the investor, because usually he claims for a minority share, and must understand in advance who makes decisions in the company.

Personnel matters are checked: how many employees, how labor agreements are processed. It may seem, that it is a secondary element, but the staff is one of the main startup assets. Intellectual property and information protection are something that investors and lawyers will also pay attention to during Due Diligence.

Contracts with counterparties and financial aspects are studied at a more advanced stage of startup development: does the company have loans, credits, collateral, sureties, etc. There should be no implicit financial burdens that will later become a bad surprise for the investor.

At the end of Due Diligence, investors get a report with an evaluation of all factors, a list of risks and recommendations on how to eliminate these risks. A startup may be risky and then an investor can request to lower the company’s value (and accordingly, to increase his share for the same amount of money).

We can draw an analogy with the purchase of an apartment. The location and type of housing in the photographs you do like, but in reality, the wallpaper turned out to be faded. Most likely you will not refuse the transaction because of this, but ask to lower the price by at least the amount you are going spend on repairs. This is fair.

In order not to have to give an unfortunate discount for the faded walls, a startup should initially correctly resolve all legal, financial, technical and labor issues.

“Law offices «Sysouev, Bondar and partners SBH» together with Rocket DAO and a few other partners launched a loyalty campaign — Startup Pack. It is a complex of complementary services for prospective startups, who received a high evaluation from the experts on the Rocket DAO platform.

In the framework of juridical support, startups will get a package of three document templates, developed by a company. It is a Convertible Loan Agreement, Associated Co-founders Agreement, Intellectual Property Creation Agreement. Such quality solution can be easily suited for the specificity of your business.

Join the platform and get use of your chance to get a valuable complex of services for your startup.

25 Nov 2019

 

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