People often complain about the ‘ease of doing business’ in a country, or the lack thereof. While this may be partly due to the inherent nature in which legal processes are carried out in certain countries, the rest of the onus is on us (pun intended). As founders, there are several parameters to consider before setting up and thereafter running a business – right from the choice of what legal status the company should have to its governance structure. Each additional dimension adds a layer of complexity to the process, which is why it seems intimidating (and frustrating) at times. We took a stab at creating a ‘cheat sheet’ that provides a simple checklist to help you set a more solid foundation for your business:

Structure:

Big or small, riding solo or with a team – depending on the nature and scale of the business, founders need to take a call on which corporate vehicle is best suited to their business. We have summed up the most common types of corporate vehicles that are used in India, in the appendix.

Funding:

Our raison d’être (obviously) but more importantly what defines the pace, scale and ubiquity of a venture. Raising funds is hard, and arguably bootstrapping, even harder. Which approach a founder chooses depends both on their vision as well as the ability of the business to be self-sustaining. A few important documents that any founder must spend considerable time drafting are:

• Term Sheet: non-binding terms that should outline the deal structure, funding, corporate governance, and liquidation;
• SHA (Shareholders’ Agreement) and SSA (Share Subscription Agreement): easily the most important document of the lot, which clearly lays down the rights of the investor(s) as per the shares issued to them, including Cap Table, Transfer Restrictions and Exit Rights;
• Amendment to Articles of Association (AOA) of the Company: aspects of the SHA and SSA that are not included in the AOA become difficult to enforce and also leave room for discrepancy.

Some investors may even want a board seat, MIS’, other information rights, which makes it even more important for a start-up to carefully negotiate the above transaction and charter documents. Additionally, in light of the many cases of disputes between founders, investors and boards that have made headlines recently – it is becoming increasingly important for start-ups to conduct diligence on potential investors. Most start-ups avoid such diligences as they may seem costly at first or because of an urgency to raise funds. 

Arrangements between the founders:

Co-founders are oftentimes more significant parts of our lives than our life partners. In the early days itself, it is best to demarcate roles and responsibilities and therefore advisable to execute a Founders’ Agreement that details ownership, profit sharing, initial capital contributions and other crucial aspects of the business.

Advisors / Consultants:

Starting up can be a lonely journey; sometimes even with a co-founder, one might find themselves a little lost. For days like these, it is important to have a set of trusted professional advisors who are experts in their respective fields. They not only bring credibility and heft to the venture but also help steer founders in the right direction. These advisors and consultants can either be retained or made a part of the advisory board, compensated by way of a retainership + fee or equity in the company.

Legal Documents / Contracts:

In addition to providing advisors with equity for their expertise, start-ups often incentivise their early employees with Employee / Management Stock Ownership Plans (ESOPs / MSOPs). While drafting these and other employment contracts, founders must incorporate robust confidentiality and intellectual property clauses that are in favour of the company, clearly stating the roles and responsibilities of each individual (including terms and termination of the engagement, compensation, and benefits, amongst other provisions). 

Corporate Governance:

Many founders do not pay enough attention to corporate governance in their initial stages. This inevitably comes back to haunt them at a time when investors conduct their due diligence exercises on the start-ups legal compliances. The four pillars of any basic corporate governance structure are: accountability, honesty, responsibility and transparency. Moreover, with ESG gaining more prominence, new ventures are even better poised if they are able to efficiently deploy, meet and report their footprint from day one.

Sector-specific Mandates:

Every sector / industry has licenses and permits that need to be obtained by any entity before starting their business (which may even differ by State, like in the case of alcohol). It is important to study the mandate(s) and obtain the requisite licences in order to avoid penalties and even the risk of closure.

While this is a mere outline of the initial challenges any business faces, two key takeaways are: first, to see the bigger picture and make sure the business is compliant from the very beginning; and second, to have the right advisors, experts and resources that can help streamline these processes. The pace at which the ecosystem is growing cannot be ignored – but outcomes may vary because of simple mistakes we make in the early days.  In the larger scheme of things, knowing facts like whether a potential investor has existing litigations against them might be the difference between an IPO and an Apple TV documentary (not the good kind).

Appendix