Legal Challenges faced by Start-up while Raising Funds

Legal Challenges faced by Start-up while Raising Funds. Startups are new, fast-growing companies founded by one or more entrepreneurs. They are still in the early stages of development, with few resources and experience. Even though the Indian government has taken several initiatives to promote entrepreneurship and employment by providing easier IPR facilitation, a favorable taxation system, and easier compliance for the setting-up company, among other things, start-ups in India still face numerous challenges such as funding, insufficient skill, and a lack of marketing strategies. Over and above that, startups are required to operate in accordance with the law. Failure to follow the law can cause major problems for start-ups, such as fines, penalties, license revocation, legal expenditures, and so on, all of which can deplete companies' limited cash.
One of the most difficult decisions startup owners must make when raising funding is:When is the right time to raise funds? With the increasing number of startups in India in recent years, this has become a major question. Most entrepreneurs plan to launch their product, do a pilot, and then raise money to pivot to the next stage or scale up to the next level. Fundraisers frequently result in firms transferring a portion of their ownership or shareholding to another individual or entity. As a result, it is critical for Indian startups to ensure that they are operating in a proper and legal manner.
Raising funds is analogous to handing someone or a firm partial custody of your metaphorical baby (your startup). Think about how cautious you'd be while doing so, don't you?
What is a start-up?
"A startup is a cohesiveness of entrepreneurial talent engaged in producing new discoveries in two ways, namely identifiable & investable form, in progress to validate & capture the worth of and to grow in a rapid manner with a scalable business strategy for the greatest impact." Startups are often tiny developing businesses started by one or more entrepreneurs who want to do business and are in their early phases of operation with limited funding and experience. Startups are involved in innovation, either by improving existing items or by developing a new set of goods and services. The majority of the startups are technologically oriented and have high development potential. Among the most recent startups in India are Udan, Ola, Razorpay, Pharm Easy, CRED, and others. Compliance Calendar LLP have a dedicated Startup Consultation team who can help you with the right mentoring as and when you need it.
Are you familiar with the startup mechanism?
A startup typically begins with an individual or a small group of people who share a common idea to meet a specific need. Startups are frequently compared to the operations of corporations, but what differentiates a startup from a corporation is its mode of operation. For example, a restaurant owner may franchise an established business, which means they follow a pre-existing business model. A startup, on the other hand, focuses on developing a completely new template. This also points to another key difference between startups and other businesses: speed and growth. Startups strive to build quickly on ideas. Iteration is a process used by startups to continuously improve products based on feedback and wage data. Often, it will begin with a product known as a Minimal Viable Product [MVP] that will be tested and revised before being presented in the market. While they are developing the products, they must also rapidly expand their customer base. This assists them in expanding their market share, allowing them to raise more money and promoting the growth of their products and audience.
How are start-ups funded?
As funds are critical for a startup, one must devise a strategy for raising them. Before raising funds for a startup, one must consider all possibilities. Typically, funds can be raised through multiple rounds of funding:

Bootstrapping is a preliminary round of investment in the business by the founders, friends, and family.

Seed Funding: Seed funding from so-called "Angel Investors," or high-net-worth individuals who invest in the early stages of a business.

Following that are the Series A, B, C, and D funding rounds, which are mostly led by private equity firms that invest tens to hundreds of billions of dollars in companies.

Finally, if the Startup wants to grow, it can become a public company and raise outside capital through an IPO, an acquisition by a Special Purpose Acquisition Company [SPAC], or a direct listing on a stock exchange. Anyone can invest in a public company, and startup founders and early backers can tell that stakes will yield a high return on investment.

Legal challenges faced by startups
Taxation: Compliance with Taxation laws is a mandatory requirement. Startups must be informed about their tax obligations to the government in order to avoid further legal complications in India. Vibrant industries attract vibrant taxes. As a result, startups must ensure that they are aware of any new taxes, liabilities, and the impact on their business. Furthermore, the Government of India has launched certain Startup schemes that may provide them with exemption if certain conditions are met. With our years of experience, it has been observed that taxation always leaves founders clueless and for that reason, Compliance Calendar has a dedicated team who can work as a Virtual CFO for your Startup Company.
Listing Requirements: If a startup decides to list on a stock exchange, it must meet the listing requirements as well as the SEBI regulations. These regulations illuminate how a Startup can ensure compliance and adherence to listing procedures. As a result, updates on such matters can be beneficial to a startup wishing to be listed on a stock exchange.
Licensing: When it comes to running a business smoothly, licensing is crucial. Several licenses are required, as well as the necessary permit. For example, licenses related to food safety, adulteration, and health must be obtained for food businesses. A startup must adhere to the conditions outlined in the license or face legal ramifications.
Intellectual Property Rights: As a startup grows, it becomes more important to protect its intellectual property, which includes research findings, logos, designs, algorithms, codes, and so on. Most startups are clueless about intellectual property protection, such as patent filing, trademark registration, and copyright protection. Knowledge of these topics would help to avoid future difficulties.
Corporate Governance: This is a common issue for all startups. The problem that Startups face when developing Corporate Governance is the lack of a blueprint that corresponds to each stage of maturity. The significance of Corporate Governance may not be realized at first, but failing to meet a filing deadline or register can have serious consequences. The Central Government not only instructs on the filing of tax schemes and other statutory returns, but it is also an effective tool for reducing barriers faced by Startups and increasing output.
Lack of Proper Documentation: In many Startups, employment paperwork is regarded as trivial and is largely ignored. Documentation is a two-way street between the employer and the employee. This employee documentation describes both parties' rights and obligations and binds them to the company's laws. Employee policies, performance improvement plans, initial job offers, and Employment Contracts are all part of it. Drafting & Vetting Services are important for any business.
Non-disclosure Agreements: When conducting business, there are some confidential matters that must be kept confidential, and this can include any confidential information about a company. This comes into play when a startup considers merging or forming a joint venture with another company. As a result, one should be aware of his or her company's information and draught a Non-Disclosure or Confidentiality Agreement with another company. A Startup will face a slew of problems if this Agreement is not in place.
So, the above are the legal challenges that Startups in India face. However, in order to meet these challenges while also encouraging Startups, the Government of India analyzed the situation of Startups and launched a few Startup-related schemes.
Schemes for startup companies
Startup India Initiative: Prime Minister Shri Narendra Modi launched this scheme on January 16, 2014, with the goal of creating jobs and wealth in the country. The primary objective of Startup is to develop product and service innovation in order to increase employment in India. Startups typically benefit greatly from this Scheme because it provides financial support, the existence of simplified work, government contractual arrangements, and so on. Startups usually receive a lot of tax breaks, and the Department of Industrial Policy and Development is keeping this initiative going and working on it long term. It is regarded as one of the best government-sponsored schemes because it offers numerous concessions.MUDRA Bank: On April 8, 2015, this scheme was launched. As the name suggests, the Micro Clients Development Refinance Agency [MUDRA] focuses on promoting small businesses in rural areas. In 2015, INR 1,00,000 crores were set aside to promote the startup culture in India. These MUDRA banks provide INR 10 lakhs to small startups looking to start a non-corporate and non-farm small/micro-enterprise. There is no collateral security in this scheme, and it is divided into Tarun, Kishore, and Shishu loans.
Support for International Patent: Patent Protection and Information Technology [SIP-EIT] as is one of the legal challenges faced by Startups. Many startup owners are unaware of the importance of patent filing and other intellectual property rights. The Government of India recognized this challenge and devised a scheme to assist startups with patent filing. Aside from this, financial assistance is provided for international filing in the field of information and communication technologies. There is a maximum reimbursement limit of INR 15 lakhs per invention or 50% of total charges incurred in filing patent application, whichever is less, and it can be applied by the applicant at any stage of international patent filing.
Credit Guarantee Fund Trust for Micro and Small Enterprises [CGTMSE]: On January 1st, 2000, the Credit Guarantee Fund Trust for Micro and Small Enterprises was established in India to provide business loans to micro-level Startups, small scale industries, and even Startups with no collateral. It provides highly subsidized loans to startups. Government. The government collaborates with SIDBI to provide a maximum of INR 100 lakhs under this Scheme to promote new startups as well as the rehabilitation of existing ones.Stand up India Schemes: This is a notable government scheme for financing SC/ST and/or female entrepreneurs. This scheme provides a loan of INR 10 lakhs to 1 crore that can be borrowed by at least one member of SC/ST and at least one woman per bank to establish a greenfield enterprise. It can be based in the manufacturing, service, or trading industries. According to this scheme, SC/ST or female entrepreneurs must have 51 percent of the shareholding and control.
New Generation Innovation & Entrepreneurship Development Centre: The National Science and Technology Entrepreneurship Development Board [NSTEDB]. Department of Science and Technology has established the New Generation Innovation and Entrepreneurship Development Centre. The New Generation Innovation and Entrepreneurship Development Centre was established by the Indian government. Many of the challenges that startups face in their early stages can be addressed through this scheme. Essentially, this scheme instils hope and the spirit of innovation and entrepreneurship in young people and assists them in creating or forming a startup. Some academic institutions are also involved in programme implementation, which will increase students' confidence in planning a Startup and motivate them to pursue new initiatives with commercialization potential.
Conclusion
This article has covered everything from what a startup is to what schemes are and how they work. We investigated the types of challenges that a startup must face in its early years of operation. However, the Government of India recognized the challenges faced by startups and devised various schemes to help them. So, these schemes are extremely beneficial for Startups that are still figuring out how to develop a Startup. Startup founders should take advantage of the government's listed schemes, as they will show them how to work on the development of a Startup into a company with the assistance of various schemes. This can also assist them narrow down or work through the legal issues that arise when starting a business. If you need any help, feel free to reach out at info@ccoffice.in

Legal Challenges faced by Start-up while Raising Funds

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