If ideas made entrepreneurs, everybody would be one. Many prospective founders think that an innovative idea means guaranteed funding. However, every startup has to undergo an entire lifecycle of ideation, implementation, operation and funding to sustain itself. Opening a startup is not about just `setting up shop’ and then waiting for the investors to take notice. Only those startups which pay attention to all the four stages are able to reach the last stage of this lifecycle.
A startup begins with an idea. However, in order to put this idea into implementation, certain groundwork needs to be done. The first thing which a prospective founder needs to do is to evaluate his existing commitments with his current employers. A non-compete or non-solicitation clause, in his employment contract, may restrict the prospective founder from opening a business similar to his current employer and also from approaching his colleagues to join him in his new venture. Hence, it is pertinent, that all aspects are reviewed and assessed before a prospective founder, quits his employment to start an entity. It is also critical that, a founders’ agreement which includes key elements of the partnership is entered into by all the co-founders of the startup. Having a legally sound Founders’ Agreement goes a long way in boosting investor confidence as it reduces the likelihood of future disputes. Other legal safeguards such as Non-disclosure agreements with service providers, choosing a unique name, checking the name with the MCA and the Trademark Registry etc. also need to be done to reduce the risk exposure and the liability of the entity and the founders. Investors too are more inclined to invest in an entity which is legally sound rather than a mismanaged non-compliant organization.
Having an idea is not enough until it is implemented into action. A startup enters the implementation stage after the groundwork for implementation is done. As the name suggests, this stage includes choosing which entity to set up, the registrations required to set up a particular entity and startup recognition. Choosing an entity may be tough. Each structure (private company, LLP, partnership etc.) has its own pros and cons and one needs to weigh these before one decides upon the nature of the entity. Startup recognition is equally important. In India the Startup India initiative recognizes startups and then confers on them numerous benefits such as tax exemptions, easier compliances, reduced costs of regulatory filings etc.
Many founders think that setting up the entity is the most complicated part and once that is done, their job is just to find clients and reap in maximum profit. This is a misnomer. The toughest stage in the lifecycle of a startup is the operations stage. Opening a company is easy but running a company within the legal framework and adhering to all the requisite compliances within the stipulated deadlines, is very time-consuming. Company-secretaries are typically engaged by startups to take care of compliances. Compliance with the law is extremely important. Non-compliance not only exposes the startup and its directors/founders to civil and criminal liability but also poses a major obstacle in securing funding. Investors would not be willing to invest in an entity which does not have a clean image.
Once you have successfully navigated your entity through the stages of ideation, implementation and operation, you can start `selling’ your idea to investors to secure funding. Funding involves many components such as pitching to the investor, due diligences, preparation of term sheets etc. The successful performance of a startup through the first three stages, is a crucial determinant for obtaining funding. Due diligence would assess an entity’s compliance, legal liabilities etc. and a having a clean house will help the startup secure funding. Investors would be wary to invest in an entity which is not compliant with the law. Similarly, choice of entity, proper setting up of the company and proper documentation are also some of the factors which investors take into account before deciding to invest.
We know, that setting up a startup is a tough job. Hence, to simplify this process for you, we will be publishing a series of blog posts on the lifecycle of a startup which would discuss at length the requirements involved in each stage: ideation, implementation, operations and funding. Let the journey of your startup commence.
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