LEGAL AND ETHICAL ASPECTS OF START UPS.

 LEGAL AND ETHICAL ASPECTS OF START UPS.

DINESH K KAPILA, CGM (Retd), NABARD, Mentor

My subject areas today are For a Start Up How to Plan Legal and Ethical Steps. Now this is a somewhat gray area for most founders, they often overlook this. Or leave it to advisors. I am going to emphasise here that my coverage will be based on what I know, perceive and observe, specially as regards Ethics. The typical founder is so involved in raising resources, deploying manpower, meeting investors and fire fighting, that the legal side or aspects get lower attention. Its often delegated to a legal recruit, often with minimal real world legal or court experience.  As about Ethics, we have to be able to balance it against the need for the hustle in business, the need to grow exponentially, the pressure of investors and plain simple greed.  

Let  me clarify I am not a lawyer or expert, I just have an interest in start ups and this issue is something I have often encountered in a limited way. As regards Ethics, I am not a philosopher or professor, I simply say your heart and culture are reflected in your actions.  

Entrepreneurship is always an exciting adventure full of potential and possibilities. However, the road to entrepreneurship is long and presents many challenges, especially in the legal field. For Indian startups, the legal aspect is not just mere compliance but an essential tool for long-term business growth and sustainability. There is a need for comprehensive legal work in the Indian startup ecosystem, which has grown exponentially in the last few years.

Legal considerations must not be ignored in the development process. These lay the foundation for a startup’s activities and therefore affect everything from the type of company structure to compliance with rules and the protection of intellectual property. Unforeseen legal issues can arise that can plunge a startup into a costly dispute or trigger sanctions that can drive it into oblivion. In this way, legal advice becomes a strategic necessity and not a formality.

The startup ecosystem has been booming in India, driven by government initiatives, increased funding from venture capitalists, and an ever-growing market of young, tech-savvy consumers. The government’s Startup India initiative has helped fuel innovation and entrepreneurship, allowing startups to access funding, mentorship, and other resources. With growth, therefore, comes the necessity for strict adherence to legal norms, which implies that an entrepreneur must be equipped with the right legal knowledge and expertise.

My thoughts started from a founder coming over for a discussion. His partners were trying to sell out their shares and he was facing a real dilemma over retaining control over his start up. Or when another mature start up, now matured, had its founder state he had crafted his start up with an equal share for his brother and a close friend, now these two were against him. This made me curious. Who guided them in this process. Were they adequately briefed. My own son, Prashant, a lawyer in practice, based on his legal relationships with start ups, also underlined the need for founders to select a lawyer wisely, to which I also agree. We even know about some established companies, ill drafted contracts on shareholding has made founders rue their decision, whether driven by ignorance or trust or emotions. I have heard reasons like, but we were best friends or cousins or we never knew we would go grow this much. This is only hindsight or thoughts, the damage is done.

I know a start up which raised Rs 30 crore, had a unique idea, great Board, dreams of goig to an IPO in five to six years, and went bankrupt. Totally, the founder is in dire straits. O do not even know what is expected from me, as I have been sounded out, I am more of a talking board. But the whole issue is, the Founder was let down by his investors and he depended upon the legal firm connected with the Investors. And his ill drafted agreements led to his partners deserting him, he says I trusted. A disturbing lesson. What about non disclosure agreements, its generally recommended to have them specially before the recruiting process, to protect confidential information including technical processes. Of course it can be situation specific or as per the perception of a candidate, but how many focus on this. So it is not just about knowing what the law states and specifies and complying, it is about understanding the law, deciding your structure and then aligning your goals and vision with it. That is the crux. Or a losses yet tender winning concern as I came to know.

Ethics, yes, why not. But not just about compliances but understanding the spirit of it. And I go one step further, ethics in data, ethics in business, having a conscience and understanding the complexity and socio economic reality of our nation. I met a founder focused on a physically challenged technical assistance, he was blunt, he would build for the developed world but not for India. Though he could. Or a start up based on quick purchases of fruits and vegetables, to my specific query, for all the big talk, the offer to farmers for vegetables was Rs 1/- per kg more than the nearest rate at the Mandi – formal market. How do you treat your employees. New Hires. Do you feel responsible for them. And their families, if the business goes under. A businesswoman,  who has revived her business single handedly after the demise of her husband, won my heart by stating that her every decision had her think of this aspect too. Data, one start up told me they had plus 7500 farmers enrolled, later it transpired, that the Commission Agents at a few markers were actually enrolled as partners, and their claims for the number of customers were accepted as such and totalled up. This is the issue of ethics. Respect your mentors, I have felt this personally and this should find a place too.

Setting up a startup in India involves several crucial legal aspects, including choosing the right business structure, registering your business with the government, understanding tax benefits and compliances, labor laws and compliance, intellectual property protection, and managing contracts effectively. 

Here's a breakdown of key legal considerations: 

• Business Structure:

• Choosing the right structure: Select a structure like a private limited company or LLP, which offers limited liability and potential benefits. It could be a sole proprietorship, partnership firm, Limited liability partnership, private limited company or a public limited company. 

• Startup India Recognition: Consider registering as a "Startup India" recognized entity to potentially access incentives and streamlined processes. 

• Registration and Compliance:

• Legal Entity Registration: Register your business as a legal entity to ensure operational smooth and compliance with legal requirements. 

• Government Registration: Complete all necessary registrations with the relevant government bodies. 

• Startup India Certification: Obtain certification from the Inter-Ministerial Board before incorporation. 

• Tax and Financial Compliance:

• Tax Benefits: Understand tax exemptions and benefits offered to startups under the Startup India scheme. 

• Tax Compliance: Comply with all applicable tax laws, including income tax, goods and services tax (GST), and others. 

• Labor Laws:

• Adherence to Labour Laws: Comply with relevant labour laws regarding employment, wages, and working conditions. 

• Intellectual Property Protection:

• Protecting Your Assets: Safeguard your startup's intellectual property rights, including patents, trademarks, and copyrights, through legal frameworks. 

• Contract Management:

• Effective Contractual Obligations: Implement robust contract management practices to mitigate risks and ensure smooth business operations. 

• Co-founder Agreements: Draft a co-founder agreement to outline terms, equity distribution, and other critical aspects. Think it over deeply.

• Data Protection:

• Data Privacy Compliance: Adhere to data protection regulations, including storing and managing customer data securely, and ensuring data privacy policies are accessible. 

• Startup India:

• Eligibility: Ensure your company meets the criteria for Startup India recognition (e.g., being a private limited company or LLP, a turnover less than 100 Cr in a calendar year, ability to create wealth, etc.). 

• Benefits: Access various government schemes and incentives for recognized startups, including funding, tax benefits, and streamlined compliance processes. 

• Key Documents:

• MOA & AOA: Make sure to prepare the Memorandum of Association (MOA) and the Articles of Association (AOA), which are crucial documents for the legal formation of a company. Think over these carefully, every word or line.

• Seeking Legal Advice:

• Consult Legal Experts: Consult with legal professionals and advisors specializing in startup law to navigate the Indian legal landscape effectively. 

 The importance of timing to incorporate or set up a formal structure

1. When to incorporate a startup  Founders need to incorporate as soon as possible to protect against personal liability. When your business is a corporation, it assumes this risk so your personal finances will not, in most cases, be affected by third party claims. 

2. When you need flexibility  Incorporation allows you to freely transfer shares without approval from other shareholders. Most startups, however, do restrict transfers to protect the corporation and shareholders. The right of first refusal, for example, gives the corporation a right to repurchase a departing founder’s shares. 

3. When you need Investors Prior to investing in your startup, investors at every stage of your startup — from angels to venture capitalists — will insist that you incorporate. Any investor funds you receive cannot be co-mingled with your personal funds. To prevent this, you need to incorporate so you can open a bank account in the company’s name, isolate company funds and maintain financial statements. 

4. When you own intellectual property As you grow, you’ll begin to amass intellectual property (IP) like patents, copyrights, trademarks and trade secrets. These are valuable assets, and you need to make it clear as soon as possible that your corporation owns your IP. The chain of IP rights and titles cannot be broken. The easiest way to ensure this is through corporate ownership. If IP ownership is uncertain, it will impact investments, partnerships, and acquisitions.  

5. When you need prestige Corporations have greater credibility among investors, partners and customers — particularly for startups. 

How to incorporate your startup For many businesses, it makes fiscal sense to incorporate in your home state or where you intend to do business. But for startups looking to secure outside funding, investors will likely insist that you incorporate in some other location or even abroad, because of maybe a favorable corporate climate. 

Do you need a lawyer to register your startup? Setting up a Corporation, a formal company,, my preference is to use an experienced lawyer, and many entrepreneurs still choose to retain one for various reasons, even for on line submissions or certifications, get every document vetted and understand it. Online services are now discussed in India but try the lawyer you can tap on route if possible. Try to negotiate a fees that covers informal consultations too.

A Co-Founder Agreement allows you to set out the equity ownership, initial investments and responsibilities of each Co-Founder. The purpose of the agreement is to make the understanding the co-founders have regarding the functioning of their company and relationship and obligation between co-founders legally binding through a formally written agreement.

The formation of such an agreement requires an open discussion between the partners regarding their apprehensions, fears, outlook, aspirations and all arrangements involving the start up. The objective of the agreement is to minimize the possibility of debilitating surprises in the future when the company is functional in terms of inter co-founder relationship. One of the toughest challenges for founders of a young company is deciding how to split the equity among the founders and early hires. This is especially complex when cofounders are inexperienced or have a friendship as well as business partnership. Putting value on each partner’s role can get personal and it is best done not in one late-night session, but more methodically, over a period of time, and with advice.

Legal mistakes can be incredibly costly for startups. Some of the mistakes that the Startup make are: -

1.     Not negotiating a co-founder’s agreement;

2.     Not starting the business as company;

3.     Not evaluating regulatory issues in your business;

4.     Not considering intellectual property related issues;

5.     Not having a privacy policy and effective terms of use; and

6.     Not choosing the right legal counsel.      

 It is essential for every Software Developer/Companies to have a firm grasp of intellectual property rights and how they apply to the Software Industry. Software developers/Companies need a solid understanding of their rights to develop and protect a brand, ensure exclusive ownership of their creations, and keep their work confidential to create and maintain an advantage in this competitive market.

Many startups do not recognize that having a privacy policy is mandated by the law if they are collecting sensitive personal information

R Why Do You Need a Lawyer for Your Startup?

Hiring a lawyer may be of prime advantage in many areas concerning an operation. To begin with, this lawyer may aid to determine the most suitable form for the business that shall fit in well in executing a specific goal during creating such a startup. This in return helps to minimize individual liabilities and reduce taxation dues. Secondly, all other requirements from local and national bodies pertaining to registration, licensing or permit are all sourced for by the lawyer on your behalf, thus saving a possible offense of the law.

Lawyers also play crucial roles in drafting and review contracts. A well-crafted contract will prevent all kinds of misunderstandings and further protect the interests of all parties involved. Moreover, a lawyer can counsel startups on the intricacies of employment law so as to draft employment agreements that are compliant with labor laws and statutory benefits are received.

Legal advice is most critical when seeking funding for startups. A lawyer would help negotiate terms with the investors, structure equity agreements, and ensure compliance with the securities laws. Legal representation is also a significant advantage if there are disputes since lawyers can navigate the complexities of mediation, arbitration, or litigation.

Choosing the Right Business Structure

One of the first critical decisions that a startup has to take is the choice of its business structure. In India, there are several options, each with its advantages and disadvantages. A sole proprietorship is the simplest form of business ownership, allowing full control to the owner. However, this structure exposes the owner to unlimited liability, meaning personal assets could be at risk if the business incurs debt or faces legal issues.

A partnership is the sharing of ownership, responsibilities, and profits by two or more people. These are the advantages associated with this structure: shared resources, expertise, and all this has a disadvantage – shared liability.

An LLP retains the benefits of both a partnership and a corporation. Whereas in an LLP, members have limited liability that protects their personal assets from a business’s debts. Therefore, this structure is most loved by startups as it offers easy flexibility without the onerous regulatory requirements of a private company.

A Private Limited Company, as a separate legal person, offers its shareholders limited liability, which is the correct organizational structure for startups which intent to raise capital through giving equity funding, thus has permission to have several share holders and issue shares however, it has much stiff compliance and costlier functioning. The appropriate business structure could only be decided after balancing out several factors that could range from liability and taxation, to funding needs, and obligations compliance. It is best for a lawyer to consult to better clarify which of these structures would fit the startup’s vision and operational strategy.

Registration and Compliance

After determining the business structure comes the registration of the start-up. In India, it involves a few steps as it begins with the naming of the business to unique and then submission of documents with the Ministry of Corporate Affairs. On the basis of selected structures, some registrations are mandatory. For example, when one chooses a tax’s name, one must need GST because it is indispensable.

Apart from registration, the startups have to obtain several licenses and permits. Some of them include Shops and Establishment license, professional tax registration, and industry-specific licenses. All these compliances are not only legally binding but also important for building credibility with customers and investors.

The other critical aspect of running a startup is ongoing compliance. This includes annual filing requirements, conducting audits, and maintaining proper accounting records. Failure to comply with these obligations may attract penalties or even the revocation of licenses. For this reason, it is very important for startups to stay informed about their compliance requirements and seek legal guidance to ensure adherence.

Intellectual Property Rights (IPR)

Intellectual property protection, in today’s competitive business climate, is basically indispensable for a startup. IPR is short for a wide range of rights conferred under law, which mirror intellectual creations, such as inventions, literary and artistic works, symbols, names, and images used in the course of trade. This way, IPR protection can never be overemphasized, as it will ensure startups protect their innovation and remain afloat.

There are various forms of IP protection available to startups. Patents prevent other people from making, using, or selling a patented product without permission. Trademarks protect brand names and logos so that consumers can identify a startup’s products from those of competitors. Copyrights ensure original works of authorship, such as software code, music, and literature, are protected. Finally, trade secrets protect confidential business information from which the startup derives a competitive advantage.

The process of registration and enforcement of IPR requires the clear understanding of the steps involved. Lawyers can be of great importance to guide startups through all the processes of registration in order to ensure proper filing of applications and in the right time. Legal advice is always required to enforce rights in case of infringement and remedy.

Contracts and Agreements

Any business relationship is formed into contracts, which are pretty much extremely essential in case of startups because they create well-drafted agreements that one does not go into dispute with people or against his interests. These main contracts, therefore, include partnerships, employment, NDAs and service contracts with suppliers and customers.

A partnership agreement details all the terms of cooperation that are involved between partners: their roles, responsibilities, profits, and how disputes arising between partners are resolved. Employment contracts detail the employment terms and conditions, stating the work duties, compensation package, and conditions for its termination. NDAs prevent sensitive information shared between two parties from being used elsewhere. They ensure that a party’s proprietary knowledge stays confidential.

There is no doubt that well-drafted contracts are important. Ambiguously worded or poorly constructed agreements often lead to misunderstandings and legal disputes. A lawyer will ensure that the contracts have essential clauses such as a mechanism for dispute resolution, indemnity clauses, and confidentiality provisions that will ensure adequate protection for the startup.

Employment Law

Labor laws are highly relevant to startups, as such firms start hiring their very first employees. It broadly encompasses all the matters concerned with employment, wages, working conditions, and all employee benefits. Compliance to these laws is critical because non-compliance may cause unhealthy legal complications and a work environment.

Drafting employment agreements constitutes a critical step toward specifying the employer-employee relationship. Such agreements ought to include job responsibilities, the compensation package, hours to be worked, and remunerations. Further, they should specify procedures relating to termination and reasons for the same to minimize the occurrence of disputes.

Statutory benefits involve EPF, ESIC, and gratuity. That is something that requires awareness about the requirements for such compliances and creating an amiable workforce. Such obligations will be fulfilled through legal counsel while ensuring they are adopting best practices in employee relations.

Funding and Investment

The biggest issue with most startups is probably accessing funds. There are lots of funding types-from angel investors, venture capital to crowdfunding. Each of these types has legal considerations and deep financial considerations that must be addressed in protecting the interest of the startup.

The legal implications of equity financing must be known by the startups when raising funds. This involves negotiation terms with the investors, structuring equity agreements, and securities laws compliance. Equity agreements must define clearly what rights and obligations the shareholders hold-to include voting rights, distribution of dividends, and also exit provisions.

Such agreements can be drafted by a lawyer, usually reflecting the needs of a startup but in alignment with legal requirements. For instance, he may even help startups navigate through their due diligence processes-most investors undertake before placing any funds in a startup venture. Proper legal guidance during due diligence can add more and enhance the appeal of attractiveness for potential investors and secure financing.

Regulatory Compliance

Every industry in India has specific regulations, and startups must comply with them. Be it a technology firm or health care, to operate legally and ethically, one should know the regulations. Industry-specific regulations do not only safeguard the startup but also gain confidence among consumers and stakeholders.

With the upsurge of tech start-ups handling personal information, data protection laws have increased in importance. Data protection and cyber security in India are mainly governed by the Information Technology Act and its rules. Some global regulations, such as the General Data Protection Regulation (GDPR), come into play if a company operates in international markets, with the implications for companies.

Consumer protection laws also are equally important to protect customer rights. Startups should always ensure that their products and services are in line with such laws, which gives full transparency and quality to consumers. Legal counsel will, therefore, be a perfect guide for navigating through regulatory landscapes to help mitigate risk and maintain compliance.

Dispute Resolution

Conflicts are an inevitable part of a business. For start-ups, knowing how to resolve disputes effectively is crucial for minimizing disruptions and conserving resources. Some common types of disputes that a start-up may face include contractual disagreements or employment-related issues.

There is mediation and arbitration, which may be relatively cheaper and faster than a litigation process. It is beneficial in that it provides avenues for the parties to resolve an amicable dispute without causing some damage to the business relations. A lawyer may enable a contract to stipulate a clear framework on disputes resolution, specifying mediation procedures and arbitration procedures.

Litigation should rarely be the first course of action but legal counsel is necessary whenever disputes go sour. A lawyer can coach a startup through the process of litigation by helping in preparation of all necessary paperwork and representing the interests of the startup in court.

Taxation for Startups

Doing business entails tax obligations. An India new venture has to function within a broad and vast array of tax obligations which comprise corporate tax, income tax, and Goods and Services Tax (GST). Business has to know all such obligations to maintain compliance, hence avoiding penalties.

Specific tax incentives and exemptions are also available to startups to encourage entrepreneurship. For instance, under Section 80-IAC of the Income Tax Act, eligible startups can claim a tax holiday for three consecutive assessment years. Such incentives can be very relieving in terms of finance, especially in the early stages of operation.

Tax compliance and planning is very crucial to keep a startup in financial health and sustain it. Through a lawyer working together with a tax advisor, startups would be assisted in setting up effective tax strategies that will guarantee them adherence to tax obligations.

Exit Strategies

Exit planning is an integral part of the lifecycle of a startup. Whether it’s an M&A or IPO, there has to always be a well-defined exit strategy to ensure the optimum returns for founders and investors alike.

Legal considerations during an exit are complex and will affect the final outcome. A startup should ensure all legal documents are in place, such as contracts with investors, employee agreements, and records of regulatory compliance. There should be thorough due diligence on the value of the startup and any liabilities that could affect the exit.

Valuation is an important element of exit planning. Start-ups have to go through proper valuation in order to identify their actual worth. Professional legal counsel can guide through the legal implications of certain valuation methods and help achieve better deal terms at exit.

In conclusion, legal matters related to startups in India are quite complex and two-sided. Care should, therefore, be taken for the same to comply as well as protect the interest of business. There should be no over-emphasized need for getting an attorney for a startup. End.

From the right choice of a business structure to regulatory compliance, every facet of legal compliance is pivotal to a startup’s success. Startups should seek to put in place the best possible legal foundation through professional counsel to navigate them through all the complexities surrounding the setting up and growing of any business.

As the Indian startup ecosystem goes through its growth trajectory, the key to long-term success will be staying abreast of and proactive about the myriad legal obligations. The only priority for startups would then indeed be their core mission-innovation and growth-with an ensured foundation on solid legal footing.

Selecting the Right Lawyer

Navigating the legal landscape is a crucial part of launching and scaling a startup. The right legal guidance can help you mitigate risks, protect intellectual property, and ensure compliance with regulations. As a startup in Chennai, Delhi, Gurgaon, Bengaluru etc, finding a proficient startup lawyer who understands the unique challenges of your business is essential. Here are five key considerations to keep in mind when choosing a startup lawyer.

1. Expertise in Startup Law

Choosing a law firm with specific experience in startup law is paramount. A proficient startup law firm will have expertise in areas such as Founders' Agreements, funding strategies, intellectual property protection, and statutory compliance. For instance, a startup lawyer in Delhi or Gurgaon should be well-versed in local regulations and the startup ecosystem. A lawyer who has advised companies from their formation to significant exits can provide invaluable insights and help navigate unforeseen challenges.

2. Industry-Specific Knowledge

Working with an industry lawyer who understands the specific challenges and regulations of your sector can significantly streamline legal processes. Different industries, such as healthcare, manufacturing, or the gig economy, have unique legal requirements that need specialized knowledge. For example, if your startup deals with gig economy issues, having a lawyer familiar with these specific challenges ensures they aren't coming up to speed while you are. The lawyer or firm should actively shapes clients' businesses from their formative stages, providing tailored legal and regulatory solutions suited to entrepreneurs and startups.

3. Accessibility and Location

Accessibility and proximity are crucial factors when choosing a startup lawyer. Delhi, Gurgaon, or the wider NCR region ensures easy communication and quick meetings. The need for responsiveness and undivided attention cannot be overstated. Your lawyer should be readily available to address time-sensitive issues and provide prompt advice. Clear and consistent communication is vital for an effective lawyer-client relationship, ensuring that your lawyer understands your business operations and priorities.

4. Track Record and Reputation

A law firm's track record and reputation are strong indicators of their capability to support startups. Researching testimonials, case studies, and references from previous clients can provide insights into their success with startups. Legal fields are reputation-heavy, and referrals from other founders or business owners can guide you to trusted partners. Alaya Legal, a reputable law firm in Delhi and Gurgaon, has a proven track record of assisting startups in becoming distinguished market players, ensuring that their clients receive the best possible legal support.

5. Cost and Flexibility

Understanding the cost structure and ensuring it aligns with your budget is essential when choosing legal services for startups. Discussing fees upfront and exploring flexible payment options can help manage expenses effectively. Some law firms offer packages tailored for startups, with options to defer payments until a significant funding milestone is achieved. Open conversations about billing rates and fee agreements can prevent misunderstandings and ensure that the legal services provided are within your financial reach.

Pro Tip: Maximizing Your Legal Partnership

To get the most out of your relationship with your startup lawyer, ensure clear and consistent communication. Share regular updates about your business to keep your lawyer informed and aligned with your goals. Consider having your lawyer attend important meetings, such as board meetings, to provide immediate legal insight and stay abreast of your company's progress. Additionally, use online legal directories and services to find and vet potential lawyers efficiently. This proactive approach can help you address legal issues promptly and maintain a strong, supportive legal partnership.

Choosing the right startup lawyer involves careful consideration of expertise, industry knowledge, accessibility, track record, and cost. Ensuring that your legal partner can provide comprehensive support tailored to your business needs is crucial for your startup's success.

 Legal Advise. I have always maintained start up founders should maintain a close liaison with an aware lawyer while setting up the company / start up. Today two youngsters well on their way to setting up a start up (part funds raised) came to meet my son, Prashant Kumar Kapila, who is an advocate. He was pleasantly surprised at their range of queries. Including the finalisation of shares between them (who owns how many and in what mode and why) and I think two more founders, an exit policy for a founder or a star / core employee and developing non disclosure agreements etc. And inquiring about the mode of resolution of commercial disputes with suppliers and customers. They had obviously done their homework. Prashant expected them to be more focused at this stage upon resource raising and planning and execution. I told Prashant if I had known them, I would have complimented them. Rather than go by emotions, they were calmly setting out their shareholding and if it came to it, even exits plus the structuring and smooth ending out the process of dispute resolution and compliances. They were clearly educating themselves, taking time out and going about it professionally rather than just looking up an acquaintance. Even otherwise I find that at times in house legal counsels can be more effective by interacting with lawyers in actual practice. This is another aspect which is important. Just sharing this crucial aspect which is often ignored.

I was myself flummoxed after a founder, who actually pioneered the start up, rang up to ask how he could coax his co founder, who had a substantial share, to exit. He himself had brought him on board with a substantial share. For his technical acumen. Hence the need to be careful from inception. And have a fundamental understanding of the NCLT, Contracts, Arbitration, DRT, NI Act etc. And later, when the core senior executive had to be let go, the concern was how to draft a non disclosure agreement as he knew the technical and commercial aspects in depth. Founders have to develop themselves. Let us work on

 

A youngster, a founder, had come over today to meet my son, Prashant Kumar Kapila, a  practising lawyer. I sat in only as the young CEO had met me earlier. The drafting was of agreements with farmers on the one hand and with vendors and suppliers on the other side. Plus a couple of corporates. My only inputs were some on the project as such - not legal but maybe legal cum operational. However we discussed and then agreed that the agreement with farmers had to be structured simply but yet inclusive of all crucial legal aspects. Else they would not agree or would lose trust, or be apprehensive. And their rights and duties had to be clearly defined. As regards the vendors or suppliers, these agreements had to be comprehensive and carefully drawn up, complexity could replace simplicity if the clause or concern demanded so. This is where the skill of the lawyer mattered in drawing it up while nuancing all aspects and the CEO or founder had to equally skilled in providing his or her inputs and views clearly and thoughtfully. The lawyer and the Founder should invest time on the clauses. Clauses with Corporates should ideally have arbitration as an enabling provision. Simply put as above. Just a share to articulate my thoughts

I was talking to my son, Prashant Kumar Kapila, a practising advocate. The young man has had an association with some start ups at varying stages. My association has been more of what is the sector all about but it has led to many founders reaching out to me for advise. On partnerships gone sour, key personnel quitting and setting up their own enterprises, being accused of fraud, tiffs with investors, missing out on key clauses in agreements etc. Patents and IPR too. Well we the father son duo one day discussed this and came to the conclusion each start up should preferably have a competent (not necessarily expensive) legal advisor or consultant who is in practice. Pay by the hour or case or a retainer is their decision. Even if an in house legal associate is there, a competent lawyer in practice can offer straight professional advise. As Prashant says, that is my value and similarly with other such lawyers. A legal advisor would be ideal to formally define partnerships and roles, equity, responsibilities and exits, the structure of the company, the non disclosure agreements and safeguards to be incorporated on exits by key personnel, vetting of contracts and compliances. Regulatory compliance is a key area as are enforcing contracts. And understanding the implications of certain government policies and modifications. Also contracts with vendors and customers. Local employment rules and policies should be understood. And whether to go in for arbitration if commercial disputes arise. When investors offer to invest funds or to come onboard, the contracts and terms and conditions can be discreetly vetted by a lawyer. It pays in the long run. Problems or concerns or implications should be known and understood in advance then later when valuable man hours are invested with negativity. You actually are shielding yourself and your company. Broadly this is the gamut we father son could think off.

 Ethical Issues

The purpose of a start-up is to earn profit but while earning profit ethics should not be ignored. The start-ups should comply with the laws and regulations and at the same time, it should not forget their duty towards the community, people, customers, and the company.

1. Duties towards the customers – The start-ups should not indulge in any kind of activity which may be detrimental to the interest of the customers, the start-ups should accept the feedback from the customers and should take care of the after-sale services and assist the customers. A start-up can grow only with the help of satisfied and happy customers.
2. Duties towards the employees – The employees for a start-up are as important as wheels for a car, be it a small or big employee everyone’s contribution is necessary for the proper growth and functioning of a start-up. The start-up should be legally as well as ethically give regard to the rights of the employees. They should be given proper treatment, timely payment of salary and allowances, the Start-ups should have a proper system for hearing the grievances of its employees and it should try to keep its employees motivated in order to maintain healthy growth of the start-up.
3. Duties towards the environment – The Startups should be careful that they obtain all the legal certificates, permissions, and permits from the government bodies and they should not involve in any activity which may have a negative impact on the environment.
4. Duty towards the Start-up – The employees in a start-up should prioritize the interest of the start-up rather than their personal interest. All the employees should work together for the growth of the start-up.
5. Duties towards the community – The Startups should be careful that they should not in any manner cause harm to the sentiments of the people and they must follow a proper pathway for the betterment of the society by keeping provisions of investing in social causes like education, food, environment, etc. Start-ups should be careful about the religious sentiments of the people, especially while advertising.
6. Issues with respect to Labour laws – It would be wise for a start-up or any other company to be well-versed with the labor laws and the local laws because when we are hiring some person to work for us then we have several legal as well as ethical responsibilities towards that person as there are several statutes which protect the rights of the laborers with respect to the working hours, sexual harassment at the workplace, payment of wages, payment of bonus, etc. However, the new start-up, India initiative which was launched by prime minister Narendra Modi in 2015 exempts the start-ups from labor inspection.
7. Use of deceptive or inappropriate marks – Since the launch of the Make in India initiative by the Narendra Modi Government in September 2014. People have connected their patriotic sentiments with the make in India campaign and many businesses and start-ups could be seen using the make in India logo on their products in order to market their products in the name of the country and befooling people. Back in 2016, a Noida-based start-up named Ringing Bells announced the launch of a smartphone named Freedom 251 at exceptionally low cost which gained attention all over the country. It came up with an advertisement on the front page of several local newspapers which consisted of India’s tricolor flag and later on the company ended up merely as a scam.
   The improper use of such marks or emblems is prohibited from use under the Emblems and Names (Prevention of Improper Use) Act, 1950 which prohibits any person from using or continuing to use, for the purpose of any trade, business, calling, or profession, or in the title of any patent, or in any trademark or design, any name or emblem specified in the Schedule or any colorable imitation thereof without the previous permission of the Central Government or such officer of Government as may be authorized in this behalf by the Central Government. The start-ups should keep in mind that they should not use any mark or emblem or logo which is prohibited by law from use.
   The start-ups should not try to befool the customers by using the certification marks without obtaining the certificates from the competent authorities. If any individual for any reason misrepresents any certification mark as registered in regard to any products or services; then he/she by law is punishable with imprisonment for a term which may extend to three years or with fine, or both.

Dealing with counterfeit goods

The start-ups should avoid the sale or promotion of food, beverages, health supplements, medicine, auto parts, clothes, beauty products, pirated software. The US Trade Representative (USTR) offices ‘Notorious Market’ report has marked Snapdeal and Amazon for the sale of counterfeit products. The sale and promotion of such goods are detrimental to the start-up’s reputation, the manufacturer as well as the consumers.

The entrepreneur has so many things on his or her mind: the "value proposition," the features of the product or service, financing, technology, building the team, getting the phones installed, just surviving from month to month. What role can and does ethics play in the critical first months and years of a company's existence? What can the entrepreneurial team do to give ethics a role in the start-up?

Be Ethical with the Actual Technical Leads – A Request

The study of how ethics works in companies known as "organizational ethics" has unfortunately focused primarily on larger enterprises. Starting in the mid-1980s, many larger companies established ethics programs staffed by ethics officers. These officers have encouraged others to study how they operate and to measure the effects of their programs. Those who study organizational ethics, fortunately, have been just as interested in how other enterprises those without formal ethics programs succeed in making their companies ethical and value-centered. These insights help us examine how start-ups deal with ethics.

It is obvious the start-up company is unlikely to establish a formal ethics program or appoint an ethics officer, though some start-up CEOs proudly declare that they are the new ventures "ethics officer." Even without a formal program, however, start-ups can create and many have created a very effective commitment to ethical practice.

Examination of the best practices of these start-ups reveals several key steps new ventures can take to make ethics a distinguishing mark of the start-up's culture:

1. Ethical start-ups recognize the ethical dilemmas that surround them in the first few months. The pressures to cut ethical corners are great in a start-up. How much puffery do you use in presenting your idea to venture capitalists? How do you divide stock ownership and options fairly among the founding team and later hires? How reliable does a product have to be before you ship it? How creative can you be in your accounting when the value of your stock is so sensitive to a stumble? When a deal falls through, how quickly do you tell your board and your funders? How generous can you afford to be in employee benefits in the early days? 

2. Ethical start-ups make ethics a core value of the enterprise. Start-up founders have discovered that they must explicitly embrace doing business ethically to counter the temptations to fudge various standards. Ethics should appear in business plans, in company mission statements, and in all other company documents. 

3. The ethical entrepreneur finds early opportunities to make his or her ethical commitment real. A Silicon Valley entrepreneur who took over a months-old company recently refused to send faulty financial data to the venture capitalists, over the objections of his new team. "You just don't do business that way," reflects the entrepreneur, who enjoys both financial success and a superb reputation today. He communicated clearly from that day the ethical standards he and the company would follow. 

4. The ethical entrepreneur anticipates the ethical tensions in day-to-day decisions. As business plans are written and product capabilities are described, the ethical tension between the truthful and the "hopeful" is inevitable. As a start-up tries to attract top talent, there is an unavoidable ethical tension in determining how rosy a picture to draw for the prospect. The ethically thoughtful entrepreneur anticipates these tensions and talks about them with the team before the situations are confronted. In later years of a company's life, this practice will become more formal "ethics training." 

5. The ethical entrepreneur welcomes ethical questions and debates. Some situations cannot be anticipated, and the ethical entrepreneur must always keep an open door so that new ethical issues can be worked out. Even the willingness to take time to discuss and resolve tough ethical dilemmas gives the signal that ethics is important in the start-up. 

6. The ethical entrepreneur is watchful about conflicts of interest. It is hard to single out one area of particular ethical concern in start-ups because there are so many of importance. However, the world of high-tech start-ups emphasizes partnerships, strategic alliances, and "virtual relationships." These arrangements are rife with opportunities for conflicts of interest where an entrepreneur or start-up employee can line his or her own pockets to the detriment of the organization. An early and consistent stand against questionable conflicts of interest is an important dimension of a start-up ethics effort. 

7. The ethical entrepreneur talks about the ethical values all the time. The frantic pace of start-ups and their rapid growth create short memories and a staff that is often very new to the enterprise. Only by continually articulating the ethical commitment can the entrepreneur be sure the members of the organization particularly new hires understand the ethical commitment and know it is real. 

8. The ethical entrepreneur weeds out employees who do not embrace the ethical values of the company. Hiring is among the most important strategic steps a start-up takes. Inevitably, the venture will hire some individuals who believe financial success, perhaps just personal financial success, is the only value. The ethical entrepreneur is on the lookout for "teammates" who do not share the company's values and weeds them out before they can do damage to the reputation or culture of the firm. 

9. The ethical entrepreneur looks for opportunities to engage the company in the community. The start-ups preoccupation with meeting product and financial goals and with its own growth can lead to blindness about anything other than personal gain. Ethical entrepreneurs find ways to engage the team in community service and to emphasize the continuing importance of the teams family relationships. 

10. The ethical entrepreneur takes stock occasionally. Just as the entrepreneur must keep an eye on the start-up's cash flow and produce a balance sheet periodically, so he or she must also take stock of the company's commitment to its ethics and other values. 

11. The ethical entrepreneur renews the commitment to ethical behavior. Companies change as they grow. The most pressing ethical dilemmas of a Rs 100 crore or a Rs 1000 crore company differ from those of a fledgling start-up. Ethical values and the commitment to ethical behavior must be recast and re-communicated periodically, preparing the company and its employees to deal with the ethical dilemmas currently faced.

12. Respect your mentors and those who assisted you, being ungrateful to the mentor is also being unethical. I have myself undergone this ad such experiences have been shared by other mentors too.

The rewards of being an ethical start-up are many. Personal and team satisfaction is the most prominent. Workers who feel free to act ethically and to deal with others ethically feel better about themselves. Greater personal satisfaction translates into higher productivity and to lower turnover.

For the individual entrepreneur, a reputation for ethical dealing can increase the opportunities for business partnerships and lower the "transaction costs" of managing an ongoing relationship. "The ability to trust the other party and to do business on a handshake speeds up the progress we can make," commented one entrepreneur. A reputation for ethical dealing can make it much easier to attract employees and financing to the current venture or the next.

Business ethics is a fundamental aspect of any successful startup. It involves making ethical decisions and conducting business in a responsible and morally upright manner. By prioritizing ethics, startups can build trust with their stakeholders, including customers, employees, and investors. 

Integrity and honesty are key values that should guide every decision and action, as startups that prioritize ethics are more likely to maximize customer retention, gain a competitive advantage, and foster a positive reputation in the market.

In sum:

Ethical business practices contribute to long-term success and sustainability.

By acting ethically, startups can avoid legal issues and potential damage to their reputation.

Ethical behavior creates a positive work environment and promotes employee satisfaction and loyalty.

Key Principles of Business Ethics

Before looking at the five essential aspects of business ethics for startups, let's analyze some of its key principles:

Integrity: Upholding honesty and transparency in all business dealings.

Respect: Treating all stakeholders, including employees, customers, and partners, with fairness and dignity.

Accountability: Taking responsibility for one's actions and ensuring that ethical standards are upheld.

Compliance: Adhering to legal and regulatory requirements to maintain ethical practices.

Sustainability: Considering the long-term impact of business decisions on the environment and society.

Business ethics checklist questionnaire for your startup business

When it comes to running a business, there are a lot of ethical considerations to take into account. From how you treat your employees to how you interact with your customers, it’s important to always act with integrity.  here’s a business ethics checklist:

1.     Are you familiar with all the laws that apply to your business? Does your action violate the law?

2.     Have you made a clear & public commitment to integrity? Do you have policies to back it up?

3.     If you have doubts about any particular action, can you proudly tell others about this action? Is your gut feeling or conscience telling you ‘no’?

4.     Are your deals/transactions transparent to all concerned parties?

5.     Are your transactions/deals documented?

6.     Would your transactions stand up to audit?

7.     Do your company policies align with your spiritual teachings on bribery and corruption?

8.     Do you have policies against corruption?

9.     Do you treat your employees fairly and with respect? This includes things like providing fair wages and working conditions, as well as not tolerating any form of discrimination or harassment.

10.  When taking an action, ask yourself – “would it be ok if someone did the same to you?”

11.  When taking a particular action, ask yourself – “In the long run, would I regret doing this?”

 In conclusion, you as an entrepreneur, should be aware of the ethical implications of their actions and make decisions that are not only profitable but also reflect the company’s values.

By following these simple tips, you can help your business maintain a positive reputation while still achieving success in today’s competitive market.

To sum up, it is crucial for start ups to not only focus on innovation but also ensure robust ethical and legal foundations. Engaging with a knowledgeable lawyer early on can prevent potential pitfalls and facilitate smoother growth. Additionally, fostering a culture of integrity and transparency within the team can significantly enhance trust and long term success.    

----------------