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Key legal issues in the start-up

ecosystem

Dhruv SuriCo-head, Victus and Principal Associate at PSA

February 03, 2015

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Startups in India: A Number Game

The 2014 NASSCOM Startup Report unveiled the following statistics:

•~3100 startups in India

• India is the 3rd largest startup ecosystem globally

• 800+ startups setting up annually making it the largest growing startup

industry

• By 2020 there would be ~11500 startups; employing over 250k people

• ~300 VC/ PE & ~225 angel investment deals worth over USD 2 billion

• Over 20 M&A’s worth ~USD 1 billion in last 3 years

Digital platforms, social media, online clouds, etc.-

easier to start a busy than ever before

BUT

Scalability is the hard part

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“The Indian startup ecosystem is rapidly evolving drivenby an extremely young, diverse and inclusiveentrepreneurial landscape. This is leading to emergenceof focused domain solutions for verticals like healthcare,agriculture, and education etc. An additional driving forceis a four-fold increase in access to capital through VCs,angel investment and seed funding is allowing Indianentrepreneurs to work on building tailor-made productsfor their customers. Simultaneously, we need to also workaddressing challenges on creating supportive governmentpolicies in terms of ease of doing business, tax incentives,participation in government contracts, availability of riskcapital etc. NASSCOM will continue to actively engagewith stakeholders across to address these challenges.” –

Mr. R Chandrashekhar, President, NASSCOM

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Roadmap of our discussion

• Funding

• First steps

• Things to think

• Term Sheets and not Term(inate) Sheets

• Key terms and negotiations

• Closing, post closing and next steps…

• Intellectual Property

• What is it?

• How do you even know you have created an IP?

• Is my IDEA protected?

• Why is IP protection so expensive?

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First Steps…

Traditional sources of raising funds

Family Friends Banks

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Contd…

•Venture Capital Firms:

Established companies/firms.

Pros:

oAccess to a fatter pay cheque

oExperienced Investors – can add value

to running of the business

Cons:

oLong and cumbersome process

oProof of Concept and Revenue

Visibility

oReturns sought are high

•Angel Investors:

High net worth individuals.

Pros:

oPatient Investors, remain invested

for a longer period

oQuick access to funds – deal

closing doesn’t take much time

Cons:

oNeed to have a strong professional

network/contacts

oNeed to show capital efficiency of

the business idea

New trend: Investors disregard stage of the start-up

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Things to Think..

• Research the investor and

its experience

• Analyze market and

economic

conditions

• Enough capital to allow

for some slippage in

your business plan? • Additional funding

permissible or any

restrictions?

• Voting rights and

control- Board and

Shareholder

• Exit clauses and

redemption of

shares• Can the investors

unilaterally replace

the management

team?

• Has the firm completed their

due diligence? Impact of the

“no shop” clause.

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Negotiate to build a symbiotic relationship

Prepare

Understand

Maximize

Pay attention to non-monetary provisions

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Key Terms of the Term Sheet

Valuation is key…… but not THE most important thing!Agree on a pre-money and post-money valuation

Put/Call options

Anti-dilution

clauses

Right of First

Refusal

Types of

security

Tag Along/Drag Along

rights

Liquidation

preference

Dividends

Voting rights

and control

Redemption

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Mistakes Often Made by Founders

•Unsure about Capital Requirement

•Seeking funding too early

•Overestimating future revenue

•Underestimating expenses

•Raising too much/too little money

•Not consulting experts for negotiation: Case in point –

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Closing/Post Closing

Typical roadblocks

RBI reporting ROC filings

ESOP SchemeCompanies Act compliances- private

placement, rights issue, etc.

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Intellectual PropertyPower of IP…

=

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Contd…

“The empires of the future are the empires of the mind” - Winston Churchill

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COPYRIGHT PATENT TRADE MARK

Protection original literary, dramatic,

musical, artistic works,

cinematograph films, and

sound recordings

Inventions Brand, logo, symbol,

domain names, etc.

Term Generally, author’s life + 60

years

Max. 20 years + Annual

renewable fee

10 years + Renewable

Jurisdiction District Court where

plaintiff resides, does

business

District Court where

infringement arose, often

transferred to High Court

if counter-claim for

revocation

District Court where

plaintiff resides, does

business

How is ownership

established and

registration

required for

judicial action?

Established upon author’s

creation; Registration not

required

Must be applied for and

granted; Enforceable

upon publication of

application;

Assignee/licensee must

then register as such

Established by

registration, required for

infringement action; OR

established by first use,

registration not required

for passing off

Who can enforce? Owner/holder/proprietor, valid assignee, or exclusive licensee

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IP for Start-ups

Not protecting IP

Not defending or spending too much in

defending IP

IP in contracts with customers, vendors

and….EMPLOYEES!

Self diligence- infringing someone’s IP?

Trade secret? Welcome to India!

But..

What about my IDEA?

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Thank You