From startup to unicorn: legal aspects of starting your own business. Photo: Unsplash
According to StartupBlink rating, Ukraine is in the top 30 countries with the best ecosystems for startups. The number of Ukrainians who wnat to start their own business continues to grow, even despite the pandemic and coronavirus crises. However, for the effective implementation of ideas and profit making, it is necessary to have appropriate legal support.
Mykola Stetsenko, Deputy Chairman of the Ukrainian Bar Association's Committee on Corporate Law and Stock Market and also Managing Partner of Avellum, a law firm, told the Page how to start your startup, what risks and dangers should be kept in mind, and what legal aspects should be paid special attention to.
How to start a startup?
First of all, start-up owners need to conclude a corporate agreement, i.e. an agreement that defines the rights and powers of founders, business participants, and the procedure for their implementation.
In other words, a corporate agreement is a written agreement between the owners on how to manage a startup and dispose of shares, who is responsible for what, how participants can go out of business, and how to resolve conflicts between founders.
The document does not have to contain a large number of pages—the main thing is that it clarifies all the necessary nuances that were not disclosed in the company's charter. A corporate agreement will help to make amends through the court in case of violation of the agreements established in the text of the agreement.
According to the lawyer, in a prestigious law firm, such an agreement will cost about $5,000. For novice businessmen such a sum can be overlarge, therefore, they can download samples of the charter and other corporate documents for free on government portals or, for example, from websites of various platforms for legal documents automation. In addition, it is worth ordering a consultation with a law firm to get specialists’ advice on customizing the received samples.
5 tips for startuppers: how to avoid legal problems
- Thoroughly check all documentation from the start of the startup. In case of a deal with a large investor, the company will need a backup of all information and basic documents.
- Regularly communicate with the involved investor, inform them about the status and progress of the project, tell them about your ideas and plans.
- Record any agreements on paper, since it is almost impossible to prove the details of an oral agreement in court.
- If you plan to involve American investors and enter the American market, you need to think about establishing a company in the United States.
- Ask for help and advice from fellow businessmen, lawyers, and various communities helping startups.
How can a startup avoid conflicts with an investor?
All the subtleties of the relationship with the investor must be reflected in the charter. However, the risk associated with investing in young startups can repel potential investors. An investor can be attracted by granting them certain rights, and that will become a kind of "safety bag" for them if the startup "isn’t a bomb" or the founders spend the invested funds unsuccessfully. For example, open access to bank accounts for the investor so that they can track payments, or coordinate with the depositor any expenses over $1,000.
When it comes to significant investments in startups that have been working for several years and have proven their effectiveness, the investor will require more serious guarantees of financial security. It could be a pledge of shares: the investor asks the founders to pledge their shares as security for fulfilling their obligations. They can also initiate the creation of a complex corporate governance system and introduce their representative to the directorate. Moreover, the investor is likely to demand options (that is, the right to sell this asset) in order to protect themselves from the wrong actions of the founders.
How can a startup prepare for an IPO?
If a company plans an IPO in the future, then at the startup stage it is necessary to take care of maintaining the correct documentation. In the future, this will help to avoid unwanted problems.
A company that is planning an IPO must be ready for an audit of financial statements and full-fledged corporate governance that includes independent directors, regular reporting, and systematic meetings of the supervisory board. An entrepreneur must understand that an IPO requires full transparency and publicity of the company, and that means the disclosure of all financial gains and losses. At this stage, the business will face complex bureaucratic processes that a novice startupper is usually not ready for.
What are the prospects for startup development in Ukraine?
Entrepreneurship in Ukraine is gaining momentum. Firstly, this may be attributed to the fact that there is a lot of talented youth in the country. Especially in the field of IT that generates most startups. Secondly, the stratum of people who are ready to invest in them is growing.
In addition, the development of entrepreneurial activity is facilitated by the development of legal instruments and qualitative changes in the Ukrainian legislation. The innovations introduced over the past few years have quickly gained popularity and increased the number of corporate transactions under the Ukrainian law. Judicial practice will gradually develop in the future. As a result, Ukrainians will become more confident that it is quite possible to achieve success.
And in the case of the Ukrainian stock market effective development, there will be new opportunities for those who want to move to a higher level. Potential startuppers will be attracted by prospects that can be achieved even within our country.