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September, 18 2019
September, 12 2019
Start up’s legal woes
The current wave of entrepreneurship and innovation is unprecedented and has turned into a tide sweeping old structures away making way for a new generation ever ready to challenge any and all status quo. The sheer amount of ideas and ingenuity coupled with the technological means available in our times makes literally anything possible. It would not be an overstatement to say that we are truly the generation to change the world!
It’s a shame then that this impetus towards innovation and entrepreneurship, despite its propensity to disrupt existing structures and mentalities, is still dependent upon relics of the past such as paper forms which have to be stamped by 3 different government officials. Yet the reality of the matter is that in most cases a good idea and execution plan on their own are not sufficient. Que in the lawyers…
To most technologically oriented start-up entrepreneurs the Law is a mystic discipline, shrouded in mystery and obscurity, much akin to voodoo rituals. The legal aspect of starting up your own business are most often the subject of misinformation, ending up as urban myths of the sort that registering a company is absolutely essential for starting up your own business. Well its not!
Much like any other system the legal system has its own hacks which can be applied in order to reduce start up costs and save time. For example in most cases registering a company is not essential since a trade name is still a good way of establishing a brand without incurring the costs of setting up and maintaining a company. Another important fact that all lawyers know yet few would admit in the presence of outsiders is that in the age of information more often than not all the information on a particular legal issue is available to anyone online. All legislation and the majority of reported cases in Cyprus are available to anyone through the Cylaw portal, 100% free and with no registration required! Once you perceive the Law not as a cryptic art but as simply as a collection of rules and guidelines aimed to organise various social aspects, rules which are easily discoverable, then the job is already half done.
The above advice however does not in any way advocate ignoring the legal aspect of your business. In fact it is explicitly and unequivocally advised that the legal aspect is one of the first things to be considered. There are certain key points where not having a concise and clear idea of the full legal implications of a particular decision is one of those things that can and will come back and bite you and it’s the bite is likely to be hard! And just to bring the point across more clearly it is highly advisable that any decision made should be an informed decision, with as much knowledge of the relevant legal provisions.
The key areas which legal information and advice is essential, in our experience of working with start ups, include but are not limited to the following:
I. Choosing an entity with which to operate. As mentioned above a limited liability company is not the only viable legal entity. There are a number of other options to be considered ranging from a sole physical owner to a public company, and each entity carries its own advantages and disadvantages. Unfortunately there is no one-size-fits all advice and each particular case will depend on a number of factors such as the amount of capital, the number of collaborators and the particular service to be provided.
II. Clear and unambiguous agreements/contracts. This actually is a one-size-fits all advice and should be applied in any agreement concluded. This includes the agreement between the partners starting up the business, investors, associates and collaborators, employees, end-clients, visitors to your website and the list goes on. This is an area with many pitfalls and even though the purpose here is not to use some legalistic tricks (e.g. fine print) to obtain a greater benefit than the one bargained for yet this doesn’t mean that you shouldn’t try to achieve the best deal possible for yourself. I cannot stress how vital it is to have a clear understanding of the obligations, benefits and extent of liability between each of the parties in a particular agreement.
III. Taxation and social insurance. Another area of great importance which will also affect the decisions made in the two areas mentioned above. The issue of tax liability should be one of the first to be considered. As the most quoted lower-court judge of the US, Judge Learned Hand, famously said “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes”. It is highly inefficient to pay one cent more in taxes than absolutely required, especially if the reason is simply uninformed choice.
IV. Intellectual property. In the information age an idea can be as much of an asset as money in the bank. However there are steps to follow from taking an idea from your head and fortifying it into a bankable, transferable asset. And more often than not a start-up’s biggest asset is a really good idea.
V. Choosing legal counsel. If indeed there comes the need for legal counsel, and at some stage after the preparatory stages of the start-up this will be a given, then choose wisely. The problem is that the choice for legal counsel is often made based on all the wrong reasons and can end in tears. Choosing a lawyer who is your childhood friend, is a relative and/or long time family friend or offers you the cheapest price are all the wrong reasons. Instead you should choose a lawyer who deals with the relevant area of law required.
Obviously this list is not exhaustive and it’s based solely on personal experience from dealing with start ups which allowed me to observe entrepreneurs long enough to notice the emergence of a certain pattern in their legal needs. Another important source of input was the CEL Legal Meetup event, organized by the wonderful people over at Cyprus Enterprise Link (http://projectcel.com/), which was a great opportunity to discuss various issues with both legal professionals and entrepreneurs themselves.
Author: Angelos Shakas.