Fundraising and governance issues involve multifaced legal challenges facing startups and unicorns, whose threats gets enhanced with increased growth and investments in the businesses. This blog explores these issues making complex legal matters accessible for entrepreneurs and stakeholders.
Introduction
Startups and unicorns, driven by speedy innovations and aspiring growth, often come up against legal obstacles during fundraising and in establishing sturdy governance frameworks. The escalating scale of operations, observatory inspection, and investor demands create a maze of compliance and strategic risks that must be effectively managed.
Legal Hurdles In Fundraising
Fundraising is the process of seeking and gathering voluntary financial contributions by gathering individuals, businesses, charitable foundations or governmental agencies. In simple words – raising capital in different phases and each of these has legal challenges:
1) Taxation- submissiveness with taxation laws is a sine qua non. Startups and unicorns have to be clear about their tax liabilities towards the government to elude further legal further legal complications faced by them in India. Vivid sectors attract vivid taxes. Therefore, startups and unicorns must make certain that they are informed about new taxes, their liabilities and impact on the business. Furthermore, the Indian government has launched schemes for Startups that could render them immunity if certain conditions are satisfied.
2) Listing necessities- If ant unicorn or startup decides to get listed on Stock Exchange then it has to satisfy the conditions of listing and regulations given by SEBI. These regulations define how a Startup can make adherence with respect to listing guidelines.
3) Licensing- licensing is of supreme importance when it comes to starting a business. Various licenses are required and for that important permit is also needed. For example, for food business licenses related to food safety and standards are to be obtained. The startup is required to follow the guidelines mentioned in the license or else it will have to face legal repercussions.
4) Intellectual Property (IP) Rights- As startups and unicorns grow or expands, the need to safeguard their intellectual property also increases which contains logos, codes, designs, research outcomes, etc. Most of the startups are innocent about their protection of intellectual property i.e. patent filing, copyright. Awareness about these things would remove any further challenge.
Challenges In Corporate Governance
Startups face corporate governance challenges such as informal structures, founder dominance, limited resources, and lack of transparency.
1) Informal decision making- unicorns and startups often rely on informal decision making rather than structured processes, which can lead to a lack of clear roles.
2) Founder dominance- founder often hold on to significant control, leading to possible conflicts of interest with investors who might have different priorities.
3) Limited funding- startups have limited financial resources, making it difficult to engage experienced board members or invest in technology required for good and strong corporate governance.
4) High costs- executing and maintaining governance practices, including adherence, can be costly for early stage startups and unicorns.
Solutions And Best Practices
- Due Diligence- pre-funding due diligence by hiring legal experts and rectifying adherence gaps mitigates risks during investor scrutiny.
- Vendor checks- executing periodical due diligence on the vendors helps detect ongoing regulatory and also contractual risks.
- Engagement of legal counsels- contract negotiations and adherence management including experienced lawyers have judicious advantage regarding protection of assets.
- Documentations- complete records of all the business deals, board meetings, employee documents, helps avoid legal issues and ensures transparency.
Conclusion
Legal challenge in fundraising and governance abide and continue to develop for startups and unicorns. This will advance a way to proactively address such issues and challenges through planned legal advisory, documentation, and clear governance frameworks that position businesses for successful fundraising and growth. With the correct legal procedure, startups and unicorns can balance innovation with risk management.
Author Name- Tanvee Londhe, student, BBA LLB (H) School of Law and Public Policy, Avantika University
