From the Launchpad - Semanta Dahal

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From the Launchpad - Semanta Dahal

 

The need to recognise startups as a different entity 

A startup in Nepal within the current legal framework is regarded as being no different from any other company—everything from the registration process to the taxation formalities are the same. However, many countries in the world today have started recognising startups as a different kind of entity and have begun providing them with special privileges to help them thrive in competitive markets. The Indian government, for example, defined startups in April 2015 as “entities working towards innovation, development, deployment, and commercialisation of new products, processes, or services driven by technology or intellectual property, upto five years from the date of incorporation whose turnover does not exceed 25 crores in the last five financial years.” They have created benefits like income tax exemptions, relaxed government procedures and provisions for investment and mentorship for startups. These provisions help startups find their feet in the globally competitive market. Having similar provisions in the Nepali legal system would be very helpful for local startups.


Startups may not necessarily need a law firm 

It is usually helpful for startups to have law firms to support them. But startups, due to the limited resources they have, may find it expensive to hire a law firm. In that case, it would be beneficial if someone in the company decided to take on the responsibility of the legal procedures. Diligently taking care of a company’s legal procedures is all about timeliness and maintaining focus on becoming a law-abiding company from the very start. There are some formalities to do with annual reporting and organisational renewal that should be taken care of. Companies registered under certain industries will have to renew their industrial registration requirements as well and will also have to keep up with the changing laws in the industry. Having a law firm or legal advisor can help startups keep track of these changes. But otherwise, simply having a person or partner who keeps an eye on regulatory issues is good enough.


Recognising conflicts 

Many entrepreneurs in Nepal start their companies in ‘good faith’ and fail to recognise that conflicts are a real possibility. Founders of startups in their early stages are zealous, and their zeal can lead to their not accounting for possibilities of future conflicts. So many startups hesitate to form a legally binding contract, for example. Startups should be more reasonable and understand that conflicts of interest between two parties may arise at any time. And in times of turmoil, only good faith is not enough.


Possible sources of conflict 

The main types of conflicts that arise in organisations are usually conflicts of interest between two or more parties. Conflicts can arise amongst and between any of the major parties involved in a business—partners, cofounders, board members as well as the investors. Because every party wants to protect its own interest in the company, disagreements may arise at any time. And the real conflict arises when these disagreements cannot be sorted out. It can be related to anything—shared passions, expected level of output, inability to grasp the market and even different ideas related to quick growth. Simply put, anything that doesn’t satisfy the interest of a major stakeholder in a company can become a source of conflict.


Mitigating conflicts 

The only legal tool available for conflict mitigation as well as management is an agreement—a legally enforceable understanding between two parties. An agreement is a preparatory tool for future conflicts of interest between different parties. It brings forth clarity and can go a long way toward keeping a company together and protecting the interests of different stakeholders. Legally, it is always advisable to communicate in writing wherever possible. A written document acts both as a reminder to get things done and serves as legal proof in case of disputes. Also, having a mentor that the founders or cofounders of a company look up to and can trust can help minimise disagreements.

“A WRITTEN DOCUMENT ACTS BOTH AS A REMINDER TO GET THINGS DONE AND SERVES AS LEGAL PROOF IN CASE OF DISPUTES”


Managing conflicts 

Legally, companies have the option of referring to agreements whenever conflicts arise. The reason an agreement is emphasised is that it helps clear miscommunication between the involved parties. This legal document helps enforce penalties in case there are breaches in a contract. To enforce penalties, parties in dispute can go to an individual, like a lawyer or a mentor, that both of them trust. This person looks at the agreement and provides decisions that two or more parties should agree to. If either party doesn’t agree to the decision, they may go to litigation—knock the doors of the court.


Keeping basic agreements in place 

There are two basic agreements that are vital for startups—the founders agreement and the agreement with investors. The founders agreement basically outlines the roles and responsibilities and particulars to do with equity ownership and investing, and intellectual-property assignment among cofounders. It is advisable to put some hours into this simple document as it helps cofounders obtain better output and minimise conflicts since parties can refer to the document in times of disagreement. As they grow, startups will have to think about the investors agreement too. The most important stakeholder in a startup after the cofounders are the investors. Conflicts of interest with investors can also be fatal. Hence, it is advisable to prepare an investors agreement as well.

*First Published by the author in M&S VMAG

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Guest Tuesday, 24 May 2022