Creating a start-up: What the most important things are

09.06.2019 Creating a start-up: What the most important things are

Lawyers advise those who create a start-up first of all to formalize their future activities by a contract, so that an oral agreement alone does not come back to bite you later.

Practitioners put the accent elsewhere—for them, the uniqueness of the idea, the ability to implement it and sell it quickly are the most important things.

Creating a start-up is not only useful but also fashionable. A successful company cannot be created without a unique idea, but that is not enough. Given that any solution can be crucial for a young business.

Practice shows that only one of 10 attempts to surprise the world is successful. Lawyers advise, even without waiting for the first results, still in the stage of business creation, to formalize everything by contracts to avoid, in case millions are earned, subsequent disagreements, litigations or payment of huge compensations to any of business founders withdrawing from the business because of mismatched interests.

Contracts are needed

“The first thing to think about is corporate documents. Sometimes they are not taken care of because of ignorance or frugality. However, for any start-up, it is particularly important to have all the legal documents that are essential for the company’s operations from the start of the business, which will ensure the smooth and efficient management of the company, monitoring the performance indicators and results, as well as will help to attract investments,” Julija Skardžiūtė, TGS Baltic UP HUB creator explains.

She points out that written documentation of a variety of questions shows to a potential investor the company founders’ understanding of and interest in the business, which makes it easier to attract investments. In addition, it is particularly important to ensure legal protection of intellectual property.

“If during legal due diligence a potential investor finds out that the company’s intellectual property is not adequately protected or handed over to the company, it is very likely that it may deter the investor from investing in this company,” J. Skardžiūtė says.

Speed is more important

However, start-up founders believe that properly formalized activities are not a priority.

“The statement that the decision of investors is greatly influenced by how the start-up has formalized the business documentation, somehow makes me smile. I would think investors are most impressed by performance indicators, the growth of the number of customers or users, the size of the market and potential and, in previous stages, achievements and experience of the team members. In subsequent investment rounds, primary share ownership is, of course, also important: the founders should still hold the majority of shares in the company,” Simona Andrijauskaitė, one of the founders of Interactio says.

The start-up offering conference organisers to replace the majority of special translation equipment with an app on smartphones attracted nearly a EUR 0.5 million investment from business angels and Co-investment Fund in May. The Interactio program has been used in more than 38 countries for several years and is among the forty world’s best mobile solutions.

In the opinion of Ms. Andrijauskaitė, the fact that founders do not formalize agreements in writing at the beginning of the activity is not certainly one of the fundamental mistakes. Other solutions are more important.

“If we were to develop a start-up now, we would do many things differently. For example, we would start selling earlier without waiting for a perfectly refined product, also we would hire customer service managers at an earlier stage. Since our product was probably first in the world to offer a simultaneous translation system for a mobile gadget, we would focus on market education from the very start,” the speaker said.

The success of each start-up also depends on a number of individual factors, but several denominators are common. It is the idea and the team that takes to implement it.

“If a strong team of ambitious, intelligent people who share the same values is brought together, it solves potential problems that lawyers have identified,” Interactio co-owner says.

To what business owners should pay attention when concluding a contract

Distribution of shares in the company.

It is important for the founders to remember that just because they created an idea, they would not necessarily own 95% of shares in the company. It should not be the case where, for example, 15% of shares in the company are allocated to a cousin of one of the founders simply because he contributed EUR 2,000 to the company’s activities; rather, a loan agreement should be entering into with him.

What will be the involvement of the shareholders in the company’s activities?

Who will be responsible for what, what will be responsibilities of each of them? The most common disagreements between the founders concern the division of responsibilities within the company: who has more influence in taking decisions on business development conditions, who decides on the business plan, development of new activities, budgeting and coordination of costs.

Restrictions on the disposal of shares.

Rules and conditions for redemption of shares. What is the exit strategy? If one of the founders decided to leave, what would be the exit plan? Would other shareholders be able or obliged to sell their shares together with the exiting founder? At what price would the shares be transferred?

How will the key and everyday decisions be made in the company?

By a simple majority or unanimous vote? Will a shareholder be given a veto right over certain issues? Will there be a board in the company? If so, what issues will it dealt with and how will decisions be made?

What will the consequences be if one of the founders violates the shareholders’ agreement?

A shareholders’ agreement may include non-compete obligations of the founders in order to avoid payment of compensation provided for in the Labour Code.

Source: Verslo žinios