Charting Your Startup’s Course: Essential Legal Structuring Tips

15
September 2023

Senior Associate:

Are you dreaming about launching your startup? Is your idea the one that will significantly change the industry? Are you ready to embrace the exhilarating journey and take the first step to turn your dreams into reality?

If the answer to these questions is yes, you are in the right place!

Statistically, only 1 out of 10 startups survive.[1] Reasons for startup failures are different. Hence, you should make sure that you plan all aspects of your business properly. Even though your business idea is crucial in this journey, it is important not to overlook the aspect of legal structuring.

The first step in starting your business is, of course, incorporating a company. This brings you to the important question – Where should I incorporate my business? The answer to this question depends on three core criteria that you should consider before making the final decision.

1. Defining Your Target Market

At the very beginning, you should determine who will be your targeted customers. For example, if you plan to develop an HR app with a focus on the European market, you will likely establish a company that will be the owner of the app in the EU.

2. Building a Core Team

Having a good core team is vital for the success of your business. For example, if you intend to develop an app, it will be crucial to have a team of IT experts who will help to turn your idea into the (online) reality.

This means that you should look for a market that can offer you a set of IT experts. Considering that startups usually have limited budgets, it will be necessary to find a perfect balance between a competitive labor market that can offer educated, talented, and skilled manpower and lower living costs that influence the salary range.

3. Finding Investors

Most startups at some point look for VC investors or angel investors. This means that you should also consider in advance who would be your ideal investor, and how you will attract them. Investors have different preferences, and you should think about the type of investors that you will attract.

Also, you should be aware that investors will, before investing in your company, perform due diligence on your company. If you want to be prepared for due diligence, you can find some useful tips in our previous blog on Due Diligence.

Upon setting up the basic criteria for your startup, you will be a step closer to the incorporation of your company.

It is important to bear in mind that even though it sounds more practical, it does not necessarily mean that establishing only one company is the best solution. For example, one jurisdiction can be a perfect solution for potential investors. However, it does not have to be the best choice for your core team and your targeted market.

If this is the case, you should consider establishing affiliated companies in the jurisdictions that are advantageous for each of the criteria. Nevertheless, before establishing a company in any jurisdiction you should consider a few more things.

1. Company Establishment and Bank Account Opening

Before starting the company establishment process, it is advisable to make sure that the procedure is straightforward, and that it will go smoothly. Spearing a lot of energy into the company formation is usually not the start that the founder expects.

Upon the company’s establishment, it is important to open a business bank account as soon as possible. This will enable your startup to run properly. In this regard, you should also make sure that the bank account opening will be smooth and easy.

For example, with adequate legal support, company formation in Serbia will be a pleasant and straightforward process. As a country with a competitive IT labor market, a lot of startups have decided to establish their development center in Serbia.

If you are interested in company formation in Serbia, you can read more about this process in our blog.

2. Exploring Types of Legal Entities

It’s very important to have a clear vision of the type of legal entity that you would like to establish. In the initial stage, you will likely establish a private company, with one or more shareholders. In this regard, it is recommendable to take into account if one jurisdiction imposes any limits regarding the number of shareholders, the possibility for foreign citizens to establish a company, etc.

3. Share Transfer

The type of legal entity is closely connected to the potential share transfer. As mentioned above, it is likely that you will eventually seek investors. For that reason, you should make sure that you choose the jurisdiction where it is likely that the transaction will go smoothly.

For instance, Serbian regulation defines a clear and straightforward share transfer procedure.[2] Upon signing the Share Transfer Agreement and filing the application for registration of the new shareholders to the Business Registry, the registration process will be finished within 5 working days.

For this purpose, important questions will be:

What type of documents are required for this purpose?
What is the form of the required documents?
How long does it take to register the new shareholder?
Are the KYC procedures for new shareholders reasonable?
Are there any additional steps that I should take?

4. Shareholders Agreement

When embarking on a startup journey, it’s vital to establish a strong foundation for collaboration between the founders. The shareholder’s agreement is a crucial document that defines the rights, obligations, responsibilities, and expectations of each founder. Even though it might sound unnecessary at the very beginning, it is important to define a decision-making framework, founders’ rights, obligations, and duties, as well as all other relevant questions.

It is important to consult with a qualified attorney when drafting your shareholder’s agreement. Each startup is unique, and an attorney can help you customize the agreement to meet the specific needs of your startup.

For example, if a startup has 3 founders each of whom will contribute to startup development in some manner, it is recommended to define their responsibilities in writing. For instance, Founder A will mostly provide funds, Founder B is an IT expert who will supervise the development process, and Founder 3 is a sales expert who will contribute to the product placement. For transparency purposes, their responsibilities can be defined in detail under the Shareholders Agreement.

In case you wish to learn more about the Shareholders Agreement, get in touch with us.

5. Tax Considerations

Understanding the tax obligations of a company is crucial for startup compliance and financial optimization.

It often happens that startups in the initial stage disregard the potential of tax incentives and benefits. However, this is something that should be considered before the establishment of a company.

Some countries offer a wide range of tax incentives such as R&D, IP boxes, incentives for employees, different tax exemptions, etc. To fully use tax incentives, it is useful to explore the options before starting the business. This proactive step will contribute to a well-structured business setup and efficient tax optimization.

To give an example, Serbia is one of the countries that offer many tax incentives, subsidies, and other benefits that could help your business grow.

6. Intellectual Property

From a legal perspective, one of the crucial things is to protect a startup’s IP. Often, the value of a startup is mostly determined based on its IP assets. IP is usually created by the employees.

For that reason, it is essential to have a clear mechanism to transfer IP from the employees to the company. This will ensure that the company is a holder of all IP rights and that it can transfer it further.

Also, it is important to choose a jurisdiction that offers adequate protection of trademarks, patents, and business secrets.

7. Data Protection Regulations

Personal data protection regulations should also be on the list of matters that you should consider before establishing a company. This is especially important if you intend to process personal data on a large scale.

If you are developing an app, it is almost certain that you will process personal data. For example, it will be probably necessary to sign up to use the app. This means that you will process personal data.

Above, we gave an example of an HR app targeting the EU market. Compared to the US, EU (and generally European) regulations concerning personal data protection are more restrictive. In this regard, if your target market is the European market, you should make sure that your business is set up in jurisdictions that can assure compliance with European data protection regulations.

However, a company’s targeted market can be the EU market, but the company can also export personal data to a third country. If this is your case, you should make sure that personal data is exported under the law.

8. Compliance Roadmap

Following the compliance roadmap is essential for a successful startup launch. On this road, the first step should be to understand the regulatory landscape and specific rules for the industry. In other words, you should check which obligations your company will have in terms of financial report submission, whether your business model requires specific licenses or permits, etc.

For instance, if your business model includes the development of an app in the field of FinTech, you should pay more attention to the financial regulations of the specific jurisdiction. Namely, such a business model may fall under a specific regime that requires licenses and approvals for the app.

Also, you should check if the chosen jurisdiction offers a possibility to reduce operating costs. For example, a virtual office could be a significant saving at the early stage of startup growth. Also, employees would probably be satisfied with the possibility of working from home.

9. Employment Regulations

Employment regulations are essential in the jurisdictions where you plan to build your core team. In this regard, you should make sure that your company is compliant with all employment regulations.

Also, you should consider what is the best manner to keep your core team together. Therefore, potential benefits for your employees should not be discharged at any stage. For example, ESOP is one of the benefits that could encourage your top employees to stay with the company.

In the dynamic environment of startup ventures, sound legal structuring is the cornerstone of success. Even though it might sound unnecessary at the very beginning, proper legal structuring is essential for a successful startup. With the well-organized approach to legal structuring, you’re now ready to chart your startup’s course toward a successful startup story!