A startup is a newly established business incorporated as a private limited company, sole proprietorship firm, registered partnership firm or a limited liability partnership (“LLP”). The distinguishing aspect of a startup is that it is engaged in developing new products or services through the use of innovation. In this article, we have answered the general questions which are related to various legal aspects of startups, including incorporation of startups, protection of intellectual property rights, process of fund raising and structuring of ESOPs.
Incorporation and Recognition of Startups
1. What is the most preferred structure for a startup?
The most preferred structure for a startup is of a private limited company as a private limited company is eligible for exemption from:
a) Angel tax on investments above fair market valuation
b) Tax on profits and gains of startups
c) Capital gains tax from investments in specified funds
d) Capital gains tax on residential property
A company also enjoys benefits such as a fast track corporate insolvency resolution process and convenient raising of funds through issue of shares and debentures. Moreover, a number of relaxations have been provided to companies recently under the Companies Act, 2013. The procedure for registration of a company has been simplified and it usually takes 1-2 days to incorporate a company with minimum 2 directors.
2. What are the eligibility criteria for an entity to be recognized as a startup by DIPP, Government of India?
An entity is regarded as a startup by DIPP on the basis of the following criteria:
The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership
Turnover should be less than INR 100 Crores in any of the previous financial years
An entity shall be considered as a startup up to 10 years from the date of its incorporation
The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth. An entity formed by splitting up or reconstruction of an existing business shall not be considered a "Startup."
3. How can a startup obtain certificate of recognition from DIPP, Govt. of India?
A startup that wishes to obtain certificate of recognition from DIPP has to apply online on the portal or mobile application of DIPP provided below: https://www.startupindia.gov.in/content/sih/en/startupgov/startup-recogn.... The application should be accompanied by a copy of the certificate of incorporation and a writeup about the nature of business. There is no fee charged for applying for certificate of recognition.
4. What are the licenses required by a startup for commencing business?
A startup should apply for PAN, TAN, GSTIN, Importer Exporter Code (if the startup is involved in importing or exporting of products or services), registration under Employee Provident Fund Scheme (for startup with more than 20 employees), Employee State Insurance Act (for startup with more than 10 employees) and registration under Shops and Establishments Act of the particular state where the office of the startup is situated.
Intellectual Property Rights
5. What are intellectual property rights?
Intellectual property refers to creations of the mind: inventions; literary and artistic works; and symbols, names and images used in commerce. Intellectual property is divided into two categories: (a) Industrial Property includes patents for inventions, trademarks, industrial designs and geographical indications; (b) Copyright covers literary works (such as novels, poems and plays), films, music, artistic works and architectural design.
6. What are the benefits provided to startups in registration of intellectual property rights?
The Government has appointed facilitators who advise and assist in the registration of intellectual property rights. These facilitators are paid by the Government and do not charge any fee from startups. The Government has also reduced the fee for patent registration by 80% and trademark registration by 50% for startups.
7. What is a trademark?
A trademark is a distinctive sign that identifies certain goods or services produced or provided by an individual or a company. Trademarks may consist of words, letters, numerals, colors, drawings, symbols, phrases, logos, images, three dimensional signs, such as the shape and packaging of goods or a combination of any of these elements.
8. Where to apply for a trademark?
An application for trademark can be submitted personally at the front office counter of the respective intellectual property office or can be sent by post. Trademark can also be applied online along with fee mentioned in First Schedule on the website www.ipindia.nic.in.
9. How much time does it take for the registration of a trademark?
After the application for trademark has been filed, an examination report is issued by the trademark office. A reply to the examination report has to be filed by the applicant. In case the reply is accepted by the trademark office, the trademark is published in the trademarks journal to invite the public to file an opposition. The time period to file the opposition is 4 months and if no opposition is filed, the application will proceed for registration and will be registered within 18 months from the date of application. A trademark is granted for a period of 10 years.
10. What is a Patent?
A patent is an exclusive right granted for an invention – a product or process that provides a new way of doing something, or that offers a new technical solution to a problem. A patent provides patent owners with protection for their inventions. Protection is granted for a period of 20 years from the date of filing of application.
11. What is patentable?
An invention relating either to a product or process that is new, involving inventive step and capable of industrial application can be patented. However, it must not fall into the categories of inventions that are non-patentable under section 3 and 4 of the Patents Act, 1970 such as a mere discovery of a scientific principle, a mathematical method or a computer program.
12. Who can apply for a patent?
A patent application can be filed either by true and first inventor or his assignee or legal representative in case of a deceased person.
13. When to apply for a Patent?
The application for patent should be filed before the publication of the invention and till then it should not be disclosed or published.
14. Where to apply for a Patent?
A Patent application can be filed with Indian Patent office either with complete specification or provisional specification alongwith fee mentioned in first schedule on the website www.ipindia.nic.in. The application can also be filed online on the website www.ipindia.nic.in.
15. Is it necessary to file a provisional application?
Generally, an application filed with provisional specification is useful in establishing a priority date for the invention. The inventions filed earlier get priority in grant of patent if a similar patent is filed by another inventor.
16. How much time does it take for the registration of a patent?
After the application for registration of patent has been filed, a request for examination can be filed within a period of 48 months from the date of priority or date of filing of application, whichever is earlier. The patent is published after a period of 18 months from the filing date or priority date, whichever is earlier, in official e-journal of patent office. The applicant can make a request for early publication by filing Form-9 alongwith prescribed fee. After examination, the patent office issues a first examination report and the applicant is required to comply with the requirements within a period of 12 months from the date of issue. In case the application is found to be in order for grant, the patent is granted, provided there is no pre-grant opposition filed or pending. The startup can also file Form 18A for a patent application in which complete specification has been filed to expedite the procedure of registration of patent.
Raising of Funds
17. How can a startup raise funding for its future ventures?
A startup can raise funds through alternate investment funds, external commercial borrowings and issue of shares and debentures.
18. What are the different stages of raising funds through issue of shares?
The stages of raising funds are:
- Negotiation between the parties
- Signing of term sheet
- Due Diligence
- Signing of the shareholders agreement
- Amendment of the Articles of Association
19. What are the necessary clauses of a term sheet?
The necessary clauses of a term sheet are:
- Valuation of the Company
- Number of shares and price per share
- Conditions Precedent
- Conditions Subsequent
- Tag Along Rights
- Pre-Emptive Rights
- Affirmative Rights
- Liquidation Preference
20. What are the benefits provided to startups under Insolvency and Bankruptcy Code?
The Central Government has notified section 55 to 58 under Chapter IV of the Insolvency and Bankruptcy Code and provided an application for fast track corporate insolvency resolution process for corporate debtors. A startup (other than a partnership firm) is also considered to be a corporate debtor.
21. With which parties should a startup execute binding agreements?
A startup should execute binding agreements with its employees, shareholders, manufacturers, distributors, service providers, suppliers, etc. These agreements should contain necessary clauses such as non-disclosure of confidential information, restriction on use of intellectual property rights, indemnity, exclusivity, non-compete, non-solicitation, term and termination, force majeure, dispute resolution and governing law, representation and warranty etc.
[ DISCLAIMER: This article is for academic purpose and is solely to provide readers with general information regarding developments in Indian law. The information contained herein does not constitute legal or a professional advice. ]