Decoding The Legal Framework For Entrepreneurs

A Presentation by Genesis LegalDisclaimer: This presentation is a copy right of Genesis Legal. No person should act on the basis of any statement made herein or by the presenters without seeking processional advice. Genesis Legal expressly disclaim all and any liability to any person who has followed this presentation, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this presentation.

1.SELECTION OF THE RIGHT

BUSINESS ENTITY

Types of Business Entitiesa. Sole Propreitorship

b. Partnership Firm

c. Limited Liability Partnership

d. One Person Company

e. Public and Private Limited Company

“Selecting the right business entity almost entirely depends upon the

vision of the entrepreneur

2.EMPLOYEE AGREEMENTS

EMPLOYEE AGREEMENTSWHAT IS IT?

It is the primary agreement codifying the Terms of employment between the Employer and Employee.

It ascertains the rights, liabilities and duties of the Employer and Employee, and is a binding contract on both the parties.

WHY IS IT ESSENTIAL TO HAVE ROUBUST EMPLOYEES? To agree upon the terms governing employment

To protect the intellectual property and confidential business information of the employer

To ensure that the employees do not engage in competing business with the employer

To ensure smooth resolution of disputes between employers and employees

EMPLOYEE AGREEMENTSWHAT ARE ITS BROAD CONTENTS?

Designation and responsibilities Remuneration and incentives Leaves and Leave Encashment Confidentiality and Non-Disclosure Non-Compete and Non-Solicitation Intellectual Property Assignment

Resolution of Disputes through Arbitration Covenant reserving the companies rights to formulate internal policies from

time to time Covenants restricting employees on accepting further employment during the

existence of current employment agreement Termination of employment, retirement and resignationHOW IS IT ENFORCEABLE? Enforceable as a simple civil suit in the Court of appropriate jurisdiction.

Pre-Hire & Hire process:1. Past employment obligations;2. Offer Letter, Letter of Intent, Appointment Letter

During Employment & Termination:

1. Non-Compete, Non-Solicitation, Non-Disclosure etc:

2. Employment Contracts and supplementary agreements;

3. Event based agreements (issue of shares, additional perquisites, Directorship etc.)

4. Common Issues-Absconding employees, irregular termination of employment, resignation without notice period, breach of confidentiality, employment bonds, past employment commitments, non payment of salary by employer.

Post Employment:

1. Non-Compete, Non-Solicitation, Non-Disclosure, non-Poach contracts survives termination (only in reasonable situations)

2.Irregular Termination disputes

3. Full and final settlement of Salary-Disputes

*obtain an undertaking from the employee that Employee has not

breached any obligations towards

past employer

3.NON-DISCLOSURE

AGREEMENTS

NON-DISCLOSURE AGREEMENTSWHAT IS IT? The first step towards protecting your ideas and intellectual property

when sharing valuable and confidential information with third parties Easiest and most common way of ensuring that your idea is not

compromised, made public or exploited in any way Sets out that proprietary information has been shared only for a

specific purpose and the recipient agreed not to share it with anyone else.

WHAT ARE ITS BROAD CONTENTS? Definition of ‘Disclosing Party’ , ‘Receiving Party’ and ‘Confidential

Information’ Term, if any, for keeping the information confidential; Restriction on the use and disclosure of confidential information which

include:o use of information only for restricted purposes; o disclosure of information to restricted persons and on a ‘Need to

Know’ basis;o adherence to a standard of care relating to confidential information;

Clause that confidential information is the sole IP of the Disclosing Party

NON-DISCLOSURE AGREEMENTS Indemnity in case of breach and specific relief

Mode of settlement in case of a dispute through arbitration and the law governing the contract

WHAT ARE ITS BROAD CONTENTS?Vendors, service providers, consultants, employees, potential business partners etc.

QUICK TIP!Have a standard NDA ready, drafted specifically as per the requirements of your organization, instead of using generic templates.

Only share “WHAT” you do but not “HOW” you do.

3.TERM SHEETS AND

INVESTMENT PROCESS

Term SheetsWHAT IS A TERM SHEET ?

A non-binding agreement briefly codifying the terms and conditions of an investment

Non-binding in nature i.e. none of the parties are obliged to enter into a transaction until the execution of Definitive Investment Agreements (Shareholders’ and Share Subscription Agreement)

Subsequently culminates into Definitive Investment Agreements upon completion of Legal and Financial Due Diligence

Lays down the expectations of the parties i.e. the founder and the investor from the transaction

Angel and Venture Capital Investment Process

Investor identifies

Target

Preliminary valuation

and signing of a Non-binding

Term Sheet

Detailed financial and legal

Due Diligence

Final Valuation based on

the outcome of Due

Diligence

Final negotiations and signing of definitive investment agreements

Deal closure

and investment

upon completion

of CPs

“It is essential for any startup anticipating investment to be financially and legally sound and to have the cleanest track record possible in terms of corporate

governance.

4. Startup India-Stand up

India!

Definition of startup DIPP has notified the definition of a startup as follows:-

Entity: A Private Company, LLP or Traditional Partnership - up to 5 years from the date of its incorporation / registration

Turnover: To not exceed Rs. 25 crore

Eligibility: Working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

Exclusions: Entities formed by splitting existing businesses

Business to be covered under the definition of startup only if:

(a) it aims to develop and commercialize a new product or service; or

(b) significantly improves an existing product, service or process that will create and add value for customers or the workflow.

▷  

Definition of startup – contd... Mere act of developing the following would not be covered under the

definition of ‘startup’:▷ Products or services which do not have potential for commercialization; or▷ Undifferentiated products or services or processes; or▷ Products or services or processes with no or limited incremental value for

customers or workflow. Entity to be qualified as a ‘Startup’ to have one or more of the following

(format to be specified by DIPP):(a) A recommendation (with regard to innovative nature of business) from any

Incubator established in a postgraduate college in India or from any Incubator recognized by GoI;

(b) A letter of support by any incubator which is funded by GoI as part of any specified scheme to promote innovation; or

(c) A letter of funding of not less than 20 per cent in equity by any Incubation Fund / Angel Fund / PE Fund / Accelerator / Angel Network duly registered with SEBI; or by Government of India or any State Government as part of any specified scheme to promote innovation; or

(d) A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

Key Government Initiatives Launch of the Startup India Action Plan – A first step in the right direction Regulators and ministries working in sync with each other – MCA, RBI, Labour

Departmenr, DIPP, SEBI etc. Setting up of an Inter-ministerial board to approve of application for

registration as startups consisting of the Joint Secretary, DIPP, Representative of Department of Science and Technology and Representative of Department of Biotechnology.

GoI to invest Rs. 10,000 crore over the next four years into funds investing in Startups

Exemption from capital gains tax for individuals investing upto Rs. 50 lakh in startups focused funds

Relaxation in taxability from royalty on patents abroad – 10% Section 56 Exemption stated in Action Plan not covered under the Budget

2016 Startups to be included under the Public Procurement norms for PSUs

however no relaxation as to quality and standards Launch of web portal for startups by DIPP LTCG period for unlisted shares reduced to 2 years from 3 years - A relief for

angel investors

Key Government Initiatives – contd.. Labor and Environmental Compliance - Self Certification allowed;

FDI Provisions relaxed – FVCIs can invest in all sectors except prohibited sectors

Startup India Hub-Hub of mentors, experts and such others facilitating the support and guidance for entrepreneurs;

Mobile App & Portal-Automation of most of the processes for startups-Expected to be launched by next week;

Legal Support-Facilitation for filing and registrations-quick and easier process to register;

Exit for Startups- fast track closing of companies and exits-avoids the current long process of winding up of companies;

Rebate in patent application fee and consultants to be engaged by startups to assist them with filing patents

Onerous reporting and inspection requirements under Labor Laws relaxed

Our Analysis Certification by an Inter-ministerial board – does it take us back to the

License Raj?

Definition does not cover existing companies

Definition of ‘Eligible Startup’ in the Budget 2016 does only includes companies. Thus, tax benefits to accrue only to startups structured as companies

Section 56 exemption as promised under the Action Plan not included in Budget

Clarity required on ‘What would amount to innovative nature of business?’

Tax Exemption given to startups only for 3 consecutive years out of the initial 5 years. How much can startups benefit?

No exemption from Minimum Alternate Tax to Startups

Turnover of Rs. 25 crore – too low a threshold for certain types of businesses

Difficult for startups to access Incubators, VC Funds, PE Funds etc. in initial stages

Patent registration itself takes 3 years making the requirement almost redundant

Thanks!Any questions?

Feel free to reach out to us anytime !

Parth Jain Ajinkya Kurdukar

E-mail: parth@genesis.legal ajinkya@genesis.legalPhone: 91-9833182600 91-9619834646

www.genesis.legal