Often start-ups with a great idea and a great team hit road blocks while scaling up. Usually they realize this when acquiring finance. These road blocks are because the company was not structured correctly. This brings me to a very crucial step in the whole start-up process – The Structure.
The Structure of the company should be created very carefully and with the help of good lawyers and CA/CPA. This is a big expense for a start-up but should be considered as an investment because this will come handy in future. You should have a clear road map for the company and consider the following to structure the company properly.
- Where will funds to finance the company come from? — This will govern where the company is set up and how.
- Who is the principal investor and what is his/her citizenship status in the country where the company will be set up?
- What are the tax implications (both personal for shareholders and for the company) for setting up the company in a particular country or state of the country? — Most lawyers will suggest the best location from a tax and investment standpoint.
- What are the legal implications and compliance requirements for setting up the company in a particular country / state?
- How will the shareholders agreement be drafted and what all will be included in the agreement? — A good practice is to write down everything that a shareholder is allowed and not allowed to do with the stock of the company or with the operation of the company. I think it is a good idea to keep friends and family of shareholders away from the company and have that included in the shareholders agreement.
A lot of young entrepreneurs try to cut corners by hiring inexperienced attorneys and CA/CPA that have a standard format for the structure of a company and do not have extensive knowledge about the laws applicable to a particular business. This can later in the life of the company become very painful, time-consuming and expensive to correct. I am a big fan of cost savings for a start-up but this is an area that needs a lot of attention and one should be ready to spend money to get the structure right the first time. There are many good lawyers and CA / CPA who will structure the company for a very basic and minimum down payment and rest as 2-5% stock in the company. If you cannot afford good advice outright, pro-Bono would be the best option.
Guru Mantra: Early advice is very crucial and should be considered as an investment and not an expense.