The Structure…

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.

  1. Where will funds to finance the company come from? — This will govern where the company is set up and how.
  2. Who is the principal investor and what is his/her citizenship status in the country where the company will be set up?
  3. 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.
  4. What are the legal implications and compliance requirements for setting up the company in a particular country / state?
  5. 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.

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