Why startups fails? - Law perspective

We all know the startups are start and end of the entrepreneurial journey, starts with innovation and idea, ends with bruises and insults. Its a journey of idea to innovation, innovation to startup, startup to company, company to public. Governments trying to support such initiatives like a child, providing incentives, incubation centers, providing trainings, subsidies, ideas, fueling with their leadership, states changing their policies to accommodating such businesses, even though most of the startup fails, there around 18,000 startups were started in India on 2018, only 12,000 got failed in 2022.

Reasons were told for this shortlive is Startups never thought Covid situation will end, startups boomed on this situation tried to incentivize the remote and virtual situations. For Ex. Byjus, Vedantu their business got boomed and acquisitions were made, to provide the home tuition, but situations got changed, physical tuitions for students were started, scope of remote education got affected. Its just a miniscule of gravel in the tons of sand.

Today we are going to look startup fails due to some mistakes., probably done it in ignorance, not thought of it., grey areas, shot in blindfolded, whatever you might to name it, some of the startup issues through law perspective here we go with those,

Wrong Entity

What kind of company is startup making? If they answer this question most of the problems will be resolved. Either its Private/partnership, Sole partnership or general partnership, how they are going to reduce the legal issues or reducing the tax issues after they started, it belongs to the entity they are choosing.

IP Laws

Suppose an contractor who is not legally bind with the company, innovated the product and joins in another company, the product created from your startup will not be yours. Always Intellectual property claims affect the most. I personally know that one of the big company, even though they patent the small non-productive idea, they give themselves the intellectual property protection. Startups have to create the strategy within their objectives they have to embed the strategy to have the intellectual property protection.

Investor relations

Structuring the organization is more important than ever for startups, for ex. one of the idea generator agreed into contract with 10% of shares with the company, when he fails and attempts to lose generating business or value to the company, suddenly founder want to raise the funds through the Venture capitalists or investors, to get the share from that idea generator is not easy, then founder of the company have to lose the share or losing the investment. Contract and agreements with the people is to be made with proper agenda and with appropriate terms and conditions.

Complying with the security laws

At times startups tend to rule out the security laws, or only following the local laws. When they want to do the business with their foreign clients, they forgot to add up on their country laws. This give them hefty penalties, GDPR, OECD, Privacy laws are strictly followed in countries like US and UK. Also keeping the track of customers and back-up their information is important in countries like Korea. 

1) Taxes, 2) IP Laws, 3) Privacy Laws, 4) Anti-Trust laws, 5) GDPR, OECD, WPA, CCPA etc., these laws are very important to comply with.

Not doing due diligence

Whether your product is MVP (most viable product) into the market or not, respecting the NDA (non-disclosure agreements), local laws, auditing your company, organization structure, job allocation, project management, even brainstorming were providing values to your startup. Having the mindset of encouraging employees work like a corporate not for providing all for free or low cost, allow some cost for these compliances, local security laws, allowing big companies to do business with the startups.

This is for only educational purpose or awareness, kindly reach out to your attorney to know more of it.

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