Best Practices For Startup Legal Structuring in 2022
Whether you’ve been dreaming of starting your own company for years or if the idea just popped into your head in your sleep — like Mendeleev’s periodic table — you need to prepare your business idea for the real world with help from a secure legal structure. As soon as you have validated your business idea and concluded that it’s commercially viable, it’s time to register your business. The location–the jurisdiction–that you choose will have lasting impacts on your business, particularly when attracting clients and seeking external capital. Overlooking the importance of picking the right jurisdiction could land your business in trouble down the line.
When incorporating your startup, you have to analyse the following:
- Where is your core market?
- Who are your ideal investors and where will you find them?
- Where will your core team be located?
If you are based in Montenegro, working on a price comparison platform you plan to incorporate in the Cayman Islands, with your target audience for sales being elderly English women, and your dreams of investments coming from certain “a-some numbers, maybe a sixteen-z” fund…your business plan might not work so well.
What to consider when choosing a country to register your business:
- The perception your customers have of your corporate location.
Customer opinions matter; without customers you don’t have sales. People also hold opinions on different countries (rightly or wrongly), and these opinions affect who they buy from. So, make sure you choose a reputable country of incorporation. For example, a B2C SaaS startup with a head office in the British Virgin Islands might look suspicious and garner less trust from customers, whereas a business based in the EU is likely to be considered more trustworthy by consumers.
- Your relationship with your investors
Investing is based on trust, risk, and the overall relationship between the investor and the project they're investing in. If you are considering sourcing investments for your organisation, and want to obtain outside capital, think hard about the type of investors you want to attract. Each angel investor or VC has their own area of innovation they’re most interested in; smartech, healthtech, edutech, traveltech, the list goes on.
Each investor will also have some kind of geographical preference or areas of interest. Different jurisdictions will offer different methods of protecting their investments, as well as tax laws and legal frameworks and costs that are applicable when investing. For example, Investor A prefers the US for its Silicon Valley lifestyle, Investor B prefers the EU for its unity of regulations, and Investor C prefers Asia with its skilled yet affordable workforce. All investors will be wary of protecting their assets, no matter what their business interest or where they invest their money, so be sure to think about what type of investors you wish to work with in the future, and where you’re likely to find them.
- Your core team
Your core team are vital to moving your business forward. A disgruntled or dysfunctional team can ruin work ethic and dampen entrepreneurial spirits, threatening the success of the business. Avoid all of this by setting up your core team to succeed. Start with finding a location that can both satisfy your human resource needs, and provide startup friendly governance, first class legal and business infrastructure and a good quality of life. Your dream team only lasts as long as their happiness and productivity is alive. A location that promotes a happy business and happy workers is key.
- Your startup’s unique needs
Every startup will be slightly different - what exactly does yours need to hit the ground running? Think about those needs, from intellectual property business and legal structures, to tax optimisation, and corporate management tools. Now ask yourself, does the jurisdiction I want to register in serve these needs, or will it create barriers and unnecessary complications? Work out which countries have IP box regimes, are tax-friendly to your business, and will help ensure that your rights are protected both in the Apple App Store and Google PlayStore, and in court.
Which jurisdictions are best for incorporating a startup?
You’ve covered your basics – customers, investors, team and business needs – but what else is there to consider? Here are 4 more things to think about when choosing the best jurisdiction for your startup.
- Whether share transactions (share issuance / secondary sales / reasonable KYC for shareholders) are likely to be smooth. For example, Estonia provides e-residence, which can be obtained in several days and allows prompt registration of a company;
- Whether opening and operating bank accounts is quick and easy or might take years. The recent growth in the number of UK fintechs (neobanks and banking apps) has resulted in increased access to e-banking business solutions in this particular jurisdiction;
- Whether the operating cost can be reduced and accrued funds are enough for operations. Cyprus allows a series of various solutions to establish a business that meets the required level of substance that Cyprus will then recognise and apply relevant tax benefits. Many other EU countries provide virtual offices, accounting, etc.;
- Whether tax and IP preferences are available for tech companies. From an IP box regime in Cyprus and the UK to a special tax regime attracting tech companies to Estonia, different countries offer different tax and IP schemes.
Here's a table that gives a quick comparison of some of the most popular jurisdictions for registering a startup.
Incorporation is done. What’s next?
As soon as you’ve chosen a jurisdiction, and have all the paperwork and company’s registration done, your major business operations can begin. You must now attract clients — either B2B or B2C — and need to ensure all the activities are regulated properly. It is vital for SaaS / Marketplace businesses to have Terms & Conditions, Privacy & Cookie Policies, and Licence & Publishing Agreements covered. The list of the required documentation depends on the type of business and is adjusted on a case-by-case basis.
What do founders need to know before they start fundraising?
When it's time to fundraise, most businesses consider attracting outside investments. The more effort put into legal structuring for the startup, right at the beginning, the smoother the fundraising process will be. Both angels and VCs pay attention to corporate and IP issues. A good investor will check to see if the cap table is “broken” or not. They will also check if the founders’ interests and options are regulated and also if business IP is protected by trademarks, patents, and a clear mechanism of assignment of the IP created by employees and freelancers to the company.
Once you get a green light for funding, the work isn’t over. Funding can trigger a new set of issues, depending on the form of the financing (advanced subscription or equity investment). Some investors prefer standard documentation by YCombinator or SeriesSeed, whilst other investors will develop super customised and unique bundles for their deals. Different legal matters should be solved at different stages of the fundraising process, from negotiating a term-sheet and carrying out due diligence to preparing transactional documentation describing business and investor rights and obligations, and regulating various post-closing issues.
How to Choose the Best Jurisdiction for Your Business
It can be a complicated process, and there’s a lot to cover, but done properly, your startup has the best chance of registering, operating, and growing.
As soon as you've decided to start a business, you should tick the following boxes to be safe and sound from a legal perspective:
- Registration stage (captable, certificate of incorporation (or equivalent), Articles of Association / Bylaws, Founders / Shareholders Agreement, Share Option Plan / Share Option Agreement)
- Operations stage (Terms & Conditions, Privacy & Cookie Policies, Licence & Publishing Agreements, Contractors & Partners Agreements, Employment / Contractor Agreements, NDAs & IP Assignment)
- Growth and Fundraising Stage (all from stages 1 and 2 + convertible loan / SAFE, or Stock Purchase / Share Subscription Agreements, Shareholders Agreement and related corporate documents).
If you need help with any legal matters arising at any of these stages, or you’re just starting out and don’t know where to begin, contact an expert at Legal Nodes to get started. From a quick consultation, we’ll allocate a dedicated Legal Manager, map out your legal needs, and mobilise a virtual legal team of lawyers, ready to solve your legal tasks.
Book a free consultation here.