The Indian startup space has been on a roller coaster ride in the last few years. The years leading up to the Covid-19 pandemic, saw a steep increase in the number of startup ventures in India. From fintech companies to online gaming portals, there appears to be no shortage of diversity in the Indian startup ecosystem. While there are several reasons for this growth, a general inclination of younger individuals towards entrepreneurship has played a key role. But like any industry or sector, startups are also not immune to the changing market conditions. Be it changes to existing regulations or the economic environment, business plans for growth or managing funding requirements, entrepreneurs need to be constantly adapting to the changes to ensure that their ventures remain relevant and profitable.
And amidst all this, there is the need to ensure that the business and operations are run in a manner that is compliant with applicable laws. It is not a hidden fact that in the startup space, compliance is at times overlooked during the initial stages. A variety of reasons cause this however, cost, lack of previous business experience of entrepreneurs and having a small team of core members are the most common reasons. Needless to say that running your business in a compliant manner is not a recommendation but a requirement under law, but what is also key here is that a large volume of historic non-compliances may lead to value erosion for the promoters at the time of fund raise or their exits. These also leave the promoters exposed to indemnification asks by incoming investors.
Usually during initial phases of operations, startups are eligible to avail several exemptions however, as they age and grow, these exemptions are no longer available. It often happens that while something may not have been applicable to a company in its initial phase, with time and growth the requirement becomes applicable but is not adhered to because the same is not periodically monitored.
So is there a way to find a balance to enable entrepreneurs to run profitable and compliant businesses? Well there is and it is simple. Do not leave compliance as the last thing on your to-do list. There are several steps that ventures can adopt in their initial phase to remain operationally compliant with laws. The most obvious step would be hiring a dedicated legal manager that can oversee the business and operations from a legal lens, once the business is sizeable enough to invite investments, and the entity can bear the cost. More than anything, this helps ventures to timely identify any potential non-compliances and take mitigative action. Although legal compliance personnel are looked at as cost centres, their hiring it is an important step in pre-emptive actions that can be taken to save the entity from large penalties in the future.
Another step can be having templates for your customer and vendor contracts prepared by an external legal advisor. This is helpful in 2 ways. Firstly, a well drafted contract can help in minimising legal risks and secondly, by participating in the drafting exercise with counsels, promoters as well as business teams involved can gain valuable insight on how contracts actually function and what are the things that they may want to keep in mind while negotiating commercial terms with counterparties. In this regard, retainer based services for contract management and periodic legal compliance checks have proven to be of great value to entrepreneurs in the recent past.
While all of the above steps come at a cost during a phase where growth and maintaining cash flows is everything, this expenditure should be seen by promoters akin to an insurance cost that can minimise the likelihood of future legal risks, be it during fund raises or otherwise.
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