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Importance of Legal Consulting for a Startup Company

By Sreemoyee Malakar, Head- Knowledge Management, FormulateIP TechnoLegal Solutions

2010-2020 has been marked as the ‘Decade of Innovation’ in India. As per the NASSCOM Startup Report 2014, India has the world’s third largest and the fastest growing startup ecosystem. The country has 3,100 startups and nearly 800 get added every year. It is likely that the numbers would grow to 11,500 by 2020.

In addition to developing the core product, it is crucial for startups to take into consideration the legal aspects involved in each and every stage of product lifecycle. As most of the startups would not have an in-house counsel to guide them, it becomes all the more important for them to be aware of legal issues involved. Some of the most important matters which require consultation with the lawyers are highlighted below.

To begin with, during the time of registration of the company, it is important to keep in mind the trademark registration process. Often a startup would register the name of the company, without considering the trademark perspective. For example, if the name of the company is ‘ABC Solutions’, it is recommended to check the strength and availability of the mark at this stage itself. If the company is incorporated and later the startup figures out that the name cannot be trademarked, they would have to come up with a new brand name altogether!

Alternatively, there could be a scenario where another company with the brand name ‘ABC’ already exists. If the trademarks are conflicting, the other company may send a legal notice to the startup asking them to stop using the mark ‘ABC’ otherwise they would initiate legal proceedings. Such legal issues could hamper and delay the business of the startup and could be easily avoided by consulting legal advisors at the right time.

At the same time, if the product of the startup is patentable, it must be protected at the earliest as India follows ‘First-to-File’ patent rule. Patent filing could be an expensive affair and it may so happen that the startup does not have sufficient funds for the same. Legal consulting plays a very important role here as there are several strategies which the startups must be aware of to protect their invention at this stage.

Provisional Patent Application [PPA], for example, is a brilliant tool by which a startup could protect their product even when it is not complete. PPA drafting charges are comparatively lesser than final Non-Provisional Patent Application (also known as Complete Specification) and hence, the startups could easily afford it. In addition, they would gain 12 months to complete their product and arrange necessary funds to file the complete specification.

Legal documentation is another significant area where startups require proper legal assistance and consultation. Non-Disclosure Agreements, Confidentiality Agreements, Service Agreements, Employee Agreements play an important role in protecting the service, trade secrets and confidential information of the startups. At the same time, it is necessary to have Privacy policy, User Terms & Conditions, End User License Agreements on the websites and mobile applications of the startup company. At a later stage, if the startup transfers certain rights related to its product to another company, it must have License Agreements, Assignment Deeds etc.

As the startup grows and the number of employees and revenue increase, there are certain rules which come into the picture, non-compliance of which may lead to penalty. For example, Prevention of Sexual Harassment (POSH) Act was made effective from December 2013, according to which it is necessary to have an Internal Complaints Committee and an internal policy if the number of employees are more than 10. Failure to comply with the provisions of the POSH Act may lead to monetary penalty of up to INR 50,000.

Finally, if the startup is acquired by or merged with another company, a new set of legal issues arise which require detailed legal consultation and assistance. In other words, starting from registration to acquisition phase, there are various strategies and rules which a startup must be aware of in order to dodge unnecessary legal hassles. In this regard, it is crucial to consult a lawyer for proper advice and guidance at every stage of the product lifecycle across different domains like intellectual property, company policies and compliances, legal documentation etc.

A lot of effort goes into creating and developing a product or service by a startup company. It is absolutely vital to ensure that this effort does not go in vain, by complying with the law and following the legal guidelines as and when required, as recommended by a legal consultant. 

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