Start-Ups Require Focus On Legal Matters

Start-Ups Require Focus on Legal Matters

Mireia Paulo, Director of the European-American Market

The phenomenon of start-ups is spreading throughout the world, but do young entrepreneurs know that legal issues can put the success of their new businesses at risk? What role is China playing in the field of start-ups?

China is already considered as the Asian giant, not only because of its fast economic development in the present, but also because of its great inventions throughout history. Now, in its economic swing, China once again intends to be known for its innovation, leaving behind the perception that it is a country that only makes counterfeits. Such is the objective of the Government of the People's Republic of China, which has been investing the equivalent of millions of euros in the creation of new technology companies, a firm and substantial commitment that far exceeds that which is invested by Europe.

What exactly is a start-up?

To answer this question, we only have to think about Tencent and its flagship app WeChat, or Google and Facebook, powerful companies that have thousands of employees yet which began life as humble start-ups. Behind this term, we find companies with a high technology component; they do not manufacture or export, and they commonly operate on the Internet. This offers the potential for high scalability thanks to the demographics a start-up can reach and the low economic costs to developing the business.

As for the funding of start-ups, the first steps concern the classic ‘three Fs’ (Family, Friends and Fools). After that comes the seemingly endless series of funding rounds, raising the necessary capital through Business Angels or other types of investors from Venture Capital to Private Equity. Moreover, within the start-up ecosystem, incubators and accelerators help entrepreneurs to materialize their ideas, but it is important to know the differences between the two in order to understand which one can help one’s project.

Incubator or accelerator?

These two types of company are typically associated with two different stages in the development of a start-up. Incubators are intended to be used in the early stage of a start-up, providing physical spaces, material resources or even counselling. Meanwhile, accelerators take action after the creation and the beginning of the project, accelerating the process that the incubator has already started and helping to scale the business. In both stages, entrepreneurs can count on the support of Business Angels as long as they consider that the project can be successful in the market. In this respect, China is not lagging behind. There are already countless incubators and accelerators assisting start-ups. One example is Chinaccelerator, one of the most renowned accelerators in China, which supports start-ups from around the world.

Legal focus

When entrepreneurs have the idea, the kick-off, the incubator, the accelerator, and the funding from investors… what can go wrong? Well, there are actually several legal issues that commonly arise among start-ups.

First of all, start-ups may have issues related to intellectual property rights. This usually happens when the company does not properly file for trademark registration. This happened in the case of Pinterest, one of the most famous social networks worldwide, which had issues using its name in Europe because, by the time they wanted to file for trademark registration, the name Pinterest was already registered by another company. Copyright ownership may also raise issues, since some companies do not register properly their own content or they fail to comply with the legislation regarding content already registered.

There are also financial issues that arise when a person invests in at recently-set up company and it turns out that this person does not meet requirements established by the law to be an “accredited investor”; in that case, the company is subject to fraud. Also, in many countries, it is illegal for the start-up to contact prospective investors to try to persuade them of an investment opportunity, unless the investor and the company have a pre-existing relationship.

Despite these matters, there are many other legal issues that occur in the world of start-ups, such as misunderstandings among co-founders as a consequence of not signing founder agreements, violating employment laws due to the incorrect hiring of independent contractors, problems assigning the IP to the company (as was the well-known case of Facebook’s Mark Zuckerberg and the Winklevoss twins), and tax-related issues.

Therefore, taking into account the importance of legal issues in the field of start-ups, we must consider the relevant position of an attorney that, from the beginning, can offer legal advice about commercial, tax, financial, and intellectual property matters according to the jurisdiction of the country where the services are provided. We cannot forget that start-ups are intangible ideas that people strive to turn into something with presence in the real world, where an attorney is responsible for protecting such ideas and ensuring the right development of the start-up.