Startups: What are the legal implications?

In today's world, it is increasingly common to find companies related to the world of technology. This type of company has a series of characteristics that differentiate it from small and medium-sized companies in other sectors. 

Generally, startups arise from a technological idea whose inventor/s need a financial boost to be able to carry it out. Therefore, it is very common to find in this case that the inventors or developers of the idea or business are more concerned with obtaining the financing to carry out the project than with other aspects of a legal or fiscal nature, which, however, are of great importance to ensure the smooth running of the business.  

Therefore, before starting to analyse each of these aspects, it is essential to understand what exactly a start-up is and how it differs from an SME.

What is a Startup?

A Startup is a start-up companywith high innovative and technological potentialwhich have a model of scalable business which allows them to to grow exponentially.

Therefore, one of the main differences with small and medium-sized enterprises, is that in one Startup growth expected is highly exponentialwhile the SMEs tend to have more sustained growth.

In addition, due to the characteristics of the business, there are other aspects that make them different, and the regulation of these aspects is essential for business continuity (i.e. intellectual property, etc.). 

Once the idea is in place, it is important to determine the estregal structure through which the business is to be conducted. Generally, in such cases it is important to do this through a joint stock company.

Therefore, one of the main decisions to be made is whether to operate through a Limited Liability Company or a Public Limited Company.

Generally, the option chosen is usually through a Limited Company as the requirements, mainly in terms of capital and disbursement, are lower. In the case of a limited company, the minimum initial outlay is €3,000, whereas in the case of a public limited company, the minimum capital is €60,000.

Once the legal form has been chosen, the incorporation of the company will be carried out in the presence of a notary and its subsequent registration in the Commercial Register.

Partnerships in Startups

It is very common for this type of project to be carried out by several people, each of whom brings different elements to the development of the project.

Although the rules governing the company are contained in the Articles of Association, which are approved at the time of incorporation, it is very important to regulate other aspects that may be of vital importance to ensure the continuity of the business.

It is therefore recommended to subscribe to a shareholders' agreement which regulates in addition to some aspects already foreseen in the Statute, others which, by their nature, are not included in the same but which may nevertheless be relevant to the smooth running of the company.The company's management is also responsible for the management of the company's assets, such as the entry and exit of partners, the distribution of dividends, etc.

In another of our articlesWe explain some of these agreements, as well as the importance and advantage of having such private contracts.

Forms of funding for start-ups

Once the company is incorporated, in order to be able to develop the business, as we have indicated initially, this type of companies require initial funding.

There are several forms of financing among which we can highlight:

  • Bank loan: is the most common form of financing used by companies.

  • Venture capital: In this case, a venture capital company (VC) invests in the start-up in exchange for a percentage of the company.

In this case, therefore, the SCR becomes part of the share capital and, on occasion, is even represented on the company's governing body. 

  • Business Angels: This is a private investor willing to collaborate in a business project. In this case, in addition to financial capital This type of investor also brings business knowledge, as he/she is an experienced investor.

Therefore, the main difference with SCRs is that these investors bring not only money but also their own expertise to the companies, guiding the entrepreneur to make the business as profitable as possible for both.

  • Crowfunding: It is a type of crowdfunding, in which funding is obtained through a certain number of people who generally contribute small amounts of money that make it possible to carry out the project.

Intellectual property

Another very important factor to take into account in this type of companies is the protection of your intangibles. These businesses usually base their products on proprietary technology that differentiates them from their competitors.

Therefore, in these cases it is essential to protect the idea, both from the rest of its competitors, for example by registering a patent or a utility model, and from the parties involved in the development of the project, by signing a confidentiality agreement.

Data protection

Startups generally handle personal data (customers, suppliers, employees, etc.), therefore from the moment it has access to these data are obliged to comply with data protection legislation (General Data Protection Regulation and the Organic Law on Data Protection and guarantee of digital rights).

In these cases it is essential to have good initial and recurrent advice on this matter, as a breach of this type of treatment can lead to high penalties.

Remuneration of workers: stock options o phantom shares

 Taking into consideration the high technological component of this type of business, and the need for workers with a certain amount of training and experience to develop this business, it is essential for these companies to retaining talent.

Therefore, it is very important to bear in mind that in the startup environment to remunerate employees with key positions through stock options o phantom shares. The idea is to reward these employees for the future performance of the company so that they can participate in the future profits of the company or in the event of a possible sale to a third party, on the understanding that these employees have contributed significantly to increasing the value of the company during their years of association.

However, through the stocks options workers would enter into the share capital and minority groups of shareholders could be formed that could come into conflict with the majority shareholders of the company, with the consequent problems that this entails, in the case of companies phantom shares these are economic rights linked to the value of shares/equities in a company, but in no case do they acquire the status of a shareholder of the company. 

Taxation of startups and tax advantages

Another fundamental aspect of this type of company is its taxation, as it can benefit from certain allowances or deductions, which we will analyse in a new article on this subject.

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February 10, 2024
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