Boring Stuff Thats Critical To Your Startup’s Existence

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Apologies for the long gap since the last post on startup financing…been busy at work. This post is full of some of the most boring activities that any of your entrepreneurs will be doing in your start-up. But, if you really want to build a business and get rich and famous, and not screw up on the way, you might not want to bounce off this page.

So here’s what we are we talking about today:

Legal & Regulatory

• Incorporation – legal entity for the venture
• Account numbers, PAN cards, TIN etc.
• Contracts
• Company Secretary
• Corporate intellectual property – brands, trademarks, patents

Accounting & Finance

• Managing your books and finances
• How to take care of your working capital
• Filing all your documents
• Paying your PF and sales tax on time

[For those of you new to this series, please read the introductory post here.]

Anyone who has spent anytime in India, let alone do business here, knows that it is a “functioning anarchy” (as labeled by the famous economist JK Galbraith who was US Ambassador to India in the early 1960s). Well lets add to that the view that the system will make your life chaotic. There is tonnes of paperwork, bureaucracy and mindless stuff that takes away from your productive time. If you are in default on certain kinds of paperwork or activities, either the authorities (tax, regulator, local government etc.) will harass you or your prospective investor (if not then definitely their lawyers) will think of reasons why your affairs are not in order and use this as a negotiating tactic. And, nobody wants this type of a situation to occur…..so, lets get this boring party started.

Legal & Regulatory

• Incorporate early: I know we have referred to this before, but I really want to re-emphasize how important this legal hassle is to get out of the way as soon as possible. The process should not be underestimated.

One major advantage of incorporating early is that you can you can start booking all your expenses related to the start-up in the company itself. This can be hugely beneficial to you later, if you want to be able to use your tax loss carry forwards if your venture is not yet earning taxable income.

Also, VCs might just take you a little more seriously if you have incorporated your business – they know that they can get shares in your business. If there isn’t even a legal entity, it might just slow down the process of you getting anything out of them.

• Its a numbers game: Get your corporate PAN card and TIN card (tax identification number). Also get your sales tax and/or service tax registration numbers. If you don’t have these numbers, often your forms etc. will not be accepted by the authorities and you might have to pay penalties. Nobody likes companies who have broken the law, however minor the infringements might be.
• Its also a license game: You will need to get a Shop & Establishments Act license if you are running a service business. Every state in India will have its own version of the Act. Ask any lawyer who might be asked to conduct due diligence on you, and this will often be the first thing they will check that you have a license for. If you think that this is not important, just remember that in February 2008 the Supreme Court dismissed an appeal paving the way for the Karnataka police to pursue the prosecution of the former CEO of HP’s BPO for the violation of the Act which resulted in the rape and murder of an employee when this person was CEO of the business.Another registration that you will need to get done is for your Provident Fund. When you get above 20 employees, you will have to start deducting PF from their paycheck. You might not have a choice in the matter.
• Start seeing a lawyer: A good lawyer can save you a lot of trouble, especially if you do not have any commercial sense within the founding team. A good lawyer can be worth his/her weight in gold. I know many of you will probably faint at hearing the hourly cost that lawyers will charge (anything from $100 – $300 per hour). But, that’s going to be worth spending if the lawyer will help you negotiate favourable contracts, not least of which will be a term sheet and shareholders agreement that you will sign with your investors.

Don’t make the mistake of being short sighted and save on lawyers fees only to realize a few months down the line that a term in the contract that you signed holds you personally liable. Ignorance of the law (or the effect of the terms in the contract) is not going to be any defense. The following are contracts/items where I would highly recommend that you get legal help:

• Term sheets, shareholder contracts, employment contracts
• Regulatory filings with the government, especially if you are raising money from a foreign investor (and most VC money in India today is foreign money)
• Real estate leases
• Any other materially relevant contract you are about to sign, choose your own definition of materiality, but I’d say anything around Rs 2 lakhs and above could be material
• Protecting your intellectual property – register your trademark etc. as soon as you can, otherwise you will be vulnerable to others being a parasite on the goodwill that you would have created with your brand

Even if you cannot afford a lawyer because you are really bootstrapping, then find a lawyer friend or someone who is familiar with what you might be about to sign. Please do not get rushed into signing anything where you do not understand what you are signing up for.

• Hire a Company Secretary (and I do not mean Ajit’s Mona darling): The Indian Companies Act will cause you more problems than you will ever have time to get familiar with. For instance, if you want to open a bank account, you’ll need a board resolution. If you want to open a fixed deposit account for your company, you’ll need a board resolution. You’ll need to have quarterly board meetings, maintenance of a shareholder register, maintenance of statutory registers, board meeting minute books. Not the kind of sexy stuff that was drawing you to become an entrepreneur.

Outsource of all this to a Company Secretary. All these are documents that lawyers will go through in detail when your proposed VC is conducting due diligence on you. If your governance is out of order, it can delay many things for you, not least of which is timing of your funding.

If you are a director of the company, ensure that you get your DIN details, as well as your digital signature. Your Company Secretary ought to be able to help you with this.

Accounting & Finance

• Separate your personal and company accounts: If you have incorporated your company, start to differentiate between your personal spend and what the company spends on business related items. You don’t want to show a higher cash burn just because your holiday was expensed to the company, even though the company might be living off your initial capital invested into the company

• Hire a bookkeeper: Even though it might be too early to hire a CFO type person during the early months of your company’s existence, its not too early to get a part-time bookkeeper. You will need someone to help maintain your ledgers and figure out all your bills etc. (and hopefully your revenue cheques coming in). Often start-ups fail to take care of this aspect of their corporate housekeeping and this becomes a huge problem with a very long backlog to process. Get into the habit of maintaining up-to-date books. A simple bookkeeping software like Tally will not cost you that much, and will save you a lot of hassle.

• File in the top shelf: Running a company involves a lot of paperwork. Keep a good filing system so that you have ready access to basic documents like your latest accounts, memorandum and articles of association, certificate of incorporation, board resolutions. In fact, get about 20 copies of each. You will need to give copies of these documents to almost every counterparty – whether it’s a bank, or the company that gives you phonelines in the office. A well organized filing system will also help you during your due diligence process with the VC or any investor.

• Decide what you will do with your liquid funds: Whatever money that you have invested into the company or have received from angels or VCs needs to be put into a bank. Figure out what your cash needs are going to be in the next 3, 6, 9 and 12 months. Accordingly, any cash that you do not need immediately, you should consider putting it into a safe liquid fund where you will earn a higher and more tax efficient return than a from savings account or fixed deposit. Remember, many start-ups don’t fail because they did not have sales, but because they did not manage their cash flow well. You might have made lots of sales to customers, but they might be delaying paying you. In such a situation, do you have enough liquid cash to be able to pay your employees? You need to put some thought into managing your cashflow.

• Pay your dues to the government on time: You will need to pay service tax to the authorities on a monthly basis. Don’t delay, there will not be any upside to this at all. Likewise, there will be monthly deadlines for you to pay your contribution towards the employee provident fund, and you should not be delaying these payments. And, if you business is already making taxable income then you will have to pay Advanced Tax on that income.

If you have contractors or vendors who you have to pay directly, then you will also have to deduct tax at source and pay this to the government. This is again an important reason why its worth having at least some one to maintain your accounting books so that this person can attend to these things while you go about building value in the business.

Many of the things that I have discussed above are habits that you should be acquiring early in the life of your company. Otherwise, your back office and governance will be completely chaotic. Every new venture faces lots of uncertainties. However, legal and accounting are areas that can be within your control. Once you set up robust processes internally, you can be rest assured that you are in compliance with anything the authorities might bother you with. You can also then focus all your physical and emotional energy on operating issues surrounding your business and its customers.

So like I said earlier on, this is boring stuff, but vital to the existence of your business. Many of you might disagree with a lot of this, and if so that is great. Lets hear your view on why these things aren’t important.

The next post will look at questions that you should be asking a VC when they are considering investing into your start-up. Till then, start working on some boring stuff….

If you have any questions or comments please email them to startup@iTrust.in.

The author is a co-founder of a financial services start-up, www.iTrust.in.