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Structuring an Emerging Market Start-Up — Part I

At Digital Spring Ventures we think that smart structuring is important for any start-up. For emerging market businesses with outbound plans, a well thought out structure that works for your ambitions — and needs — is even more critical.

Step 1: Set up “a” company early on

It’s not uncommon to find a group of people who have been working together on a product or business idea for quite some time that have not yet set up a legal entity to secure their business. However, whether your start-up is based in Vientiane or the Valley, establishing a basic corporate structure from early in a business’ life should be a top priority for any founder who has evolved from the Starbuck’s table-for-one stage to developing his or her great idea with a team.

Get an operating company

While it doesn’t mean you need to create a multi-layered, multi-jurisdictional behemoth group structure just yet, putting in place your first simple “operating” company now will likely save headaches in the future and put you on the right track for success. Indeed, while getting your early-stage business neatly bundled into a sparkling new company may cost you a small amount of time and money, once you’re “incorporated”, a whole host of advantages are readily available, such as:

Clear allocation of ownership

Due to (quite properly) focusing on product development and running on a bootstrapped budget, in the early stage of a business promises are often quickly made (and sometimes differently remembered) around who owns what from the outset, what later joiners will receive, and how service providers and freelancers might be rewarded with shares rather than cash.

While equity incentivization is an industry-wide practice that investors strongly encourage, if not administered and recorded properly, issues including ambiguity around exact ownership of a business can arise. A lack of clarity as to who holds what economic rights sows seeds for future division and discord amongst founders, team members, and even early investors. Worst of all, it can even result in distraction from the job in hand — building the business.

 

While it’s not always essential to actually issue shares (indeed options over shares subject to vesting and differing “leaver” treatment are often a better solution as your team and business grows) — or even strictly necessary to already have a company in place to clearly record ownership agreements — it’s in everybody’s best interests to clearly agree ownership from the outset in writing. Having a basic corporate “capital table” to work from is usually the clearest, easiest and most robust way to administer this as the number of stakeholders grows.

Intellectual property protection

There will likely be a multitude of people working for your start-up at different times, whether as employees, external contractors or, at an early stage, even friends and peers under no formal contract. While it will sometimes be clear that certain innovations, product features or code may be attributable to certain team members, many others will likely be the result of collaboration and improvement by a changing composite of people over time, some of whom may not stay with the business in the long term.

From an investor’s perspective, any lack of certainty as to formal ownership (or at least usage rights) of the product or any critical intellectual property being created or used by your business not only undermines your professional credibility but may diminish valuation or, in extreme cases, even investability of the business.

As such all business-critical intellectual property must belong to the corporate structure that investors are putting their hard-raised dollars into. The automatic vesting of intellectual property into an “employer” company cannot be guaranteed under local law in many jurisdictions, so the simplest step to protect your businesses is to have all people involved in product development in any capacity whatsoever sign an agreement at the outset with the company assigning all intellectual property to the entity.

Other benefits

Trading through a company from the get-go has a host of other benefits for a start-up: your ability to conclude contracts on market terms with certain counterparties may be improved (be it customers, suppliers, landlords or lenders); taxable losses arising particularly during the R&D/pre-revenue stage may be more easily protected and carried forward in some jurisdictions than if you incorporate later; and banks and certain types of corporate clients will find it easier to digest working with a corporate SME rather than a disparate group of individuals.

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Structuring an Emerging Market Start-Up — Part I
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