Governance and Statutory compliance issues are hardly a priority for most entrepreneurs in their excitement of launching a start-up. It seems like a party pooper and something that is mentioned to them only to deflate their enthusiasm or as wasteful expenditure or a tact to slow them down from the definite success that they believe is theirs for the taking. Ignoring this critical aspect is akin to excited first time parents deciding and planning elaborately for a baby but refusing to pay for inoculations.
More than sixty percent of start-ups are derailed in some form or the other because of governance and compliance issues. Yet entrepreneurs continue to turn a blind eye to something so essential and relatively easy to adhere to.
A scourge that is more rampant in India with the romanticized “jugaad “as a strategy.
Here are the ten dumbest governance mistakes entrepreneurs make:
1. Incorporating a Wrong Corporate Entity
Your start-up could be a proprietorship with minimal reporting requirements or a registered / unregistered partnership or a Limited Liability partnership or a Private Limited company or a Public Limited company that has the maximum reporting and statutory requirements to fulfil. In addition, state laws / incentives and central schemes for start-ups offer different options for different sectors.
Advice from a Chartered Accountant or Company Secretary apart from some self-research is essential. If you are seeking funding at any later stage, then a Private Limited company is a bare minimum requirement. Conversion at a later date from one type of entity to another is cumbersome and has multiple tax implications.
2. Not Having a Founders Agreement
Research shows that companies with more than one founder have a 30% greater likelihood of succeeding. On the flip side almost 70% of start-ups with co-founders have issues within co-founders within the first two years with devastating results. You need to define upfront; what is everyone responsible for? What if a cofounder decides they want to leave? There needs to be a defined process for all these things and a clear written agreement of the understanding with which the company was started. It's impossible to take someone to court when it was never defined what everyone's role in the company was from the beginning. Cofounder fights are notorious for getting nasty, so make sure you have a formal agreement from the start.
3. Giving Accounting a Miss
Nothing is more frustrating than watching a business stall because they are playing catch up with their accounting. Innumerable instances where founders have ignored keeping proper accounts that have led to failed investor diligence to statutory penal action come to mind. Every transaction should have a record, and those records should be backed up multiple times.
4. Ignoring Statutory Compliance
Investors refuse to touch a company where there are statutory defaults. Yet it is quite common to find start-ups ignoring compliance to national and local laws without a thought. In India the law is slow but sure, which gives founders a fall sense of complacency as there are no notices or alerts for the first few years. Mostly the notices land up in year three and that is the time you are either looking for investment, or to scale up or to shut down; and in each of those scenarios this past delinquency will come to haunt you.
5. Not Protecting Intellectual Property
Founders tend to be paranoid about protecting their “Unique Idea” while it is in their head and do an atrocious job of protecting it under available laws once the business is kicked off. The business is formed based on your ideas and product concepts. Without these, you are nothing. The start-up world isn't always a fair world. Companies have stolen the ideas of start-ups before. And the truth is they can get away with it simply because there were never any protections in place. Without intellectual property protections, anyone can steal your products and there's nothing you can do about it. Document your idea and use a lawyer who is an expert in copyrights / Trademarks / patents to file for the relevant protection in the specific geography.
6. Copying Someone Else's Name or Trademark
One of the dumbest mistakes you can make is to use someone else's company name, trademark or logo. Many entrepreneurs do this all the time because they don't put any effort into checking if that name is taken. The full extent of their mistake dawns on them when they receive the inevitable 'Cease and Desist' notice. They then have no choice but to change their name and start from scratch all over again. Regardless of when this happens, it's going to cost you a lot of money. Just because you are small doesn't mean that people are going to let things slide when you infringe upon their trademark or don't tell the full truth to investors.
7. Mixing Accounts
Mixing personal and business accounts is notoriously common among start-ups. Particularly when it comes to loans taken from friends and family. It has tax implications apart from making it very difficult for an investor to decide on the actual sums invested and value of assets created.
8. Ignoring Human Resource Regulations
While accounting is a statutory requirement and founders grudgingly and often forcibly act due to statutory compliance pressure through auditors, they completely ignore laws related to hiring of employees and regulations related to that. It is pertinent that in India laws regulating employment outnumber laws related to financial transactions by a factor of fifteen! It may be some time before you actually decide to take on employees.
This is fine, but when it does happen you must have the right protections in place. For a start, you should have agreements with your employees regarding whether they can start side projects and whether they can reveal your ideas and trade secrets.
9. Not Using Experts
Founders being cash strapped tend to cut on expenses for chartered accountants, lawyers and company secretaries in the mistaken belief that these can be caught up with later. Nothing could be further than the truth. Invest in professionals and setup proper frameworks to ensure your company, investors and employees are protected at all times. As your company grows and the number of relationships / transactions grow manifold; it is imperative that all deals are legally tenable and setup on a sound basis.
10. Paying lip Service to Governance
An effective and implemented governance framework gives an investor confidence about the maturity and decision making process of the company apart from proof of adequate checks and controls. Whether it is financial controls, roles and responsibilities, board meetings, advisory board meetings etc; it is essential that these be conducted in the spirit that they are meant for and not as a formality or a farce.
While the above are no means comprehensive and neither do they substitute a good idea and revenues, they do have the ability to stall your business and play spoil sport when you least expect it. Taking care of the above displays the right corporate behavior and provides confidence to all stakeholders thereby laying a foundation for long lasting success.
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