This presentation gives an overview of key legal issues that our faced by start-ups with a specific focus on some key Term Sheet terms and questions that emerge with respect to intellectual property

1. ©PSA 2015
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Legal Counselors
Key legal issues in the start-up
ecosystem
Dhruv Suri
Co-head, Victus and Principal Associate at PSA
February 03, 2015

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Legal Counselors
Startups in India: A Number Game
The 2014 NASSCOM Startup Report unveiled the following statistics:
•~3100 startups in India
• India is the 3rd largest startup ecosystem globally
• 800+ startups setting up annually making it the largest growing startup
industry
• By 2020 there would be ~11500 startups; employing over 250k people
• ~300 VC/ PE & ~225 angel investment deals worth over USD 2 billion
• Over 20 M&A’s worth ~USD 1 billion in last 3 years
Digital platforms, social media, online clouds, etc.-
easier to start a busy than ever before
BUT
Scalability is the hard part

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Legal Counselors
“The Indian startup ecosystem is rapidly evolving driven
by an extremely young, diverse and inclusive
entrepreneurial landscape. This is leading to emergence
of focused domain solutions for verticals like healthcare,
agriculture, and education etc. An additional driving force
is a four-fold increase in access to capital through VCs,
angel investment and seed funding is allowing Indian
entrepreneurs to work on building tailor-made products
for their customers. Simultaneously, we need to also work
addressing challenges on creating supportive government
policies in terms of ease of doing business, tax incentives,
participation in government contracts, availability of risk
capital etc. NASSCOM will continue to actively engage
with stakeholders across to address these challenges.” –
Mr. R Chandrashekhar, President, NASSCOM

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Legal Counselors
Roadmap of our discussion
• Funding
• First steps
• Things to think
• Term Sheets and not Term(inate) Sheets
• Key terms and negotiations
• Closing, post closing and next steps…
• Intellectual Property
• What is it?
• How do you even know you have created an IP?
• Is my IDEA protected?
• Why is IP protection so expensive?

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Legal Counselors
First Steps…
Traditional sources of raising funds
Family Friends Banks

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Legal Counselors
Contd…
•Venture Capital Firms:
Established companies/firms.
Pros:
oAccess to a fatter pay cheque
oExperienced Investors – can add value
to running of the business
Cons:
oLong and cumbersome process
oProof of Concept and Revenue
Visibility
oReturns sought are high
•Angel Investors:
High net worth individuals.
Pros:
oPatient Investors, remain invested
for a longer period
oQuick access to funds – deal
closing doesn’t take much time
Cons:
oNeed to have a strong professional
network/contacts
oNeed to show capital efficiency of
the business idea
New trend: Investors disregard stage of the start-up

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Legal Counselors
Things to Think..
• Research the investor and
its experience
• Analyze market and
economic
conditions
• Enough capital to allow
for some slippage in
your business plan?
• Additional funding
permissible or any
restrictions?
• Voting rights and
control- Board and
Shareholder
• Exit clauses and
redemption of
shares
• Can the investors
unilaterally replace
the management
team?
• Has the firm completed their
due diligence? Impact of the
“no shop” clause.

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Legal Counselors
Negotiate to build a symbiotic relationship
Prepare
Understand
Maximize
Pay attention to non-monetary provisions

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Legal Counselors
Key Terms of the Term Sheet
Valuation is key…… but not THE most important thing!
Agree on a pre-money and post-money valuation
Put/Call options
Anti-dilution
clauses
Right of First
Refusal
Types of
security
Tag Along/Drag Along
rights
Liquidation
preference
Dividends
Voting rights
and control
Redemption

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Legal Counselors
Mistakes Often Made by Founders
•Unsure about Capital Requirement
•Seeking funding too early
•Overestimating future revenue
•Underestimating expenses
•Raising too much/too little money
•Not consulting experts for negotiation: Case in point –

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Closing/Post Closing
Typical roadblocks
RBI reporting ROC filings
ESOP Scheme
Companies Act compliances- private
placement, rights issue, etc.

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Intellectual Property
Power of IP…
=

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Legal Counselors
Contd…
“The empires of the future are the empires
of the mind” - Winston Churchill

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Legal Counselors
COPYRIGHT PATENT TRADE MARK
Protection original literary, dramatic,
musical, artistic works,
cinematograph films, and
sound recordings
Inventions Brand, logo, symbol,
domain names, etc.
Term Generally, author’s life + 60
years
Max. 20 years + Annual
renewable fee
10 years + Renewable
Jurisdiction District Court where
plaintiff resides, does
business
District Court where
infringement arose, often
transferred to High Court
if counter-claim for
revocation
District Court where
plaintiff resides, does
business
How is ownership
established and
registration
required for
judicial action?
Established upon author’s
creation; Registration not
required
Must be applied for and
granted; Enforceable
upon publication of
application;
Assignee/licensee must
then register as such
Established by
registration, required for
infringement action; OR
established by first use,
registration not required
for passing off
Who can enforce? Owner/holder/proprietor, valid assignee, or exclusive licensee

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Legal Counselors
IP for Start-ups
Not protecting IP
Not defending or spending too much in
defending IP
IP in contracts with customers, vendors
and….EMPLOYEES!
Self diligence- infringing someone’s IP?
Trade secret? Welcome to India!
But..
What about my IDEA?

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Legal Counselors
Thank You