Startup in Belarus: information and services of a lawyer

A startup in the broadest sense is a company with a short history of economic activity. In a narrow sense, it can mean a company in the field of information technology that needs investments (IT start-up).

Startup financing takes place in several stages. Its sources can be:

• seed investments;
• angel investments;
• venture capital funds;
• mixed forms.

Startups often register in multiple jurisdictions. The complex legal structure of companies does not always bring the expected result. A simple and understandable structure will avoid additional costs. However, at a certain stage, the foreign investor may have the last word on this issue. Consequently, lawyers from different jurisdictions may be involved in the packaging of a startup.

Contact details of the responsible person: Skobey Andrey Nikolaevich, investment lawyer, you can contact him by phone (+37529 1102388) or by e-mail (info@legaltime.by).

The choice of the legal form of a startup.

Consider several legal forms in which a startup can be created. The most common is a limited liability company (abbreviated as LLC). Members are not liable for the obligations of the LLC. Participants bear the risk of losses within the limits of their share in the authorized capital of the LLC. With this form, you can engage in almost any type of activity.

It is worth considering that accounting services and the appointment of a director of an LLC will be required. At the first stages, it is better to use accounting outsourcing. The minimum size of the authorized capital is not defined. Based on the foregoing, we can say that this form is most acceptable for a startup in Belarus.

Individual entrepreneur.

This form is simpler in terms of taxation and management. Registration of an individual entrepreneur takes place at his place of residence. Work in this quality is possible with small projects that are implemented mainly individually. With this form it is quite difficult to attract funding for the project.

Joint-Stock Company.

There are two forms:

• OJSC (Open Joint Stock Company);
• CJSC (Closed Joint-Stock Company).

In a CJSC, shares are distributed among a limited number of founders. However, there are no such restrictions in OAO. Shareholders are not liable for the obligations of the joint stock company. Consequently, shareholders bear the risk of losses to the extent of the value of their shares.

There is the possibility of issuing shares of both preferred and ordinary. The issue of shares is accompanied by their registration with the securities department. Failure to comply with these requirements may result in administrative liability.

Most often, domestic startups use such an organizational and legal form as a closed joint-stock company. You can often hear from lawyers about the shortcomings and lack of expediency of creating this organizational and legal form. However, a closed joint stock company has many advantages.

Do startups enter HTP?

The startup may try to join the Belarus Hi-Tech Park (see the link for details). Is it realistic to put into practice? The HTP is not set up to accept loss-making companies, that is, companies with negative profitability. But it is startups that are unprofitable in the initial period of their activity. If this were not the case, then venture capitalists would disappear. Since all startups would be immediately self-sustaining.

However, if the project is highly innovative, the OEM may make concessions in terms of profitability. In addition, obtaining revenue is often not a long-term business for a startup, and it is able to ensure that minimum profitability indicators are met by the end of the planning period. In any case, it is worth understanding that each case is individual.

Registration of relations with startup investors.

How to transfer funds for the development of a startup? How not to lose the invested funds? How to keep participation in the startup of the original team? The first way of investing under consideration is when an investor acquires a corporate stake in a start-up.

Let's look at the example of an LLC, since an LLC is the most acceptable organizational and legal form for a startup. First of all, the investor can make a contribution to the authorized capital in connection with the registration of the company. Or an investor can acquire participant status by making an additional contribution to the authorized capital.

This shows a significant advantage of the LLC over the joint-stock company in terms of law. In the LLC, a disproportionality is possible between the participant’s contribution to the authorized capital and the acquired share. Indeed, often proportionality could lead to the fact that the share of start-up creators will be scanty. This state of affairs could adversely affect motivation. Indeed, in this case, in fact, the creators of a startup become simple hired employees of an investor.

A loan as a way of investing a startup.

A simple loan is often a means of investing in situations where, for some reason, obtaining a corporate participation by an investor is not acceptable. This method has its pros and cons. The main disadvantage is that a simple loan can be called a way of investing only very conditionally. After all, under a loan agreement, only monetary relations arise. Formally, the investor will have nothing to do with the development of the company.

If the investor is not returned the loan, he will be able to initiate bankruptcy of the incorporating startup structure. And, under certain conditions, bring the founders and the head of such a structure to subsidiary liability.

The advantage is that the founders of a startup, in exchange for investment, are not obliged to “let the investor into the house”. If the startup is successful, they can simply return the invested funds with interest to the investor. And leave the company behind or attract another round of financing through the sale of corporate participation (sell the company to the end investor). It seems that this method can only be suitable for small investment amounts. Therefore, this advantage does not cover all the risks of a loan.

Convertible loan.

A convertible loan should be distinguished from a simple loan. This legal instrument was introduced into the Belarusian legal system quite recently. He hasn't shown himself yet. In essence, the difference between a convertible loan and a simple loan lies in the fact that a startup must, under certain conditions, make a counter execution not in the form of a return of funds, but in the form of providing a corporate participation to the investor. This mechanism is very rational and is used in the field of venture investment in many jurisdictions.

There are also other ways to invest in a startup, such as a simple partnership agreement, buyout of a company's share in its own authorized fund. However, we will not dwell on these tools in detail. They are so rare in law enforcement practice that to describe them is only to create confusion for the reader. An experienced investment lawyer will suggest one of these ways if your startup needs it.

Protection of intellectual property of a startup.

A startup has as the most important object of civil rights in its activities not things or securities, but objects of intellectual property - programs, trademarks, graphic images. Therefore, it is impossible to legally form a startup without building a system for protecting intellectual property. After all, it is this aspect that venture investors pay attention to when they require a report on the results of a legal audit of a startup.

The correct structure of work with intellectual property in a startup helps to avoid litigation in the future on this issue.

Firstly, it is necessary to conduct a legal audit of the objects of intellectual property already created at the time of contacting lawyers. Secondly, it is necessary to build such a system for protecting intellectual property rights. Which would help to avoid problems with its protection in the future. Intellectual property protection takes place, among other things, within the framework of contractual formalization of relations with contractors. As well as registration of rights - trademarks, computer programs, both in accordance with Belarusian and foreign / international law.

Registration of labor relations with employees.

Also an important aspect when registering an IT startup is the correct registration of labor relations with employees. First of all, it is necessary to clearly distinguish between works created by the employee independently and works created by him as an official assignment.

References to the fact that everything created by the employee during working hours is the property of the employer cannot be considered legally sufficient. It is necessary to spell out in detail the duties of employees in the contract and job description, to correctly draw up each specific job assignment. Objects that are not created within the framework of official duties must be transferred to a startup in accordance with the author's agreement.

Trade secrets and non-competition in a startup.

An equally important issue is the conclusion of a non-disclosure agreement (NDA). An NDA is a legally binding agreement that serves as an intellectual property instrument. Protection is manifested in the impossibility of disseminating startup ideas to unauthorized persons. NDA needs to be signed not only with startup employees, but also with subcontractors.

The Decree “On the Development of the Digital Economy” opened up new legal opportunities for HTP residents in the field of labor law. Now HTP residents can enter into non-compete and non-solicitation agreements. Which is impossible under general labor law.

Using these conventions is critical for a startup. Since often measures to protect intellectual property and trade secrets are not enough to ensure the legal security of a startup. Transferring his competencies to a competitor, an employee can do more harm than violating the NDA.

At the same time, these agreements cannot limit the employee's right to carry out entrepreneurial activity as an individual entrepreneur. Therefore, there is no need to talk about the perfection of these methods of legal protection for a startup.

Read our blog posts on similar topics:

• Registration of a cryptocurrency exchange in Belarus. On the conditions for opening crypto startups in Belarus, answers to the most frequently asked questions by investors.
• Registration of LLC in Belarus: procedure. On the procedure for registering a limited liability company in Belarus.
• Open an LLC in the Republic of Belarus. On the specifics of a limited liability company as an organizational and legal form, its creation and activities.