3 Critical Reasons Why Legal Compliance Is Important For Every Startup At Every Stage
This is a Guest Blog by Mr. Himanshu Gupta, Founder and CEO, of Lawyered – a legal tech startup.
The startup culture has burgeoned in India making the country a startup hub. Multiple founders and entrepreneurs enter the startup ecosystem everyday to set up a highly profitable business. These founders start small with fewer resources, smaller teams and get occupied with managing different tasks. The majority of startup founders grind themselves to innovate a product and disrupt the market but focus on legal factors in the end.
For a majority of startup founders, legal aspects are considered as a task that is restricted to just completing documentation and formalities. They push the legal aspects for later stages or when the business grows. This is the foremost reason why around 80 percent of startups fail or have to shut down in the initial stage of building a foundation. The startups often do not realize the significance of compliance function.
In the real business sense, compliances are born even before the business itself and grow with it. A new company or a startup not meeting its legal obligations fail at maintaining its business’s health and ensuringthe welfare of its people. It further results in long-term consequences that impact business operations and brings monetary losses. A similar incident happened with a startup – Bluegape, an online merchandise store with a focus on selling fanart. The company was recording a monthly revenue of INR 1 crores, however, had to face legal issues and shut down due to copyright concerns raised by real artists. This made the founders drop the idea of using fanart which accounted for more than 70 percent of the company’s revenue and moved on to develop a different business idea.
Why Legal Compliance Matters?
The main aim of startup founders is to earn profits stay competitive in the market. In the race of staying ahead, it becomes difficult to look into the legal requirements to operate the business ethically. Thus, legal compliance is like a wheel of a chariot that drives the business forward and makes it sustainable.
In large organizations, legal compliance can be managed by dedicated resources. Additionally, if any large organization faces a lawsuit, it can make judicious use of its resources to manage the damage and losses. However, in smaller organizations, legal compliances are handled in an informal setting which is limited to the knowledge of the CEO, Finance or HR Head. Thus, failing to adhere to legal standards from the beginning may lead to the imposition of heavy penalties and fine that disrupts business operations and further leads to shut down.
Improved business operations and safety
Complying with a range of laws and standards can offer several benefits to entrepreneurs. For example, abiding by the rules of anti-discrimination can help an organization create a better place for work for diverse people.In this regard, The Prevention of Sexual Harassment (PoSH) at Workplace Act of India has also been implemented. It enables organizations to define sexual harassment policies, prevention systems, procedures and service rules for its employees. The adoption of such policies results in positivity in the work environment and improved productivity. On the other hand, if a startup does not have any strict rule of anti-discrimination in place and later a dispute arises between a set of people, it will have to face serious legal consequences. Meeting the legal obligations and making it a regular practice ensures improved business operations and safety.
New businesses and startups are in the race of meeting their deadlines. They spend ample time in finding and hiring the right candidate for their team. However, they tend to overlook having hiring policies in place. To develop a healthy and professional work environment, legal compliance is imperative for the welfare of the people. Thus, startups must make their employees sign employment contracts upon joining the company, regardless of the size of the company and have certain clauses like confidentiality, IP ownership, non-compete, etc in place. A strong HR policy and procedure build a sound relationship between the employer and its employees, resulting in higher retention.
Reduced risk of reputation damage and losses
People show interest in an organization having a good reputation. Non-adherence to any legal aspect can affect the company’s market reputation. It increases the chances of heavy fines, penalties, lawsuits and even shutdown of business that directly impacts the company and its founders’ reputation. There are various types of legal troubles that harms the reputation of the company including intellectual property issues, community issues, etc. In this regard, hiring a compliance expert can help save startups and new businesses an enormous amount of their monetary resources and reputation.
As a startup or business owner, it is tempting to cut down expenses and save in the initial stages of setup. However, legal compliance is an investment not an expenditure. A few bucks spend today will save you from parting with an exponentially higher number in the future. It makes the business ethical and compliant to keep it away from legal crisis.