COVID-19 Legal health check for start-ups: building resilience

Kokila Alagh, Founder, KARM Legal Consultants

The COVID-19 pandemic has irrevocably disrupted our lives and the economy, thrusting entrepreneurs and the business community into the daunting realms of uncertainty, risk and volatility. The quarantine related restrictions and measures have put businesses to test and entrepreneurs are still reeling from its impact and the repercussions it has brought on to them. Similar to the myriad of vitamins and immunity-boosting health checks that we have increased in our lives to combat the virus, it is imperative for entrepreneurs and start-up businesses to build upon their business’s resilience to the pandemic as well.

The most immediate concern is navigating through the current uncertainty to develop a tenacious and robust strategy to respond to the crisis. The path to creating such a strategy is paved with legal obstacles and hurdles. It is vital to understand the challenges faced by start-ups especially in these unprecedented times.

In these unprecedented times, entrepreneurs and start-up founders can start by analysing the current market situation by identifying the key risk areas for their business, assessing the probability of each risk factor, quantifying the risk over a specific period of time to develop appropriate mitigation strategies. Using this analysis, the founders can create a crisis management plan to maintain their operational resilience. The crisis management plan should be used to anticipate the business’s operational needs to get a more realistic idea of their finances and then subsequently adopt measures to reduce operational expenses. The crisis management plan should also ideally seek to identify the priorities of the business and where to focus in order to keep the business functional. For example, the business can tap into the vast talent resources available in the market to outsource certain functions as a method of reducing operational expenses.

The key for all start-ups now is to focus on survival. Start-up founders should take this opportunity to review their business model, modify their business plan and their mission statement. The significance of modifying a business plan or a mission statement is to create a “north star” that will guide founders in making any future difficult decisions. In identifying a business model best suited for your start-up, founders will need to consider multiple factors including the potential liabilities and responsibilities they wish to take upon themselves, their capital contributions and their proposed business activities. At this time, start-ups can also look into expanding into other regions to seize any opportunity to diversify their business and tap into potential markets.

It is imperative for start-up founders, at this time, to ensure that they establish strong legal foundations and an effective corporate governance regime. Their chosen business structure and the obtained license from the regulatory authorities should align with their business plan and mission statement. Start-ups can maximise their ease of operability by adopting efficient corporate governance policies for faster decision making. Start-ups should seek legal and professional advice in ensuring that it obtains all relevant approvals from the applicable regulatory authorities and adheres to all the compliance requirements imposed. Any non-compliance can create the risk of hefty fines and even restrictions or bans to their business activities.

The boon and the bane of any start-up is the funding. In these trying times, it is likely that the funding environment slows down with most investors adopting risk-averse measures and reducing any investments to protect their existing portfolios. Entrepreneurs can use this opportunity to look into new and alternative modes of finance for raising capital such as crowdfunding or tokenisation. These funding options can be heavily regulated depending on the jurisdiction. Therefore, it is important that start-ups seek legal and professional advice to identify the most suitable form of financing applicable and to ensure that at all stages of funding and financing, their business and equity interest is protected. Founders should ensure that they avoid entering into any funding arrangement under pressure and should focus on obtaining financing from trusted sources such as angel investors or friends and family.

The other integral aspect of a start-up is its intellectual property (IP). Every business can use this time to undertake a complete intellectual property assessment to identify the key IP assets that need to be protected and obtain the relevant licenses to effectively manage their IP assets. Without a robust IP protection regime, start-ups are exposed to all risks associated with competitors claiming pre-emptive rights. Further, registered IP rights increase the commercial value of any start-up that could increase potential funding options.

Now more than ever, entrepreneurs and their start-ups have to create a resilient business plan and strategy to survive the pandemic and mitigate their risks. With the pace of the global economy slowing down to play catch up with the pandemic, this is an ideal opportunity for entrepreneurs to pause, recalibrate, identify market gaps and focus on stimulating innovation and opportunity.

Authored by: Kokila Alagh: Founder, KARM Legal Consultants, and Poojitha Janarthanan: Associate, KARM Legal Consultants

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