Corporate Governance For Start-ups – Premature Or Paramount?

Legal and accounting responsibilities may not be a high priority for the bootstrapped start-up, due to inadequate human resources or financial capacity. Things heat up when investors’ requests need to be suitably accommodated, vendors default on contracts, and ESOPs need to be negotiated. So how can start-ups establish discipline within accounting, finance, and legal realms without diluting the focus on problem-solving, strategy and operations?

Are only mature companies required to focus on regulatory requirements?

Corporate governance requirements are dynamic, evolving, and should be commensurate with the size and scale of the start-up. In the early stages, the start-up may need assistance in incorporation, in choosing the most efficient corporate structure or in understanding the benefits and process of registering with the DIPP. 

As the start-up gains traction, builds a team and earns revenue, GST registration and compliance with labor laws become important. Fund-raising can be made seamless with the right choice of financial instruments, expertise in negotiating term sheets and an understanding of valuation. Policies to prevent money laundering, bribery and employee harassment need to be considered by maturing start-ups. 

Entrepreneurs today are innovating to enhance the quality of education in classrooms or redefine affordable healthcare and financial inclusion. Having an expert to maintain the books of such ambitious and fast-paced enterprises from day one allows founders to focus on their core competencies, instead of also attempting to juggle tax registrations and corporate filings.

The importance of corporate governance may not be apparent on a day-to-day basis but missing a filing deadline or registration can have adverse consequences. Sometimes, the outflows due to penalties and rectification of errors can exceed the professional fees that could have been paid to an expert, in retrospect!

Corporate governance doesn’t impact revenue -  is it relevant for early-stage start-ups struggling to break-even?

In the spirit of ease of doing business in India, start-ups are relieved from many stringent disclosure requirements required of listed companies. However, this advantage should not be an opportunity for mismanagement or carelessness, and ignorance of the law is not a viable defence. Audits can highlight discrepancies and gaps, but adverse audit reports are more end-game and less wake-up call for a budding start-up.

Throughout the entrepreneurship journey fuelled on dreams and ambitions, earning the trust of investors (current and potential), government, employees, and customers are essential. Start-ups would find that establishing a culture of compliance could enhance their levels of investment readiness and may put them ahead of the competition. A clean due-diligence report is valued by domestic and overseas investors and financial institutions. 

The Registrar of Companies has the power to strike off companies for not filing annual returns and other prescribed documentation. To avoid being construed as a defunct or shell company, start-ups should maintain updated regulatory filings. Lately, information sharing among various law enforcement agencies warrants the need to remain compliant across the board.

If a company has not filed prescribed documentation for three consecutive years, its directors can be disqualified from the appointment in other companies for five years. This is detrimental for directors of young start-ups which have not yet separated ownership from management.

How Can a Start-up On-board an Expert?

Entrepreneurs could consider inviting a trusted Chartered Accountant, Corporate Lawyer or Company Secretary as a co-founder. Such an expert can help in establishing policies or protocols as the start-up grows in complexity. These include maintaining a calendar of regulatory filings and being equipped to deal with litigations should they arise.

Working with a start-up is a unique opportunity for young professionals to use their skills to support a passionate entrepreneur’s dream for a better India, assume accountability and responsibility early on in their careers, and uphold high standards of governance in the industry. 

An entrepreneur can easily get submerged in the myriad of regulatory requirements and registrations. Being associated with a Technology Business Incubator may enable access to affordable and reliable experts. Workshops in compliances and governance requirements provide an overview of expectations with respect to documentation and reporting. 

Start-up India schemes have been instrumental in promoting entrepreneurship. In addition to tax holidays and exemptions, the scheme for Start-Ups Intellectual Property Protection ensures low fees for patent and trademark applications. Self-certification of compliance with certain labor and environmental laws and a liberal policy for applying for tenders indicate that the Government is keen to ensure corporate governance among start-ups. 

To conclude

Corporate governance shouldn’t be equated with bureaucracy and doesn’t take away from the mission and vision of the founder. Having checks and balances in place early on provides direction for a flourishing start-up to navigate the tax and regulatory landscape of India. Companies with a healthy culture of compliance can only enhance the pulse of the Indian start-up ecosystem.