In 2016, Zenefits faced regulatory issues in California due to its lack of compliance with state insurance laws. The company was fined $7 million and lost its license to sell insurance in the state. This led to a decline in the company's valuation and resulted in a significant reduction in funding from investors.

LendUp, a fintech startup that offered short-term loans to consumers, faced regulatory issues in California due to its lack of compliance with state lending laws. The company was fined $6.3 million including $1.8 million in refunds to customers. The company's reputation suffered, and it faced challenges in attracting investors. And in 2021, the U.S. Consumer Financial Protection Bureau (CFPB) ordered LendUp Loans to pay a $100,000 penalty, stop issuing new loans and halt collecting on certain outstanding ones after repeated deceptive marketing and other fair-lending violations.

These examples demonstrate how poor legal compliance can have serious consequences for startups, including decreased valuation, regulatory fines, and challenges in attracting investment.

Reasons why poor legal compliance is a red flag!

It is not uncommon for investors to back off from investing in a startup due to poor legal compliance. In fact, legal compliance is a crucial factor that investors consider before making any investment decisions. Here are some reasons why investors might back off from investing in a startup due to poor legal compliance:

Legal Liability: 

If a startup has poor legal compliance, it could expose investors to legal liability. For example, if a startup is found to be in violation of labor laws, investors could be held responsible for any damages or fines.

Reputational Risk: 

Poor legal compliance could also damage the reputation of the startup and its investors. This could have a negative impact on the investor's brand and future investment opportunities.

Costly Litigation: 

If a startup is involved in legal disputes, it could lead to costly litigation. This could reduce the value of the startup and make it less attractive to investors.

Lack of Transparency: 

Poor legal compliance could indicate a lack of transparency on the part of the startup. This could make investors skeptical about the startup's business practices and financial performance.

Regulatory Issues: 

Poor legal compliance could also result in regulatory issues that could prevent the startup from obtaining necessary permits, licenses, or approvals. This could limit the growth potential of the startup and reduce the value of the investment.

Overall, poor legal compliance can be a red flag for investors and could lead them to back off from investing in a startup. Investors want to ensure that the startups they invest in are operating legally and ethically to minimize risks and maximize returns.

How to get your startup investment ready, legally!

Here are five steps to get ready in terms of legal aspects for your startup:

Choose the Right Legal Structure: 

One of the first decisions you will need to make when starting a business is to choose the right legal structure. This will depend on the size and type of business you plan to start, and the legal and tax implications of each structure. Common legal structures for startups include sole proprietorship, partnership, private limited company or a public limited company. To begin with, a private limited company may be an ideal structure for startups. 

Register Your Business: 

Once you have chosen the legal structure, you will need to register your business with the appropriate government agency. This typically involves filing articles of incorporation or organization, obtaining a Permanent Account Number, and registering with the ward office as well as the Department of Industry or Department of Commerce depending on the nature of business. We have prepared a step by step guide to help you register your startup as a private limited company in Nepal. 

Draft and Review Legal Documents: 

To protect your business interests and ensure compliance with legal regulations, you will need to draft and review various legal documents, including contracts, leases, employment agreements, and intellectual property agreements. These documents should be reviewed by an experienced attorney to ensure that they are legally binding and protect your interests.

Secure Intellectual Property Rights: 

Intellectual property is often the most valuable asset of a startup, so it is important to secure your intellectual property rights. This may involve filing patents, trademarks, and copyrights, and ensuring that your company's intellectual property is protected through non-disclosure agreements and other legal protections. Here is how you can avoid common pitfalls and protect your trademark in Nepal.

Comply with Regulatory Requirements: 

Depending on the industry and type of business, there may be various regulatory requirements that you need to comply with, such as obtaining licenses and permits, complying with safety and health regulations, and adhering to data privacy laws. It is important to identify and comply with these requirements to avoid legal penalties and protect your business interests.

By taking these five steps, you can ensure that your startup is legally prepared to approach investors for funding, and that your business interests are protected as you grow and scale your company.

Need help? Book a free consultation call with us!