Navigating Compliance Landscape: Startup's Guide to Legal Success
A major aspect of running any type of business is ensuring its compliance with applicable laws, regulations, rules, industry standards and business norms. This is generally referred to as “Compliance”.
Compliance is a serious undertaking for most corporations, with complex internal and external procedures and specialized teams working around the clock to ensure everything is above board. In the reality of a startup company, resources (both time and money) are usually stretched to the limit, and dealing with compliance issues often takes a back seat to other more pressing matters.
This is exacerbated by the fact that startups often operate in a disruptive manner to established industry norms, and “ask for forgiveness rather than permission” is often the preferred approach when dealing with local legal and regulatory requirements – best exemplified by success cases such as Uber and Airbnb.
However, as we will see below, compliance (or lack thereof) can be of fundamental relevance to the success (or failure) of a business. Attention should always be paid to compliance matters from the earliest stage, and resources allocated to it will naturally scale as the business develops and new risks emerge.
Why does it Matter?
Reputation is Everything
While many startups attempt to gain a foothold by operating in a disruptive manner, the reality is that, in most fields, industry reputation is one of the most important factors for long term success. It is not unusual for potential business partners, customers and vendors to conduct compliance and risk assessments of their contractual counterparties (especially when they are new players in the market).
Compliance with regulatory requirements and standards in certain regulated fields (healthcare, finance and insurance for example) is of fundamental importance, and failure to do so may irreparably ruin the reputation of an emerging business.
Putting the House in Order
Startup businesses will often struggle for momentum in their early stages, and compliance may not seem so important when in survival mode. However, a breakthrough may come at any time, especially when the right investor comes along. Sophisticated investors will have a much lower tolerance for compliance risk, and any compliance red flags (many of which could be easily avoided) revealed by due diligence can jeopardize a potential deal.
Compliance Culture
Finally, making compliance awareness a part of the corporate culture from the early stage is always beneficial to a business organization in the long run. From management to employees, everyone should understand the rules and regulations that apply to their work. Internal procedures and guidelines can be progressively implemented as the company grows to ensure everyone stays up to date with their compliance duties.By taking the necessary steps to ensure compliance with
applicable rules and regulations from the start, startups can avoid lost deals, costly disputes, litigation or punitive measures resulting from government action – consequences which often surface years later.
Key Areas
Compliance should cover all aspects of running a business, both externally and internally. Some of the most relevant areas are:
Licensing and regulatory approvals
Depending on the business and industry sector, understanding what one’s licensing and regulatory requirements are might be the single most important item on the compliance checklist.
For example, an innovative medical device or product may not be able to be brought to market in most jurisdictions if it doesn´t first pass stringent testing and approval processes. Obtaining all the necessary licenses/approvals in your target markets can be a long and expensive process, and failing to properly plan for these requirements in advance will mean certain failure for the business.
Data Privacy and Security
Startups need to ensure that their handling of personal data complies with applicable data privacy and security regulations of the regions they operate in. This is particularly relevant for SaaS and other software products.
It is important to understand what rules apply to your product/service. Data privacy and security regulations are increasingly complex and strictly enforced across the world. Furthermore, depending on applicable law, prior approval or notification may be required from regulatory authorities before data collection from customers and its treatment or transfer is allowed.
Applicable Terms of Service and other documentation, such as customer consent forms, need to be reviewed to ensure they are compliant and enforceable under applicable laws and regulations.
Tax
This one is a given. However, understanding and complying with tax obligations can be a complex matter, especially if you have operations in multiple tax jurisdictions. Furthermore, tax optimization is often one of the important considerations when structuring a business, and one which can have significant long-term impact on the profitability of the business.
Tax compliance is always a core part of any due diligence exercise, and serious investors or business partners will have zero tolerance for failure to properly meet tax compliance obligations.
Intellectual Property
Compliance with intellectual property rules is an especially important aspect for most startup companies. Startups need to ensure that their innovative brands and products are not violating existing protected IP of third parties. Failure to do so may result in costly disputes, compensation payments, and loss of the right to use content or features.
On the flip side, it goes without saying that actively registering and protecting your own IP against potential IP theft should be an absolute priority for all startups.
Employment Law
If your business hires employees, it needs to ensure that it complies with local employment laws and regulations regarding employment. Employment law usually has low tolerance for employer violations, and breach of applicable requirements will often result in employee claims or government investigations and punitive measures.
As mentioned above, one of the more challenging aspects of handling compliance is cost. While an early-stage company may not be able to maintain a full-time compliance department, getting advice from professional legal counsel on specific compliance matters, or to review important contracts, is usually very much worth it for the success of the business in the long run.
Finally, it is always beneficial for startup founders and management to at least put some effort in understanding the general compliance requirements in your jurisdiction. This will not only help in communicating with both internal and external compliance advisors, but will also inform key business decisions, ensuring that you are taking the right actions to protect your business.
