Small Factories Bill

art-1192793At present, small and medium enterprises are required to comply with multiple labour laws which takes a toll on such generally resource-strapped enterprises. In an attempt to further strengthen the Government’s mission to promote ease of doing business in India, the Labour Ministry is looking to revive the Small Factories (Regulation of Employment and Conditions of Services) Bill in 2014 (“Small Factories Bill”).

What entities are covered by the Small Factories Bill?

Manufacturing companies which have less than 40 employees in a factory fall within the definition of a ‘small factory’, unless the small factory carries on a hazardous manufacturing process. In case of the later, the existing Factories Act will continue to apply.

What are the basic features of the Small Factories Bill?

  • Small factories will not have to comply with 14 legislations, including the Factories Act, ESI Act, EPF Act and the relevant Shops and Establishment Act.
  • Provisions of various labour laws, such as standards for the wages to be paid to employees, working conditions, facilities on the premises, etc will now be covered in this one Bill for small factories.
  • Employers of such small factories can electronically apply for registration of the factory, notify of the closure, and intimate the authorities of any changes in the ownership.

The Valuation Game…What Does It Mean Exactly?

In this blog, we will be explaining the concepts of investment amount and valuations. The most basic of all concepts in an investment process – if you get these basics right then the rest of the process may become relatively easier (not necessarily painless!)

Most investors / VCs and entrepreneurs start the investment game / conversation with a statement that goes something like this:

Entrepreneur: “I am seeking a $1m investment in exchange for a 20% equity stake in my company.”

Or you will hear VC say: “We typically invest $2m (or our “sweet spot” is $2m) and we take a minority stake in the startup – typically in the mid to high-teens”

The Investment Game

Let us break down the terms in the figure:

  1. The investment or Investment Amount is the actual cash amount the investor will put into your company – so it is also called “New Money
  2. The Pre-Money Valuation is the value of the company before the investment happens
  3. The Post-Money Valuation is valuation of the company immediately after the investment happens

The Ownership % is the Investment Amount over the Post-Money Valuation, also referred to as dilution, i.e. we don’t want to give away more than 20% of our company…

Dilution

So, what comes first? Pre-Money, New Money, Post Money or Ownership %?

It is the New Money!

  1. The New Money is the exact investment amount / the actual cash amount the investor will put into your company; it is also the basis for your business plan.
  2. The valuation of the company is calculated based on a funded business plan – different amount of funding means different plan – so, it comes after the New Money coming in, so, it is called Post-Money or Post-Money Valuation.
  3. So, the pre-money valuation – the value of the company before the New Money came in – is the Post Money Valuation less the New Money – it is a derived number and comes last
  4. Here you can see that the promoter ownership got diluted from 100% to 80%, or by 20%. Remember the promoters did not sell any shares, the company issued new shares which diluted the promoters’ ownership

Once the money is in – it is old money, so, now when a new investment comes in the old investor’s shares get the same dilution as the promoter shares. Take a few minutes and work through this next round of investment – $5M new-money for a $25M Post-Money.

  1. Ownership the new investor or New Money gets is 5/25 or 20%
  2. So the older ownership stakes gets diluted by 20% – i.e. reduced by a multiple of 80% or .8 – so, 80% becomes 64% and 20% becomes 16%
  3. Pre-Money is $20M – so with the new round the value of the holders of the old shares went from $10M to $20M – i.e. the value doubled
  4. The Value of the company went from $10M to $25M or 2.5x

That jump in valuation is what each investor is looking for when they invest into their company with an expectation of what the eventual return would be for them and when. All the investment terms that go alongside the valuation and ownership are linked to the differences in yours and their expectations or around the risks or ensuring some minimum returns.

So, how much equity should an investor get for funding a business?

Exactly what his Investment Amount will buy him over the Post-Money Valuation that you can agree that you will create using the funding (Investment Amount)!

Deterred by prohibitive expense for filing patents in India?

What are the benefits for startups?

A startup can now select from a list of about 280 facilitators listed on the website www.ipindia.nic.in for the purpose of getting advise on patent regitsration.

In the event a startup is unable to decide on the right facilitator, it can seek assistance from head of office of the appropriate Patent Office (as per jurisdiction) which will suggest 3 facilitators for the startup to choose from.

While the fee for the patent application and other statutory fees payable will be borne by the start-up, the fees for the facilitator shall be borne by the Government.

What is the role of a facilitator?

A facilitator will assist the startup with all steps required for filing a patent application including provide responses to any query raised by a Patent Office, attend hearings, etc. The facilitator will file all required documents to the Patent Office on time on behalf of the startup.

Protecting your Brand

brand label

Like most companies, when we came up with our name, we were convinced that it is an unique name and getting a trademark registration for the same should be a cakewalk! But this was not to be. When we applied for a trademark, the registry raised an objection stating that the name was not unique enough! But how, I wondered! We don’t have generic terms in our name like “bharat” or “coastal”. And we had also conducted a trademark search before applying for the same. Everything was clear. Then how come this objection?

Well, the Trademark Registry can, on its own raise an objection if the name sounds generic. Does that mean, you cannot protect such a name?

Get a Name Availability Search done for Free!

Not exactly! You can always get a little creative. One way to still protect your brand is by clubbing your name and logo and registering the two as a single label. Do make sure your logo is unique. Also, if your logo is a coloured one, then you may consider registering the logo in black and white. How does it help? Well, registering a label in black and white protects the logo and the label from being replicated in any colour as opposed to registering the logo/label in one particular colour, in which case the logo in that colour gets protected, thus exposing it to the risk of being replicated in a different colour.

Therefore, before applying for registration of trademark, check with your trademark consultant on whether you should apply only for registration of the name of your company or logo or both. It is important you take this call before making applications, and spending on registration fees. After all when you are bootstrapping, every penny counts!

Did you know that there is a mandatory 1 year cliff on ESOPs?

CLiff (3)

A cliff or a moratorium is the time period between grant of ESOPs to an employee and vesting of the ESOPs. Under the Indian Companies Act, 2013, there has to be a mandatory one year gap between granting and vesting of ESOPs by companies in India. Why does it matter?

It matters because in most start-ups, the promoters tend to offer ESOPs to employee as part of the compensation in the offer letter. It is one of the primary benefits to employees used by start-ups. However, a promise to give ESOPs in an offer letter is not “granting” of ESOP. The 1 year cliff does not start from the date of the offer letter. An ESOP is said to have been “granted” only once the company has taken steps to put in place an ESOP Policy, such ESOP Policy is approved by the Board and Shareholders of the Company and then the company issues a Grant Letter summarizing terms of the ESOP Policy and specifying the details of the ESOP grant to the employee.

Take a scenario where you worked really hard to get Swati Pandey, a super sharp programmer who has the makings of a future leader onboard your startup, wrestling her away for competitive offers from other companies and startups. Swati joined your company in March 2015 with a promise of ESOPs with 1 year vesting. Swati would, therefore, have been entitled to buy shares against the ESOPs upon them being vested in March 2016. However, like most start ups, you delayed putting in place the ESOP Policy and finally issued a grant letter to Swati only in November 2015. As a result, the vesting of Swati’s ESOP would now get delayed to November 2016. You would ask, why can’t the vesting be accelerated, after all the delay in vesting was because of you, so you should have the discretion to accelerate the vesting. Unfortunately, due to the one year mandatory cliff period under the law, the vesting of ESOP cannot be accelerated to less than a year from the grant of the ESOPs.

It is, therefore, important that if as an employer you are bringing employees on board with a promise to grant ESOPs, do not delay granting of the ESOPs. By doing so, you would effectively be delaying the vesting timeline for your employee, who is anyway working hard for you from Day 1.

Want to understand more about ESOPs? Sign up with LexStart here and get access to our tutorials and FAQs for free.

What’s in a name? A lot!

What is in a Name

The first thing I did once we had finalized the name for our start-up was to check if the name was available or if someone had already come up with (what we thought) a brilliant name. When convinced that we actually had come up with a unique name, we proceeded to register it.

We did not wait to register our entity or start the business.

Why in such a hurry? Well your brand/entity name is like your personal name, it’s the identity of your start up. You don’t want to be in a situation where you start with a name, work hard to create a brand and then suddenly midway you have to change it because someone else claims to have the right to use it.

Get a Name Availability Search done for Free!

Heaven forbid, if by that time, your company is profitable and you cannot afford to change your brand name, you may have to shell out a lot of money to get rights to the name. Rights to a name, which became valuable, courtesy your business! I know of a start-up that set up its business, even got enrolled with a prestigious accelerator. At the time of fundraise, the investors insisted on registration of the brand name. That’s when the start-up realized that the brand name they were trading under was already registered to another company. Imagine the pain of rebranding…How do you justify it to your customers, you are anyway in a phase where you are trying to gain their trust and now you have to change your name because of a technicality! Ignorance is not always bliss, you see!

Remember “Intellectual Property” does not mean only a technology or an invention. It also is your brand name or your company’s name. And your priority should be to protect it.

 

Trademark registration cost – INR 6000 – INR 10,000

How to go about it? As soon as you have finalized your name, check on the MCA and IP Registry website, if the name is available. Don’t want to go through the pain of doing it yourself? No problem, just click on this link and leave your details, we will check for availability of your name for free!

Once you have confirmed that the name is available, you can proceed to apply for registration of trademark. Trademark registration can be done online or through a lawyer/law firm or any trademark agent. Registering trademark is not expensive, it will cost you in the range of INR 6000/- to INR 10,000/- per trademark registration (including the statutory fees of INR 4000/-). It is a painless process and requires probably just a couple of hours of your time once you have identified the right consultant!

In my next post, I will share with you some valuable considerations for trademark registrations. Till then, I hope you all have double checked and ensured that you “own” your names!