Start-up businesses: between flexibility, legal security and predictability
A year ago, The Economist published on its website an article in which the author vividly described the events in the global economy, while the central thought was the premise that Western corporations were dying in instalments, and entrepreneurship is transforming from a classical and rigid one based on high operating costs, into entrepreneurship based on rationalization and optimization of business processes.
This trend, which, of course, is not new, is illustratively reflected in the modern world by start-up companies that are based on the concept of an idea and the initial strict cost rationalization. Ideas are followed by a business plan, followed by a search for an investor who will recognize the right business opportunity in the idea. The question is: are start-up companies well-prepared to raise funds, for the entry of a new investor, or to sell an idea or the company? Have they clearly agreed in advance on each other’s relations and adequately protected the idea? Have innovators protected their interests and perhaps even their future?
Arrangement of mutual relations
By nature, the human being thinks in the short term because this is the simplest and cheapest thing to do. However, such a mindset can be quite expensive for entrepreneurs. Start-up entrepreneurs often develop the idea in a group, hence it is reasonable to arrange mutual relationships with a contract that is nothing but an anticipated arrangement of potential conflicts.
The development of an idea itself is usually gratuitous (apart from exceptions), it does not bring immediate profit and it is a contribution of the “spirit and body”. Since there is nothing tangible in the beginning and nothing worth sharing, the question of distribution is also not controversial. At a certain point, a good business idea becomes tangible. For example, it becomes a well-developed app that is the result of the work of three good friends. The app is commercially interesting, it is spotted by a technological giant from San Francisco who decides to buy the start-up company for one million euros.
We do not question the strength of friendship ties. Yet: what if one of the friends worked disproportionately more than the other two in the development of the idea and wants to enforce this? Was someone the first to have the idea, and it was then developed by others? How will the money from the takeover be split?
If we have not considered these issues in advance, the answers may be unpleasant. In reality, the solution is simple. Friends, who together develop an idea, can define their relationship in advance by means of a contract. They can do so by concluding a social contract that creates a civil law association (a cheaper way). By doing so, they regularise rights and obligations and solve in advance possible conundrums hidden behind the corner of the future. The conclusion of a social contract is not related to the establishment of an economic operator, which means that there are no costs of registration of a company, account management, etc. The economic entity is created in the case of a contract of members, on the basis of which we establish and register a company (a more expensive way). The advantage of the company is that its shares are transferable, and in addition, investors prefer to invest in a company rather than in an intangible idea floating in the air. And last but not least: any contract can be changed and adapted to the current situation. By concluding a contract, entrepreneurs are not limited, but they are insured.
Protection of the idea
The second most important issue is to protect the idea. When artists are fuelled by a creative charge, they often do not think about whether they have properly protected the idea. An unprotected idea can be used and exploited by anyone. The point when the driving force becomes aware of the importance of the issue of protecting the idea (industrial property) often comes after the idea has already been stolen. Many start-up entrepreneurs say that they did not protect the idea because it is not worth it “because businesses from China will copy it anyway”. It is true that Chinese companies pick up good ideas on the market. This also happened in the case of Goat Story, the Slovenian idea, when collecting funds on the Kickstarter platform, where they collected nearly half a million dollars.
It results from some Facebook project masterminds’ records that they are not overly concerned about the theft of their idea and that in some way this is even a confirmation that their idea is good. Of course, we cannot agree with such logic: ideas need to be legally put into their place. The reaction would most likely be different if the idea was copied by a Slovenian or European company which would market a quality product. We may be unafraid of cheap imitations, but we are afraid of thefts by companies that would transform our idea into a top product. However, before this happens, entrepreneurs can adequately protect themselves and effectively enforce such protection.
Is it expensive to protect an idea? What if it is not repaid later on? Instead of answering we better ask ourselves: what is the price of the feeling when you take off the shelf a product that is based on your (stolen) idea.
(The text was published in the form of a column on 7.10.2017 in the weekly business v newspaper Svet kapitala. The author of the column is Uroš Čop, attorney at law and director at Law Firm Miro Senica and attorneys Ltd)