From idea to start-up: a guide for start-up founders
A business starts with a good idea: innovation that has the potential to make people’s lives easier or better. While the focus from that moment on is on developing the product or service, finding customers and working out the marketing strategy, one important aspect is sometimes overlooked: the legal side of doing business.
From the moment they decide to turn their business idea into reality, entrepreneurs are faced with important legal choices: which legal form best suits their plans? Which licenses are required? What liability risks do you run and how can you protect yourself against them? These questions are not only relevant for large companies. Successfully bringing the idea to market requires a solid plan and a good understanding of the legal and tax aspects involved. This article provides a comprehensive guide for start-up entrepreneurs and answers the most common questions to help you make the right choices when setting up your business.
How do I start a business: which legal form is best suited to my (future) business?
When starting a business in the Netherlands, choosing the legal form is one of the first and most important decisions a founder must make. Each legal form has its own legal and tax consequences and determines how liability, control and profit distribution are regulated.
Limited Liability Company
Those who wish to limit personal liability and grow their business with shareholders or investors may opt for a limited liability company (LLC). An LCC has “legal personality” and can enter into agreements with others, such as contracts with suppliers and employment contracts with staff members. Except in cases of improper management, directors and shareholders are therefore not personally liable for the debts of the LCC (in formal legal terms, the liability of shareholders is limited to the capital they have contributed).
The incorporation of an LCC is done by notarial deed: a notary is therefore required. The deed of incorporation contains the articles of association of the LCC. The articles of association determine, among other things, what types of shares can be issued, what rights are attached to those types of shares, who is authorized to represent the LCC (e.g. each director, or two directors jointly, other variants are conceivable), how decisions are made, etc. The deed of incorporation also issues shares to the founders, who thereby become shareholders.
Establishing a company through a notary may sound like an expensive process, but nowadays there are several providers who offer largely online services. In such cases, the company can often be established within on or a few days. For a simple LLC with standard articles of association, this is often a good, inexpensive and quick option. For an LLC in which several co-founders will participate and in which investors will join in the short term, such standard deeds of incorporation are often insufficient and a subsequent amendment to the articles of association is required. This often ends up being more expensive in the long run.
An LLC is a suitable legal form if you want to start a business with co-founders or other shareholders, because the capital can be divided among multiple shareholders. The LLC is also the sensible option if the company’s cost structure is high or if liability risks are high for other reasons. From a financial and tax perspective, it is wise to opt for an LLC if high profits are expected (in the long term).
You should also opt for an LLC if the sale of the company (exit) is an objective. Shares in an LLC can be sold to a buyer, allowing the entire company (including contracts) changes ownership. The sale price can also be structured in a tax-efficient manner, so that the profit on the sale is not immediately taxed (participation exemption).
Sole proprietorship
A sole proprietorship is a simple form of business and is frequently used by freelancers and small businesses. Setting up a sole proprietorship is easy: you simply register with the Chamber of Commerce and do not need to involve a notary.
Entrepreneurs with a sole proprietorship are fully (personally) liable for all debts of the company; there is no separation between private and business assets. The risk in the event of financial setbacks is therefore entirely borne by the entrepreneur. On the other hand, they can benefit from tax advantages such as the self-employed person’s allowance, start-up allowance, and SME profit exemption, which can certainly be attractive in the early years. Please note that above a certain level of profit, it is more advantageous from a tax perspective to operate through a private limited company. Assistance from an accountant or tax specialist is recommended.
A sole proprietorship is a suitable form of business if there is no collaboration with a co-founder or partner, the investments in the business are limited, the operating costs are clear and manageable (since the entrepreneur is liable for debts to suppliers), and the liability risks are manageable.
If one of the objectives is to sell the company (exit), then choosing a sole proprietorship is less obvious. The sole proprietorship cannot be sold as a whole; only the assets and liabilities of the sole proprietorship can be sold and transferred separately. The transfer of contracts is only possible with the cooperation of the contracting parties, which can cause uncertainty and complexity. If an exit is desired, an LLC is often the more obvious option.
General partnership, limited partnership, professional partnership
When you want to start a business together with one or more partners, a general partnership, limited partnership, or professional partnership can also be considered. These are forms of collaboration between two or more individuals. A professional partnership is a collaboration aimed at practicing a profession. This legal form is commonly used by lawyers, dentists, general practitioners, accountants, architects, and physiotherapists. If the activity does not involve practicing a profession but rather running a business, a limited partnership or a professional partnership is applicable. A general partnership consists of two or more partners, while a limited partnership consists of one or more managing partners and one or more limited partners: the investors who do not take an active role in management. In a professional partnership, the partners are liable for equal shares (for example, each for half, in a partnership with two partners), while partners in a general partnership are jointly and severally liable for all debts (each for the whole).
The limited partnership is a variant of the general partnership, specifically intended to enable the company to be started with (silent) financiers (limited partners) alongside the managing partners who are responsible for day-to-day management. The managing partners are personally and jointly and severally liable; the limited partners are only liable for the amount they have contributed.
No notarial deed is required to establish the above forms. Registration with the Chamber of Commerce is sufficient. However, it is advisable to lay down the terms of the partnership in an agreement. This should include agreements on contributions, power of representation, profit distribution, and termination of the partnership.
The legislator intends to reduce the differences between the various forms of cooperation through the proposed Modernization of Partnerships Act.
Interim conclusion
The most common legal form (in startup and scale-up practice) is the LLC. This is a logical choice if the company’s commitment and potential is to grow into an (internationally) successful company with the help of multiple shareholders, which can ultimately be sold. Investors also prefer this legal form. For growth, investments, and risk diversification, the LLC is the preferred legal form for many scale-ups and startups. The LLC will be taken as the starting point below.
How do I ensure good governance?
Governance in an LLC refers to the way in which the company is managed and controlled. Governance concerns the distribution of responsibilities and powers between the various bodies and stakeholders. The basis for governance is laid down in the articles of association of an LLC. The articles of association contain basic provisions on how the LLC functions. If an LLC has multiple shareholders, it is advisable to make additional agreements in a shareholders’ agreement, where further governance agreements can be made.
Shareholders’ agreement
Shareholders’ agreements often contain additional agreements on the provision of information to shareholders, agreements on the dividend policy to be applied, clauses on special management and shareholder decisions that require a special majority (reserved matters), a clause that determines when shareholders are obliged to offer shares and when a founder qualifies as a leaver (and what the consequences of this will be). Shareholders’ agreements often also contain provisions on the protection of intellectual property (more on this later), confidentiality, (non-)competition, and agreements on a possible exit strategy, with accompanying drag-along and waterfall provisions. This article discusses all the ins and outs of a shareholder agreement.
Additional regulations
Are there multiple directors and has a specific division of tasks been agreed upon? If so, it may be beneficial to draw up board regulations. Board regulations supplement the articles of association and govern the internal working methods of the board. They contain agreements on the division of tasks between directors, decision-making within the board, meeting frequency and procedures, provision of information to shareholders and supervisory authorities, and powers to enter into important obligations. Approval requirements for certain decisions are also laid down, as are procedures in the event of conflicts of interest. If there is a supervisory body such as a supervisory board, then supervisory board regulations are recommended.
Intellectual property
Protecting intellectual property (IP) is often one of the first strategic legal steps that startups need to take. Contractually securing rights to software, trademarks, trade names, designs, and know-how ensures that value created actually belongs to the company, rather than to individual founders, employees, or freelancers who are involved in developing the products. Without proper clauses on IP transfer in employment contracts or freelance agreements, there is a risk of crucial rights remaining outside the company. In addition, timely registration of a trademark or design can prevent competitors from undermining your market position. In short, a solid IP strategy lays the foundation for investability and sustainable growth.
Intellectual property plays an even more important role in spin-offs, for example from a university or after a split from an existing corporation. Often, the technology or concept has already been developed and is brought into the start-up through a license or transfer. It is crucial to make clear agreements about who owns the IP rights, what rights of use the spin-off will have, and whether there are any restrictions (e.g., territorial or in terms of scope). Agreements must also be made about future developments: do new inventions belong to the spin-off or to the original organization? Clear contractual provisions prevent discussions and make the spin-off more attractive to investors. Want to know more about a good strategy for intellectual property and its protection? Then read this article.
Attracting investors
Startups have various financing instruments at their disposal, such as convertible loans (CLAs), SAFEs, subsidies, or an initial equity round, but of course also cash loans and current accounts from financiers. If investors are going to come on board sooner or later, it is essential to draw up a clear cap table from the outset and maintain it. A good overview of shareholders and potential dilution, for example through options granted, gives confidence to future investors and prevents discussions in later rounds. Transparency in the cap table is often the first part of an investor’s due diligence. You can read more about the different forms of investment here.
Commercial agreements and templates
Once the LLC has been properly structured in terms of governance and intellectual property and the cap table has been updated, the first commercial contracts can be concluded. A set of general terms and conditions of sale that are well tailored to the company is a good start. The general terms and conditions can then be applied to every customer or buyer. Well-drafted general terms and conditions ensure that the startup is well protected against common risks in day-to-day business operations, such as disputes regarding delivery or damage, but also non-payment.
It is essential, especially for data-driven companies, to implement a solid privacy strategy and set it out in a privacy statement. From the outset, set up processes and systems in such a way that personal data is processed securely and in accordance with the rules. Under the GDPR, a startup that has personal data processed by a third party (e.g., a software supplier) may not simply hand over data. In that case, a processing agreement is mandatory. This agreement sets out arrangements for the handling of personal data, security measures, and liability. The absence of such agreements can lead to fines and reputational damage. For investors, it is also an important signal that the company takes its privacy and data management seriously. These documents therefore not only provide legal protection, but also contribute to reliability towards customers and investors.
Employee incentives
Attracting and retaining talent is crucial for a startup. A well-designed employee incentive plan, such as stock appreciation rights, stock options, or certificates via a trust office foundation, ensures that employees share in the value they help create. This strengthens commitment and makes the company more attractive as an employer and to investors. It is important that the structure is well thought out from a tax and legal perspective, so that surprises are avoided later on.
Exit strategy
Although an exit often seems a long way off, it is wise to consider this at an early stage. Investors will want to know what opportunities there are for future value creation, for example through a sale to a strategic party or a secondary sale to new investors. Including drag-along and tag-along provisions in the shareholders’ agreement provides clarity on how an exit can proceed in practice and prevents blockages at a crucial moment. Founders would be wise to do Exit math before all investment rounds and take liquidation preferences into account.
Conclusion
Choosing the right legal form, drawing up the relevant legal documents such as a shareholders’ agreement and general terms and conditions, and arranging practical and legal matters in a timely manner are crucial for a successful start. By seeking sound and timely advice and having your documents drawn up clearly and tailor-made, you can avoid common legal pitfalls. Entrepreneurship remains pioneering, but a solid legal foundation will elevate your company to a professional and high level. This will prepare your company for growth and scaling.
INC.’s specialized team offers comprehensive support to founders of startups and scale-ups, as well as their investors, throughout the entire start-up process.
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