Keeping Start-ups investable with proper legal setup

Strawberries as a symbol for keeping start-ups investable, because: why not.

Most founders of start-ups perceive legal stuff as rather dry and boring. I passionately disagree, as legal work can be exciting, creative, and surprisingly entertaining. Yet we can consent that founders need to concentrate primarily on their business. But proper structuring and set-up of a start-up is not just useful but essential: if done wrong, the business will be un-investable down the road.

Most issues that are very hard, expensive, and time consuming to correct when done wrong, could have been easily and elegantly set up in the first place.

Here is a short and non-exhaustive list of things to consider.

Choose a suitable jurisdiction

A start-up is often formed in the local jurisdictions of the founders by default. However, rather often not all founders are domiciled in one country. Or the market of the start-up is non-domestic. The local jurisdiction may not be suitable, too cumbersome, or cannot be taken seriously. It makes therefore sense to ponder the options. Here are a few ideas to consider:

  • Some jurisdictions smell like rotten fish. Unless the founders want to trade in insider information, dodge taxes or circumvent certain legislation, there is little good reason to use them, and serious investors shun them for that reason.
  • Other jurisdictions often serve special purposes. For a while, Malta was fashionable for crypto firms and Switzerland will remain a favorite for royalty-generating IP companies.
  • Smaller jurisdictions may have the disadvantage that investors simply do not know them, are not comfortable operating in them, and indeed such jurisdictions may not be overly sophisticated simply for lack of experience of the whole ecosystem (including lawyers, advisers, registers, and courts). Nothing should prevent start-ups in such jurisdictions to be founded, but they might have a change of jurisdictions at least on the radar and structure the organization accordingly.

Determine the legal structure of the start-up

Most jurisdictions offer a wider variety of legal forms in which businesses can be established. The main difference between the forms runs between more personal forms of organization (sole proprietor, partnership) and more capitalistic ones (limited companies such as, depending on jurisdiction, LLC / Ltd. / GmbH, or also classic stock companies).

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