30 Startup Legal Tips
Jul 14, 2021
We recently posted 30 blog posts each containing one startup legal tip for entrepreneurs looking to create their own startup. We’ve consolidated those tips and put them all here in one convenient place. Plus, we’ve added an extra 7 Startup Legal tips for you aspiring startup entrepreneurs who want to learn more about the legal side of startups.
30 Startup Legal Tips (plus 7 extra tips)
1. When should you incorporate your company?
In the early stages of starting a business, you may not dare to incorporate and proceed with your business preparations under the radar. However, you will still have to pay establishment costs and a flat rate for corporate inhabitant tax even if you have no sales. However, this would be a good time to make the most of the consumption tax exemption period.
2. How many shares should be issued at the time of incorporation?
When establishing a company, the amount to be paid in and the number of shares to be allotted can be freely determined. A common example is a company that pays 1 million yen and issues 100 shares. A unit of 10,000 yen per share is easy to understand, but issuing only 100 shares is not recommended!
3. Raising funds by issuing shares
When raising funds by issuing shares, the amount paid for the shares becomes the amount of capital of the company. However, an amount not exceeding one-half can be set aside as capital reserve, so startups should set aside half as capital reserve unless there is a specific reason not to.
4. Is it possible to start up with a limited liability company?
Compared to a stock company, a limited liability company has advantages such as low establishment costs, free design of organization, and no need for public notice of account settlements. This is often the case with foreign companies establishing subsidiaries overseas, such as “Amazon Japan G.K.” for Amazon and “Google G.K.” for Google.
5. Co-founding a company
When starting a business, it is not uncommon for several people to get together and co-found a company. Make sure you conclude an agreement with the co-founders so that it is clear what happens when one of the founders leaves the company. For example, you can agree that a founder who leaves the company will sell all of his shares to the remaining founders.
6. Shareholding Ratio of Co-Founders
If you are starting a business with several people, you may be wondering what the shareholding ratio of each of them should be. There is no perfect answer to this question, but it can be roughly divided into the following two patterns (1) Distributing most of the shares to one person (2) Dividing the shares equally.
7. Issuing shares unnecessarily
Immediately after starting a business, it is common to issue shares unnecessarily and without much awareness of the value of the shares. For example, you may be tempted to pay your outsourcers and advisors with stock or stock options because you have little cash and deposits.
8. Establishing a board of directors
Should you establish a board of directors? Some companies consider shifting to a company with a board of directors from an early stage because they have the image that establishing a board of directors will strengthen their corporate governance. However, I believe that a board of directors is not necessary in the initial phase of a startup.
9. Management of Minutes and Other Documents
In the early stages of a startup, document management can be a mess, and I often hear stories of people losing minutes and other documents that legally need to be kept. What you should be aware of is that when you apply for registration, you should submit the original copies of the various minutes and the originals will not be returned. So make copies!
10. Opening a Bank Account Takes Time
After starting a corporation, it is necessary to open a bank account for deposits and withdrawals. However, due to anti-money laundering and other reasons, banks may not be willing to open a bank account for a company that is just starting out.
11. Location of the head office
When a company is established, the “location of the head office” is specified in the articles of incorporation. In this case, it should be written up to “the smallest administrative division of the city, town or village (including the special wards of Tokyo, and the city in the case of ordinance-designated cities). The company’s head office shall be located in Chiyoda-ku, Tokyo. etc. Continued
12. Enrollment in Social Insurance
Even if you are a startup, you must enroll in social insurance. At first, you should join the National Health Insurance Association (Kyokai Kenpo), but if you are an IT company, you should eventually join the Kanto IT Software Health Insurance Association (ITS).
13. Executive compensation
Executive compensation cannot be changed in the middle of the fiscal year. In a start-up company, earnings are often not stable, so you may want to set executive compensation low and distribute it as much as possible when the company makes money. However, in principle, executive compensation cannot be changed during the fiscal year.
14. Checking Trademarks
When releasing a new product or service, make sure that the product name, etc. does not infringe on existing trademark rights. Existing trademarks can be checked from the Patent Information Platform (J-PlatPat) on the Japan Patent Office website.
15. Overtime work
What procedures are necessary to allow overtime work? In the early stages of a startup, there is a lot to do and a lot of overtime work will probably be required. However, it is not possible to order overtime work out of the blue; it is necessary to sign an “Agreement on Overtime and Holiday Work (36 Agreement)” in advance.
16. Fixed Overtime Pay
Should we introduce fixed overtime pay? “Fixed overtime pay” is a premium wage paid at a fixed rate for a certain amount of overtime work. It is often misunderstood because of its name, but it is not a system to “fix” the amount of overtime pay (regardless of the amount of overtime worked).
17. Fixed Overtime Pay, Part 2
This system allows workers to decide their own starting and ending times and working hours for the day, within a predetermined total working hours. However, it is not recommended for start-ups because of the time consuming procedure and operation.
18. Paying Managers Overtime
Is it necessary to pay overtime to managers? One of the most common misunderstandings in start-ups is between “managers” and “supervisors”. People often ask me, “He’s a manager, so he doesn’t need to be paid overtime,” but you should be very careful in making that decision.
19. Clarifying Working Conditions
In the early stages of a startup, people are often hired through acquaintances or referrals, so they may be hired without a clear contract. However, employers must clearly indicate wages, working hours, and other working conditions to workers (Labor Standards Law 15①).
20. Employee Health
Even if your company is just starting up, you are obligated to manage the health of your employees. Make sure to conduct regular health checkups at least once a year. Of course, the cost will be covered by the company. Even for startups that are determined to change the world, health comes first.
21. Labor Law
Obligations under the Labor Law depend on the number of employees. For example, certain obligations only apply when you have a certain number of employees, as you can see below:
- 1 employee – enrollment in social insurance;
- 10 employees – preparation and submission of work rules and appointment of health and safety promoters;
- 43.5 employees – employment of the disabled;
- 50 employees – appointment of industrial physician and establishment of health committee implementation of stress check submission of report on results of periodic health check.
22. Referral Hiring
Startups often hire employees by asking them to introduce their friends and acquaintances. You can avoid paying commissions (35%) to recruitment agencies, but be careful not to pay employees compensation unrelated to their work in exchange. The Employment Security Law states that no remuneration should be given to employees for recruitment activities, except in the form of wages or salaries (Article 40 of the same law). If you are going to implement referral recruiting, you need to take careful measures such as stipulating “100,000 yen per referral (with a maximum of 0 referrals per year)” in your work rules or wage regulations and making it part of your job description.
Here is a point of caution regarding internships. It is common for startups to offer internships. However, in such cases, please be careful that the interns do not fall under the category of “workers”. The notice (Kihatsu No. 636, September 18, 1997, former Ministry of Labor) is helpful. In this case, the intern is not considered to be a “worker.” In the case where the intern is not considered to be under the direction and order of the employer, such as when the internship is for observation or experience, and the relationship between the employer and the student is not recognized.
24. Contract Trial Period
In many cases, startups are run by a small number of elite employees, so a trial period is set and hiring proceeds with caution. However, according to precedents, the trial period is a “labor contract with right of termination”, and refusal to hire must have an objectively reasonable reason.
25. Premium Wages
Pay attention to the calculation of premium wages for the annual salary system. Many start-up companies adopt an annual salary system. For example, “annual salary of 8.4 million yen, divided into 14 parts: a monthly salary of 600,000 yen and a bonus of 1.2 million yen. In this case, the monthly salary of 600,000 yen should not be used as the basis for calculating the premium wage.
26. Premium Wages, Part 2
Who pays the premium wages for side jobs It is common for startups to utilize side hustle personnel, but be careful about hiring people who are working full time. The employer who signs the labor contract later in time must total the working hours and pay the premium for overtime.
27. Recruiting Via Social Media
Startups sometimes recruit via Twitter or Facebook. There is no problem if this is a “company visit” to ask if you would like to come visit the company. However, if it is an invitation for a “recruitment interview,” please note that the Employment Security Law requires that the working conditions be clearly stated before the interview.
28. Calculating Overtime Hours
When calculating overtime hours, are you using the fractional method of “rounding down to the nearest 15 minutes per day”? What is allowed by the Notice is to add up the total in units of one month and round off to the nearest hour, so daily rounding off may not be allowed. In the case of a company that does not have a system in place, it may not be allowed to truncate each day.
29. Statutory Bookkeeping
Employers must prepare and maintain what are called the “three statutory books” (Articles 107-109 of the Labor Standards Law). By the time you raise funds for Series A, you may have to check them with legal due diligence, so don’t forget to be prepared.
30. Resolutions and Shareholders’ Meetings
Startups have few shareholders, and it may be troublesome to send out convocation notices and hold shareholders’ meetings every time. Therefore, if all shareholders agree in writing, etc., the resolution can be deemed to have been passed without holding a general meeting of shareholders (Article 319 of the Companies Act).
7 more Startup Legal Tips…
31. Internet Transactions
For start-ups in the field of information and communications technology (ICT), please refer to the Ministry of Economy, Trade and Industry’s “Guidelines for Electronic Commerce and Information Property Transactions. It contains a fairly extensive list of legal issues related to Internet transactions. (August 2020 edition)
32. Internet Law
Startup companies engaged in Internet business should pay attention to the following laws:
- Telecommunications Business Law
- Act against Unjustifiable Premiums and Misleading Representations
- Unfair Competition Prevention Law
- Copyright Law, Patent Law, Trademark Law
- Consumer Contract Law
- Specified Commercial Transactions Law
- Specified Electronic Mail Law
- Electronic Consumer Contract Law
- Personal Information Protection Law
33. Web Services
Key Points on Startup Legal Affairs (Day 33) Be aware that when you are running a web service, there are often unexpected regulations in place. For example, if you want to offer “closed chat” to users, you will need to notify or register as a telecommunication business. (Reference)
In order to grow your product or service, you need advertising. However, exaggerated or misleading advertisements are against the Act against Unjustifiable Premiums and Misleading Representations.
35. Offering Extras
Startup Legal Tips (Day 35) Sometimes “extras” are offered to promote the sale of products and services. However, if the product is sold with something too expensive, it violates the Act against Unjustifiable Premiums and Misleading Representations. According to the public notice, in principle, the amount of freebies should be 20% of the transaction value, so if a product costs 5,000 yen, the freebies should be limited to 1,000 yen.
36. Internet Usage
Internet services may issue points based on user usage. In this case, be careful not to fall under the category of “prepaid means of payment” under the Fund Settlement Law. If you want to avoid the regulation, issue points without getting compensation.
37. Legal Holidays
Most companies have a two-day workweek (Saturdays and Sundays), but are you properly dividing Saturdays and Sundays into “legal holidays” and “non-legal holidays (designated holidays)”? Under the Labor Standards Law, one day off per week is required, and this “holiday” is the legal holiday.
We hope you enjoyed these 37 Startup Legal Tips!
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