What awaits in-house counsel when they are tasked with building a legal department for a startup? Katherine Abraham reports

With India’s population surpassing China’s this month, as per UN data, the government must ensure that the working age population is gainfully employed and has sufficient opportunities for development.

Startups are among the most important contributors to employment generation and in providing training to youth. Realising their importance, the government announced Startup India was one of its signature campaigns shortly after coming to power, introducing incentives and regulatory support measures for startups in areas such as funding, taxation, compliance and intellectual property.

As per figures from August 2021 collected by Invest India, the country’s national investment promotion agency, there are 77,000 startups across the country that are recognised by the Department for Promotion of Industry and Internal Trade.

In January last year, Union Minister of Commerce and Industry Piyush Goyal called for global venture capital (VC) funds to focus more on startups from tier-II and tier-III cities, as well as to invest in, promote and protect the intellectual property created by startups. Along with various exemptions, the ministry has provided incentives to investors and financiers within the startup ecosystem.

As small-scale businesses grow, the need for a separate legal department becomes more acute to take on the responsibilities of compliance, contracts, risk management and dispute resolution.

So, what must in-house counsel consider when they go about the complex task of building a legal department, which includes managing the interests of stakeholders, speeding up legal and especially the contractual processes, and preparing a newly built team for critical decision making?

Vivek Mittal, the global general counsel for Dr Reddy’s Laboratories in Mumbai, who heads a team of 75 legal professionals, says that “retention coupled with providing growth to existing talent” is one of the foremost challenges that a general counsel is faced with. He also mentions the need for the development of in-house skills to reduce reliance on outside counsel, in addition to cross-function/country collaboration and developing uniformity in work processes.

PM Devaiah, ex-general counsel for Adani and now the managing partner of boutique firm StarLaw in Bengaluru, says that a legal team “must be competent, fit the purpose and survive to see very many seasons. Organisational goals can be achieved only if the team is cohesive and led by a selfless and capable leader”.

PM DevaiahMittal, who is also the compliance leader at Dr Reddy’s, says that while joint venture companies have to blend processes from joint venture partners, “a startup will have to develop processes from scratch”.

Devaiah adds: “Flexibility in a startup is manifold and the play is wider. One can experiment and make mistakes in the process of laying the building blocks.” He says there is an additional challenge of human dynamics. “The misgivings, the clash of cultures and looming conflicts of interest constantly demand an equal balancing of constituencies with the potential to dampen efficiency and flexibility.”

Recruitment and training

Priya Mehra, who was previously the legal head for Indigo Air, describes the challenges she faced when she joined new aviation startup Akasa Air and was vested with the responsibility of building a legal department. “The number of resources were limited but the work was substantial because one had to step in across business verticals,” says Mehra who is based in Singapore. Another key challenge she says, was that her team had to ensure that documents and negotiations were best standard, “even though the pressure of turning around deliverables was immense”.

Nitin Mittal, general counsel and cluster head for Asia and South Pacific at Signify in Gurugram, says another important point that startup legal departments must consider is deciding how much work can be outsourced, vis-à-vis mundane legal requirements.

Nitin MittalRisk assessment and mitigation is one of the most critical functions of the legal department, required to not only ensure that the company is minimising its legal liabilities but also that it is compliant with government norms. On this point, Mittal says that, depending on the company’s business and risk profile, it becomes important to streamline areas of specialisation.

Given the dependence on technology in a digital economy, Mittal emphasises the importance of its integration, which must be “agile, proactive and lean”.

Tackling startup troubles

Kama Raju Chitrapu, the principal of IFIM Law School in Hyderabad, says in his 2017 research paper, Startups and Legal Compliance in India, that an institutional investor such as a venture capitalist conducts financial and legal due diligence on a strategy to uncover risks. “Issues that come up often relate to corporate, labour law and foreign exchange law compliances,” he says. “In order to keep the startup’s valuation high, it is essential to ensure that such issues don’t arise, or to iron them out prior to a diligence process.”

Not all startups face trouble starting up, though. Mehra, at Akasa Air, says that the team is professionally sound and faces no budget constraints nor backlogs. However, Deepthi Rajeev, general counsel at global payments company X-Flow in Bengaluru, says she hasn’t been that lucky. “Given our business is cross-border payments, there is a lot of reliance on specialist counsel in India and abroad,” she says. “I have to do some haggling given we are only a startup with limited funds.”

A deciding factor in the success of a legal department is the quality of its hires.

Mittal suggests: “Set clear expectations from the founder on the ambit of legal operations.” But he admits that recruitment is a challenge because having “the right mix of people, (experience in domain areas, diversity, the right soft skills and industry experience) must fall within budget or [the GC is] forced to ask the company to increase the budget, which is a key challenge.”

Having worked on recruitment and training, the new legal department must be integrated with existing departments. Lavanya Chandan, general counsel at Lenskart in New Delhi, says: “Interdepartmental collaboration is extremely important in fast-paced businesses like ours. This alignment helps business teams see the legal department as enablers and fosters a symbiotic relationship between the teams.” However, he also cautions that “collaboration can never be enforced”.

All in a day’s work

Mittal, of Dr Reddy’s, highlights that apart from the usual collaboration issues, “business priorities versus the risk-averse approach, changing regulatory environment, and young employees with less number of years of experience” are all potential issues for a general counsel.

Rihab Dias, general counsel for Upekkha in Goa, adds: “It’s about maintaining bonds. One needs to have complete understanding of how each vertical operates, be regularly updated about new developments (commercial as well as legal), and not come across as a service provider that is stalling any business operations.”

Lavanya ChandanChandan acknowledges that while there may be some conflict in expectations and outcomes when it comes to new hires, they gradually acknowledge the benefits and their behaviour evolves for the better with time. On how to establish legal processes, he says: “Templates among contracts executed by the company on a recurrent basis can be formulated based on transactional risk that the company faces generally in its recurrent transactions, leaving customisation to non-standard instances.”

Devaiah believes that if a startup has a healthy level of funding, it must invest in a GC to get things right from the start. “A repeat clean-up exercise is a waste of time and resources.”

Dias suggests that “OKRs [objectives and key results] must be put in place at the very beginning, to increase clarity.” Adding trackers to complete the OKRs will also help gauge any additional resources needed and these processes can be smoother if “legaltech is embedded in legal processes”.

Deepthi highlights that when she joined the company, the legal department was approached only when there was a contract to be vetted, so she took the initiative to make her team a part of product-related discussions, which helped all departments. She also established structures for recruiting and departing employees, which met with some resistance, but helped the company in the long run.

The work doesn’t stop at appointing a general counsel or establishing a separate legal department. It’s the beginning of a long journey, one with legal, intradepartmental, interdepartmental and collaborative roadblocks. Steering the process is a collaborative effort. As Devaiah of StarLaw observes: “Unproductive one-upmanship or chiselling to perfection could cause needless friction and wasted time.” A collaborative atmosphere is imperative for organisational success. As Dias says: “Empathy is key.”