SPACE-TECH START-UPS: BUSINESS STRUCTURE AND LEGAL COMPLIANCES IN INDIA

“Start-Up”, the trendy term used by everyone, right from a Millennials to Gen-z. In reality it is not just a fashionable phrase, rather it is “a young company found by one or more entrepreneurs to develop a unique product or service and bring it to market.” Such entrepreneurial ventures are customarily shoestring operations, with initial funding from the founders themselves or their friends and families. One of the main challenges a start-up faces is to prove to potential investors and lenders that the idea and concept behind the start-up is valid and has the capacity to grow in the exceedingly competitive market.

Company law Sep 4, 2021 0 Add to Reading List

SPACE-TECH START-UPS: BUSINESS STRUCTURE AND LEGAL COMPLIANCES IN INDIA

Introduction

“Start-Up”, the trendy term used by everyone, right from a Millennials to Gen-z. In reality it is not just a fashionable phrase, rather it is “a young company found by one or more entrepreneurs to develop a unique product or service and bring it to market.” Such entrepreneurial ventures are customarily shoestring operations, with initial funding from the founders themselves or their friends and families. One of the main challenges a start-up faces is to prove to potential investors and lenders that the idea and concept behind the start-up is valid and has the capacity to grow in the exceedingly competitive market.

The primary difference between a start-up and a typical business in the market is that, a start-up undertakes a fairly new approach, with modern day entrepreneurial zeal, in order to fill the market gap.

Although, start-up founders are at a slight disadvantage when it comes to funding but they have several potential and legitimate sources to tap. Since this risk prone venture results in high profitability if successful, investors today are willing to pump in funds and take the risk. Take for instance Airbnb, the success story of three men who went from renting mattresses to building a $75 Billion (As of Dec. 2020) company. But this wasn’t an overnight success tale, it was an idea with immense potential, which was executed with a lot of thought and precision.

For this reason, every enterprise needs a structure or a basic framework in order to function smoothly and avoid legal complexities. But what exactly does a business structure mean? A business structure refers to “the legal structure of an enterprise which is recognized in a particular jurisdiction.” Moreover, the legal structure also ascertains various kinds of activities which can be undertaken by the enterprise, including administrative pursuits such as supervision, work allocation, coordination, taxation, statutory compliance, etc. Therefore, choosing the right type of business structure for the enterprise is of utmost importance.

This article aims to cover aspects related to the business structure and legal compliances of a space-tech start-up in India.

Start-Ups: How They Came About?

With the advent of technology and high-speed internet around the world, more specifically the USA, several entrepreneurial ideas materialized into start-ups. With some of them being highly successful, such as Microsoft and Apple, many were fascinated and determined to try their hand at such entrepreneurial ventures as they were extremely scalable and grew rapidly.

Start-ups are time and again linked to the rise of Silicon Valley. The concentration of tech companies around Stanford University had a massive impact on the technological development of the world since the 1970s. But the surge in the number of start-ups didn’t really start until the late 1990s; when people finally had the belief and conviction that technology and the internet could change the world as we know and take it to unmatched pinnacles. Entrepreneurs learned from the dot.com bubble fiasco and altered their approach. For instance, well-known companies such as Facebook and Uber have all developed into billion-dollar valuations in just a few years.

The amalgamation technology and one crazy idea is more deadly than one can think of!

The start-up phenomenon had taken the whole world by storm, they were not just confined to a few parts of the world or only for professionals with experience or to a particular field, from students to dropouts, everyone wants to own a start-up.

The advent of start-ups in India is comparatively new but is rapidly catching up. The country has seen many success stories ranging from Flipkart to Oyo Rooms but none of this happened in a day. The Great Recession had a global effect, with the fear of unemployment coming true. With the majority of its population being young, India harnessed its biggest resource i.e., its people, and rose above. Soon, people realized the advantages start-ups brought along; flexibility, work-life balance, transparency, etc. Presently, India is the 3^rd largest start-up ecosystem in the world, with several factors contributing to this, including, cost-effectiveness, size of the domestic market, 2^nd largest internet user-base, and the entrepreneurial environment.

“Indian entrepreneurs never lacked imagination. But, in the last 10 years, the best talent has been limited to corporations. Now, that gap is being bridged. This reverse flow of talent is the most inspiring thing about the B2B start-up sector right now.”^{^[1]}

The best thing about a start-up is that it can be anything you want it to be. It can have any background – right from technical to environmental; can be of any size – micro, medium, small or large.

“Don’t tell me the sky's the limit, when there are footprints on the moon.”^{^[2]} The empty vastness beyond earth and sky, the unknown space, has immense potential for exploration when harnessed with technology. With the race to space accelerating each minute, the space-tech industry is rapidly growing in today’s era, with ample opportunity and scope to thrive. It majorly deals with weather forecasting, navigation systems, remote sensing, communication systems, etc.

Since space is a universal territory, meaning no single country has control over it, it is governed by international laws and treaties. Although, the majority of the countries do have their own space laws.

Business Structure

“Young companies that adopt structured systems to run their operations in their early years grow three times faster than competitors and have a lower rate of CEO turnover.” – Cathy Castillo, Stanford Business.

Like any other start-up, space-tech start-ups also need to have a basic framework and it is not very different from the general one. Although, one can always make minor changes depending upon the requirements. A business structure, basically is the underlying framework of the enterprise, which is also one of the key determinants when it comes to deciding the future of the start-up. Moreover, it also has an impact on the taxes, liability, control and management, capital contribution, etc. Although, there is no such thing as a “perfect business structure”, one can always make the right decision after a thorough research about the short-term and long-term goals of the enterprise; advantages and disadvantages of all the types of structures; general market conditions, etc.

Generally, start-ups rush into incorporation and end up doing the same thing everyone else is doing, registering as a company. Lack of awareness regarding the legal implications, investment opportunities and loan or credit options, are contributing factors to such unthoughtful incorporations. In order to avoid all such complications and ensure easy functioning of the business, a suitable business structure has to be chosen, which can be modified as per the requirements of the enterprise. The structure for a business enterprise in India is predominantly categorized into 5 types namely;

S.No.	Type	Meaning	Features	Advantages	Disadvantages	Suitable For
1.	Sole Proprietorship	The word “sole” means “only”, and “proprietor” means “owner”. Hence, a sole proprietor is the only owner of a business. A sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks.	-Easy formation and closure. -Unlimited liability -Sole risk bearer and profit recipient -Complete control -No separate legal entity -Lack of continuity of business	-Quick decision making -Confidentiality of information -Direct incentive -Sense of accomplishment -Ease of formation and closure	-Limited resources -Limited life of a business -Unlimited liability -Limited managerial ability	-Unorganised sector -Small traders and merchants -Small Businesses -Suitable for the businesses which are simple in nature, less risky, low capital, need more personal attention, limited and localized market
2.	Partnership	As per the Indian Partnership Act, 1932, partnership is “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.” Additionally, there are 6 different types of partners and 4 different types of partnerships.	-Easy formation and closure -Unlimited liability -Risk bearing, as per deed or equally -Decision making and control - Lack of continuity -Number of partners -Mutual agency	- Ease of formation and closure -Balanced decision making -More funds -Sharing of risks -Secrecy	-Unlimited liability -Limited resources -Possibility of conflicts -Lack of continuity -Lack of public confidence	-Home businesses -Micro or small businesses
3.	Limited Liability Partnership	Limited liability partnership (LLP) is an improved version of general partnership as it allows for a partnership structure, wherein each partner’s liabilities are limited to the amount they put into the business. Limited liability ensures protection from negligence, misdeeds or incompetence of the other partners.	-Legal compliances -Limited liability -Feasible Start-up cost -Taxation	-Minimal compliances -Limited liability -Reasonable costs -Tax Advantage -Flexible -Separate legal entity	-Public disclosure -Income is considered as personal income -Difficulty in retention of profits	-Non-Scalable businesses, since outside funding can be raised easily and it also limits the liabilities of its shareholders.
4.	Private Limited Company	A Private Limited Company is one of the most complex business structures. It is a company which is owned by non-governmental organisations or a relatively small number of shareholders or members of a company. This structure is preferred by most investors, as it is vastly regulated and transparent in nature.	-Limited liability -Continuous existence -Separate legal entity -Transferable ownership -Perpetual succession	-Limited liability -Continuous existence -Separate legal entity -Easy closure -Transferable ownership	-Lengthy incorporation -Complex compliances -Minimum two shareholders	If there are sufficient funds and investments and the business requires several employees, then this business structure is suitable.
5.	One Person Company	A One Person Company is an improved version of sole proprietorship. It gives a single promoter full control over the company while limiting his liability to contributions to the business. Therefore, there is no scope of raising equity funding or offering employee stock options.	-Limited liability - High compliance requirements - Minimal tax advantages -Varying start-up costs	- Limited liability -Minimum Capital -Single owner -Less compliance burdens -Separate legal entity	-Ownership limitation -Compulsory conversion -Restriction on banking activities and conversion	-Solo entrepreneurs

There are a few basic pointers to keep in mind while working on a space-tech start-up:

Niche: A niche market is “a segment of a larger market that can be defined by its own unique needs, preferences, and identity, that makes it different from the larger market.” It basically means creating specialization by further refining the market based on certain parameters, such as price, demographics, quality, psychographics, geographics, etc. It is very important for any business concern to find a market niche, as it ensures brand loyalty, reduced competition, higher profit margins, expertise and is cost effective.
Global Investment: Space-tech start-ups aren’t just a USA thing anymore; they are a global phenomenon. With investors and venture capitalists from around the world wanting to invest in such start-ups, the industry is seeing an increasing trend. More and more countries are drafting foreign investor friendly space-tech policies, so as to attract foreign investment and stay on track with globalization.
Government Funding: Grants, incentives and other subsidies given by the government are a huge benefit and relief, for those in the space-tech sector. For instance, New Zealand’s enthusiasm to create and develop a robust space-tech industry has worked very-well in the favour of Rocket Lab, a U.S.-New Zealand company. According to reports, “the company received around $1.3 million in government grants since 2007 for both research and development projects and student funding; a growth grant from Callaghan Innovation, a New Zealand quasi-government organization, meaning that New Zealand’s government refunds Rocket Lab 20¢ for each dollar Rocket Lab spends on R&D inside of New Zealand.”

Legal Formalities

Space-Tech Laws in India

With the establishment of Indian Space Research Organization (ISRO) [Previously known as Indian National Committee for Space Research] in 1962, began the journey of India’s space exploration. A year later, in 1963, the first rocket was launched under the guidance of Dr. Vikram Sarabhai. Later, in 1975, Aryabhata, the domestically designed and built Indian scientific satellite was launched. Since then India has made significant progress in the field and this is evident from its recent mars mission, Mangalyaan. It was built with “lowest cost of transport - less cost per kilometre travelled than what an autorickshaw was charging per kilometre then in tier two cities of India.” Currently, India has the capability to design, develop, launch, monitor and commercially exploit outer space, making it one of the 7 countries in the world to do so.

While technological and scientific developments have been significant, legal regulations are a subject of concern as legal certainty is a precondition to the development of commercial activities. India has no concrete regulations related to space-tech unlike other countries which are yet to make a mark in the field.

India has ratified 5 international treaties, namely; The Outer Space Treaty, The Rescue Agreement, The Liability Convention, The Registration Convention and the PTBT, whereas it has signed The Moon Treaty. Additionally, Article 51 and 73 of the Indian Constitution, deal with “International Law and Treaty obligations in harmony with the Vienna Convention of the Law of Treaties, 1968.” Other policies include “Satellite Communication Policy of 1997; Remote Sensing Data Policy of 2011; Draft Geospatial Information Regulation Bill, 2016 and draft Space Activities Bill, 2017”

In the recent years, several companies have ventured into the space-tech sector in India, but due to lack of concrete space laws, governing end-to-end commercial space activities in the country is uncertain. Hence, the country needs more comprehensive space laws to protect itself and private parties to take care of avoidable international legal consequences.

Intellectual Property in Space

Intellectual Property Laws are a crucial component in space exploration and space R&D. Although, the enactment of any such laws may be in conflict with the “principle of free and fair access to knowledge, information and resources derived from space activities” and might be a limitation to the same.

Anyways, the following are the feasible options that can be conferred to space technology:

Trade Secrets: Companies which are self-reliant and have the capability to manufacture and execute space missions independently, without a third-party, can protect their intellectual property using trade secrets.
Patents: Since, patents are territorial rights they cannot be granted in such a region which has no jurisdiction, i.e., the space. Article VIII of the Outer Space treaty solves this issue. It states that “the State (party to the Treaty), on whose registry an object launched into outer space is carried, shall retain jurisdiction and control over such object, and over any personnel thereof, while in outer space or on a celestial body.”
Copyrights: Copyrights play an important role when it comes to the transmission and reception from satellites, yet there is a lot of uncertainty regarding the same.

All in all, there is immense scope for the development of intellectual property in the space-tech sector but space being common to the whole world is a small hindrance.

Space-Tech Start-Ups in India

Skyroot Aerospace: Founded by Dr. Pawan Kuman Chandana (ex-servicemen, ISRO) and Dr. Naga Bharath Daka in the year 2018, this Hyderabad based start-up became the first private company in the country to test the “upper-stage rocket engine.” This 3D printed rocket engine has the capacity of a traditional rocket engine but weighs less than half of the same. Moreover, the company intends to launch the first rocket that can hurl satellites of 250-700 kgs into a lower Earth orbit by the end of 2021.

Pixxel: Founded by Kshiitj Khandelwal and Awais Ahmed, in the year 2019, Pixxel is a Bengaluru-based space-tech start-up. The company raised a seed funding of $5 million led by various investors. Additionally, the company plans to launch its 2^nd satellite by mid-2021 and the funding amount will be employed to build a proprietary data platform, in order to analyse the satellite images.

VestaSpace: VestaSpace was incorporated in the year 2018 and is recognized as an “off-beat venture of an Aeronautical engineer to help mid-sized businesses” It specializes in creating small satellite platforms for scientific and commercial applications. The start-up builds small satellite platforms for various applications, such as communications, earth observation missions, etc. Moreover, the founder Arun Sureban, believes that the start-up will witness a “growth boost of almost 300% based on the acquisition of ground stations, reaching out to a more robust global network with the funding amount.”

Description: VestaSpace

Agnikul Cosmos: Located in the National Centre for Combustion R&D at IIT Madras, Chennai, the start-up has signed a memorandum of agreement with Alaska Aerospace Corporation for test-launching their Agnibaan rocket from PSCA (Pacific Spaceport Complex Alaska) on United States’ Kodiak Island.

Conclusion

It requires more than just sheer good luck and coincidence for a start-up to become successful. “In order to become the one percent, you must execute the right idea, in the right direction, at the right time.” When these three fundamental elements work in sync and harmony, the demand for the product or service increases, greater output, expansion of customer base, brand recognition, high-profit margin and steady growth. But, before all of this is possible, the start-up has to raise sufficient funds, research and analyze the market conditions, past-present-future trends, legal compliances, best suited business structure and other necessary groundworks. Start-ups in the space-tech sector are growing rapidly, with astounding advancements every day. The aforementioned start-ups have contributed immensely in order to develop products and processes, so as to make space missions cost effective and improve space travel.

References