Legal Support for Startups in Serbia

Meaning of Startup

In Serbia, the definition of a startup can be found in the Law on Innovation Activity, which states that a startup is a newly established business entity or entrepreneur engaged in innovative activities and has the potential for rapid and significant growth.

Establishment and Legal Structure of Startups in Serbia

Every successful startup begins with a well-established legal structure.

General partnership (GP),
Limited partnership (LP),
Limited liability company (LLC), and
Joint-stock company (JSC).

Although each of these forms has its advantages and disadvantages, one legal structure often stands out as the most suitable for early-stage startups, which is the limited liability company.

The advantages of this legal form lie in the fact that startup founders are not personally liable with their private assets, but only up to the amount of their contributions. Additionally, the minimum capital required to establish a startup in the form of a LLC is just a symbolic 100 dinars, and the procedure for establishment is not very complicated.

On the other hand, when a startup surpasses the early development phase and enters the scale-up phase, which requires accumulating greater capital, this legal form may become problematic as it does not allow for public share sales.

In such cases, founders often decide to change the legal structure to a joint-stock company, which enables public issuance of shares and raising capital through initial public offerings (IPOs).

In any case, after choosing the legal form and other essential details (name, registered office, date of establishment, primary activity, management structure, representative, etc.), you will also need a founding act.

You can draft this yourself or seek assistance from the same startup lawyer you hired for the establishment of your startup. One of the most important documents is the shareholders agreement, which regulates the relationships among the founders and outlines the tasks, rights, and obligations of each. The absence of this document often leads to misunderstandings among founders due to differing expectations.

In any case, a lawyer can be helpful not only in selecting the legal form and drafting initial documents but also in numerous other legal aspects throughout the development of your startup, including:

Advising on contracts in startup business, as well as drafting them (contracts with employees, contractors, managers, suppliers, customers, etc.)
Protecting the startup's intellectual property (often the most crucial part, as the entire value of the startup lies in the software or other IP)
Managing startup investments (including due diligence when raising investments and negotiating with investors)
Tax planning and optimization for startups
Advising on issuing digital tokens (ICO)
General compliance advisory (i.e. if in fintech sphere then compliance with Central bank regulation)
Compliance with regulations in the field of personal data protection, etc.

Due Diligence During Investment Raising or Startup Sale

Investors will always seek/conduct legal due diligence before investing in your startup.

In other words, they will request detailed information about all areas of your startup's operations to ensure that the data you have presented is accurate and reliable.

Legal due diligence includes:

Verifying that the startup is properly registered and that all documents are up to date. If permits are required, whether it possesses them (often applicable to electronic money institutions - EMI).
Analyzing the startup's assets, including its intellectual property (primarily patents, copyrights, and trademarks).
Reviewing the startup's contracts with employees, as well as with clients, partners, and suppliers.
Checking the startup's legal compliance with all relevant laws and regulations.
Reviewing ongoing legal proceedings in which your startup is involved.
Identifying other potential risks to the startup's operations.

In addition to legal due diligence, investors will also conduct financial due diligence to verify the accuracy of business and accounting data and analyze the startup's financial condition.

If you are a startup owner, a startup lawyer can check the accuracy of all your documents, the compliance of your startup with laws and regulations, as well as any potential irregularities in contracts and other acts that could signal to investors that investing in your startup may be a risky endeavor.

On the other hand, if you are an investor considering an investment in a startup, a lawyer can help you thoroughly check all legal aspects of the startup to ensure that there are no hidden issues that could affect your investment decision.

Startup Contracts and Other Important Documents

In the operations of a startup, you will encounter a large number of contracts and other legal documents, including:

Founding act
Shareholders Agreement
Employment contracts (as well as decisions, e.g., on termination of employment or dismissal of employment contracts)
Contracts with partners
Contracts with suppliers
Contracts with clients
License agreements (e.g., software agreements for IT startups)
Non-Disclosure Agreements (NDA) – documents that protect business secrets and confidential information ("know-how") from unauthorized disclosure.
Agreement on the admission of a new member to the company
Convertible loan agreement
Contract for performing a task (with an independent contractor)
Copyright agreement
Vesting agreement
SAFT agreement, etc.

The fact is that, due to limited budgets at the beginning of operations, many startups use templates for these contracts, as they seem like a practical and economical solution.

However, using standard templates without adapting them to the specific circumstances of each startup can lead to significant risks.

For instance, the contract template you are using may not be aligned with Serbian regulations or may contain provisions that are not relevant to your business, leading to lengthy and costly disputes with partners, suppliers, employees, or clients. It is particularly risky to use templates for contracts related to intellectual property.

A startup lawyer can help you tailor contracts to the specific needs of your startup, which will, in the long run, not only help avoid potential disputes but also reduce your startup's operational costs and protect your business interests through the safeguarding of intellectual property rights and business secrets.

Intellectual Property of Startups

Every good startup has a solid IP strategy and aims to develop an adequate IP portfolio. This way, the startup protects its competitive space and establishes its position in the market.

For example, if your startup is developing a technical solution to a specific problem (a well-known example would be Bluetooth technology), it may consider obtaining a patent for that solution. On the other hand, if you are developing an external or aesthetic solution for a product, such as a special design of a thermos that is easier to carry or hold while running, you will think about industrial design.

Certainly, your startup should timely protect its recognizable brand and the distinctive appearance of its products. This includes protecting the appropriate name, logo, or other signs through trademark registration.

Finally, it is important to consider the registration of your startup's copyright, i.e., depositing the copyrighted work. Companies that have developed software as a service (SaaS) and generate revenue by granting rights to use that software can achieve significant tax relief through a tax incentive known as the "IP box" if they register their copyrights.

To learn more about the advantages of copyright registration for startups developing their own software, read more here.

Raising Capital for Startups and Negotiations During Investment

Every stage of a startup's development requires raising a certain amount of capital to expand operations and ensure financial stability.

In Serbia, there has been a growth in the activities of angel investors over the past few years, who not only provide financial support to early-stage startups but also often bring valuable experience, expertise, mentorship, and a network of contacts.

In the process of negotiating investment terms, whether you are a startup or an investor, a good lawyer will be essential.

A startup lawyer will assist you in negotiating:

The amount and distribution of the investment
Repayment terms, such as interest rates, repayment timelines, etc.
The valuation of the startup
Rights to future equity, voting rights, rights to sell, and other rights related to company management
The contents of the NDA as likely the first contract you will sign with the investor/startup (e.g., regarding the duration of confidentiality obligations and sanctions for breach of contract)
The contents of the term sheet
Aligning the startup's values and goals with those of the investor
Timelines for executing the investment / meeting goals set by the startup
Conditions for exiting the investment, etc.

In any case, a lawyer can help protect the interests of all parties involved in the negotiation process, as well as ensure the long-term successful collaboration between the startup and the investor.

Startups in Serbia and Personal Data Protection

Given the increasingly strict legal regulations in the field of personal data protection and the growing consumer awareness of privacy, your startup should consider protecting it.

Our advice is to first get well-informed about the applicable regulations in these areas, such as GDPR in the EU or CCPA in the USA, and to understand how they apply to your business. This is especially important if you process any personal data, whether it belongs to your consumers/clients or employees.

It would also be wise to hire a lawyer who can assist you in creating a privacy policy and terms of use for your startup's website.

A lawyer can also help with:

Developing internal procedures for collecting, storing, and sharing personal data.
Responding to complaints from individuals and representing you in disputes with them.
Negotiating and drafting contracts with third parties that process data on your behalf, if you have engaged such parties.
Preparing for inspections.

Offering Ownership Shares in a Startup to Employees – Vesting

If your startup wants to retain quality talent, whether it's your employees, advisors, or other individuals, you can offer them ownership shares in your startup, commonly known as ESOP/Vesting.

If you decide to take this step, a lawyer can assist you with:

Preparing legal documentation, including a decision for acquiring shares and clearly defining the conditions for acquiring them.
Advising on the procedures necessary for making a decision on reserving shares.
Registering the decision for acquiring own shares and issuing financial instruments with the relevant authorities.
Advising on tax obligations and tax incentives related to vesting.

In general, a lawyer will facilitate the process of implementing a vesting system in your startup, creating an incentivizing environment for your employees and collaborators, and ensuring the growth and success of your startup.

Startups in the Cryptocurrency, Artificial Intelligence, and Advanced Technologies Industries

If your startup operates in one of the innovative industries, there is a good chance that, in addition to general compliance with basic laws and regulations, you will also need to adhere to specific regulations related to your activity.

For instance, if you provide services related to digital assets (VASP), you will need a license to offer such services.

The process of obtaining this license is not straightforward, as it involves:

Compiling and gathering a range of different formal documents,
Submitting descriptions of various measures from the National Bank of Serbia (NBS), including those for protecting users' funds and those regarding internal controls and employee training related to transactions with virtual currencies, etc.
Providing staffing, technical, and organizational data, as well as
Demonstrating compliance with the mandatory minimum capital requirements stipulated by the Law on Digital Assets.

Similarly, if your business involves the development or use of artificial intelligence, you will need an innovative and up-to-date lawyer who understands the legal regulations surrounding AI, as these have only recently begun to develop.

Startup Lawyer in Serbia

The Pekić Law Firm has a deep understanding of corporate law in the context of innovative and technological companies, as well as experience in providing legal support to domestic and foreign startups in Serbia.

No investor invests in a company that has legally uncertain relationships. For this reason, if you have any questions or legal uncertainties regarding any of the aspects mentioned above related to the operations of a startup, feel free to contact us at [email protected].