Legal aspects of startup investing in Ukraine

It is a  common situation when a promising start-up faces the issue of lack of funds or other assets necessary for the proper organization and operation of a business. The most acceptable solution is to search for the investor willing to take over the funding of an innovation enterprise. The search for a potential investor and conclusion of contractual relations with him are the most important tasks of a startup.

The main regulatory legal act, defining the investor and start-up relations, is the Law of Ukraine “On investment activity”. In accordance with this law, investments shall be any and all kinds of material and intellectual values, which are made to

objects of business activity and other kinds of activity, and result of which is connected with the creation of profits (incomes), or any other social effect is achieved.

Investments can be represented as:

 - financial resources, specific (purpose-oriented) banking deposits, shares, stocks, and other securities, with the exception bills of exchange;

 - movable and immovable property;

 - rights to the intellectual property;

 - “know-how”, i.e. a package of technical, technological, commercial, and other knowledge in the form of

technical documents, skills, and production experience, which are required for the organization of one

or another kind of production and which are not patented;

 - right of enjoyment of land, water, natural resources, buildings, structures, equipment, as well

as other rights of property;

 - other values.

A contract (an agreement) shall be the basic legal document, which shall regulate mutual relations of subjects of the investment activity, namely the investor and the participant (the startup). According to the above law, subjects of the investment activity shall have the exclusive rights to conclude contracts, select partners, determine obligations and any other conditions of the mutual business relations provided that they shall be in line with the laws of Ukraine.

At the same time, the concept of “investment contract” is absent in the legislation of Ukraine, and accordingly, conclusion of an agreement with the investor can be made in various forms. The main rule is that the contract must comply with the requirements of Ukrainian legislation.

When concluding a contract between the investor and the startup representative, it is important to remember that both parties are equal partners, whose investments are made on the one hand in the form of investments, and on the other - in the form of innovations.

In practice, the most common forms of investments are:

- setting up a limited liability company or investment in an existing company;

- joint venture;

- loan application;

- lease of property.

From a legal point of view, all of these forms comply with the legislation of Ukraine, but setting up an LLC seems to be the most effective form of cooperation.

Setting up a new enterprise allows individuals, who are promoting the  startup, and the investor to determine the amount of the LLC’s charter capital, the shares of participants and their kinds, and, most importantly, the procedure for distributing profits. A charter of the LLC shal be the basiс document, regulating these issues. It is important to remember that if a natural person contributes an intangible asset, such as know-how, to the charter capital, it must have a monetary value.

If the LLC has already been set up, the investor can enter it as a new participant. This decision is made by the general meeting of the founders, followed by the amendment of the company’s charter. These changes shall be recorded by the state registrar.

It is important to remember that the role and scope of the founder’s rights depend on the amount of his contribution to the charter capital, and accordingly, the basis for determining the amount of dividends shall be the proportion of the founders in the charter capital.

In some cases, for example, if the investor is unwilling to be a participant of an LLC, the investments may be formalized in loan, lease or joint venture agreements.

The loan agreement records the amount of borrowed funds, loan maturity, the user fee (interest), and also loan back guarantees, such as a third-party guarantee  or a security deposit. The lease agreement specifies the leased property, such as an office space, occupation, payment, and other significant conditions.

A joint venture contract is concluded if the parties do not plan to create a new legal entity. In this case, the person responsible for the conduct of a business must be identified. All issues related to settlements between the participants must be specified in the contract.

Publication date: 21/11/2014
Volodymyr Gurlov

About author

Name: Volodymyr Gurlov

Position: Partner

Education: National Academy of the Security Service of Ukraine

Knowledge of languages: Russian, Ukrainian, English

Email: [email protected]

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