РУС ENG

+ 375 17 226 10 26     + 375 44 500 15 10

info@revera.by

Life cycle of IT start-ups in Belarus

9 March 2015

In the last 20 years, thanks to the government support system at the level of the Hi-Tech park special regime (hereinafter - HTP) and the general loyalty policy in relation to IT-business, Belarus has made this sector one of the fastest developing business sector. A high level of personnel training also played its positive role (in Soviet times in Belarus one of the best training bases for engineers was created) as well as closer for Europeans mentality, harmonizing with an acceptable level of labour remuneration and taxes. Accordingly, in the last few years, the combination of the words "Belarus" and «IT» is associated with such well-known all over the world brands as Viber and World of Tanks.

In the development of the Belarusian start-ups some certain regularities and laws are already observed and through the eyes of associates can be represented as a kind of life cycle composed of the following stages:

1) creation and entry into a market;

2) creation of the basic product, formalization of relations with the team;

3) entry into HTP;

4) business structuring and preparation for sale;

5) business sale or sale of a company.


«Out of swaddling clothes»

Today in Belarus there are two classic schemes of IT-project start-up:

1) development of their own solutions alongside with outsourcing work;

2) selling the idea to create a product with an initial original attraction of outside investments.

A few years ago the main motive force of the Belarusian IT-market evolution was outsourcing, which allowed many companies to augment capital and switch from writing a code for the benefit of external parties to own projects. Having a design team working on a by-order basis provides the company with a financial flow for existence, allowing some funds to be directed to develop its own product ("a labor of love ").

The same scheme is applicable for freelance programmers, who at off-work time are developing their own projects individually or in cooperation with a group of enthusiasts. Implementing this scheme mostly the point is about small projects, on the whole aimed at the sector b2c (mobile applications, games, and so on). Similar solutions do not require considerable financial and time investments, if the project does not "shoot", it will not hit hard in the developer pocket.

The second scheme implies capital raising from outside. At the same time this variant with attraction of investments is often the next stage of the project development, implemented before at its own cost and expense.

It’s typically for Belarus that in many cases start-ups are started their creation by programmers, registered as individual entrepreneurs, applying the simplified taxation system

It’s typically for Belarus that in many cases start-ups are started their creation by programmers, registered as individual entrepreneurs, applying the simplified taxation system (STS). It allows earning income by legal means at the first stages of project promoting with the tax payment in the amount of 3% (including VAT) or 5% (excluding VAT). Gross revenue is recognized as the taxation base under STS, i.e. the whole received income excluding costs. Accordingly, accounting for individual entrepreneurs does not require any special knowledge and takes the minimum of time.

A variant of this model may be a coworking-center creation, where many individual entrepreneurs are working together on the same product. While developing the project the team often cannot include only developers and testers. A need to expand arises for the team at the expense of not only operating personnel, but also non-manual workers who should be formalized.  

At the same time, while completing the product prototype on the threshold of the alpha version launch, developers are thinking: how they can make money from their pet project. Many questions are concerned with it - from distribution channels of the product to profit receiving. Distribution variants usually depend on the product specificity. As judged by one of the most popular mobile application markets today it is sufficient for developers to create a user account on the AppStore or Google Play, concluding the relevant public contract and then to promote purposefully their product. Other software is sold by means of the site of its developers, but with the help of processing platforms, which undertake the functions of a mediator to receive money from various payment systems and direct the received funds less the remuneration interest for the account of the developer. Models of work by means of publishers (whose role is often played by the known to everyone social networks) are also very popular. One of the advantages of this model is the fact which is sometimes noted that social networks represent already collected targeted audience, it can simplify the market promotion of the product.

Finally, a large segment of products use b2b system with conclusion of contracts under the conditions of customization of the product for a particular corporate customer. On the whole questions on distribution channels at the first stage require legal due diligence only in the field of risk assessment and potential liability, because the system  is often based on the conclusion of public contracts with large corporations, which are not fit in individually with each common client. With time and, above all, increase in profits of the product the approach may be changed. An example is the practice of changing the conditions of the standard contract of the social network "VKontakte" for the customer with a good product, who is not at the same time a large corporation. However, it is still an exception rather than the rule.

With regard to receiving of profit, then at the very first stage almost the entire flow is closed to the Belarusian company-developer and completing the product, with reinvestments and the office maintenance, so in this period questions on the formation of a separate business unit, which will attract the flow of funds, and on the application of the complex of tax optimization tools, are usually irrelevant.

Next stage is an active market promotion of the product. During this period, most companies make a blunder, not strictly enough controlling the way of the product registration, as well as who owns the rights, and whether they are formalized in full.

These questions lead the company to the second, more mature stage, namely the creation of the base product, registration it as a corporate unit and building of the legal relationship with the team. That is the stage when associates are mostly involved in active cooperation with the developers of the new software solution.

Well, where are the rights?

If the product has passed all the test modes, presented to public and begins to give quite a significant profit, then the developers and other staff, who stand at the origins of the project, traditionally begin to wonder about the participation in the sale income position. At this stage, the belonging of rights to the product is clearly defined, their legal implementation is occurred.

This procedure is almost always subject to a single algorithm: reservation clauses related to the transfer of rights to the product of the company as work made for hire are entered in staff contracts. Extra civil agreements aimed at detailing of such the transfer, cession of all property and limitation of  non-property rights of the authors, resolving the question on royalty fee payment can be concluded.

For the project the requirements list is drawn up with the description of its functionality, due to internal documents (orders to develop and improve, duty assignments and execution reports) business processes to create an object are formalized. Additionally, the product is put on accounting record as an intangible asset with the minutes on the depreciation policy, a delivery-acceptance act, and an inventory card.

Additionally, it is recommended to have an  insurance in case before or after the entry of the developed product into the market, some of its developers decide to leave the team. At the same time, they either retain the rights to the software (with the possibility of claiming if the product suddenly becomes commercially successful), or simply copy original materials for the use in an independent activity. For the second situation, for the developer detached it is worthless within a short time to create even a clone or at least the "cousin" of the created product.

Unfortunately, the post-Soviet legal system has not yet invented utterly effective mechanisms to deal with such the situations. However, while "cleansing the rights to the product" in any case it is necessary to attend  to the signing of assignment agreements with contractors or agreements on the transfer of rights to work made for hire with the corporate employee, as well as agreements on the prohibition on competition and disclosure of information.

One more additional mechanism of registration of rights can be a work to create and register a trademark of the particular product or the company-developer.

Economy ____________ and prestige

Thus, the rights to the product are registered, the relationship with the team are settled, the trademark is registered, and the created product step by step is winning the hearts of a growing number of users, and this, in its turn, entails an increase in costs of maintaining the team and the office, as well as growth in tax expenses. Particularly at this point residency in the park of high technologies becomes especially relevant, it provides IT-companies with the special legal regime. At the same time in addition to the obvious economic profit the title of HTP resident today is quite high-status and c promotes attractiveness for potential investors and customers.

DISTINCTIVE FEATURES of IT-start-ups

• it is extremely risky, and at the same time highly profitable activity. According to statistics, at least 80-85% of IT-start-ups are unprofitable, but the profit of the rest of them, "shot", covers investments hundreds of times. In addition, it should be noted that in the IT-sphere the law of Pareto works especially striking: 20% of highly specialized companies get more than 80% of the market profit;

• the main asset is intellectual property. At the same time exceptional significance is the confidentiality regime - an uncontrolled spread of ideas or prototypes can instantly kill a start-up;

• a global competition level is conditioned upon extraterritoriality of Internet. A truly successful product should be competitive not in a particular country or a particular region, but all over the world;

• the life cycle of products is ultrashort in comparison with the production of many traditional business branches (it is always necessary to catch up with developing technologies);

• not only resource investments (money, labor force) are important, and smart-investments (communication, expert examination, achievements and experience exchange, co-working);

• a special focus on the entertainment industry (games) and social activities (social networks, mobile applications). It is highlighted by one of the latest news, flying around Internet: Facebook named Wargaming the most profitable game company of all time.

Questions on distribution channels at the first stage require legal due diligence only in the field of risk assessment and potential liability, because the system  is often based on the conclusion of public contracts with large corporations

Usually, from the moment of recognition of the desire to try to be a candidate for the entry into HTP to obtain the resident status from four months to a year may pass. The process duration is related to the necessity to write a detailed business project, which is relevant to the standards established by the governing body of the park for its residents.

The key components of this business project are a detailed description of the activities that are a potential candidate plans to carry out as a resident of HTP (including technical component), the development strategy of their company or a project in a five-year period and a strategic vision of key financial indicators such as proceeds from activities and the dynamics of its growth, profitability, growth in staff and salaries, an investment plan. The approval of the planned project takes, as a rule, in the process of joining the lion's share of the time.

In addition, the company has to "catch up with" to meet the informal criteria established for the residents of HTP. Among them there are applicability of the development, the proper level of salaries at the entry time, the proper registration of the intellectual property rights, a high percentage of profitability, maintenance of education and many other things.

After all the approvals when a special role is played by the company-candidate executive, there is the official submission of the business project and the statement, its presentation and defense before the expert and supervisory boards. In case of a positive opinion the supervisory board shall decide on the registration and issue a relevant certificate from the moment of the receipt of which the company is entitled to use all the benefits of its residence. It should be noted that the most significant are:

• substitution of the standard income tax by contributions to HTP administration in the amount of 1% of the resident profit;

• absence of VAT;

• reduction in income tax from salaries of employees of the HTP resident from 12 to 9%;

• a significant reduction in the size of social security contributions due to the fact that the basis for the calculation of 34% is the average salary in the republic instead of the real salary of the employee;

• customs privileges during the equipment import for the activities of the resident and an exemption from the obligatory sale of foreign currency;

• reduction in the tax rate on income of foreign legal entities (withholding tax) from 15 to 5% and exemption from offshore duty payment.

Restructurisation

Almost simultaneously with the process of entry into HTP (if such the decision is appropriate), companies are realizing that it is not already enough to work as one company which is a "workhorse" in terms of development, and the holder of exclusive rights and the profit center.

At this point questions on the acquisition of expensive assets become more relevant (for ex, construction or purchase of an office), the development of other business lines that require the free flow of investments, building of the own distribution channels, private investments of the owners. Often there are "side" lines of business that do not fit into the exclusive activities of HTP, also with the high popularity of the product there are more often tender offers to acquire the project with the development team.

This situation is probably the main reason forcing IT-business owners to turn to external associates, because questions on registration of the rights to the product are often resolved by its own efforts. Firstly, restructurisation requires the involvement of a number of specialists in the field of corporate, contract law and tax planning. Secondly, at this stage, traditionally the question arises on a special formalization of partnership relations in a situation when there are several owners, as well as building of an effective system of motivation for top management, when the owner would like to change from the operative business management to strategic planning.

All these reasons combined with the desire to increase the level of business protection and accrued assets, and provide easy scaling and possible involvement of buyers or investors for the further business development change into quite global restructurisation projects. In such projects, usually different jurisdictions and legal systems are involved various corporate units are created and transformed, profit centers and mechanisms of its redistribution are defined more clearly, contract "binding" is built. Usually at this stage, the owners decide to formalise legally their partnership agreements by means of the conclusion of shareholders’ agreements , as a rule, transferred to the subordination of the British jurisdiction, under the motivation system option or pseudo-option agreements with the key employees, and so on. Finally, a start-up initially consisting of a Belarusian company, often turns into quite a complicated holding company consisting of the entities of three or five jurisdictions.

Study under your elders and become a part of the greater part

At some stage (if even from the very beginning) many Belarusian IT-companies are thinking about how to become a part of the greater and highly developed corporation or completely sell the business when it reaches the highest investment attractiveness. Today, a special interest in investments of this kind in Belarus arises from the side of large corporations of Russia, the USA and Asia region.

The process of a potential sale is very complicated, long, and taking into account the specifics may also require a considerable assistance of external legal advisers. Options of sale can be quite a lot: from a simple assignment of the exclusive rights to a successful product to the sale of one company from the group or even the sale of a "chain" of companies, including both the development-company, and the publisher-company and their holding structure.

This process is subject to the standard laws of M&A transactions: conducting of the pre-investment audit, building of a clear business structure with a view to sell it (for example, using an effective tax agreement) and giving to the company or the product for sale the marketing "gloss". Then there are differences depending on what the company decides to sell.

Option 1. Sale of the product. If the company decides to sell the created product quite a simple procedure for the assignment of exceptional rights to intellectual property is used, it may include a software solution, and, for example, a particular trademark or other related objects (domain and site, and so on).

Option 2: Sale of the company. There is another option, when the object of acquisition, together with the product is the development team that in the future will continue to develop the project, as well as established in the company business processes. In this case, it is often a matter of the company purchase in a particular configuration. The advantage for the customer in this case is that in addition to the popular product he will have people who know him thoroughly. So it also may serve as a certain guarantee that after the transaction to buy the company the investor will retain its structural hierarchy, for example, agreeing with the former seller of the operative management of the project for a certain period. The obvious disadvantage is the acquisition of the company together with its history and possibly latent defects.

Start-up initially consisting of a Belarusian company, often turns into quite a complicated holding company consisting of the entities of three or five jurisdictions.

Option 3: Sale of the business. It happens that at the time of sale the company has managed to develop into the holding and not only the development company is offered for sale - a resident of Belarus, but also the company-pablisher (for example, a resident of the United States), a holding company registered, for example, in Cyprus and the service company - a resident of the UK. In this case, the object of the sale is a holding company which is the owner of the entire corporate structure. Similar to the second option, the advantage is to buy the business already fully structured. Also, the transactions which is outside the jurisdiction of Belarus can be a tool of the perfectly legal tax optimization and more flexible formulated terms of the transaction, rather than it is allowed by the Belarusian corporate law. Finally, in some cases, the parties of the transaction do not want to inform immediately about the change of the business owner, and, despite the fact that sooner or later everything becomes clear, structuring outside Belarus allows to get  a longer time period, which sometimes is needed by the parties, for example, to resolve issues with the team.

Subscribe to our news on Facebook and get useful information in convenient form