So, you think you might have an idea for a startup or have even launched your product but are wondering what to do next?
This is not a 10-step guide, which will help your startup succeed. There is none.
Instead, based on the most common questions we get, we put together a short guide to help you navigate when launching and growing a tech startup out of Slovakia. The guide also includes a legal part that was prepared together with Sparring and their Playbook. If you are missing anything, drop us a line.
First, let’s agree on some basic terms.
We say “out of Slovakia” because we believe startups should be scalable. And to be scalable means to be global.
What do we mean by “startup”? We follow the classic definition by Steve Blank: a startup is a temporary organization designed to look for a business model that is repeatable and scalable. The goal of a startup is to be a small business but to find a repeatable business model that will turn into a high-growth and profitable company.
While working on your startup, it is crucial to understand the stage you are in. You don’t want to skip a stage or, even worse, get distracted by something that should worry you in 12 months and NOT NOW. This model by Startup Commons (Check out all resources at https://www.startupcommons.org/) nicely illustrates the startup phases ranging from an idea to an established business.
This guide is focused on helping founders in pre-idea, seed, and early stage.
The first step is to have an idea to work on. But even if you don’t, there are concrete steps you can take to get an idea worth pursuing. Founders should learn the science and art behind getting the right ideas as well as abandoning them.
Check out this blog by Jared Friedman, Partner at Y, on how to get startup ideas. You can also participate in hackathons (ideation events taking place usually over a weekend) or sign up for a Startup Weekend. These events are a great way to form teams and work together on problems that can lead to some great startup ideas.
Most founders get obsessed with their ideas. That’s a good thing. Otherwise, they would never spend all those hours on top of their regular jobs. But before building your product, make sure you spend enough effort (time & resources) validating your idea. Yes, you are right – you validate your idea by talking to customers over the phone, email, or by meeting them at events.
If you are not sure how to do it (the chances are that you don’t 🙂 ), we recommend learning how to validate your idea at https://rozbehnisa.sk. There are also a ton of great resources freely available online. You can start by checking out these blogs by Mitchell Harper or Alexander Jarvis. If there is one book you need to read on this, it is the Mum Test – it is fun and eye-opening.
There is nothing more important when building a startup than having the right team of co-founders. Here are few basics you need to know:
You should not be on your own. Y Combinator, the world’s most famous startup accelerator, even has a rule of not accepting startups with a single founder. If you are a solo founder and you think you can pull it all together, watch this video interview with the founder of Dropbox describing his journey of having to search for a co-founder to get into the Y Combinator.
Complementary skills. If you are a group of 2-3 co-founders, make sure your skills are complementary. In your core team, you need to have a product expert with technical skills and a business person.
Agree on the vision. What kind of company do you want to build? Are your ambitions to create a local small business or to become a high-growth global company?
Agree on fundamentals. It happens too often that founders do not explicitly agree on the fundamentals when starting their business. Define your commitments (time, resources, capacities) and decide on the ownership of shares. Write down a simplified Shareholder agreement or agree on the basics in writing in short bullet points. You might be best friends now, but it is still essential you explicitly agree on this. You might want to renegotiate later as your situation or commitment changes, and that is ok.
There is a lot of support and programs available for founders aimed at incubating and accelerating startups. Many of them can be of great help and stepping stones for your business growth. They can provide you with great mentors, office space, access to investors, or even give you some cash.
However, as a founder, you should be busy building your team and product (often on top of your regular job) and not attending every event, training, or incubation program that you see.
At https://innovateslovakia.sk/ecosystem/, we curated the best support programs and go-to organizations based on your startup phase.
There are also programs dedicated to startup needs in specific sectors, e.g. HealthCarelab for digital health startups, Lifbee for biotech, Fintech Hub for fintech startups, or Challenger Urban: Creative aimed at startups working in creative industries or city challenges.
You can also take advantage of university infrastructure and their incubation programs. We recommend the incubator at STU (InQb) in Bratislava, Startup Center at TUKE in Kosice, or UNIZA incubator in Zilina.
In multiple cities in Slovakia, there is also the National Business Center that runs multiple programs for entrepreneurs and can provide you with some specific experts.
Funding and Investors
When building your startup, you will hear a lot about “raising money”, “angel investors”, “venture capital”. Before you send your pitch deck to any investors, make sure you understand what it means to have an investor in your startup. Sometimes founders forget that the goal of a startup is not to get funding. Getting funding (capital from an external investor) can be the right thing to do for many startups, but it is not the only way to get your company started or grow.
There are a few main questions all startups should be able to answer: Why should I raise money? When? How much? What are my financing options? We recommend reading this guide to seed fundraising by Y Combinator. Also, most startup incubators and accelerators can guide you very well through the fundraising process.
In the last few years, there has been a significant growth of investment deals to startups in Slovakia. You can find all deals to Slovak tech startups in our Spreadsheet.
You can find a nice overview of the leading VC funds here.
Increasing revenue, growing the team, acquiring new customers, or attracting investors are naturally the highest priorities for each founder. Getting oriented in the legal area and making sure you have the right documentation in place will support your business when achieving these goals. If you want to understand the basics of startup legalities, keep reading on.
A. Establishing a Company
Creating a legal entity is necessary for protection of your personnel affairs and pooling all business assets (such as intellectual property, revenue or investments) under one roof. You should have a company established before you issue the first invoice to your customers or before you get the first outside investment.
The most common and easiest to operate in Slovakia is a limited liability company (LLC or “s.r.o.” in Slovak). The process of establishing an LLC is fairly simple. With the exception of specific startup documentation (e.g. a Shareholder’s’ agreement or ESOP), it is possible to establish an LLC through providers such as Firmáreň for approx. EUR 250.
If your startup reaches turnover of more than EUR 1 million or has more than 50 team members, you can also consider establishing a simplified joint stock company (“j.s.a.”) but keep in mind that the operations will be more complex in this case.
B. Founders’ Relations
The main document regulating the company (in case of an LLC) will be its memorandum of association (MoA) which is an obligatory part of founding documents and sets forth the basics of relations between the co-founders (such as voting rights or consent to transfer shares) and the powers of managing directors. The content of a MoA is publicly available and quite strictly regulated by the Commercial Code.
In startups, it is standard that the founders’ relations are regulated by a shareholders’ agreement (SHA) on top of the MoA. The SHA is non-public and more flexible contract between the co-founders (and later on also the investors) and commonly includes provisions on:
- founders vesting (typically 3 or 4 years),
- bad leaver/good leaver situations
- drag along and tag along
- non-compete obligation of the founders
- Anti-dilution mechanisms against disproportionate dilution of existing investors’ shares (broad-based weighted average, which is standard or full ratchet, that should be avoided)
Also, do keep in mind that SHA should not conflict with the MoA and applicable law.
C. Contracts with your team
Although you might be working with your best friends, without the proper contracts in place you put your business at risk. There are four basic options of how to contract your teammates.
- Employment contracts are often concluded with the back-office workers and sometimes with creatives (e.g. designers). They offer protection attractive for the employees and allow for automatic transfer of intellectual property (IP) rights from the employees to the employer (your company). On the other hand, employment contracts provide for limited flexibility on the part of the employer in the HR agenda, e.g. with redundancies and firing and come with high tax, health and social security insurance burden (48%).
- Contracts with freelancers (i.e. self-employed persons with a trade license (“SZČO”)), most often in the form of a contract for work or mandate agreement, are suitable for software developers, designers, marketing or sales specialists. They offer low administrative costs, flexibility and come with lower health and social security insurance. However, be careful if the freelancer regime on paper is not employment in fact, in which case you may be subject to penalties. Also, the intellectual property (IP) is not transferred automatically from the freelancer to the company and you need proper IP transfer clauses in place.
- Contracts with independent authors who are not your employees nor do they have a trade license (“živnosť”). In this case, your company will have the obligation to withhold taxes from the payments to the authors in the amount of 19%.
- Contract with teammate’s company (usually LLC) is typically suitable for a team member with an income of at least EUR 40,000 p.a., who has sufficiently high overhead costs. In this case you should safeguard the IP transfer directly from the natural person, as the LLC usually is not an author of the IP.
D. Protection of IP
The IP is the most valuable asset of a startup and an area where the investors find the most mistakes during the due diligence process. There are four basic types.
Copyright protects authorial works. Keep in mind that software code is also authorial work and without proper IP transfer agreement in place, your company does not have the right to use the code developed by your software developers (regardless of invoices paid to them). When licensing the copyright, it is necessary to determine whether an exclusive or non-exclusive license is applied and what limitations (if any) apply to territory, time or scope of the license.
Startups should think about trademarks when creating unique and unmistakable brands for their products or services. Trademarks help to avoid conflicts with existing or emerging competition. It is valid for 10 years and can be repeatedly extended by 10 years. You can get one in Slovakia for EUR 230 and in the EU for EUR 1,120. Before registration, check whether your trademark is suitable for registration. Free verification can be done via TramaTM.
- Design and Patent
You can also protect the design of a product’s appearance by registering a design. Innovations in the form of computer devices, chemical formulas, mechanical equipment, or other types of inventions (e.g. a gaming console or Rubik’s cube) may be protected by registering a patent. Patent applications may exclude competitors from the market covered by the patent, but it is more time-consuming and costly to obtain and uncommon for digital startups. You can use a patent search tool.
Know-how is not subject to legal protection unless they are expressed in a form that is perceptible by the senses (e.g. in the form of a business plan or product specification) do they become a part of a trade secret and their protection can be enforced. For this purpose you can also use a non-disclosure agreement (NDA).
E. Investments in Startups
The ideal investor should, in addition to money, also bring know-how, experience and contacts so you should choose your investor carefully. Investors’ expectations from the startups and the investment process depends on the investment round/stage – the later the stage, the higher the expectations and complexity of the process.
- Singing of a term sheet which is a non-binding document setting forth the most important business term of the investment transaction. These terms should not change later on in the process so pay close attention to it even though it says it is not legally binding.
- Audit/due diligence process when the investor checks the situation in the startup from a legal, financial and sometimes technological point of view
- Drafting of investment documentation – the costs of preparation are usually borne by the startup, which then pays for them from the investment provided. Usually there are several iterations and revisions before the documentation is signed.
- Singing the documentation and providing the investment
Methods of investment
- Convertible loan is a loan provided by the investor that is converted into investor’s share in the startup under certain conditions agreed in a convertible loan agreement (CLA). It is most suitable for the early stages of a startup, or for bridge financing. The aim is not to repay it, but to convert it into a share in the startup in the next investment round. Via convertible loan the startup may get a better valuation if its performance will go as planned.
- Share buyout is more common for later stages. The investor purchases the share on the basis of a share transfer agreement, so that their share in the registered capital corresponds to the share that the investor is to hold after the investment. The rest of the investment amount will usually be provided by the investor as a contribution into the capital fund.