Interview with Olga Belyakova, partner and Co-Head of the TMT Sector Group in Central and Eastern Europe at CMS
Read about legal challenges for startups, what they should pay attention to before deciding to enter new markets, and an assessment of the legal regime in Ukraine in this interview with Olga Belyakova.
Can you share your background and experience in working with the legal aspects of tech startups?
I started my career in the telecom industry in 2000. Now, I have 23 years of experience and actually the company I started was basically a sort of startup because it was a web developing company that developed into a huge company called Golden Telecom. This later merged with Kyivstar. Then, I left it and started working with various organizations in the law firm Baker McKenzie. A year later, I joined CMS and totally dedicated my career to the tech industry, to IT, telecom, media, technology. We started working with young organizations as part of our CMS initiative. We developed a couple of courses for startups and we presented them at various levels. We cooperated with several incubators and accelerators and presented the course. We also cooperated with Lviv Business School and created our Basics of IT laws course there. In CMS, we have a great initiative called EQUIP which trains startups and helps them grow with the support of lawyers. So, we have a variety of angles working with startups. Moreover, I also teach software developers IT law at Kyiv Mohyla Academy. I have developed a specific course dedicated to the basics of IT law and we work with software developers throughout the whole semester. We grow startups from day one till the launch of the product. This way, startups can learn how to create a startup and hire people, then protect data, and then protect IP. We dedicate a lot of time to teaching startups how to protect their intellectual property because it seems to be the biggest problem with them. They don’t think about IP until investors ask them.
What are the common legal challenges tech startups face?
The common legal challenges are normally structuring and IP, so unfortunately there is no culture of legal hygiene. Both in Ukraine and I would say in the rest of the world, startups don’t think of engaging lawyers at an early stage, and then when investors come, startups either need to cure the defects which they discover during the negotiations with investors, or they sometimes need to start again from scratch. So, the biggest problem is that startups don’t have a valid structure. They might be a group of people with great ideas and great skills, but they don’t have a single or valid structure on how to proceed further with developing the business. This is #1, and the biggest problem is IP, because normally startups begin from idea followers. They have so much in their brains to develop an idea into a real product that they simply don’t consider who is responsible for what, who owns what, and who owns the intellectual property rights to what they are developing. And the first question investors ask is: what is your IP? Who holds it? And, unfortunately, very often startups cannot answer that question. In 99% of cases where we deal with investors buying startups, there are IP problems. So, either they don’t formalize the relationship with each other or with their helpers and developers, or they don’t know who owns what. They might use some open-source software and then build something on top of it, which means that it’s not really theirs. They don’t look into the license that regulates the terms of using open-source software. If we talk about AI, very often it’s training AI on some unknown or unauthorized data. In that case, there are a lot of issues. So, it could be a great project, a great product. But if nobody knows who owns the IP, it means that nobody can really dispose of the product because it’s not clear who has that right.
Talking about legislation, what does a startup need to know before it expands?
First, what they need to think about is who their audience is. It’s not possible that they will start selling globally at once. They need to start from something and think who their target audience will be. It might be Asia, it might be the US, or it might be Europe. But they need to start from something. If they start from Europe, they need to understand where their holding and operating companies will be located and they need to choose the right jurisdiction for their product. So it’s not only about taxes, it’s also about the regulation of certain activities like if they sell gaming activity. This is a very profitable area, so people start their business in Malta because of the favorable regime specifically regulating the gaming industry. If we are talking about fintech, then we need to look at the regulations: banking and financial regulations and where those will not be too burdensome for a startup to start the business in certain jurisdictions. So, depending on the product, depending on the scale, depending on the plans, they need to choose the right jurisdiction to start with and then expand. Also, they need to understand what the rules of the game are, because in Ukraine we have a very favorable regime for hiring people, of taxes mostly, but it’s not the same in every jurisdiction. In most jurisdictions, such form of hiring people as private entrepreneurs would simply not be allowed. And none of the jurisdictions allows sole taxes. Very often, startups say that it’s the same all over the world, or at least in the majority of jurisdictions, at least in those that are deemed to be tech jurisdictions like the US, UK, Germany or CEE, but they’re not the same. And they need to balance the risks, to understand the consequences, to know what the government is and whether their type of activity, their product, will fall within certain specific rules which would require specific permits. And for that they need to know the legal background, financial background, and business background. And actually, it is a combination of all those things.
And talking about Ukraine, as I understand, you’ve said that it’s much easier to start a startup’s journey in Ukraine from the point of legislation
It’s not easier, but it’s generally easy to start any business anywhere, because now we live in an online world. Almost always, startups think that if they start delivering company C-Corp, they will become a Unicorn immediately, which is not true. So, creating a company is not a problem elsewhere, but understanding the rules of the game; that’s where the issues can lie. What I mean is that in Ukraine, we have more relaxed approaches to hiring people. So those could be private entrepreneurs, with very low taxes. We have Diia City, which is a specific regime for the IT industry where startups can benefit in terms of both taxes and hiring models, and it’s a relatively unregulated business in Ukraine. But what I mean is that it’s not always the same elsewhere, both in terms of mechanisms of hiring people and how much the business will actually cost the startup in other jurisdictions, because taxes can be higher, labor costs could be higher, labor taxes could also be higher, permits might have to be obtained, corporate governance could be payable, etc. So, it’s not like an indication for scaling, it’s knowing the rules, because there are so many Ukrainian startups which have succeeded globally by understanding the rules of the game. And it’s absolutely impossible to attract investors without a valid legal structure, without the correct corporate governance, and without proper tax hygiene.
How do you think Ukrainian legislation is developing sufficiently in terms of startups?
I don’t think that tech startups should be regulated in general. There are certain sectors that definitely need to be regulated, like the financial sector and defense sector to a certain extent. But I don’t think that startups could actually be regulated or that legislation in terms of startups should be developed. I say that we have a very favorable regime in Ukraine. And when I discussed it with my foreign partners, they were literally astonished at how low the taxes are, how favorable the regime is, and how flexible the hiring method is. So, it’s not that easy in some jurisdictions but I do think that we have enough regulation, I don’t think we need more. We just need to help our startups succeed and not create additional obstacles, because sometimes legislation is an additional obstacle, especially in such a dynamically developing sector as tech. And we will never be able to reach the same legislation development level as tech development. It’s not possible to do everything in parallel, and that’s why tech will always dictate the rules and not vice versa. And that’s very clear from Diia City, because hiring people as private contractors has always been a grey area and is forbidden in many countries. But, given that the IT industry is developing so quickly it was impossible to cancel this and just tell IT industry to start hiring developers as employees. The legislation followed the development of the tech industry and not vice versa. So, legislation follows, it doesn’t link; tech leads, legislation follows and this is true all over the world.
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CMS is an international law firm that offers legal and tax advisory services. It provides companies and organisations with advice on a full range of legal issues. CMS consists of 18 independent law firms with about 80 offices worldwide and is the world’s 5th largest law firm by lawyer headcount and the 21st by revenue.
