What is a startup?

While start-ups are commonly tech related, they aren’t necessarily so. Neither are all new tech companies, start-ups. Most importantly, you are not required to be socially awkward or badly dressed to found a start-up.

Here is a more concrete definition of a start-up:

A start-up is a newly emerging, entrepreneurial and innovative business which is typically small but fast growing.

Start-ups begin with an innovative idea designed to provide a novel solution to a problem, or create new ways of doing things. As such, they tend appeal to a large market, which enables fast growth.

The Australian Government has recently shown interest in supporting new start-ups, or what they call Early Stage Innovation Companies (ESIC). Because the term start-up is more general and colloquial, we will focus on that term. In the last section of this article, we will term to the more precisely and narrowly defined ESICs.

Is there a difference between a start-up and a small business?

Yes, there is. A small business is usually geared towards a small market. A local café or barbershop are good examples of small businesses. A start-up, however, is geared towards a large market. While they begin small, if they are successful, they tend to grow quickly. Thus, start-ups don’t tend to remain start-ups for too long. Because the nature of start-ups, they tend to have different risks involved. New ideas are disruptive and may not hit off, but if they are successful they can generate large profits. Because of the difference in the risks and benefits of small businesses and start-ups, they are usually funded differently. Small businesses are usually financed by loans or grants, while start-ups rely on venture capital firms or angel investors. Moreover, investors in a start-up often are involved its development, advising and mentoring its founders.

What does a start-up look like?

A start-up has one or more founders who originally came up with an innovative idea. The founders will then have some employees who help work on the idea and turn it into a reality. The newly founded start-up will need to find investors who will fund the business. Because of the risks involved, start-ups usually have a tight budget, and wait until they begin spending a lot of money. What start-ups have in common is an innovative and entrepreneurial spirit. Start-ups tend to value new ideas, and their small size can encourage employees to feel free to challenge old ideas. Start-up culture includes creative thinking, a ‘flat’ organizational structure, a fun work environment, and an attitude of non-conformity.

Are all start-ups tech related?

Not necessarily. However, because start-ups are innovative in nature, they often are tech companies. And because of the internet, tech products can quickly reach a larger market.

Are all tech companies start-ups?

Nope. But they probably started off as one. Apple, Google, Disney and HP all started in garages. However, they did not remain start-ups forever.

When does a start-up cease to be one?

Here are a number ways that a company graduates from being a start-up. Keep in mind that there are no official rules that define the end of a start-up, just some general indicators. In the next section, we will discuss the official requirements to qualify as an ESIC.

  • It grows too big. If a company receives millions of dollars in revenue, is worth millions on paper, or has hundreds of employees, then it becomes unreasonable to still call it a start-up.
  • It is acquired by a larger corporation.
  • It goes public.
  • It gets old. If after many years, it doesn’t grow to a large extent, it would probably be best described as a small business.
  • It dies. Strangely enough, in order to be called a start-up, a company must still exist.

While becoming a large company is often a key goal in a start-up, many wish to keep the start-up culture.  Google, for example, is famous for its work campuses which feature unique, fun, and cosy workplaces.

What is an Early Stage Innovation Company (ESIC), and how does it help me?

Officially qualifying as an ESIC has potential financial benefits. Since July 2015, investors in an ESIC may be eligible for tax benefits, thus increasing the investment coming its way. The Australian Government sets out three tests, two of which must be met in order to qualify as an ESIC. These tests look at the recent income, potential growth, and demonstrable innovation.

A company qualifies as an ESIC if it meets both:

  • The early stage test; and
  • Either the
    • 100-point innovation test or
    • Principles-based innovation test.

For more information, visit the ATO’s website.

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