Giulia Keese Montanhesi
Lawyer at Marcos Martins Advogados
The English term “Startup” originated in the second half of the 20th century and is derived from the word start (which means to begin or the act of beginning something). It was first used globally in an article in the US magazine Forbes in the 1970s.
However, in the sense we know it, the term became popular in the 1990s, with the emergence of the Internet and entrepreneurship in the US technology hub Silicon Valley, a region in California that is home to a number of companies in the sector, such as Google, Facebook and Apple. Since then, its concept has been linked to an enterprise with innovative potential, capable of bringing new ideas and technologies to the market, generally linked to the Internet and information technology.
The start-up market in Brazil began to develop around the 2000s and grew wildly, requiring legislators to create an environment conducive to their development and differentiated tax conditions, as well as regulating investments in the sector.
In 2018, “99”, the transportation and cab app, was the first Brazilian startup to surpass the US$1 billion mark in market value. In 2019, other companies such as Nubank, Stone, Pagseguro, ifood, loggi and Quinto Andar also surpassed this billion-dollar barrier. According to the Brazilian Startup Association, in 2020 there were approximately 13,182 startups in the country. There is a clear and urgent need to discuss the regulation of this type of entrepreneur.
On October 20, 2020, Complementary Bill (PLC) No. 249 of 2020, which “establishes the legal framework for startups and innovative entrepreneurship” was presented for consideration by the Chamber of Deputies, with the main objective of fostering the business environment in Brazil.
The Bill amends Law No. 6,404/1976 and Complementary Law No. 123/2006, and seeks to establish principles and guidelines for the actions of the public administration, as well as present measures to foster the business environment, increase the supply of capital for investment in innovative entrepreneurship, as well as regulate the bidding and contracting of innovative solutions by the public administration.
PLC 249 covers, in general terms:
- The classification of companies in the definition of startups;
- Guidelines for investment in innovation;
- Promotion of research, development and innovation;
- Experimental regulatory environment programs; and
- Contracting innovative solutions by the state.
At first, the Bill considers “Startup” to be “entrepreneurial organizations, either nascent or in recent operation, whose operations are characterized by innovation applied to their business model or to the products or services they offer”[1].
It’s important to note that the concept of innovation is complete and can be defined in different ways, i.e. it can be the transformation of a particular product, process or business model, to varying degrees.
Innovation can be either incremental (or improvement innovation, which entails minimal or insignificant change) or radical (maximum or paradigm-breaking). Recent examples of radical innovation are Uber and Airbnb, which have transformed the way transportation and accommodation services are offered, with a new business model. Other companies such as iFood, Yellow and Nubank, all startups, are also successful examples of radical innovation.
According to article 3, individual limited liability companies, entrepreneurial companies and simple companies are eligible for the benefits of this project, provided that they meet the following requirements, cumulatively:
- Have annual gross revenues of up to R$16 million in the previous calendar year or R$1.3 million multiplied by the number of months of activity in the previous calendar year, when less than one year;
- Have been registered with the National Register of Legal Entities (CNPJ) for up to six years; and
- Declare, in its constitutive act or amendment, the use of innovative business models or inclusion in the special Inova Simples regime.
The PLC also provides for various types of investment to encourage innovation activities and productive investments in this type of business. Startups will be able to receive capital contributions through the following instruments:
- Share or quota subscription option agreement between the investor and the company;
- Put option agreement for shares or quotas between the investor and the company’s shareholders or partners;
- Convertible debenture issued by the company;
- Loan agreement convertible into an equity stake between the investor and the company;
- Partnership structuring between the investor and the company; and
- Other capital contribution instruments in which the investor, whether an individual or a legal entity, is not part of the company’s share capital.
It also has a chapter on hiring startups by the public administration, with the aim of solving public demands that require innovative solutions using technology and promoting innovation in the productive sector through the use of the state’s purchasing power.
The current wording establishes the rules for the bidding process and the public contract with these companies, which will be called “Public Contract for Innovative Solution – CPSI”, with a term of up to twelve months, extendable for an equal period.
The bill is being processed as a priority and as an appendix to the first bill presented to the Legislative Houses to regulate the sector, Complementary Bill no. 146/2019. It is important to note that this bill has several points that differ from the current wording of PLC 249/2020, since some topics defined in the initial document ended up being removed from the final version of the bill, for example, the possibility of corporations using the Simples Nacional tax regime, compensation for capital gain taxes for angel investors.
If PLC 249/2020 is approved by the Chamber of Deputies, it will go to the Federal Senate for approval, which may even change the original wording. After this deliberation, the bill will be sent for presidential sanction and, it seems, the sector will be regulated in 2021.
The current wording of the Bill leaves many questions unanswered and some gaps in the labor and tax spheres, but it is undoubtedly a big step towards regulating the sector and the relationship and contracting between startups and the public administration.
[1] See article 3 of Complementary Bill 249 of 2020.
