10 legal mistakes startups make
To help startups thrive, Tiu Gi Gyn, senior associate at Chooi & Company creates CLInc. It’s not to build a startup community but to build startups in the community with a strong legal foundation. Chooi & Company have given legal advice to startups at previous WIEF IdeaLab events. This year WIEF IdeaLab will be held on 16-17 October 2018.
Tiu Gi Gyn, senior associate at law firm Chooi & Company has been advising companies on various legal and business issues in the corporate life cycle – from initial market entry all the way through exiting the company. On today’s startups, she says they remind her of the dotcom era of the late 90s. ‘I have witnessed many dotcom startups with “get big fast” mentality and lack of solid foundation unable to survive the tech bubble and flamed out in a couple years. Looking back at lessons learnt, we shouldn’t let history repeat itself,’ Tiu recalls.
Though startups in Malaysia are saturated, she observes a lack of enablers. ‘For startups to keep thriving I believe professionals, industry players and corporations play a pivotal role in strengthening the ecosystem,’ Tiu says and believes that the key isn’t to build a startup community but to build startups in the community.
That’s why she founded CLInc, the first legal incubator for startups in Malaysia as part of the law firm’s corporate social responsibility. It began as a platform to help lawyers provide startups in the local community with legal resources, support, advisory and documentation services throughout their corporate journey. ‘Startups rather save on expenses by doing-it-themselves than consulting a lawyer, thinking that legal issues can be dealt with last.’
CLInc deals with startups from various tech and non-tech fields like media production, culinary training, fintech, travel, fashion, biotechnology, education, food and beverage as well as other businesses. Tiu points out that these startups even come from different levels. ‘Some [startups] are still in ideation process or infancy stage, whereas some are in the process of commercialising their idea and there are those who wish to take their business to the next level,’ she explains.
10 mistakes to avoid
Through her experience, Tiu highlights 10 legal mistakes startups often make:
1) Startups rather save on expenses by doing-it-themselves than consulting a lawyer, thinking that legal issues can be dealt with last. One wrong step or lack of sound legal framework may cost a startup more money to rectify the mistake when it could have been avoided.
2) In haste of starting up, founders often dive into making the ideas work but neglect high-tension discussions such as equity allocation, IP ownership and profit split. As a result, feuds can happen and ideas can get stolen.
3) ‘I came across many founders who had poorly-drafted contracts or none at all with their co-founders, business partners or investors. Often promises were made through strings of emails, WhatsApp messages or verbally. Some founders spend no time documenting them in properly written contracts. When one party asserts that the other party had promised them certain deals, proving them can be problematic,’ Tiu recalls.
4) Some startups fail to consider legal compliance issues such as regulatory approvals, permits or license, disclosure and filing obligations. Violation of any regulatory and licensing requirements can attract significant fines or derail a business. In some cases, founders use pompous jargon in describing their business and create an unintended misconception that their businesses are operated in a heavily regulated space. Either way, these founders find themselves incurring more costs than expected.
5) Inexperienced entrepreneurs also encounter problems when they form the wrong legal entity to operate their business. As a result, they’re unable to obtain certain grants, loans and incentives, and risk having their operation approvals being rejected.
6) Investment agreements entered with venture capital firms are typically one sided and in favour of the venture capital as compared to the startups. Some are quite complex and startups who need funding desperately aren’t in the position to negotiate.
7) There’s a risk of former employees competing with companies after resignation or dismissal, using the proprietary knowledge such as trade secrets and know-how as well as skills they acquire during their employment. Startups who don’t maintain human resource documentation – that includes employment contracts, invention or technology assignment agreement, confidentiality and non-compete agreement as well as employee handbook – can be problematic and have little protection over such matters.
9) One of the common oversights among startups is failing to ensure the intellectual property of the unique technology or services and its brand are protected.
10) Many new entrepreneurs are unaware of how the corporate tax system works in Malaysia. Lack of awareness can cause the business to incur high or excessive tax.
To avoid such mistakes, Tiu cautions entrepreneurs to have transparent discussions with their co-founders at the earliest stage possible to manage each other’s expectations. ‘Committing all verbal and informal agreements into contracts is a must,’ she stresses. ‘If you’re unsure of the laws to comply in certain industries related to your business or how to prepare legal documentation, it’s advisable to do some research, seek professional help or ask industry players for sample contracts.’
However, solutions may vary depending on the case such as startups’ financial stance and future plans. ‘There’s no such thing as one size fits all method or quick fix when it comes to legal matters. It’s a process,’ she adds.
At WIEF IdeaLab 2016, Chooi & Co were given the chance to run IdeaClinic, where they mobilised four of their esteemed lawyers, each specialising in different areas such as corporate commercial law, franchising and IP laws, dispute resolutions and employment/industrial relation issues.
This year, IdeaLab 2018, will be co-organised and held at the Goa Institute of Management (GIM) in India on 16-17 October. For the first time IdeaLab is expanding beyond ASEAN and will be offering various features including free consultation on legal advisory services in this year’s IdeaClinic with Legal Minds LLP and the Centre for Incubation and Business Acceleration (CIBA).
The participants of IdeaLab 2016 had the opportunity to meet with the consultants in a private and informal setting to discuss legal issues concerning their businesses. ‘Since IdeaClinic, we’ve managed to foster great friendships with some of the participants and have been coaching them through CLInc.’
She explains that startup laws are generally the same as the laws applicable to corporations. These laws include company and corporate laws, security laws for those going for IPO or crowdfunding, intellectual property laws, employments laws, international trade, taxation laws and others.
‘Having said that, Malaysia has recently recognised that businesses are moving towards a new age of technology, digital currency, e-commerce and global outreach. The regulators have taken significant steps to cater for such moves, including amending trade policies, industry regulations and guidelines,’ Tiu says.
For example, according to Tiu, the Securities Commission of Malaysia in their efforts to protect the public’s investment introduced crowdfunding guidelines. The new Companies Act 2016 changed the way for us to incorporate a company and these changes are aligned with the company laws in Australia, UK, Hong Kong and Singapore.
‘There are new ways to think about the law. The law is fluid and dependant on the economics, politics, consumer and business psychology of the society at that period. A disruptive idea that provides great solutions to communities would drive the law to adapt to circumstances. Do not be afraid of the law. Educating yourself about startup legal matters and establishing a good legal foundation for your business is as important as developing proof of concept, branding of your product/services and establishing a market presence,’ She concludes with advice for future startups.
For more from IdeaClinic this year with free consultations from Legal Minds LLP and the Centre for Incubation and Business Acceleration (CIBA), join WIEF IdeaLab 2018 in Goa, India, where major and minor startup ecosystem players will meet to drive the industry forward. WIEF IdeaLab 2018 will be held on 16-17 October 2018 at the Goa Institute of Management (GIM), India. Register here to attend.
Photo by Tim Gouw on Unsplash