Google “what is a start up?” and you’re likely to find something along the lines of the following: “an endeavour pursued by an entrepreneur to seek, develop, and validate a scalable business model”. Note the emphasis added.
The scalability or growth of a startup (typically) depends on the stability of the building blocks laid at the inception of an entrepreneurial journey.
The more stable these blocks are, the easier it is for a startup to scale up and remain stable. One of these blocks relate to the legal aspects of the startup. This article explores the significance of having a startup/corporate lawyer on board during the initial phases of a startup (even before you start a company).
A. Dealing with Governmental authorities and Regulators
Initially, the classification of your startup as being within a regulated space or not will depend on the nature of your business model. Typically, if your startup operates in industries such as healthcare, financial services, or logistics that are already subject to regulations, those regulations will also apply to your startup.
It would be advisable to engage the services of a competent corporate lawyer while you navigate through the development of your minimum viable product (MVP). This precaution is crucial to avoid legal repercussions, including potential fines or penalties for non-compliance.
For instance, consider the fintech sector. If your startup operates in the fintech space, you may fall under the purview of regulatory bodies such as the Securities Commission of Malaysia or the Central Bank of Malaysia. A competent corporate lawyer can assist you in determining the specific regulator you need to approach. They can guide you through the process of obtaining the necessary regulatory approvals, ensuring that your business can commence operations lawfully.
B. Negotiating with ‘seasoned people’
No matter how much research you've done or how many templates you've used, as a first-time entrepreneur, you're likely to encounter individuals with more experience in the startup ecosystem. From venture funds to angel investors, these people have probably dealt with numerous similar agreements. They are familiar with the crucial points and key terms that carry weight in negotiations.
Having a good corporate lawyer by your side can ensure that the playing field is not fully tilted on their side (and in some cases may even help in tilting it towards you!)
C. Founders’ Issues
Co-founders often depart from a business for various reasons, such as personal circumstances or better opportunities elsewhere. Thus, when you have a co-founder, it is essential to establish a founders’ agreement or shareholders agreement when forming the company.
The terms outlined in this agreement hold significant importance as they lay the groundwork for your business entity. It is crucial to ensure its accuracy. Without a written agreement, including vesting schedules, it becomes challenging to regain shares if the departing co-founder refuses to return them to the remaining party.
D. Mitigating your legal exposure
Founders usually assume that documents such as Memorandum of understanding or Term Sheets are not legally binding. This may potentially be a hefty misconception.
Reason being, the legality of these documents depends on the intent and language used. Without having a professional by your side, you potentially open yourself (especially your company) to unwanted legal exposure and liabilities early on.
Sure, it might just be a term sheet that you’re signing off, but do you really wish to commit to onerous confidentiality obligations or a term that prevents you from getting an offer from another buyer for an indefinite period?
If you’re seeking legal advise on all things startup, please feel free to contact us at 0126582798 or rajvin@rajvingill.com for a complementary chat.
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