GUEST COLUMN
AVOIDING LEGAL PITFALLS
HOW TO ENSURE THAT YOUR BUSINESS IS LEGALLY SOUND By Alex Tanglao
M
ANY STARTUPS CORRECTLY focus on getting the business fundamentals right. Thinking about how to commercialize the product and raise funding is crucial to making any startup a success. However, another area that many founders often neglect is the legal part. There are five legal pitfalls that all startups should avoid to ensure that the business is legally sound.
Clarify Co-founders’ Rights And Duties
In the rush to develop the product and build a team, many co-founders forget that it is crucial to set out the rights and obligations of each member of the founding team. In other cases, co-founders mistakenly believe that sitting down to properly discuss a Founders’ Agreement is unnecessary as the co-founders have worked well with each other so far. Both scenarios can lead to disastrous outcomes when co-founders realize they are not on the same page and misunderstandings or disputes arise. Get it right from the start by putting together a Founders’ Agreement, which describes the respective rights and obligations of the founders and how the company should be operated. As co-founders are typically shareholders in their company, this can be set out in a Shareholders’ Agreement (in fact, the expressions Founders’ Agreement and Shareholders’ Agreement tend to be used interchangeably). Key clauses in a Shareholders’ Agreement include: ● Name, address, and shareholding of each shareholder; ● Restrictions on share transfer (with the option to include a tag-along clause and/or a drag-along clause); ● Level of consent required for key business decisions (e.g. adopting business plan, approving any transaction above a certain value);
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● Level of consent required for fundamental decisions (e.g. changes to share capital, winding up); ● Option to include a non-competition clause; and ● Confidentiality obligation. The importance of a Shareholders’ Agreement is so great that we would describe it as a legal ‘must have’.
Not Choosing The Right Business Structure
Depending on the business structure that you choose for the startup, your business and its owners will be subject to different types of personal liability and tax requirements, among other things. When approaching the subject, consider the following elements: 1. What are the characteristics of each business structure, and the pros and cons of each? 2. What are your long-term business plans, and the underlying business objectives? 3. What filing and documentation is required for each type of business structure? The business structures commonly found in most countries include sole proprietorship, partnership and limited company.
Flouting Employment Laws And Regulations
As an entrepreneur, you may decide to start up your business in another country for various reasons, such as the availability of certain types of talent and the ease of access to a certain target market. When hiring a team in a different country, remember that legal protections for employees and, correspondingly, the obligations of employers may vary. If you are looking to expand your business beyond Hong Kong into the rest of Asia Pacific, make sure to read up on topics such as the legal considerations