Why Legal Documentation Matters to Start-Up Success

There is a misconception that start-up companies should just focus on capital-raising and developing their technology, trade, software or products.  Start-up companies often neglect the legal requirements essential to business success.  There is a misconception that legal costs are prohibitively high and that start-up companies are unable to afford legal fees.  The reality is that law firms today are in fact reducing their fees and changing their operating models in order to cater to the needs and budgets of start-up companies.

Many start-up companies rely on template legal documentation available online, rely on services of ‘self-help’ companies that ‘bundle legal documentation’ applicable to start-ups or rely on friends or family members (with legal knowledge) for legal advice.   This approach may however back-fire and have disastrous consequences if they for example omit essential terms and clauses from contracts that make these documents enforceable or omit to clearly stipulate the appropriate mechanism for dispute resolution or governing law of the contract.  These firms may actually end up wasting even more money on legal bills to correct these problems!  It is thus integral to have proper legal documentation in place from the outset for start-up success.

Below is a (non-exhaustive) list of legal documentation commonly required by start-up’s:

Term Sheets or Memorandum of Understanding

Term Sheets or Memorandum of Understanding (MOU) are integral preliminary documentation that set out the intention of contracting parties.  Initial discussions on capital injection or an acquisition or merger of business operations may occur orally over a cup of coffee or over drinks at a bar and it is prudent to follow up with a Term Sheet or MOU to properly document the scope of what was agreed.  These Term Sheets and MOUs are usually non-binding agreements.  Nevertheless, it is important to note that the courts have adopted a more practical approach in recent times and assess the intention of the parties and precise content of provisions in a Term Sheet or MOU in determining if a Term Sheet or MOU should be treated as an enforceable document or be treated as non-binding.  It is prudent that parties adopt caution in what they put into Term Sheets or MOUs and seek legal advice prior to executing a Term Sheet or MOUs as it is not a given that these Term Sheet and/or MOUs will be deemed non-binding even if the express term “non-binding” is stipulated on the Term Sheet or MOU .

Capital-Raising Documentation- Shareholder & Subscription Agreements

Start-up founders often have novel ideas but require capital to grow or build their business.  These start-up companies often approach venture capital or private equity firms for capital raising or injection.  This is where capital-raising legal documentation are required.  The Shareholders Agreement is a documentation that lists out the rights and obligations of shareholders (approvals, general meetings, minority shareholder protection, exit strategy, anti-dilution (of shares) mechanisms etc) while the Subscription Agreement is a documentation listing out the type of shares (ordinary or preference shares or any other class of shares), amount invested and rights attached to a specific class of shares.   The Shareholders and Subscription Agreements are often fused together as one complete document and updated (by way of supplementary agreements) if the parties enter into subsequent rounds of funding- commonly called Series A, B and C etc rounds of funding.  It is integral that the Shareholder & Subscription Agreements are well drafted and protect the interests of all the shareholders.  These Agreements must also have a clearly defined exit strategy mechanism for investors who want to sell their stake in the business in order to avoid disputes.

Website Privacy Policy & Terms & Conditions

Businesses that operate online (web-based applications) should have robust privacy policies in place.  This is integral to protecting a customer’s privacy and/or personal data in order to be in compliant with the data protection laws in different countries.  Singapore for example, has in place a Personal Data Protection Act (“PDPA”) that stipulates very clearly how organisations should collect, use, retain and transfer personal data and it is integral that organisations privacy policies comply with provisions of the PDPA.

Website terms & conditions (“T&Cs”) serve as a contract entered into between the users of a website and the operators of the website.  It is absolutely integral to have a well-drafted T&Cs as it clearly state who is the legal proprietor to the information (on a website) and what a website user can or cannot do with information on a website. This will prevent a scenario from a user misusing information on a website for personal gain.  It is also important to notify the user that a contract has been formed (for example, by getting a user to click on a tick-off box) and this gives the website owner a course of action against the user in the event of abuse of information on the website.

It is thus integral to start-up success that start-ups not neglect these legal requirements as well!

 

Kenneth G Pereire is advisory board member for Girls in Tech Singapore and an Associate Director in the Corporate & Commercial Practice of Consilium Law Corporation. His focus areas are in Mergers & Acquisitions (“M&A”) transactions in Singapore and ASEAN and securities regulatory work. He also has considerable experience in assisting technology companies with their legal needs including capital raising documentation, commercial agreements, structuring advice and compliance.

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