Starting up in Asia? You Don’t Want To Make These 5 Mistakes
By Alex, Last updated: 2023-01-18 (originally published on 2016-03-02)
In the case of legal, most businesses don’t realise what they need until it’s too late. In an era where a search for “free contract templates” delivers 28,100,000 results on Google, it is inevitable then that fledging founders and entrepreneurs choose to go for the easier way out.
The Client Relationship team at Zegal works with countless numbers of early-stage founders and entrepreneurs everyday. We asked them about the most common legal issues they encounter with startups in Asia. These ones topped the list:
1. Not incorporating their business
In a free market, it is easy for any individual to start supplying goods or services as an
independent. As a result, and in order to avoid the additional administrative hassle and tax burden, Founders often choose to start their “business” without taking the steps to incorporate a company or other legal entity. While this may seem viable at the beginning, it will undoubtedly expose you and your business to future mismanaged legal liability.
The key purpose of setting up any business entity is to avoid personal liability when conducting business. Providing services in a personal capacity puts personal assets at risk – yes, your own house, car and other assets may be at serious risk in the event of a dispute or lawsuit!
It is also worth noting that incorporation procedures in pro-business hubs like Singapore and Hong Kong have been made relatively straightforward in the governments’ attempt to encourage more entrepreneurship and economic development. For example, qualifying startups in Singapore enjoy tax exemptions in their first three years of operation. Hong Kong’s Budget 2016 further announced the waiver of business registration fees for the next two years, an initiative believed to benefit 1.3 million business operators.
2. Founders not having a Shareholders’ Agreement at the very outset
A Shareholders’ Agreement outlines the rights and responsibilities of each Founder and dictates what decisions have to made by consensus and discussion. Failure to set out a Shareholders’ Agreement at the start of the business can make for a host of very complicated situations – some of the more obvious being in the event that a Founder decides to leave the business, an exit, or a company liquidation.
A well-prescripted Shareholders’ Agreement addresses what will happen in these events:
- What roles will each Founder play?
- What are some of the key metrics or goals that must be achieved by each Founder at each phase of the startup?
- How much decision-making power does each Founder possess?
- Is the percentage ownership subject to vesting based on continued participation in the business?
- Under what circumstances can a Founder be removed as an employee of the business? (usually, this would be a Board decision)
- What happens if a Founder decides to exit the business?
- How will a sale of the business be decided?
- How will Founders go about splitting ownership of the business?
Learn what clauses to look out for in your Shareholders’ Agreement:
3. Not owning their Intellectual Property
Intellectual Property protection is what prevents the commercial exploitation of your hard labour. As the author, you want to claim the exclusive rights to any reproduction, publishing, performance communication and adaptation of your work.
Just earlier this year, Global Yellow Pages lost a suit against Promedia Directories despite a claim that Promedia had copied from four of its directories over a period of an entire decade. Global Yellow Pages did not own the copyright, and the court ruled there was no infringement.
Learn more about the different types of IP:
Never in history has personal data been collected, analysed and used at the magnitude it is today, thanks to technology. With such a trend comes growing concerns from individuals about how their personal data is used.
In order to maintain individual trust in organisations that manage data, government bodies have begun to take a protective stance to govern the collection, use and disclosure of personal data.
5. Not having the right legal documents in place for fundraising
There are various legal considerations and documents involved when raising capital through a private investor. If an Angel or VC wishes to invest in your company, depending on the type of investment structure, you will need one or more of the following documents:
- Term Sheet
- Seed Investment Agreement
- Convertible Note Purchase Agreement
- Simple Agreement for Future Equity
- Shareholders’ Agreement
- Board Resolution
- Share Certificate for the new Investor
Learn all you need to know about early stage funding:
Has your organisation given serious thought toward the above?
Many entrepreneurs try to shortcut legal processes by printing documents they find on the Internet, and then attempt to make contract edits by themselves. This puts the legality of such documents into question. By the time they decide to seek legal assistance, it may cost even more to have to go back to undo the damage done.
Get serious about legal without having to incur exorbitant legal fees. For an inexpensive annual fee, Zegal’s technology makes it easy for organisations in Singapore and Hong Kong to identify, create and customise the legal documents required at every stage of the business.
Find out how Zegal can help you:
Zegal’s technology helps companies in Singapore and Hong Kong build legal documents they need at every stage of the business. Its intuitive platform allows users to create, customise and store legal documents in the cloud for sharing and signing online.