Common legal mistakes startup founders in Asia don’t realise they’re making

Photo credit: Guardian Liberty Voice

For legal issues, 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 that fledging founders and entrepreneurs choose to take the easy way out.

We work with a countless number of early-stage founders and entrepreneurs everyday, and 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 independently. As a result, 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 liabilities.

The key purpose of setting up a business is to avoid personal liabilities. Providing services on a personal capacity puts your personal assets at risk – yes, your own house, car and other assets may be at 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 with the governments’ attempt to encourage 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 can make for a host of very complicated situations – some of the more obvious ones 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:

1. What roles will each founder play?
2. What are some of the key metrics or goals that must be achieved by each founder at each phase of the startup?
3. How much decision-making power does each founder possess?
4. Is the percentage ownership subject to vesting based on continued participation in the business?
5. Under what circumstances can a founder be removed as an employee of the business? (This would usually be a board decision.)
6. What happens if a founder decides to exit the business?
7. How will a sale of the business be decided?
8. How will founders go about splitting ownership of the business?

3. Not owning their intellectual property

Intellectual property protection is what prevents the commercial exploitation of your hard labour. As an author, you’ll 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 that there was no infringement.

Here’s more on the different types of intellectual property rights.

4. Not creating a privacy policy

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