Know these 7 legal contracts before starting up in Singapore, or risk facing liabilities

Photo credit: Shahzeb Ihsan.

Many founders jump into building a startup without considering important issues like contracts and agreements. Legal issues never seem to be a problem until they become one, and resolving conflicts become onerous and complex, with founders themselves facing possible liabilities.

So what are the key contracts and agreements that a new founder should look out for when starting up? What are the consequences of a poorly drafted agreement? And when should you hire a lawyer?

I recently got insights from Ted Poh of Pegaxis, a former lawyer turned entrepreneur, and Asia Law Network‘s (ALN) lawyers Yingyu Wang, Samuel Ng, and Sean Lee.

Shareholders agreement

A shareholder agreement governs the relationship between shareholders. According to Samuel and Sean, “You [need to] be clear on the following points:

• Reserved matters (i.e. which matters of the company should be subject to shareholders’ approval or directors’ approval),
• Who should be on the board of directors and the quorum and approval thresholds,
• Veto rights for particular shareholders on certain important matters,
• Tag-along rights,
• Preemption rights,
• Drag-along rights,
• Deadlock provisions, and
• Dividends (the division of profits).”

According to Ted, a shareholders agreement is also known as a partnership or founders agreement. He adds that the agreement should also include the parties’ duties, decision-making powers, share issuance, share transfer restrictions, and liquidation rights.

Not having a shareholders agreement leads to many complications. As an example, he says:

“There are also common issues with [sequentially] unwanted persons on the company’s cap table who can potentially block decisions of the company. Always ensure that third parties like key employees are offered share options rather than straight up equity. People do fall out with each other after they start to work with each other, so treat share options like a trial period of dating before deciding to marry the person. Because there is no law to force a shareholder to sell his/her shares.”

Yingyu, on the other hand, highlights the failure of not having a properly written shareholder agreement. According to her:

“If the shareholder agreement is not properly drafted, the courts can decide that it has no binding effect. This was the case in Teo Chong Nghee Patrick v Han Cheng Fong [2014] SGCA 29, where the Singapore Court of Appeal decided that a shareholders agreement drafted without legal input and which was riddled with problems was ‘a piece of legal nonsense devoid of any binding effect.’”

Employment contracts

An employment contract outlines the rights and responsibilities between an employee and employer. The Ministry of Manpower in Singapore has provided an example for use.

Investment agreement

Non-disclosure agreement

Terms of use on platform

Constitution of the company

IP assignment contract

When to use a lawyer