Here is a list of the top things that can, and do, go wrong for entrepreneurs without proper legal support.
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The UAE startup ecosystem has developed significantly in the last couple of years and is leading the MENA region in terms of investments. In 2017, US$560 million was invested in 260 startups, according to research from community platform MAGNiTT. With the UAE committed to strengthening its non-oil sector through diversification, startups and SMEs are rightly being recognized for the crucial role they can play in achieving this goal. This makes the case for access to proactive and sound legal advice for startups even stronger.
We know that lawyers often get a bad rap, and that many entrepreneurs are fearful of engaging with them. Many entrepreneurs think that lawyers are prohibitively expensive and are not financially viable, and therefore put them at the bottom of their priority list. Entrepreneurs can be so focused on the development and growth of their startups, and so sure of their product or service, that they tend to address the more immediate issues of funding or product development, while overlooking the legal risks that their organization may face down the track.
The failure statistics are alarming and access to quality legal services is often a key factor in a startup’s failure. When money is tight, entrepreneurs may resort to Dr. Google (downloading unsuitable contract templates off the internet), or avoid spending precious cash on expensive lawyers. With early legal decisions having a significant impact on the safeguarding of a business as it scales, overcoming “lawyerphobia” early on in a company’s development can prove crucial to the success of a startup or SME. Don’t become another statistic. Here is a list of the top things that can, and do, go wrong for entrepreneurs without proper legal support.
1. LACK OF STRUCTURE
A common mistake made by entrepreneurs early on is failing to choose the right legal entity to operate their business. There are multiple organizational structures available and using the correct one can be critical to ensuring that your business is successful. With so many alternatives, and without seeking legal advice, the choice can be overwhelming, and the temptation strong, to choose the cheapest or fastest form and location. Failing to choose the right structure can be extremely costly –both in terms of money and time– if you make the wrong choice and need to rearrange your company structuring later during an investment round or exit.
2. FOUNDERS’ AGREEMENTS
Many new companies fail to establish a well-written Founders’ Agreement that explicitly outlines duties and obligations of each partner. When there is more than one founder, a Founders’ Agreement is crucial for solving issues that may arise in the future. It is normal to believe nothing could possibly go wrong and you and your fellow founders will be friends forever. Entrepreneurs often wait too long to ask themselves the tough questions, and to think about how they will deal with the challenges that may arise in the life of their business. It is easier to discuss worst-case scenarios while the going is good than to be unprepared if the relationships go sour. Discussions between founders must be both objective and honest, and consider the current situation and future scenarios for the business and its founders. What are the roles and responsibilities of each of the founders? What happens if one of the founders wants to leave?
3. INTELLECTUAL PROPERTY ISSUES
If you have developed a unique product, a worldchanging idea, or an eyecatching name for your business, you should consider taking appropriate steps to protect your intellectual property. It is important to ensure that your company obtains all the legal rights to own or license the intellectual property the founders have created and which are vital to running the business. It is relatively easy and inexpensive to assign this IP to the company at the time it is incorporated. The assignment process can then be built into your employment agreements as you move forward, allowing employees to transfer the ownership of any IP they create during their employment, to the company. Intellectual property rights will be a key area of focus for any investor doing due diligence on your company, so it is important to get it right from the start. Entrepreneurs should continue conducting regular reviews to ensure that the company’s business is not exposed to infringement claims and force them into costly changes to the business.
4. LACK OF EMPLOYMENT DOCUMENTATION
As your team grows, you’ll want to have a solid foundation of employment documents. Business startups often encounter employeerelated problems, but this can be avoided with a comprehensive set of employment documents, giving everyone a clear view of the rules, regulations and expectations in your workplace. Examples of essential employee documents are the following:
- Offer Letter (basis on which employment is offered and addresses immigration procedures)
- Employment Agreement (compensation, role responsibilities, working hours, grounds for termination, ownership of IP)
- Company policies (policies, procedures and expectations on various matters e.g. annual leave, social media, dress code)
- Record-keeping (including emergency contact details, annual leave, sick days, days in lieu, length of service, permission to make deductions from salary, such as housing loan, etc.)
- Pay slips
- End-of-employment/termination letters (including calculation of end of service gratuity and any other deductions)
6. LACK OF BUSINESS TERMS AND CONDITIONS
A common cost-cutting measure by new entrepreneurs is having a poorly-drafted set of terms and conditions which don’t accurately reflect how the business operates or none at all. Your Business Terms are essentially a contract governing your relationship with each of your customers. Think carefully about how your business operates, and how it may operate in future, when drafting your Business Terms. Review them regularly as your business grows or changes. The key provisions in your Business Terms will be dictated by commercial decisions (e.g. your company’s sales process, variations to the scope of work, delivery, warranties and payment options). Involve employees from across your business when drafting your Business Terms and ensure that they follow them in day-to-day operations.