So, you have launched your technology startup. What’s next?
Launching a startup is just the beginning of a long and often uncertain journey. Not only you will have to put in extremely long hours and spend a lot of money into developing and fine-tuning your product or service, but you will also have to learn how to manage your startup and run it like any other kind of business.
Managing Your Employees
No one can build a startup entirely on his own. You will have to start bringing people into your team and working with other people at some point in time.
Jason Baptiste in his book, “The Ultralight Startup” says that “people are the most important asset of a startup. They breed perseverance, come up with great ideas, and let you build for the long haul and ultimately succeed. Once you have great people on board with what you are doing, everything will fall into place over time”.
When you hire new employees, make sure that you put in place a proper letter of offer or employment agreement which sets out all the relevant terms of employment to prevent uncertainty liability and unnecessary dispute in the future.
Clauses such as termination grounds, notice period, salary and other benefits, non-solicitation, confidentiality, limitations on the employee’s ability to compete with your business after the employee leaves employment, protection of intellectual property, etc should always be clearly set out in a letter of offer or employment agreement. You must also make employees provident fund (EPF) and social security fund (Socso) contributions to your employees as well as comply with the prescribed minimum wage and minimum retirement age requirements.
The prominent business management guru Peter Drucker once said, “the most valuable asset of a 21st-century institution, whether business or non-business, will be its knowledge workers and their productivity.” In today’s knowledge economy, it is the people who create intangible assets such as intellectual property, patents, brands, designs, etc. If you manage your employees well, they will become your valuable asset, but if you don’t, they can also become your biggest liability.
Intellectual Property Rights Protection
If people are the most valuable asset in an organisation, then the next most valuable asset must be the intellectual property created by the people. This is particularly true in a technology startup where it is the innovative product or service that forms the core asset which generates profits for the startup.
You should have a good understanding of intellectual property rights so that you will appreciate how to realise the full economic value of your intellectual property and incorporate them into your business strategies.
Trade secrets are basically confidential information that is not publicly available, such as ideas, designs, methodologies, processes, marketing plans, methods of business operation, pricing policies, etc. One of the ways to protect the value of a trade secret is to enter into a non-disclosure agreement prior to the disclosure of any confidential information. In addition, you will also need to put in place a proper information protection program.
If your invention provides a new way of doing something or offers a new technical solution to a problem in the field of technology, your invention can be protected as a patent.
You should also register your brand as a trademark. If you are in the business of product design, the three-dimensional features such as the shape and configuration of your product, or two-dimensional features, such as pattern and ornamentation of your product can be protected as an industrial design. Copyright is a form of protection that is granted to authors of literary, dramatic, musical and artistic works. Copyright does not protect the idea, but rather the expression of an idea.
Director Duties
A company, while it is recognised as a legal person in the eyes of the law, cannot act on its own. Ultimately, the day-to-day affairs of a company will still have to be run and managed by a group of natural person i.e. directors, officers and shareholders.
The Companies Act 1965 and the common law set out certain statutory and fiduciary duties of a director:
- Duty to act in good faith and for proper purpose in the best interest of the company with reasonable skill and care
- Duty to make independent assessment of the information, professional or expert opinions presented to him
- Duty to ensure dividends are declared from profit and not capital
- Duty to seek shareholders’ approval at the general meeting before carrying out any arrangement or transaction of substantial value relating to the company
- Duty to keep proper accounts and registers and to make the same available for inspection when required
- Duty of fidelity i.e. being faithful and loyal to the company
- Duty not to profit secretly from the company, or place himself in a position of conflict of interest between his duties to the company and his personal interests
- Duty not to fetter his discretion by agreeing, either with one another or with third parties, on how to vote at future board meetings
Breach of any of the above duties may result in the director being judged as unfit to remain in the management of a company and lead to his disqualification as a director. He may also face civil and criminal liabilities and in certain cases, personally liable for the loss or damage suffered by the company.
Financing the Business
The growth in the technology startup ecosystem has attracted investors and fund seekers alike. Startups usually face challenges in raising enough money to fund their working capital, research and development as well as a marketing expenditure.
Before you start looking for funding, you should first be sure that your business is ready to raise funding. Investors will look at three key factors when considering a startup for potential investment: people, product and market. Issues such as whether you have a strong management team, whether you have developed a good product or service and whether your product or service has gone through market validation must first be dealt with before you reach out for funding.
There are various types of financing such as self, debt and equity financing.
There are also various sources of financing, ranging from the founders themselves, friends and family, angel investors, venture capitalists, government funding and/or grants, strategic investors to banks and financial institutions. Crowdfunding is also another platform which has recently gained much traction from technology startups and investors. Understanding the different considerations, strategies, implications and expectations in each of these funding mechanisms is important to planning a successful fundraising campaign.
Due-Diligence
Assuming you have secured a financing investment opportunity, the first thing that will usually follow is the execution of a term sheet which sets out the major terms and conditions of the proposed financing. The term sheet will usually not be binding on both parties until the completion of due diligence and the execution of binding agreements which incorporate the terms set out in the term sheet.
A due diligence exercise is a process to assist the investors in evaluating the team, the technology, the market, the financial as well as the legal and regulatory compliance so that they can make a prudent and informed investment decision. After that, parties will engage in documenting and negotiating terms of the agreements. This whole process can be quite arduous, time-consuming and costly. It is therefore always good to get your legal documents in order from the beginning, as it will make it easier for the investors’ lawyers to verify that your company is in good legal standing which will help make the investment process proceed smoothly.
*****
About the author:
This article was written by Edwin Lee Yong Cieh, Partner of LPP Law – law firm in Kuala Lumpur, Malaysia.
This article was first published in CHIP Magazine Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.
Edwin is a corporate and technology lawyer. He is also the founder and deputy managing partner of Lee & Poh Partnership (LPP Law). Edwin has advised a range of companies from technology startups to multinational corporations on a range of matters. In 2020, Edwin was named as a Malaysian Rising Star by Asian Legal Business, a finalist for the Young Lawyer of the Year at the ALB Malaysia Law Awards as well as a lawyer in the annual ALB publication of Asia 40 under 40.
View his full profile here.
