As a lawyer myself, l would unsurprisingly tell you that you need to engage a lawyer as early as possible in your journey as an entrepreneur, urges lawyer and author
By MARCUS VAN GEYZEL / Graphic By TMR
Nothing beats getting things right from the very beginning. It would be ideal to avoid making any legal mistakes.
However, I know that this is not practical for most start-ups. Not all start-ups need to engage a lawyer.
Unnecessarily engaging a lawyer increases your cost, and l’m well aware that money is a scarce resource at the early stages of a start-up.
There are many basic things which entrepreneurs can do without legal advice: Obviously the ideation and planning stages, and even setting up a company and going through the early stages of working out your product or service.
When incorporating a company, a corporate secretarial firm is more than able to handle the entire process for you.
I advise many of the early-stage start-ups who approach me for advice on the incorporation of their company to directly contact and deal with a company secretary.
Where hiring a lawyer becomes a must — is when you are negotiating an agreement of any kind.
You absolutely have to engage a lawyer at this stage, and definitely before you sign anything legally binding.
You must understand that no matter how many articles you’ve read, and how many sample documents you’ve downloaded from the Internet and combed through line by line, if you’re negotiating with an investor or an experienced businessperson, that other party may have negotiated hundreds of similar agreements and knows exactly what the pressure points and key terms are.
If you have a co-founder, you’ll need to enter into a founders’ agreement, or shareholders’ agreement, when incorporating a company.
The terms of this agreement are very important — they lay the foundation of your business vehicle, and you have to get them right.
From my experience, start-up clients usually first look to engage a lawyer when an investment term sheet is being negotiated, as this is usually the first “serious” legal contract that is being negotiated with a third party.
However, there are times where a client only approaches a lawyer to assist in the preparation of a full-blown agreement, where a term sheet has already been negotiated and signed.
This is not the best approach.
If possible, you should get a lawyer involved even before you start negotiating with another party.
There are mistakes you could make at the negotiation stage that could be difficult, if not impossible, to rectify if you put off seeking legal advice for too long.
Negotiating Term Sheet
Here are two reasons you should get legal advice as soon as the negotiation of a term sheet begins:
1. A lawyer will ensure your interests are protected. l’m often approached by potential clients who have already signed term sheets, and are looking to engage my services to draft the full-blown agreements.
Unfortunately, these signed term sheets sometimes contain terms that are not in the best interests of the client.
While it is, of course, to be expected that a party will have to make some concessions as part of a negotiation, and accept terms that are not in their best interests, these concessions must always be made with both eyes open.
Founders often agree to terms that aren’t in their favour because they thought it was “normal” based on articles or sample documents they found on the lnternet.
In some cases, the investor or potential new partner gives the founder a free hand in proposing the terms, and it is unfortunately common in such cases for founders to propose terms that harm their own interests — for example, anti-dilution protection clauses that actually “protect” the investor — even when the other party didn’t request for such clauses.
A lawyer won’t just ensure that you’re not tricked into signing up to terms that aren’t in your best interests; he’ll also help you to avoid shooting yourself in the foot.
2. Despite what you’ve heard, term sheets can be legally binding.
When l ask clients why they only look to engage a lawyer after the term sheet was negotiated and signed, they often say that they didn’t think it was an issue, as they’ve been told that term sheets aren’t legally binding anyway.
This very common assumption is actually a grave misconception.
Term sheets can be legally binding. It very much depends on the specific facts surrounding each negotiation and the wording of the document itself. Even if you’ve “only” signed a term sheet, you could have committed yourself or your business to some obligations, or be exposed to liability.
Also, the market reality is, even if the term sheet you’ve signed is not legally binding, there is a strong reputational risk, which means that you can’t simply tear up a document and walk away once you’ve received legal advice that the terms aren’t favourable to you.
- Extracted from ‘Law For Start-ups: What You need to know when starting a business’ published by MPH Publishing. The author Marcus Van Geyzel is a corporate lawyer and a business advisor.
- The views expressed do not necessarily reflect the editorial board or The Malaysian Reserve and its owners.