In a 6-week series, Izwan Zakaria, the Managing Partner of Izwan & Partners will be covering legal topics and trends affecting technology entrepreneurs and startups.
But just before you head off to read what all 18-tips and quips are all about, I have got some news for you.
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The start of a new year is a great time to make a list of new year’s resolutions to help you accomplish your personal and business goals. The usual answers are to sweat a lot more, lose 10 kilos, spend more time with your loved ones, catch up with your old friends, reduce debts or even read more books. They are all fantastic resolutions and great goals.
But if you’re an entrepreneur or a startup founder, you would have missed out if you don’t look at the following new year’s resolutions for your business.
Incorporate your legal entity and follow the legal formalities
Stop exposing yourself to legal risks and personal liability. Form the correct legal structure to operate your business (usually it will be a private limited company or a ‘Sendirian Berhad’ (Sdn Bhd)) to ensure that you separate your personal assets against business assets. In other words, no commingling of assets.
If you run a business with more than two or more people, get it formalised in a founders agreement
What happens if one of the cofounders has a disagreement or has a different change of priority or focus after six months or twelve months after you’ve started a business together? What if a co-founder got into a nasty divorce or even sudden death? What happens if there is a deadlock, say if there is a disagreement between co-founders over a new business development manager? How will such a ‘sticky’ issue get resolved?
These agreements are usually referred to as the founders’ agreement, operating agreement, shareholders agreement, and partnership agreement. Whatever the agreement’s name, entrepreneurs should ensure that they have this agreement to help ensure that the business transition can be smooth and the business can continue as usual.
Assess your business plan
I know with exceptions to corporate planning or venture capital funds, young entrepreneurs or founders may not see the value of having a business plan (especially when you’ve got an ongoing pandemic out there). But a good business plan still plays a considerable role to make sure that you remain in line with your business goals for the immediate future or even long term. Make time to review, evaluate and update your business plan.
Put your verbal promises of ownership to employees
If you’ve agreed to give out equity to your employee or anyone that has contributed in your business, get it done in writing. A formal sweat equity agreement or a simple offer letter can set out the promised ownership, including the necessary vesting schedules or other ownership restrictions.
Again, if you’ve promised to issue shares to somebody, get it done now. Yes, do it today, not tomorrow or next week.
Protect your intellectual property assets
Do a full audit of your company’s business and assess what your intellectual property assets are. Take the necessary steps to record and protect your trademarks, trade names, copyrights (i.e. contents, software) trade secrets and other relevant intellectual property assets. You may not know you’re sitting on a valuable IP asset that can be monetised for revenue for your company if you license it to a customer. Anyone who contributes to the company, including the staff and independent contracts must sign an intellectual property assignment and the confidentiality agreements.
Do a cybersecurity audit
Cloud services are no longer popular or default option among startups or technology companies. Even brick and mortar companies are moving into the cloud and using online platforms to sell their products or services. Your employees may also be working from home and sending emails or confidential documents using cloud services. Ensure that you take the necessary steps to avoid potential cybersecurity breach and implement plans and strategies to address a security breach if it happens like phishing or even social engineering attack.
Put your verbal agreements to writing
The founding father of the United States, Benjamin Franklin says its best, “Creditors have better memories than debtors.”
Every important business deals and terms and conditions and agreed discussions need to be in writing. People forget stuff. Memories can fade. Your customers or people in charge of your vendors change. Confusion and disagreements can happen. Avoid disputes and get a peace of mind when you put things in writing.
Have a record keeping policy
Everyone in the company should keep track of documents in some form of a document management system. It could be Google Drive, Dropbox, OneDrive etc. but do have a standardised rule that everyone can follow easily.
Also, confidential documents involving customers personal data, transactions, payment details (i.e. credit/ debit card details), customer service logs are accessible by the only relevant person in a company on a ‘need to know’ basis. A simple example will be to encrypt personal data like users’ password instead of merely storing them in just plain text.
Also, founders and entrepreneurs should copy their latest statutory records and filings made by their company secretary to the companies’ registrar. Having a copy of these filings also helps keep things handy when doing a corporate exercise like a fundraising round or an audit to have things ready.
Understand contracts and the terms
Every entrepreneur or founder should not sign a contract that they do not understand. You may not agree with every provision, but you should know the consequences and legal implications when signing a contract. Refuse to be bound by a term that you don’t think is acceptable or understood.
Review and improve your contracts for important agreements
All agreements that you use again and again in your business should get a review. You should contact your legal counsel to review your usual agreements annually or when there is a change of business model by your legal counsel. Get your lawyer to vet and craft the terms to reduce exposure and limit your business’s potential legal liability.
Tackle issues directly (and put them in writing)
Conflicts can arise for many reasons with another party. If there’s a problem, review the relevant contract and determine the appropriate actions based on the agreed terms. Put things in writing. In my experience, ignoring issues or concerns will not make them go away. Things can worsen as it may result in unintentionally waiving rights or consent to a new scenario that may deviate from the originally agreed terms.
Deal with employees matters methodically and carefully
Do not mischaracterise employees as independent contractors or freelance workers because you cannot afford to pay their regular salaries.
The pandemic will be challenging for entrepreneurs struggling with cashflows. Do not change existing employment terms unilaterally, including reducing employees’ salary without their express consent. If you need to do a pay cut or layoff, do not ignore applicable employment laws. Or worse neglect your statutory obligations like paying the Employees Provident Fund (EPF), Social Security Organization (SOCSO), Employment Insurance System (EIS), Inland Revenue Board (IRB) etc.
Formalise agreements with employees to protect the business
In addition to the existing employment or services agreements, when necessary, enter into a non-competition, non-solicitation, confidentiality agreements with key employees.
The issue of taxation was mentioned in the Bible about the Roman dictator Julius Caesar during the Roman period. Here’s a reference to Mark 12:17:
“Jesus said to them, ‘Render to Caesar the things that are Caesar's, and to God the things that are God's.”
Unfortunately, we cannot ‘choose’ if we can pay or not pay taxes, so we have to pay them if we are eligible taxpayers. Do not delay in paying your taxes as a way to “managing cash flow”. Failing to declare income or under-reporting sales in your annual tax reporting, and deducting applicable monthly tax deductions against your employees will result in fines, penalties, and even personal liability.
Get the relevant insurance coverage for your business
Assess your current insurance policies and coverage with your usual trusted insurance agent and ensure that your business is adequately insured. If you do not have an insurance policy in place, get an insurance agent to assess your business if you should get certain aspects of the company covered like personal accident, theft, general liability, etc. Make sure you understand the fine prints, and you are not paying an unnecessary premium.
Get the best team of professional advisers
Ask around and engage competent company secretary, legal counsels, tax adviser, and accountants with relevant industry experience. Find an adviser or a professional who is willing to work with you as a ‘team member’. Don’t work with someone who looks at his time all the time (i.e. ‘by the hour’ mercenaries or hired guns). If you are a startup, ask for a ‘startup friendly’ package. Finally, a professional may come highly recommended or an expert in a particular area. But before hiring someone do ask yourself, “Do I like him or her as a person?”
Assess and evaluate financing options
Assess your current funding sources. If you’ve taken money from a venture fund or an angel, look at your current funding terms so that you can anticipate any financial challenges or funding needs. If you are raising money, make sure you know how much money you need, including the proposed terms. And make sure to read our first part and second part of a legal guide to fundraising.
Draw up a succession plan
Technically, a legal entity exists in perpetuity, and the business owners can change. Every business owner needs to come up with a succession plan in place. Some business owner may want to plant their exit by selling the company to another more significant player or a strategic investor. Even so, you may not get to maximise your full business value if you rely too heavily on certain vital people or critical relationships. In practice, it can be hard to assign a person a formal agreement with a crucial hire. I mean, a good talent may just leave if he is unhappy with the business owner on how perceives his treatment when he sees that his boss is making a big bonus from selling the company.
Starting this year with completing even a couple of these resolutions can ensure that this year could be a healthy, happy and exciting one for your business. Of course, getting these resolutions done while keeping up with a healthy lifestyle and spending quality time with family and friends will make this new year a good one.
Izwan Zakaria is the managing partner of Izwan & Partners, a corporate and technology law firm. He is also the author of The Startup Law Blog, a website covering legal topics and trends affecting technology entrepreneurs and startups in Malaysia. He can be contacted on Twitter at @izwanzakaria1 or email at firstname.lastname@example.org.