Ask any entrepreneur who is in the early stages of funding their business about their priorities. There’s no doubt that funding, growth, and product development will be among them (plus caffeine, of course!). Somewhere at the bottom of their priority list will be all their legal matters. This is understandable for growth-orientated startups.
Additionally, some entrepreneurs think that lawyers are prohibitively expensive and that legal templates can be downloaded from the internet. This is common—but wrong. Such a mindset can lead many successful startups to wind up their business or something worse.
There are over 2,000 startups in Singapore and the city-state has been justifiably named as one of the top 10 startup ecosystems in the world, with 220 funding deals made in 2015. It is evident that Singapore has become quite the wellspring for entrepreneurs and startups, and while this is great for our economy, it does bring with it its own brand of problems and challenges.
Many first-time entrepreneurs are sometimes so overwhelmed by the bustling activities and the ins and outs of running a new business that they tend to overlook legal fundamentals which ensure protection if things go wrong.
Unfortunately, the cost of legal services is often daunting for startups that may have limited funds. This makes sense, with the market rate for a website’s terms of service (prepared by a lawyer) at approximately US$2,100. Bills could add up if you include additional vital documentation such as employment contracts and partnership contracts.
The surprising reality
One in 10 startups fail due to legal reasons, many of which could have been avoided if basic legal matters were taken care of properly. This happens because these business owners either tried to use a contract template off the internet or never sought legal counsel from a lawyer.
It is understandable if they were concerned about legal fees. But dealing with issues with legal documents and having to appear in court to settle disputes will cost them so much more. This is a classic case of being penny wise but pound foolish.
A client’s case from before comes to mind here:
There were two young Singaporean entrepreneurs (Company A) who discovered a way to make special industrial ovens that were fundamental in baking microchips. They were based in the US and went to Taiwan to find an industrial oven manufacturer (Company B).
By this time, Company A had secured millions of dollars in the form of pre-orders. They knew they had to produce the ovens fast, but they also knew the importance of legal protection. So, they downloaded a legal agreement document template off the internet and made modifications without consulting a lawyer. Through this, they secured their position as the sole distributor of the ovens in the US—or so they thought.
Everything was well until 5 years after the initial launch. Company B found a loophole in the agreement signed by both companies and used that to terminate the agreement and sue Company A for damages. This apparently came off the back of late payments and other breaches in the original agreement committed by Company A.
Company A, embroiled in lawsuits, eventually had to wind up. Meanwhile, Company B repositioned themselves as both the manufacturer and the distributor of the specialized ovens in the US, essentially taking over the entire market.
The changing reality of the law
In the past few years, we observed that there has been a rise of companies that make use of technology to create legal documents for multiple types of situations. This is an improvement from using templates without the counsel of a licensed lawyer. Innovative individuals have made this their core business, leveraging on the savings their clients could enjoy with their service/product. For businesses with limited budgets, like startups, such a service is an ideal way to make sure they have some form of legal protection for their business.
The legal landscape is set to change and face-to-face consultations—the traditional way lawyers conduct their business and one of the main reasons why legal services are expensive—may soon fall out of favor.
A balanced approach
Looking at the legal challenges startups face and the changes that are already shaking up the legal communities in Southeast Asia, there is an aspect of this entire issue that can sometimes be forgotten—considering the mindsets of startup owners and their legal needs. Legal protection is important for businesses, but it is not always as simple as using a program that generates a draft of a legal document and hoping or assuming that it is the right type of document for your business.
It might be more accurate to say that currently we are in a middle ground, where technology helps to alleviate some of the basic and labor-intensive ground work done by lawyers (which is normally charged directly to the client). But we will still need to see qualified lawyers giving legal advice to make the content of legal documents more suitable for their clients.
A cost-efficient, technology-oriented service coupled with face-to-face consultations with lawyers might be the best way to give business owners true peace of mind.