Startups: What You Should Know
1
Paul P. Subramaniam
7 March 2015
Awareness Session 2015
Outline
2
The Arc of an Idea
Whose Big Idea Was
This?
Taking It To The
Next Level
Contracts
Where Next?
Not having the right legal counsel
Not carefully considering intellectual property protection
Not coming up with a great standard form contract in favor of your company
Not starting the business as a corporation
5 Common Legal Mistakes by Startups
3 Source: http://www.forbes.com/sites/allbusiness/2013/10/03/big-legal-mistakes-made-by-start-ups/
Not making the deal clear with co-founders
Overview of the law in relation to entrepreneurship
The Arc of an
Idea
4
Just came up with a great new idea for a business! But what
do I do next??
5
The Arc of an Idea
6
Overview of the laws in relation to entrepreneurship
Contracts Act 1950
Employment Act 1955
Companies Act 1956
Registration of Business Act 1956
Sale of Goods Act 1957
Income Tax Act 1967
Employees' Social Security Act 1969
Trade Marks Act 1976
Patents Act 1983
Copyright Act 1987
Employees Provident Fund Act 1991
Consumer Protection Act 1999
Personal Data Protection Act 2009
Competition Act 2010
Price Control and Anti-profiteering Act 2011
Trade Descriptions Act 2011
Limited Liability Partnership Act 2012
Goods and Services Tax Act 2014
and many more…
The Arc of an Idea
7
Overview of the laws in relation to entrepreneurship
Contracts Act 1950
Companies Act 1956
Registration of Business Act 1956
Personal Data Protection Act 2009
Competition Act 2010
Goods and Services Tax Act 2014
Employment Act 1955
Sale of Goods Act 1957
Income Tax Act 1967
Employees' Social Security Act 1969
Trade Marks Act 1976
Patents Act 1983
Copyright Act 1987
Employees Provident Fund Act 1991
Consumer Protection Act 1999
Price Control and Anti-profiteering Act 2011
Trade Descriptions Act 2011
Limited Liability Partnership Act 2012
and many more…
Which should you choose?
8
Sole proprietor/ Partnership
Company
Limited liability
partnership
Cooperatives, societies, etc.
Company and Business Statistics for 2014
Number of Registered Companies and Businesses
2012 2013 2014
Local companies 1,013,449 1,059,698 1,108,842
Foreign companies 4,492 4,564 4,623
Total companies 1,017,941 1,064,262 1,113,465
Total businesses 4,971,483 5,301,378 5,634,101
0
1000000
2000000
3000000
4000000
5000000
6000000
2012 2013 2014
Number of Registered Companies and Businesses
Total Companies Total Businesses
Source: www.ssm.com.my
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Which should you choose?
Sole proprietor
It is the simplest form of business organization with minimal legal
requirements;
Includes every form of trade, commerce, craftsmanship, calling,
profession or other activity carried on for the purpose of gain;
Business wholly owned by a single individual using personal name
as per his identity card or trade name.
10
Which should you choose?
Company
Most common legal vehicle for business;
It is a legal entity that is separate and distinct from its members and
shareholders;
Can be incorporated as either a public or private company, with
either limited by shares or guarantee, or unlimited with share
capital;
Regulated by the Companies Commission of Malaysia (CCM) or,
Suruhanjaya Syarikat Malaysia (SSM);
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Which should you choose?
Limited liability partnership (LLP)
Combines the characteristics of a company and a conventional
partnership;
Only available for certain types of businesses
No formal requirements (meetings, reporting, submission of
financial statements, auditing, etc.)
Taxed as a company
Features the protection of limited liability to its partners similar to
the limited liability enjoyed by shareholders of a company coupled
with flexibility of internal business regulation through partnership
arrangement similar to a conventional partnership;
Offers flexibility in terms of its formation, maintenance and
termination while simultaneously has the necessary dynamics and
appeal to be able to compete domestically and internationally;
Any debts and obligations of the LLP will be borne by the assets of
the LLP and not that of its partners’.
12
Which you should choose?
One-off Costs Recurring Costs
Sole proprietor Sole proprietorship using personal name as stated in the identity card: RM30.00
Sole proprietorship or partnership using trade name: RM60.00
Registration of branches: RM5.00 for each branch
Business Information Print out: RM10.00
Similar costs applicable for renewal of Business Registration, which can be made for a period of one (1) year and not more than five (5) years.
Company Application for name of company: RM30.00
Registration fees depending on share capital: from RM1,000.00 to RM70,000.00
Minimum annual compliance fee: RM150.00
LLP Registration fee for a new LLP: RM500.00 Reservation of name: RM30.00
Submission of annual declaration: RM200.00;
Lodging, registering or filing of any information: RM100.00
Source: www.ssm.com.my
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Whose Big Idea
Was This?
14
What is Intellectual Property?
15
Intellectual property (“IP”) refers to creations of the mind, such
as inventions; literary and artistic works; designs; and symbols,
names and images used in commerce.
IP is protected in law by, for example, patents, copyright and
trademarks, which enable people to earn recognition or financial
benefit from what they invent or create. By striking the right
balance between the interests of innovators and the wider public
interest, the IP system aims to foster an environment in which
creativity and innovation can flourish.
(Definition from the World Intellectual Property Organisation (“WIPO”))
What the law can protect?
16
Copyright Act 1987
Geographical Indications Act 2000
Industrial Designs Act
1996
Patents Act 1983
Trade Descriptions
Act 2011
Trade Marks Act 1976
What the law can protect?
17
What does ‘copyright’ mean?
It is the exclusive right to do, and authorise other to do, certain acts
in relation to literary and musical works, in relation to artistic works
and sound recordings, films, broadcasts and published editions of
works.
COPYRIGHT © 2014 YOUR COMPANY. ALL RIGHTS RESERVED.
What the law can protect?
18
What is a trademark?
A mark used or proposed to be used in relation to goods or services
for the purposes of indicating a connection in the course of trade
between the goods or services; and
A person having the right either as a proprietor or a registered user
to use the mark.
Trademarks include, a device, brand, heading, label, ticket, name,
signature, word, letter, numeral, or any combination of the above.
What the law can protect?
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New
Involves and inventive step
Industrially applicable
What is a ‘patent’?
An invention which has not been anticipated by prior art
A step which is not obvious to a person having ordinary skill in the art
Can be made or used in any kind of industry
What the law cannot protect?
20
What that is in the public domain;
Incomplete ideas;
IP which has already been registered with the relevant
Registrars
Ownership of an idea
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Copyright
Owned by the author of the work in concern; and
Registered with the Intellectual Property Corporation of Malaysia (“MyIPO”).
Trademarks
Owned by the proprietor of the goods or services in concern; and
Registered at the Trades Mark Office, domestically and internationally.
Patents
Owned by the inventor of the invention in concern; and
Registrable at a national-level and at an international-level.
How much to protect my ideas?
22
Type of IP Manual filing (RM) E-filing (RM)
Copyright Notification of works 15 15
Deposit document 10 (for first 25 pages)
20 ( for the next 25 pages)
10 ( for every subsequent
additional 50 pages)
None
Trademark Application of trademark
370 330
Patent Request for grant of patent 290 260
Request for substantive
examination 1100 950
Statement justifying the applicant's
rights to the patent/certificate
80 70
Source: http://www.myipo.gov.my/
*Note: The abovementioned costs are administrative costs in relation to first time registration of such IP, and do not
include any professional fees or any appointment of agents.
*Note: Assuming this is for a single
mark in a single class
*Note: Assuming this is for less than
ten (10) claims made
*Note: Assuming this is for copyright of
a book or written document.
Taking It To
The Next Level
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Financing
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Debt Financing
Equity Financing
Borrowing money from lenders
Exchanging ownership for
money (partners, investors, etc.)
Either way, strings attached…
Debt Financing Equity Financing
You owe cash + interest You owe profits (which can be more than
interest in some cases)
Less cash in hand More cash in hand
Creative and strategic control retained Some loss of creative and strategic
control
Risk is not shared Risk is shared
Principal + interest are predetermined + time
of payment Investors and partners don’t expect
large returns immediately
Interest is tax deductible
Debt = “high risk reputation”
Assets and personal guarantees
required
25
Debt Financing vs. Equity Financing
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Finding the right balance
Get a blend of both forms of financing to balance out the
disadvantages of both.
Consider the following when deciding which form of financing suits you
best…
Debt Financing vs. Equity Financing : Deciding
27
Type of your business
Your relevant industry (Competitive? High barriers to entry?)
Cash flow (one time, or recurring?)
Profits earned (estimated ROI)
Expansion plan
Your financial position (value your assets)
Size of financing required
Management capability (from C-suite level and below)
Age and stage of your business
Technology patentable?
Examples
28
Debt financing
Banks;
Friendly investors (e.g. friends, relatives);
Leasing
Moderate forms of financing
Government;
Development Financial Institutions;
Barter (in relation to supplies);
Factoring
Equity financing
Bootstrapping;
Venture capitalists;
Crowd funding;
Mergers & Acquisitions;
IPO;
Corporate restructuring
Pro
fit, contro
l & c
erta
inty
Cash in
hand, e
xposure
& o
blig
atio
ns
The thing about debt: Everybody wants to be secure
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Collateral – An additional form of security which can be used to
ensure a lender that the borrower has a second source of loan
repayment.
Collateral can be tangible or intangible, physical or non-
physical, real or virtual
Tangible – Equipment, machinery, inventory, furniture, money
Intangible – Goodwill, science of knowing what to do, operative
processes, technology, information, databases, capacities,
abilities, innovation.
The thing about debt: Everybody wants to be secure
Types of collateral:
Real property
Revenue, cash flow, net income (profits)
Cash savings, deposits, stocks, bonds, mutual funds
Hard assets (equipment, machinery, etc.)
Intellectual property
Anything with title of ownership
Large, long-term purchase orders/contracts
Personal guarantees
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The thing about debt: Everybody wants to be secure
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Loans and financing options available to startups and SME
enterprises usually require little or no collateral
Government guarantees to a certain extent
Have an updated list of all your assets and liabilities when
sourcing financing
The thing about debt: Everybody wants to be secure
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Creditors – A person or company to whom money is owed.
Terms and Conditions
Repayment schedule that must be met
Events of default that allow the borrower to cancel loan
Access to your financial information and accounts
Giving up a portion of your business (except for banks, but collateral?)
Interest
Late payment penalties
Costs, fees and expenses (stamp duty, legal fees, out of pocket
expenses)
Business Plan
Market research
Marketing plan
Financial position (Supplies & inventories, payroll, rent, equipment,
etc)
The thing about equity: Till debt do us part
Once a debt is repaid, the relationship with your financier ends.
With equity, it is a marriage for life.
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Financing contracts
Passing of title, ownership, risk and funds are purely a matter of
contract.
Financing contracts are no different.
The power to decide is in your hands.
Parties to a financing agreement can never be forced to act, so
be wary when entering into such agreements.
Parties are only entitled to compensation for losses suffered.
Specific performance is discretionary and not a right.
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When finance is not enough
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Expertise/trained workforce
Clientele/wider market
Real estate
Intellectual property
Industry expertise, experience and knowledge
Reputation/branding
Business development
Cross marketing
Promotional support
Joint Ventures and Strategic Partnerships are the way to go…
Joint Ventures and Strategic Partnerships
36
Faster and cheaper growth of business
Higher confidence in strong, strategic partnerships
But beware…
The Good, The Bad and The Ugly
37
You will probably be limited to one industry partner (pick the
biggest and the best)
Voting rights, and vetoes
Buy out provisions and terms that affect your exit options
Ensure fair equity for all partners (value your company)
Standing by, through thick and thin
Exposure of partners to liability and debt
Commencement and termination of partnership
Deadlock!
Foreign partner?
Forms of Joint Ventures and Strategic Partnerships
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Contractual
Agency
Distribution (more transfer of risk)
Collaboration
Franchise
Strategic alliances
Intellectual property licence
Corporate
Corporate veil
Partnerships/Limited Liability Partnerships
Public-Private Partnerships (PPPs)
Partnerships & Limited Liability Partnerships
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Where turnover is low
Less strictly regulated (no need for General Meetings, auditing
of accounts, submission of financial statements, reporting, etc.)
No need to bow to the will of shareholders
Taxation (partners are personally taxed)
Unlimited liability
Except for Limited Liability Partnerships (LLPs)
Contracts
40
What is a contract?
41
An agreement between two or more parties.
Legally binding promises to each other.
Establishes a legal relationship between the parties.
Violation of the contract allows a party to a contract to sue under
the contract.
Contract and law will provide for remedies in case of breach.
Look out for the fine print.
Look out for standard form contracts that are one sided.
Typical contracts in entrepreneurship
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Memorandum & Articles of Association / Constitution
Contracts with suppliers
Goods
Services
Employment
Leases
Sales & Purchase Agreements/Tenancy
Shareholders/Joint Venture Agreements
Invention Assignments
Non-disclosure, solicitation and compete clauses
Financing contracts…
Financing contracts
Passing of title, ownership, risk and funds are purely a matter of
contract.
Financing contracts are no different.
The power to decide is in your hands.
Parties to a financing agreement can never be forced to act, so
be wary when entering into such agreements.
Parties are only entitled to compensation for losses suffered.
Specific performance is discretionary and not a right.
43
Boilerplate, but wait…
44
Choice of law, jurisdiction and court of choice
Partial invalidity clause
Communications – slipping through the cracks
Variation of terms
Force Majeure
Interpretation and definition of key terms in a contract
Ancillary evidence of agreement
Commencement and termination
Warranties! Guarantees! Indemnities!
Dispute settlement
Where Next?
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Contact Details
Paul P. Subramaniam
Chief Risk Officer and Head of Knowledge
Management and Training
Tel: + 603 2083 2345
Fax: + 603 2094 9666
Email: [email protected]
Zaid Ibrahim & Co. a member of ZICOlaw
Level 19 Menara Milenium
Pusat Bandar Damansara
50490 Kuala Lumpur
Malaysia
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@ZICOlaw. All Rights Reserved. 47