JOHANNESBURG - Many highly successful start-ups are bedevilled by legal disputes, often between founders or funders, which could have been easily avoided. The story of McDonald’s is one example. It was founded by brothers Richard and Maurice McDonald, who were allegedly short-changed by Raymond Albert “Ray” Kroc, who joined the business after its establishment but took all the glory (and the money). How? Because they did not put legal agreements in place to regulate their partnership.
It is understandable that entrepreneurs are focused on growing their businesses and not on legal matters. However, some of the greatest pitfalls that face start-ups arise from the failure to lay a proper legal foundation. These five tips should assist:
1. Limit your liability. It is critical to ring-fence the assets and liabilities of the business from those of the founders. Take steps to protect your assets in the event of your business failing. Establishing a limited liability private company is usually the quickest and most cost-effective way. This can be done by purchasing a “shelf company” (which has been incorporated, but which has not yet started trading), or incorporating the company through the offices of the Companies and Intellectual Property Commission.
2. Agree on founding documents. A shareholders’ agreement and memorandum of incorporation are foundational documents for any start-up. These set the “rules” and provide a structure for a company. They can be flexible and can be adapted as the business grows.
3. Negotiate and prepare clear contracts. Start-ups need to be flexible to adapt and grow. However, whether your business renders services or sells goods, it is critical that the terms and conditions of its offering (which may change from time to time) are clearly communicated to consumers. If your business offers an online subscription service, the terms of the offering should be presented to consumers and agreed to by them before rendering the service. In the case of the sale of goods, the terms and conditions of sale should be clearly explained, and you should ensure that they comply with legislation such as the Consumer Protection Act. As regards suppliers, make sure you negotiate the best terms possible, and make sure that your suppliers put those terms in writing.
4. Ensure statutory compliance. Keep records! One of the most common mistakes made by start-ups is the failure to maintain basic company secretarial and other statutory records. These are vital to ensure that your business complies with its tax obligations, with the requirements of the Companies and Intellectual Property Commission or ensuring that cross-border transactions are approved by the SA Reserve Bank.
Failure to maintain proper records can be very costly if the business grows and wishes to obtain investment in the future. Most investors will want to conduct a due diligence on the business before investing any funds, and statutory compliance (or non-compliance) is a key consideration.
5. Ask for help. Don’t be penny wise, pound foolish. Engage the services of an accountant and attorney to assist with bookkeeping, tax returns and legal compliance.
Justine Krige is a director in the corporate and commercial practice at Cliffe Dekker Hofmeyr.
The views expressed here are not necessarily those of Independent Media
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