We've got the privilege of regularly advising start-ups, small and medium enterprises (SMEs) on enterprise selections and company actions, and in the midst of these engagements we're presented with varying challenges, knowledge and numbers that paint an image of the prospects of an organization – whether for the great or unhealthy. Oftentimes, these challenges do not seize the underlying issues a enterprise faces, as it is taken without any consideration that you would be able to all however treatment business ills by waivers. At different times, there is simply little understanding on what to do subsequent in a way that makes it troublesome to sustain the well being of the enterprise.
Consequently, we have now compiled a listing of frequently occurring business points that require utmost attention by begin-ups, SMEs and those affiliated with them. A variety of companies could already pay attention to these issues, but there is a distinction between consciousness and motion. In the end, the impact of these issues is enterprise-specific, and there is no telling when an entity can be dropped at its knees by not proactively mitigating its challenges. For the mindful investor, business manager and employee, the preservation of wealth and worth is enough to compel progressive motion.
1. Founders:
Partners or founders: A typical incidence in most startups and SMEs with one or more founders is the absence of clearly outlined roles and obligations, equivalent to whether a founder is merely a enterprise partner as opposed to a founder/promoter of the company – a distinction that's lost to most companies. This lack of readability concerning roles and tasks plays out in several ways, from day-to-day operations, to decision-making course of, dispute decision, ownership stakes, and exit course of; and is mostly traceable to the pliability and freedom culture that is inherent in most startups’ work atmosphere. Whereas that free-spirited perspective to business can present a lift to morale, it is often the cause of a lot clash and resentment between founders, with attendant damaging effects like overlapping duties, non-recognizable chain of command, shirking of obligations, in addition to uncertainty amongst staff.
It is typical for the business to show a blind eye to most transgressions under the guise of friendship till large cracks type that can prove deadly to the harmonious functioning of the enterprise.
Controls and governance: Allied to the dearth of clarity is the tendency for startups and MSMEs to have little to no controls or governance processes, typically resorting to actions "on the fly". Amongst the myriad of reasons adduced, the necessity to stifle bureaucracy and time pressure to institute essential governance options stand out. Whereas the previous motivation is laudable, the latter is primarily a recipe for catastrophe, because it merely heightens the effect of existing dangers in the enterprise; and because the absence of controls and governance means the absence of accountability or reporting constructions, businesses end up in dire straits. The place, for example, key-man danger exists in a business, it means all corporate selections are routed by way of one individual, who invariably builds a character cult, and paired with the absence of governance processes, it means the important thing individual in the organization can take actions with out applicable checks regulating those actions.
What to do:
Formalize present relationship between the founders
Agree on and write out each founder’s role and obligations
Create a mechanism for resolving disputes between founders
Create a mechanism for founder exits
Build out minimum governance and controls processes
2. Human capital:
Worker relations/status: Human useful resource and employee relations are a thorny challenge for business owners and staff alike. The one class seeks a better return on human capital vis a vis the price of acquisition, while the opposite seeks commensurate remuneration for services rendered; and except incentives are properly aligned, the value of a fallacious match can outweigh the advantages of an employment. Worker relations are purely contractual relationships, and aside from compliance with minimal wage legal guidelines, pension contributions and other statutory levies on employers, parties can contract freely.
In sure conditions, corporations could utilize the services of independent contractors or interns as a substitute of engaging full-time employees, and here the motivation is the discount of staff overheads. At different times, using an outsourcing agency to perform non-core enterprise capabilities might change into expedient. In all instances, quite a few firms fail to properly doc these relationships, and simply depend on e mail communications or text messages as the premise of a contract. Evidently, when issues floor, they're largely undocumented situations or obligations, similar to where an employer decides to unilaterally change the character of independent contractor’s engagement on account of "changing business needs".
Human resource policies are typically an afterthought in most firms, and this may be attributable to the reality that most startups primarily deal with revenue generating actions. Yet human assets policies set the tone for work culture, anticipated conduct and productivity. At the least, startups and MSMEs ought to have in place minimum insurance policies that govern enterprise ethic, disciplinary course of, health and security, office misconduct and harassments, compensation and advantages, learning and improvement, company go away, suspension, redundancy or termination of employment.
What to do:
Provide employment contracts for employees
Classify unbiased contractors and unpaid interns properly
Formalize relationship with unbiased contractors or staffing companies
Put in place minimal human useful resource insurance policies and standards
3. Business Structure:
Partnership vs Corporation: When deciding on a enterprise entity structure, the selection is incessantly between a partnership versus an organization. As with all issues, this selection can have essential implications for each the legal and tax dangers of the business, as well as the possession structure. The key difference between the partnership construction and a corporation is in relation to liability for the debts of the enterprise entity: so that under a partnership construction, the debts and excellent obligations are personal to the promoters of the partnership; but in a corporation, they remain the money owed and obligations of the corporation. For start-ups, the final rule needs to be to reduce any publicity to personal liability of the founders/promoters and make sure that all business activities are carried out by the enterprise entity, and never by a person founder.
From the outset, the choice of enterprise construction should primarily be guided by the entity that finest helps the founders and business’ objectives from a authorized, tax, development and capital standpoint. This will even serve as a buffer within the occasion of a future change in business structure. Thus, whereas it could be prudent to determine a partnership if the enterprise is one to be carried out on a small scale with little capital; a business with far-reaching targets will be finest served by being established as an organization.
What to do:
Keep away from publicity of founders to personal legal responsibility
Perform a enterprise formation evaluation
four. Enterprise Assets:
Protection of intellectual property: Very few begin-ups set out to build a enterprise which in just a few years can be brought low on account of challenges pertaining to intellectual property (IP), but this is a familiar story in start-up wonderland. Tales of woe regarding IP theft, sale, exposure or disclosure of IP, commerce secret and customer information to opponents or third events, non-registration or renewal of rights in IP, non-project or license or IP rights make for a founder’s nightmare. The implications are numerous: lawsuits, loss of revenue, lack of popularity, lack of prospects, enterprise dilution, distrust, and even bankruptcy. A latest instance concerned a shopper whose director was registering and transferring firm IP to his private title, effectively utilizing firm IP as a bargaining chip to demand higher wage.
When situations like the above happen, they're often the results of the business’ failure to account and plan for the remoteness of such operational and strategic dangers. The place a begin-up develops a unique product, expertise, or service, applicable steps to guard the exploitation of the IP should be taken. In the same vein, the business has the same duty to keep away from infringing on the mental property rights of third events by frequently auditing its IP portfolio and its engineering/product improvement processes. The widespread protecting measures undertaken by begin-ups will sometimes embody patents, copyrights, logos and the utilization of IP contracts akin to licensing agreements, task agreements, non-disclosure and non-compete agreements. As a result of technicality of this subject, businesses are greatest served by working with skilled advisers to be able to safe their aggressive edge.
What to do:
Develop a complete IP technique
Execute non-compete contracts with employees
Execute IP assignment and license contracts with employees and founders
Keep a database of IP assets & register IP
Audit product growth processes
Receive clearances and rights to 3rd occasion IP
As considered one of our partners who just lately completed a due diligence train on a N200million seed funding funding for a consumer observes, this is more or less a well being test at the hospital. Examine weight, peak, sight, listening to, internals, reflex after which examine to previous report playing cards to ensure issues are all right earlier than you plunge deeper. Finally, nice companies make educated, balanced decisions founded on sound company governance structures. Such structures can only stem from a repository of sound authorized and business knowledge.
For additional questions or enquiry, please contact:
Moyo Maku (Associate Counsel, Imperial Regulation Office)
David Edoziem (Associate Counsel, Imperial Regulation Workplace)
info@imperiallawoffice.com
Disclaimer:
The views expressed herein shouldn't be wholly relied upon when beginning up a enterprise. Skilled legal advice needs to be sought in that regard.
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