By Ahmed Arif / Entrepreneur ME
The UAE startup ecosystem has developed significantly in the last couple of years and is leading the MENA region in terms of investments. In 2017, US$560 million was invested in 260 startups, according to research from community platform MAGNiTT.With the UAE committed to strengthening its non-oil sector through diversification, startups and SMEs are rightly being recognized for the crucial role they can play in achieving this goal. This makes the case for access to proactive and sound legal advice for startups even stronger.
We know that lawyers often get a bad rap, and that many entrepreneurs are fearful of engaging with them. Many entrepreneurs think that lawyers are prohibitively expensive and are not financially viable, and therefore put them at the bottom of their priority list. Entrepreneurs can be so focused on the development and growth of their startups, and so sure of their product or service, that they tend to address the more immediate issues of funding or product development, while overlooking the legal risks that their organization may face down the track.
The failure statistics are alarming and access to quality legal services is often a key factor in a startup’s failure. When money is tight, entrepreneurs may resort to Dr. Google (downloading unsuitable contract templates off the internet), or avoid spending precious cash on expensive lawyers. With early legal decisions having a significant impact on the safeguarding of a business as it scales, overcoming “lawyerphobia” early on in a company’s development can prove crucial to the success of a startup or SME. Don’t become another statistic. Here is a list of the top things that can, and do, go wrong for entrepreneurs without proper legal support.
1. LACK OF STRUCTURE
A common mistake made by entrepreneurs early on is failing to choose the right legal entity to operate their business. There are multiple organizational structures available and using the correct one can be critical to ensuring that your business is successful. With so many alternatives, and without seeking legal advice, the choice can be overwhelming, and the temptation strong, to choose the cheapest or fastest form and location. Failing to choose the right structure can be extremely costly –both in terms of money and time– if you make the wrong choice and need to rearrange your company structuring later during an investment round or exit.
2. FOUNDERS’ AGREEMENTS
Many new companies fail to establish a well-written Founders’ Agreement that explicitly outlines duties and obligations of each partner. When there is more than one founder, a Founders’ Agreement is crucial for solving issues that may arise in the future. It is normal to believe nothing could possibly go wrong and you and your fellow founders will be friends forever. Entrepreneurs often wait too long to ask themselves the tough questions, and to think about how they will deal with the challenges that may arise in the life of their business. It is easier to discuss worst-case scenarios while the going is good than to be unprepared if the relationships go sour. Discussions between founders must be both objective and honest, and consider the current situation and future scenarios for the business and its founders. What are the roles and responsibilities of each of the founders? What happens if one of the founders wants to leave?