MaGIC Academy : What Startups Should Know About Legalities

Startups: What You Should Know

1

Paul P. Subramaniam

7 March 2015

Awareness Session 2015

Outline

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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

http://www.forbes.com/sites/allbusiness/2013/10/03/big-legal-mistakes-made-by-start-ups/














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


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?

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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

9

http://www.ssm.com.my/


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


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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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’.

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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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http://www.ssm.com.my/

Whose Big Idea

Was This?

14

What is Intellectual Property?

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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



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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.


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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.


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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?

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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?

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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.

http://www.myipo.gov.my/

http://www.myipo.gov.my/

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

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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

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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

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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.


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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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


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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

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Faster and cheaper growth of business

Higher confidence in strong, strategic partnerships

But beware…

The Good, The Bad and The Ugly

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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

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What is a contract?

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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.

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Boilerplate, but wait…

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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

mailto:[email protected]

mailto:[email protected]

MaGIC Academy : What Startups Should Know About Legalities

Business

Transcript of MaGIC Academy : What Startups Should Know About Legalities