Pay for a good startup lawyer

This article is the eighth in the Startup Series on FirstPost’s Tech2 section and first appeared on Dec the 23rd, 2016.

I am aware this is controversial advice.

Especially since the last column said: “You pay for some things, you do not pay for some things; you should take your time to understand which is which.”

Especially since we all know free legal templates are available online, or a friend can send you their stuff, and you can take them and tweak them, and you are done. This is where I mention that I have seen startups in India working with documents that state their jurisdiction as England and Wales. They certainly found a template for free! But is it serving them and their purposes?

The ability to make sense of legal documents is not for everybody. The inability to make sense of legal documents could however be quite expensive. The advice of a competent, experienced startup lawyer is something founders would do well to pay for.

Here is why.

A good lawyer will not just write you legalese and lots of documentation but she will build you the scaffold for a future of success and high growth. It is something to plan for now, because let’s face it, when you are blazingly successful, you won’t have time to come back and re-do the paperwork assembled from a random assortment of templates.

One of the first decisions in a startup is about location and structure. A competent lawyer, equipped with adequate tax advice if necessary, will help set up the most optimal structure for future growth and in a location that works for you. “But I am incorporating in India,” you may say. Fair point, but a good lawyer, who understands the competing jurisdictions you could incorporate in, such as Singapore, will explain the options to you, thus helping you think more broadly and globally about your business right from the start. Tax is not the only consideration, of course. A location can often beat your default location on the entrepreneurial ecosystem, the ease of finding and hiring talent including from other countries, and most crucially, the ease of doing business.

With cofounders on board, you will need a watertight shareholding rights agreement everyone agrees to sign. A shareholding rights agreement outlines founder shares of equity, but more importantly, outlines important issues that may come up including cofounders wanting to leave, resolving matters in a going concern, potential conflicts arising and so on. I have lost count of how many founder conflicts could have just been avoided or resolved more easily, had someone thought of writing a sensible shareholding rights agreement up front.

As you build the business, you will need to think about several other contracts e.g. with service providers and partners. Service providers may send you their own contracts on which it would be wise to get legal eyes so you know what you are signing up to and what recourse is available to you if things don’t pan out as expected. Next come employees and their employment contracts, which for startups may be different from those offered by BigCo employers. A major difference, for instance, may be the inclusion of stock options in the employment contract, as well as termination clauses and what happens to unvested or unexercised options in different scenarios. Especially if your startup is a success, this is an important matter to not deal with in an amateurish manner.

Whether your website is transactional or not, it is an essential for business and brings responsibility. A good startup lawyer will help write the right policies governing the use of your website for the visitors, and policies disclosing how you will treat data you may collect on their visit, their interaction and their transactions with your business.

These considerations are common across startups. Some specific startups may need specialist advice.

For instance, if you are creating a startup in a regulated industry, such as FinTech, in which none of the founders has adequate deep experience, the importance of a lawyer with industry specialisation cannot be overstated. A competent lawyer can advise you on compliance and regulatory challenges arising from, say, your business model.

In case, you are creating a social enterprise or a non-profit, correct legal advice would save you much heartache. Can you set up a trading arm? Who can and cannot donate to your organisation? What tax benefits are and are not allowable? How do you ensure adequate transparency, disclosure and compliance?

And of course, if you are creating a startup with a patented product, you will have already dealt with a lawyer specialising in intellectual property, and the advice here would dovetail with your experience.

Ignorance of the law, in no jurisdiction, is an admissible excuse for violations or non-compliance. Ignorance is definitely an expensive indulgence should anyone, from your cofounders to your customers, bring about a lawsuit against your startup.

Be smart.

Brexit and the luxury brands of Britain

(A version of this article appeared in LiveMint on November the 17th, 2016.)

British Prime Minister Theresa May’s visit to India and trade talks with her Indian counterpart take me back to the midsummer’s day in 2016. We in Britain woke up to find that the Leave campaign, colloquially called Brexit, had won the referendum. The pound plummeted and for a while, the stock markets were in chaos. Markets stabilised but the pound continued a downward trend, beating historic lows.

Britain luxury brands are known for their heritage, design, craftsmanship, and quirky individuality which together shape a luxury narrative matched by no other country’s. London too is a choice destination for the experience of buying both British and non-British luxury brands.

The weakened pound was good news for tourists visiting the UK. The month of Ramazan, which traditionally brings wealthy visitors from the Middle East to London, followed. Flight bookings from Europe as well as Asia reportedly rose after the referendum. Premium and luxury hotels benefited from a rise in reservations and stays by overseas guests too. All this made London the hottest and cheapest luxury shopping destination this summer. Much shopping took place as is evident from UBS’s analysis of tax refund receipts. Tax refunds, which are typically sought on big ticket goods, rose by 36% in August.

So far the Brexit vote looks good for luxury shoppers from outside the UK. The picture for luxury brands is more complicated.

The iconic British brand Burberry has seen a 30% rise in sales in its British stores in the last six months. Facing headwinds otherwise, Burberry has also cut prices in its Hong Kong stores, taking advantage of the weaker pound as the brand notably incurs 40% of its costs in Britain.

It is a mixed picture for luxury watches, which are often presented as investment pieces, hence seen as considered purchases not impulse buys affected by currency fluctuations. Many coveted luxury watch brands are imported into the UK and the weaker pound has made the imported goods more expensive. Prices for brands such as Cartier and Mont Blanc, owned by the Richemont Group, have been increased while Hublot, Omega and Tag Heuer, owned by LVMH and Swatch Group, are holding on. The latter category of brands is taking the impact on its margins. For now.

The British luxury watch maker Bremont however is quids-in despite 30% of its costs being imports of Swiss watch parts, which are now more expensive. A weaker pound has helped the firm deal with falling sales in Asia and come out stronger.

To complete the picture and London being a hub for creative entrepreneurs, I spoke with proprietors of several upcoming luxury brands. My conversations revealed a mixed picture. Many small luxury brands source parts, finished products or packaging abroad while serving mainly local British customers. After the referendum, the bill of materials is decidedly more expensive by 10-30% depending on where they import from. As small businesses and nascent brands, however, they cannot always pass on the costs as price increases to the customer. Some however are slowly edging up prices of some products while keeping other prices steady. Overall this does not bode well for smaller, upcoming British luxury brands. Tighter margins will hamper their growth, and in many cases, their ability to survive.

It is also important to remember that despite the outcome of the referendum, Britain is, at the time of writing, still operating in the single European market with free movement of people. This makes it easier for people from Euro countries to travel to and shop in the UK. Any change in the ease of travel will affect Europeans travelling to and shopping in the UK just based on a weaker pound.

Luxury marques already under pressure, such as British car maker Aston Martin, expect a short term lift from the weakened pound but that may only last till Britain quits the single market. The automotive supply chain is global, and that will continue to affect the brand’s margins and profitability especially if Britain loses single market privileges and is not able to strike similarly attractive deals with the many countries where Aston Martin sells.

Some luxury brands are already thinking long term. For instance, Bremont is collaborating with the Advanced Manufacturing Research Centre in Sheffield to reduce its reliance on imported parts. Aston Martin too has made recent investments in product development and a new plant in the UK although its reliance on imported parts will continue for a while. But absent any clarity on the nature of trade deals Britain may be able to make, the return on these investments remains uncertain.

The pound recorded a brief recovery on November the 3rd, 2016 after the High Court ruled that the government will need parliament’s approval to trigger Article 50 which is essential for the official start of negotiations with the European Union. The judgment has temporarily buoyed the Remain voters. The uncertainty is further compounded by the government choosing to appeal the decision in the Supreme Court.

Luxury brands, like many others, will just have to sit tight and watch. After all, what is a couple of years in the grand schema of luxury brands that have lasted or intend to last for centuries?

Slicing up the equity pie

This article is the fifth in the Startup Series on FirstPost’s Tech2 section and first appeared on Nov the 2nd, 2016.

Cofounder conflict over equity sharing can often cause a startup to be aborted before launch or otherwise fail quickly, as many of us who work with founders in very early stages know well. Some founders do not want to share equity. It is fine as long as they understand what is needed to grow the startup and can buy that talent in. Early stage ventures often cannot afford to pay people market rates, nor can they risk core talent walking away easily. Giving equity to cofounders, who bring key talent, helps address these concerns.

Founders often ask, “how much equity should I give my cofounder for the amount of work she will be putting in?”. My brisk answer to this “how long is a piece of string?” question is: “it is what you negotiate and what all cofounders are happy with”. Inevitably it leads to a further question whether there is a formula to make this negotiation easy and the answer to that is “No”.

Founder experiences show that a long term and successful cofounder relationship is predicated not so much on the slices of the equity pie but on the sense of perceived fairness in the arrangement, including in the course of the relationship.

To facilitate the equity sharing discussion, I start by advising potential cofounders to develop their vision for the venture together. Creating a shared vision and defining broad strategic goals then help them understand better the contribution expected of each of the cofounders in shaping the startup. More importantly, they develop some appreciation of how much weight each cofounder is pulling, and how their roles and contributions may evolve over the life cycle of the startup. At this point, I often see relatively inexperienced founders starting to relax and then I remind them to consider probable contingencies.

Roles and responsibilities aren’t cast in stone. Scope creep can and does happen. What happens, for instance, when the person, who was in charge of customer development and marketing, ends up leading on user experience design, developing the product roadmap, and owning all revenue generation and operations, because they appear to stack together naturally? How would the cofounders deal if she wants to return to the drawing board and renegotiate the slicing of the equity pie?

People and their priorities change over time. What happens if the chief technical architect develops the core product and then wishes to leave for a job with more income security and predictable hours because her family is growing, but wishes to retain her equity in the business? How would the remaining cofounders deal with that negotiation while also ensuring that the future of the core product is not jeopardised?

What about unforeseeable things? What if the business runs out of money before lining up the next round of funding? What if, in the virtual team, one of the cofounders becomes unresponsive while holding the business to ransom? What if a cofounder becomes unwell or dies unexpectedly, bringing her partner or family into the picture in the way nobody has quite imagined? These are a fraction of the scenarios that I have seen played out in cofounded startups where the cofounders were caught unawares.

Envisioning these possible scenarios is a squirm inducing exercise for most founders. But it also makes clear that the relationship the founders are about to enter is an evolving entity with uncertainties and potential conflicts in the future, not an immutable one. Cofounders also start to realise that fairness as accepted by all sides matters.

They also realise that above all, at all times, a focus on the business is crucial. It is not beyond possibility that a cofounder decides that not only will she leave the startup she will also ensure the startup does not survive after her. It is uncomfortable to think of such a scenario but it must be considered in advance.

How do we ensure fairness then, if things are going to chop and change, and people are going to behave unpredictably, even maliciously?

Here let’s draw upon some common sense. While resolving a cake dispute, a parent friend of mine uses a trick. She lets one child slice the cake, and the other children pick the slices first. The resulting dynamic is fascinating and instructive. Stretched to a cofounder negotiation, one of the tests of fairness would be, if you were doing all that any given cofounder is doing, would you be happy with the share she is getting?

It is also important to understand that fairness must be perceived and seen as fairness by all parties. And that perfect fairness is an asymptotic goal, albeit one worth working towards.

In a later column, we shall discuss embedding these negotiations into formal agreements and what it means for the startup.

On fancy job titles

This article is the fourth in the Startup Series on FirstPost’s Tech2 section and first appeared on Oct the 19th, 2016.

In one of my corporate venturing roles with a large Indian conglomerate, I served as the country manager of a European country. That was also the job title on my card and in my email signature file. The important sounding title was not just about sitting in a fancy office overlooking Zurich lake. I made a lot of calls and set up my meetings with prospective clients for business development purposes. I also went daily to the post office to collect our mail, printed and sent and filed my own faxes, made coffee and washed my own coffee cup, took out our recycling, and did a whole bunch of administrative work that people in large companies do not even think about or farm out to secretaries and assistants.

It was, after all, a new and small operation albeit with a BigCo parent company.

Startups are no different. In the early days of a startup, founders do everything from washing cups to taking and making calls to filing papers to paying bills. They do VAT returns, meet account filing deadlines, minute board meetings, keep an eye on the cash in the bank and so on. They pack products and take those packages to the post office for mailing. They also go out and represent the company to customers, partners, vendors, media and financiers. There is nobody else to talk about the brand, the company, the product but the founders who created the business. In other words, early days are when the startup founders are always selling, trying to sell or fulfilling orders.

Is there a need for startup founders have important sounding titles? Some even argue over them!

Titles serve a purpose.

Titles are useful in signalling to customers, partners, vendors and other third parties about the roles of the individuals they are dealing with. Giving such comfort and confidence is an outward facing utility of titles. Yo can go the ego-boosting heavy title route, or take a leaf from Craig Newmark’s book. He is the founder of Craigslist and calls himself “customer service rep”.

Inside the startup, roles and titles can help start a useful and essential conversation about allocation of responsibilities as the early rapid growth forces functional specialisation within the founding team. The CEO should ensure there is enough cash, that the company is heading in the right direction, and that there are enough people on the team — or from vendors and partners — to do what is necessary. The COO’s role may be defined by the context often spanning revenue ownership, supply chain, operations and other processes. The CMO takes charge of all marketing and communications with an aim to establish the brand as well as drive inbound inquiries and sales.

Then there are the future employees. As founders, you sell the vision to future employees so they consider working with you. Some of these employees then actually want big corporate-sounding titles e.g. VP. In an early stage and relatively flat organisation, a title such as VP may mean little. But what it can do is catalyse the thought process required to develop an organisational structure that will support future growth including growing numbers of employees, their roles and their career trajectories.

I am no fan of hierarchical organisations but equally the evidence from holacracy as implemented by Zappos and others following their lead, and from self management structures as implemented by Buffer is mixed. So, for now, even for startups, organisation design for growth remains an active challenge on the table. Titles are not essential but they could bring much needed clarity as jobs evolve away from the traditional functional bases of design to other philosophies including customer at the centre of the organisation.

During my country manager stint, I had several meetings with big-cheese type persons in prospective client organisations. It was not uncommon, when I turned up, to be asked by the gatekeeper to the said big-cheese, “Wo ist der Geschaeftsfuehrer?” (Where is the boss?).

I was, after all, a petite and young Indian woman, turning up to meet an important man in their company!

Handing over my card with a smile, I would reply, “Ich bin die Geschaeftsfuehrerin, bitte.” (I am the boss, please!).

The big title? It always worked.

Cofounders and the dating analogy

This article is the third in the Startup Series on FirstPost’s Tech2 section and first appeared on Oct the 3rd, 2016.

The search for a cofounder is analogous to dating. There is an ideal checklist of attributes — skills, qualities and more as you will see — and then there is the ineffable chemistry check.

Since no two people are alike, we will naturally encounter both similarities and differences. Over the years of working with startups, I have developed a framework which can help you think through the dilemma.

Values of cofounders should ideally be the same or similar. A key value to consider is the importance of control. Extensive research by Noam Wasserman of Stanford finds that there are people, who want complete control and ownership, and there are people, who understand that some control may need to be given up to build and grow the venture’s reach and value. This understanding is pretty fundamental to building a venture, especially if you plan to raise external investment to do so. A fundamental disagreement here would not make for a a good cofounder relationship.

Goals, needless to say, have to be similar not different, although one can work with  the possibility of changing mind later. For instance, a cofounder may commit today to work on the venture till an exit event but a few years down, agree to give up an active role in running the venture. Such possibilities are hard to predict but if all else is working, they are negotiable.

Skills are best if different or complementary. It helps if the cofounders bring different domain expertise to building the startup. If you are a techie who does not have experience in speaking to early adopters and customers, and your cofounder is the customer facing person essential to driving adoption and bringing customer feedback on board, you have brought together two essential skill sets.

Work ethic is best if similar. Some people emphasise hard work, others outcomes. A startup needs both but it needs outcomes and growth milestones more than anything else. If a founder thinks hard work is substitute for results, it is not going to work. It is therefore best if cofounders are on the same page as to the purposiveness of the work ethic. It is worth noting that work hours are not the same thing as work ethic. Work hours are often negotiated with the needs of the start-up in mind. While a developer can work late into the night coding, a customer facing cofounder has to work the hours when she can meet customers and partners.

Networks serve a startup best if different, or complementary. This would help the start-up maximise reach into customers as well as investors. The eagle-eyed among you may note this may not work when your cofounder is your former classmate from University, as mentioned in an earlier column. In such a case, look for the contacts you need in another cofounder or an advisor. Ask yourself “what things are you definitely not good at?” and go from there.

If this framework is lulling you into a false sense of security, don’t let it. Being able to judge these essential qualities is not simple or quick. Don’t rush the decision. Spend time talking through things and listening carefully, how they see failure and success, how they talk about disappointment, how they treat people over whom they have any kind of power, how they talk about people they have relationships with.

Occasionally someone may tick all the boxes and yet make you uncomfortable. Judging someone’s character is hard, and a lot more personal than judging their skills and experience. In such moments, listen to yourself, I say. Do not dismiss your instincts and do not dismiss your gut.

However as any person in a long term commitment or relationship will tell you, the marriage begins once the wedding is over. Committing to the relationship requires the commitment to work with all that comes with it. It helps to lay down early ground rules for all to adhere. That is the scaffold of your organisation’s culture, more on which a little later in this column series.

It is worth remembering that the advertised product may be quite different from what is delivered. In other words, people may disappoint you. They may demonstrate different behaviours in an organised and predictable environment than they do in a start-up. A start-up is a high stress, demanding environment where decisions are not hedged by a large team and wrong decisions can actually waste valuable money and time.You cannot predict all this but you can deal with it. More on conflicts arising and how to deal with those will be discussed later in this series.

(Note: a version of this framework appears in “Dear Female Founder” edited by Lu Li, who has kindly permitted the publication of this piece.)