"It is truly astonishing how often businessmen conduct their affairs, involving at times huge financial interests, on the strength of crude and vague agreements and then 'rely on hope, good spirits, bona fides and commercial expediency to make such agreements work'."– Harms JA in Namibian Minerals Corporation Ltd v Benguela Concessions Ltd [1996] ZASCA 140; 1997 (2) SA 548 (A) at 561G.
In assisting entrepreneurs to navigate the dynamic South African and global legal and tax landscape, one is reminded of the above dictum and of the steps entrepreneurs should take to avoid a number of common mistakes made at the outset of their venture.
Establishing a proper foundation
The foundation of a commercial endeavour is no trivial matter. In the construction industry, emphasis is placed on establishing a proper foundation for a building, and for good reasons too; the failure to establish this could result in the use, integrity and safety of the building being compromised. By comparison, a startup established without a proper "legal" foundation can lead to various unintended consequences for the venture. Implementing then the right legal structures, agreements, policies and procedures goes a long way in resolving internal conflict, minimising friction with third parties, encouraging investment, improving credit ratings, establishing credibility and integrity in the market, and avoiding the costs to remedy mistakes that should have been avoided. Let's take a look at some of these mistakes.
The common mistakes
Not adopting a proper legal structure for the venture. The best structures are those that protect and balance the interests of the various stakeholders and those of the startup's business. What those structures will look like exactly will depend on the circumstances. Questions that should be asked here are whether one or more of the venture's operations should be established locally or offshore; and as a trust, corporation, joint venture, or some combination of these. Enquiries of this nature should of course be blended with an assessment of which tax regimes apply in these cases.
Not entering into formal agreements with co-founders. Maintaining a healthy relationship between co-founders is paramount. One would therefore want to be crystal clear about important issues such as the funding and capital requirements of the venture; regulating the disposal or dilution of interests in the venture; establishing and regulating the managing body of the venture; protecting minority interests; and resolving deadlocks or disputes.
Not adopting formal and robust general business agreements. The more general business agreements and policies of a venture differ from one venture to the next. Particular care should be taken in relation to properly formulating a venture's website and/or App 'terms of use' agreements, privacy policies and consents, access to information policies, disclaimers and other general legal notices, as well as all other material agreements with customers and suppliers.
Not entering into formal agreements with employees. Proper employment relationships should be governed by formal agreements that make matters clear for the employer and employee. Naturally, from the startup's perspective one would want to pay particular attention to addressing matters that protect a startup's proprietary interests by way of such matters as restraints of trade, non-circumvention, non-solicitation, the assignment of IP rights, and maintaining confidentiality. Additionally, the adoption of formal HR policies goes a long way in ensuring fair treatment of employees and fostering a work culture that embraces diversity and inclusion.
Not adopting good governance practices. Good governance is about adopting the right checks and balances to ensure ethical and effective leadership. In this regard, one should seek to adopt practices and policies that foster authenticity, achieve high standards of performance, maintain effective control, champion ethical conduct, and encourage accountability. Recently too, the ESG considerations that impact on decision-making processes have in the limelight when adopting good governance practices.
Not addressing the issues that arise when inventing something new, making an original work, and in choosing company names, trading names or brand names. Issues that often arise here include assessing whether any new IP is capable of protection and should be protected by patent, copyright or trade mark. In the case of trade marks, the right IP protection process typically makes enquiries into the registrability of the trade mark in all relevant classes, filing all advisable applications for registration, and dealing properly with any objections or opposition proceedings.
Not taking expert or independent legal and tax advice for the venture. Entrepreneurs should exercise caution whenever engaging the services of persons who are not experts to advise on the legal and tax issues of a venture. Similarly, caution should be exercised in dealing with persons who are not able to provide unbiased and independent advice as a result of, for example, a direct or indirect personal interest in the venture.
Not budgeting for startup costs. It makes sense to invest as sensibly and as practically as possibly in the venture. Considering the costs and inconvenience that could be incurred in remedying avoidable mistakes, entrepreneurs would be well-advised to do this as early as possible and to budget on an ongoing basis. These costs, including engaging expert legal and tax advice, should therefore be seen as a valuable investment in the venture.
We are here to help
Our South African legal and tax teams comprise a pool of diverse experts that add value and expertise over the life-cycle of a startup, from initial planning and implementation all the way through to commencement of business, and beyond. We work closely with all role players in the planning and implementation stages and in order to meet the milestones required to commission the startup into operation. Our professionals in South Africa have years of corporate, commercial, M&A, regulatory and tax experience in various sectors. We are best placed to assist your startup business to navigate the dynamic legal and tax landscape.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
