Legal awareness helps create value, prosperity for startups

Majority of disputes are caused by expectation mismatch between the parties

  
Image used for illustrative purpose. Close-Up Of Gavel And Hammer On Desk

Image used for illustrative purpose. Close-Up Of Gavel And Hammer On Desk

Getty Images/Audtakorn Sutarmjam / EyeEm

The regional startup ecosystem has emerged as a promising destination for attracting global investments while expanding its organic reach. A lot of global Venture Capitalist (VCs), corporates, Family Offices, funds are looking at startups to invest.

So how do startups protect themselves in this rapidly developing ecosystem? Legal awareness is key to create value and prosperity for startups, says Dubai-based Prashant K. Gulati, technology innovator, early-stage investor, and mentor.

“Good quality legal structures, clear contracts, and well-articulated business plans and related documentation are like good hygiene. With the disappearance of borders and globalisation of startups, investors and markets, its all the more important that startup founder invest in good quality legal advise to create robust entities that make for better investors and attractive valuations,” said Gulati.

The two most essential things, between VCs and their investee startups, that keep a healthy relationship are honesty and clean documentation. VCs have a fiduciary responsibility towards the money they manage and invest and this goes a long way to instill confidence in the startup. Once rails of clarity and communication are established, it makes for a balanced relationship and helps increase, not just valuation, but also the pleasure in creating an enviable enterprise, informs Gulati.

Majority of disputes are caused by expectation mismatch between the parties. In most cases, startups take many years before they show profits in the traditional sense, and hence their value is determined by a lot of other metrics, and most key people are held into the business through stock options and VC money. In such high stakes environment disputes are bound to arise and usually are around equity distribution, valuations, and deliverables. Usually, in their early years when startups are in the frugal mindset, they take many shortcuts which lead to disputes later – like unclear or ambiguous contracts, unreasonable promises to investors, faulty cap tables and allocations, inter-party transactions, misuse of company resources, etc.

ICLO law firm — mainland licensed in Abu Dhabi and Dubai — covers all aspects of startups and SMEs and is already working with Dubai SME, Khalifa Fund, Dubai Future Foundation, Hub71, Sheraa, In5, and many more to bring legal awareness and importance of legal risks.

Biancka Gracias, Partner ICLO, said: “Legal risks are something that startups continuously avoid including getting a good board of advisors. In simple words I would say to a founder, assess your operations and ask yourself, ‘What If’. Understand and prepare for your worst-case scenarios and more importantly understand what laws apply to your business and what you need to comply with.”

Both VCs and startups can strike a balance ground by having clear communication which is key to long-term growth. The more the VCs share their vision and communicate to the founders, the easier it is for the founders to respond to that vision and integrate it into their operational plans.

Gracias said: “it is so important to get the right co-founder from the start and to set boundaries with each other so responsibilities do not overlap. Having a clear co-founders or shareholders agreement is also critical to ensure that disputes have a fair and real chance of getting resolved.”

Dubai-based Walid Mansour, a venture capital professional who has participated in the setup, scale-up and exit of several VC funds and technology companies, said: “Startups have many needs including incorporations, labour, commercial contracts, IP, transaction documents, and legal DD rooms. Having access to the right support at the right price is key to scale successfully.”

 

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