LEGAL SERVICES FOR DISRUPTIVE TECHNOLOGY START-UPS
We’ve been lucky enough to work with a number of exciting South African start-ups over the past few years, and we often find ourselves contemplating our role in this sphere, particularly in the disruptive technology start-up world. When a client walks into a first consultation describing their business as the “Uber for “X”” or the “Ebay for “X”” or a “Fintech Start-up”, it is the natural tendency for legal professionals to classify the client as a “private company” and service its legal needs in the same way they would the needs of any other private company running a business. And certainly, there will be times when this approach is the right one, however, we believe that there are a few ways in which legal professionals can distinguish their service offering for innovative or rapid-growth technology start-up companies, in the same way that they would tailor their services for individuals, or larger businesses established in heavily regulated industries. If you are a founder or investor in a technology start-up who is dreading the need to make a call to attorneys or other legal service providers, this article may be for you.
In the last few years there has been a fair amount of commentary in business forums on digital disruption, and how technology is changing the way we interact with our service providers, friends and customers. A few well-known examples are Uber (taxi company that owns no taxies), AirBnB (accommodation provider that owns no real estate), Slack, Skype, Wechat (communication providers that own no telecoms infrastructure), Google and Apple (software vendors that don’t develop the majority of the apps they sell), Kickstarter (funding provider that provides none of the funding), Twitter and YouTube (media and content providers who don’t produce their own content) and Amazon (retailer with no customer-facing retail premises). These companies have rapidly expanded nationally and internationally whilst providing sometimes conventional service solutions in an unconventional way. Despite this, legal services have not innovated to the same extent, or at all. We are therefore faced with the question of whether and how legal services should be forced to adapt for the disruptive technology start-up.
We believe there are a number of ways in which a legal service offering for this kind of company can be distinguished. We would point to the below basic principles underlying a legal service which can add value to most technology start-ups:
- A knowledge of, and willingness to embrace, technology in general as well as the specific service offering of the client. Your legal service provider should communicate with you using your preferred communication method (download Slack, call using Skype), be willing to use Google Docs or Dropbox for sharing documents if that’s what you need, or be a part of your Trello board for task management. Even more important, your legal service provider should understand what you mean when you talk about electronic payments, cryptocurrency, application program interface, app development, e-commerce or any other technology reference and how these pertain to your business. If they don’t, then they should be willing to invest in understanding your business so as to properly contextualise their services.
- A willingness to innovate, adapt quickly and add real value. The difference between a successful technology start-up and an unsuccessful one can often come down to timing – a delay of a few months can mean that your competitor captures the market while you are still debating whether or not to register your brand name as a trademark. Your legal services provider needs to move quickly and be willing to think outside the box. Your crowdfunding, cryptocurrency or renewable energy startup requires an innovative legal approach in light of the occasional lack of proper regulation regarding these business models, and perhaps bespoke nature of the actual business.
- Transparent costs. Whether you are bootstrapping your technology start-up or operating on funding, you will inevitably need to watch your expenses carefully, especially in the pre-revenue stage of your growth. By making fees and costs transparent and easy to understand, you will be able to budget appropriately and you won’t get an unpleasant surprise at the end of the month when the invoice arrives. Legal services can be expensive, however they can also add a great deal of value in the long-run, provided instructions and expectations are managed carefully.
With the above basic principles in mind, there are a few specific areas in which your legal services provider can add serious commercial value to your business. If you have been asking yourself why you would ever need a commercial legal service provider – we find that the following are the areas in which we most often assist our start-up clients:
- Corporate Structure: You will need to set up the company or other entity which you will use to operate your business, set up the best possible capital structure (ownership structure) for that business, and make sure that everything is executed properly. It’s all fun and games until you realise that you never actually issued share certificates to your investor shareholders, over-subscribed on your authorised share capital and are faced with a personal liability risk.
- Funding: If you have found an investor willing to fund your endeavour, then that is often a big victory in and of itself – it will be important to structure that investment properly and carefully to ensure a mutually beneficial investment relationship that ticks the box for most of each party’s requirements and hopes for that investment. Your legal advisors should advise you on all available funding options (as well as the risks associated with these), whether this be through conventional equity, loan and hybrid instruments or perhaps more ‘out-there’ funding options like convertible notes, SAFE and KISS instruments, or crowdfunding.
- Intellectual Property: Many companies speak to ‘their IP’ without having much idea of what is contemplated by that IP. Your legal service provider should be able to assist you to assess what your company’s intellectual property is, and how best to protect it, whether that be through registration of a trade mark, maintaining a trade secret, or licensing rights appropriately to third parties.
- Employment: You may grow to a size where you have employees and contractors – we strongly recommend that these relationships be governed by employment or contractor contracts which (amongst other things) exclude any right that these employees/contractors have to the intellectual property that they develop whilst they are in the company’s employ. We also find that in the technology start-up there will more often be a real need to incentivise founders and key employees to remain with your business and add value with ownership rights, through an Employee Share Ownership Plan or other means.
- Expansion: One of the advantages of a technology start-up can be the scalability of the business model. You should have legal or other advisors who are capable of advising on the best ways in which you can export your services/product to other jurisdictions, and/or the cross-border structure that may work for you within the bounds of exchange control, whilst maximising tax efficiency and profit extraction in a responsible way.
- Exit: Whether you are a founder or an investor, you may at some point want to exit your start-up, and this should always be carefully handled, whether you exit through an IPO, acquisition, merger, or simply by sale to your fellow shareholders, everything from the due diligence through to final signature should be guided by each party’s goals for that transaction.
Whether or not the technology bubble eventually bursts, we believe the nature of doing business will (and should) be irreversibly changed by technology and automation, perhaps similarly to the way in which the industrial revolution irreversibly changed manufacturing and supply of goods. It is far more comforting for those in the legal services industry to stick with what they know, and follow the fork in the road that is well-trodden, however you as the investor or founder of a technology start-up have a right to legal services that are tailored to your specific needs, and should brief legal professionals who are brave enough to meet these needs. The nature of business is changing – your legal advisors need to keep up.