TahawulTech.com’s Deputy Editor, Daniel Shepherd, spoke with Biancka Gracias, Partner & Head of Start-up and SME division at ICLO, about incorporating companies and some of the key truths Start-up founders should always be aware of.
What would you classify as key points to consider before incorporating a technology company?
“Technology company can be a broad term when it comes to giving advice. However, there a number of key questions I would ask of any company before beginning incorporation. ‘What is it exactly you want to sell people? For example, do you have a MVP (Minimum viable product)’ is a key starting point. From there I would ask ‘Have you identified your market demographic, and do you have a business plan in place?’ We would only incorporate a company after they have proof of concept and a solid marketing or business plan in place. When talking about the UAE you have to consider that there are over 53 free zones and 7+ mainland options. For technology companies in particular there are many different types of sub-activities to choose from, so it is vitally important to work with the right regulator for your business as you cannot be transferred, and it becomes very cost-ineffective to get the wrong jurisdiction. A few rapid-fire things to consider include: Would you want to expand your operations in the next few years? Do you need office space? & How many employees would you need over the next 2 years?”
In the past we’ve heard terms like structuring and incorporation thrown around. Can you explain the distinction between the two and why it is important?
“If we were to build a house, we would first appoint an architect to design it for us to ensure that the structure, pillars, ceiling and foundation were strong, and we could accommodate for any future expansion. Similarly the structuring of a company always comes before you license or incorporate it. Structuring would govern whether or not you can hold office space, how many visas you can issue, how far you can grow your business through the country, whether or not you can expand operations without limitations”.
Can you tell our readers about the broad legal risks for start-ups and what businesses can do to mitigate them?
“I would break down the broad legal risks into three key areas: management risks, financial risks and employee risks. If any of these three areas fall apart, they can cascade and grow into bigger problems. In terms of management, you don’t want to end up in a situation where you lack the plans, foresight or guiding objectives to operate effectively. This can lead to a loss of business vision which can have negative repercussions as most start-ups typically pivot away from their founding business goals. In extreme cases these risks can culminate in an environment that is management led by personality and not procedure which often clashes with the management preferences of the other founders or shareholders”.
“The financial risks come from lacking a proper accounting system or overspending on MVP and marketing. Mismanagement can often leave start-ups in a situation where they are unable to later receive financial or legal support, of which there is no substitute for”.
“Finally, the risks concerning employees can have a profound impact on the work environment. I’ve seen start-ups exhibit a deficit in hiring employees and issues retaining them. To remedy this, businesses must endeavour to offer employees training, institute incentives and give assurances that their confidentiality will be protected. Safeguarding the personal documentation of your employees is of paramount importance. Contracting a professional advisor or mentor can greatly aid businesses in avoiding the aforementioned pitfalls”.
What tips can you share about negotiating terms and settling disputes between co-founders?
“Disputes arise often and it’s important to have safeguards in place to prevent these from happening in the first place. For example, a client of mine wanted to create a co-founder’s agreement which eventually transitioned into a shareholder’s agreement. However, the requirements kept evolving and it wasn’t completed in a timely manner. As such it can’t be used to settle the ongoing dispute the client finds themselves in. What you want to do is draft a heads of terms document (HoT) when founding a business. It doesn’t have be extensive, two full pages should suffice. This will act as a way to outline the rights and obligations tied to each respective party. This documentation can eventually transition into a detailed shareholders agreement as more people become involved in the running of the business. Start-ups must understand how to deal with the growing pains that come from bringing on new shareholders, as this is often a common source of disputes. To that end, it is important to have an effective dispute resolving mechanism in place for these kind of disagreements between partners and shareholders. It would be prudent to enact employee dispute resolution via a third, impartial, party. Remember there will always be disagreements in the running of businesses like this, but it doesn’t always lead to digression and dispute”.
For all the prospective start-up founders out there, what are the do’s & don’ts when it comes to Funding and Investment?
“In my answer to this question I’d like to stress what not to do first. Don’t overvalue your business as this can lead to a multitude of prideful errors. Don’t create complex pitch presentations, prospective investors are busy, keep it short and get your point across in five minutes. Don’t spend money on clients or projects in advance before signing an agreement with them. Don’t avoid talking about business contingencies with shareholders, they will admire the confidence it takes to discuss such topics”.
“On the more encouraging side, here are some things to actively try and aim for. Do try and give as much spotlight as you can on other partners, team members and key employees. This will also help mitigate some of the managerial risks previously discussed. Allow your pitch deck to be clear about the value and opportunity you are offering. Confirm that you have all your relationships formally documented. Do inform investors if you have any IP or what you are planning to do about IP. A lot of businesses are reluctant to invest in IP, but it is well worth it as it adds value to your businesses and credibility in the eyes of prospective investors. Do sign the right kind of agreement with the right investors. Know how much to give away and when as this promotes healthy business growth. Finally, always remember to allocate aside money for good legal advice”.