How a Founder’s Legal Illiteracy Can “Kill” a Startup

Launching a startup is an exciting and ambitious process, but on the road to success you may run into legal risks that many startup founders tend to underestimate. Proper legal preparation is not just a formality — it is an important factor that can protect your startup and ensure its stable growth.

Why is it important to work through legal issues?

Intellectual property protection: Your idea and the solutions you develop are the foundation of your startup. Without proper protection, you risk losing control over your product or falling victim to plagiarism. Registering patents, trademarks and copyrights at an early stage will shield you from problems down the road.

For example, in December 2017 the Supreme Court of the Republic of Kazakhstan heard and granted a claim filed by The Coca-Cola Company. Under the ruling, the court prohibited "YUNIKS" from producing and using a label and bottle that copied the appearance of the label and bottle registered as trademarks in Kazakhstan in the name of The Coca-Cola Company. The court also ordered "YUNIKS" to destroy the labels and bottles of its Kazakhstan Cola carbonated soft drink. In addition, "YUNIKS" was ordered to remove images of the Kazakhstan Cola carbonated drink from its documentation, advertising (including its website) and signage.

Contractual relationships: Properly drafted agreements with partners, investors and employees will protect you from potential disputes and misunderstandings.

One example of what happens when internal relationships within a company are left unsettled is thecase of the Kazakhstani startup Qtap. A conflict between the spouses who co-founded the company became public and threatened to sever the project’s ties with its investors.

Regulation and licensing: Depending on your industry and the jurisdiction in which you operate, you may need permits and have to comply with certain legal requirements. Misunderstanding or ignoring these rules can lead to fines and even the closure of your business.

For example, the Kazakhstani medicine search platform I-teka planned to sell medicines in its own name. However, after consulting a lawyer, the team learned that in that case the platform’s activities would fall under the definition of “sale of medicines” and would require a license. As a result, the company decided to abandon this business model and instead allowed pharmacies to sell medicines on the platform directly in their own name.

Data privacy: In the age of digitalization, it is especially important to protect the personal data of your customers and partners. Violating data protection laws (such as the GDPR) can lead to serious financial and reputational losses.

Many people in Kazakhstan remember the scandal over the leak of customer data at the airline Air Astana and the telecom operator Kazakhtelecom. Both companies had to pay large fines for mishandling their customers’ data.

The right legal-entity form. Choosing the right jurisdiction and legal-entity form can affect many aspects of your business, from the tax burden to founders’ liability and fundraising.

For example, many startups aiming to raise investment choose a C-Corporation in the state of Delaware, USA. This form allows a company to issue different classes of shares, which makes it easier to attract venture investors. In addition, a C-Corporation is the optimal form for holding an IPO in the future.

How can you minimize the risks?

• First and foremost, consult a lawyer with the relevant knowledge and experience. This will help you avoid common mistakes and set up the legal structure of your business correctly.
• Draft sound legal documents, such as founders’ agreements, non-disclosure agreements and employment contracts.
• Regularly check that your business complies with frequently changing legal requirements, especially if you plan to expand or enter new markets.

We understand that startup founders, especially at the early stage, may lack knowledge, experience and funds. That is exactly why our venture company offers startups a mentorship program, through which you will receive support (including legal support) from our experts.

By taking part in our mentorship program, you will gain access to legal consultations, recommendations on structuring your business and practical advice.