Start-up Law 101: Being Married to Your Business

Thomas Moore wrote:

“Romantic love is an illusion. Most of us discover this truth at the end of a love affair or else when the sweet emotions of love lead us into marriage and then turn down their flames.”

A huge part of lawyering is being pragmatic for your client. After handling a number of intra-corporate and annulment cases, it strikes me how much the two have in common. In both a business partnership and a marriage, parties bind themselves to each other for better or for worse. While infatuated with each other, parties to the relationship easily and eagerly bind themselves to each other, without truly understanding what this means. It is only later on, after having legally bound themselves together, do the parties realize the difficulties and differences they have with each other. Either the parties figure out among themselves how to resolve their issues or “divorce” each other. At this point, the “divorce” is often more complicated and costly than getting committed in the first place.

The following are some thinking points entrepreneurs should consider when starting out.

A. Founders/Shareholders Agreements a.k.a the “pre-nup”

Think of the relationship between business partners as you do a marriage, except that, in the case of business relationships, the divorce rates are much higher.

During the “honeymoon” stage of starting a business, founders or partners are thrilled and full of optimism with their prospects of success but often neglect to clarify among themselves very important issues and fail to manage each other’s expectations.

Often times, founding partners are too shy and embarrassed to raise their concerns of ownership over the business, the roles each of the founding partners have to play in operating the business, and their own expectations from themselves and of each other, thinking they can resolve these issues later on. BIG MISTAKE.

Much like the mandatory “discovery weekend” engaged couples have to go through before their marriage ceremony, founding partners should shed light on and ask themselves the very uncomfortable questions at the onset.

Thomas Moore wrote:

“Romantic love is an illusion. Most of us discover this truth at the end of a love affair or else when the sweet emotions of love lead us into marriage and then turn down their flames.”

A huge part of lawyering is being pragmatic for your client. After handling a number of intra-corporate and annulment cases, it strikes me how much the two have in common. In both a business partnership and a marriage, parties bind themselves to each other for better or for worse. While infatuated with each other, parties to the relationship easily and eagerly bind themselves to each other, without truly understanding what this means. It is only later on, after having legally bound themselves together, do the parties realize the difficulties and differences they have with each other. Either the parties figure out among themselves how to resolve their issues or “divorce” each other. At this point, the “divorce” is often more complicated and costly than getting committed in the first place.

The following are some thinking points entrepreneurs should consider when starting out.

A. Founders/Shareholders Agreements a.k.a the “pre-nup”

Think of the relationship between business partners as you do a marriage, except that, in the case of business relationships, the divorce rates are much higher.

During the “honeymoon” stage of starting a business, founders or partners are thrilled and full of optimism with their prospects of success but often neglect to clarify among themselves very important issues and fail to manage each other’s expectations.

Often times, founding partners are too shy and embarrassed to raise their concerns of ownership over the business, the roles each of the founding partners have to play in operating the business, and their own expectations from themselves and of each other, thinking they can resolve these issues later on. BIG MISTAKE.

Much like the mandatory “discovery weekend” engaged couples have to go through before their marriage ceremony, founding partners should shed light on and ask themselves the very uncomfortable questions at the onset.

The founders or shareholders agreement, much like a “pre-nup”, assist founding partners to think through issues such as the equity or ownership structure of the business and articulate and capture their intentions. Confusion on the ownership structure, or a poorly articulated shareholders agreement can cause tremendous hassle and legal expenses among the founders of a business, which may prove catastrophic for any business enterprise.

B. Incorporate or not?

The benefits of incorporation may be far too familiar to the seasoned entrepreneur, but it is quite surprising how much queries I get on the topic.

Aligning the goals of business owners with the proper corporate vehicle and structure is extremely important.

Below are some of the basic benefits of incorporation:

Limit your personal liability – Incorporation allows entrepreneurs to have a personality separate and distinct from their business entity. This means that entrepreneurs are able to protect their personal assets from business debts and obligations.

Add Stability and Credibility – Incorporation enhances the credibility and sense of professionalism of a business enterprise. It facilitates the easy transition, and assures the continuity of a business through a change in ownership or management.

Take Advantage of Tax Incentives and Deductions – Incorporating a business allows the entrepreneur to take advantage of numerous tax incentives (depending on its industry) or legal tax avoidance schemes to maximize return on the business.

The incorporation of a business also allows entrepreneurs to deduct normal business expenses, including salaries, before they allocate profits among themselves. This means that entrepreneurs are able to deduct money spent on growing the business from otherwise taxable income.

C. Keeping your house in order

I once advised a group of young and talented entrepreneurs who were at the brink of closing their business. Although they identified the right opportunity, they had difficulty moving their business forward and executing their collective vision. Along with poor corporate book keeping, they never kept minutes of their meetings. I suggested that they conduct bi-monthly board meetings along with agenda setting and taking down minutes. After three months, I met with the group again. They were ecstatic because agenda setting and taking down minutes greatly helped in moving the business forward by systematically holding partners accountable to their tasks.

Aside from reducing your potential liability from the failure to observe corporate formalities, well-organized corporate records have practical benefits in running a business.

D. Invest in Mentors

Members of your board of directors are much more than fillers who collect a paycheck for attending meetings. Many times, founders of start-ups do not realize the opportunity board seats represent to attract highly experienced and knowledgeable industry insiders at minimal cost and commitment on their part. Established companies have long benefitted from independent directors to ensure that corporate decisions have the benefit of clear and independent thinking.

E. Attracting and dealing with talent

Roles (outsourcing vs. in-house)

It is often said that Philippine employment law is skewed in favor of the employee. An employer-employee relationship is not simple to terminate and must undergo the proper procedure to prevent liability. It is therefore important to understand the nature of the business and intelligently distinguish tasks that are best performed by an employee of the company, from those that are better served by an outside contractor.

Motivating Talent

Silicon Valley is famous for employee perks. Recognizing that attracting the top talent to execute and realize the founders’ vision is paramount for success. Even early stage ventures should invest heavily in talent and make sure that the interests of key employees are aligned with the success of the company by including compensation packages such as stock options or bonuses contingent on the performance of the company.

Protecting your business

Before hiring or contracting out work, it is important to have the proper agreements in place, such as employment and contractor’s agreements, non-disclosure agreements, confidentiality agreements and non-compete agreements to ensure the stability of the business and trade secrets are kept.

F. Trademarks

Register your trademark.

It takes a lot of blood, sweat and tears to develop brand recognition. Every year, corporations invest billions of dollars developing their brands.

Trademarks are the public face of a business. It encapsulates the business and is identified with the

goodwill and reputation of a product, which consumers recognize, trust and patronize. The trademark has immense commercial value, which should be protected.

G. Immigration (protect yourself)

For Filipinos: People are often surprised with the number foreigners wanted by Interpol who reside in the Philippines. Be sure to check the legal status of your foreign partners. With the great progress of the Philippine economy, we take the good with the bad.

For Foreigners: Don’t be an easy target and make sure your legal status in the Philippines is in order. Philippine immigration may be lax, but shakedowns from government officials or your local partners, because of your immigration status, are hassles you can avoid. Deportation is often the easiest way to harass and get rid of you.

Take Away

Much like the wild west during the gold rush, and silicon valley during the recent information technology boom, the Philippines is fast becoming the land of opportunity where big fortunes can be made in relatively short amounts of time.

In this period of opportunity, starting or managing an ongoing business can be overwhelming. Oftentimes entrepreneurs are too focused on the operations of their business and overlook fundamental legalities, which prove costly to solve or even lead to the closure of an enterprise.

If you can resolve critical issues among your partners before you begin a venture, and establish the right corporate culture at the early stages of a business, you can avoid expensive transaction costs and internal legal battles.

About the Author:

Mr. Juan Paolo Villonco is the first Filipino graduate of Stanford Law School. He graduated with honors and obtained his Master’s in Law degree from Stanford in 2014. While at Stanford, Mr. Villonco participated in start-up weekends and venture labs where he interacted and gave legal advise to various start-up teams composed of Stanford graduate students.

Mr. Villonco is counsel to leading Filipino entrepreneurs on legal aspects of their business and corporate affairs and draws from his extensive experience as an intra-corporate litigation specialist. He is adept in advising clients on the proper corporate vehicle for various business interests and advises clients on establishing the equity structure of new ventures between founders or shareholders and equity incentive plans for early consultants, advisors and executives.

Mr. Villonco also holds an Economics degree from Ateneo de Manila University and obtained his J.D. from the Ateneo de Manila University School of Law in 2006.