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Start-up Advice

How To Create Founding Documents

If you don’t put the right structures in place early on, you just might find that everything comes tumbling down…

Andrew Taylor

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Launching your own start-up is no easy feat, and, is likely to be one of the most daunting steps that you — and those on the roller-coaster with you — will ever take.

The value of tapping into the advice and experience of professionals with expertise in your area of need cannot be underestimated.

First off, it’s important to realise that there are huge benefits to having a firm grasp of the basics of the legal questions surrounding your venture, because these obligations apply — whether you know they do or not. Once you’ve registered a company, the first thing you ought to do is to procure customised founding documents.

Related: Start A Business They Said… It’ll Be Easy, They Said…

The founding documents of your company are just that — the foundation of your company.

A customised Memorandum of Incorporation (usually referred to as an MOI) seeks to govern several relationships, including: 

  • Those between the individual shareholders of the company;
  • Those between the shareholders as a group and their obligations to the company; and
  • Those between the company and the outside world.

Your MOI is a public document which is lodged with the Companies and Intellectual Property Commission (the CIPC). The CIPC also provides a standardised MOI which operates unless your company adopts a new, custom MOI.

In most cases, the adoption of a custom MOI will suffice, but, in limited circumstances, your company may warrant a custom shareholders’ agreement. In this event, your legal expert will ensure that the agreement is consistent with both the company’s MOI and the Companies Act 71 of 2008. A shareholders’ agreement is, in essence, a private contract between the parties to the agreement.

Specifically, the Companies Act provides that if a shareholders’ agreement is not consistent with the company’s MOI or the Companies Act, the shareholders’ agreement is void to the extent of its inconsistency. What follows, serves as a starting point when constructing the brief to be presented to your legal professional.

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Directors

A company’s board of directors governs the day-to-day operations of the company and the title carries significant responsibilities, both in terms of legislation and the common law.

Their management of your company regulates, among others, the agreements it enters into, its ability to loan money and the ability to encumber the assets of the business.

Further, it’s important to clearly delineate the voting powers of the board and, as a shareholder, you may wish to limit the powers of the board in certain circumstances — such as entering into an agreement for the disposal of a majority of the assets of the company or, at least, require special authorisation prior to taking actions with such significant impact on the business.

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Shareholders Meetings

Although the distinction is sometimes ambiguous, especially where shareholders and directors are the same people, your founding documents need to define the roles of shareholders — both as between their fellow shareholders and as between the shareholders and the company.

Your agreement ought to regulate when, how and where shareholders meetings occur and how many shareholders are required in order for the meeting to be considered a valid meeting between shareholders of the company.

This is an area where a minority shareholder may be left out in the cold, unless particular safeguards are carved out for the shareholder.

Voting at a shareholder level also needs to be regulated, and requirements for ordinary resolutions (usually 50% plus one) and special resolutions (usually 75%) need to be provided for. Where the agreement between shareholders is not achieved, mechanisms need to be inserted to cater for such deadlock — whether by arbitration, mediation or otherwise.

Related: The Basics Of Registering A New Company

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Dividends and Repayments to Shareholders

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This is one of the primary drivers behind getting involved in a business, so, where the payment of dividends to shareholders is concerned, special attention needs to be paid to ensure that everyone understands where they stand — before the chips are down, so to speak.

You need to carefully consider the circumstances under which a company will repay loans advanced to it by shareholder’s needs. This will also operate as a way to manage perceptions and ensure expectations are kept in check.

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Share Capital

This fundamental provision caters for the maximum number of shares a company can issue to its shareholders and provides clarity to all shareholders about the extent of their ownership of the company. It ought to cater for the distinctions between any different classes of shares, where relevant.

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Restricting the Transfer of Shares

Pre-emptive rights, or rights of first refusal, are characteristic of private companies and one of the obligations owed to your co-shareholders. In essence, once you form an intention to sell your shares, you are required to first offer them to your co-shareholders.

Where an offer is received from a third party, that shareholder is required to first offer the shares to the other shareholders on the same terms. In other words, he/she may not sell his shares to an outside third party on terms that are more favourable to the outsider.

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Deemed Offer

A deemed offer — which arises in limited, pre-agreed circumstances — forces a shareholder to offer up his shares for purchase by the other shareholders, upon the occurence of a trigger event.

It’s important to ensure that you agree on the manner in which the purchase price of the shares in such a situation will be determined. A legal expert is able to cater for these circumstances within the specific framework of your business needs.

Related: Tax Basics For Business Owners

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Come-Along & Tag-Along Provisions

Tag-along provisions cater for the event of a majority shareholder selling their shares to a third party and, rather than leave a dissatisfied minority shareholder behind, the sale of the majority shareholding is subject to the offer being extended to the minority shareholder on the same terms.

Closely related to these provisions are come-along provisions, which prevent a minority shareholder from blocking a sale of the majority shareholder’s interest in the company.

In essence, where one or more majority shareholders wish to sell their shares to a third party, the majority shareholders can force the minority shareholders to sell their shares on the same terms.

The above can, at best, only be regarded as a guideline, and if anything, serves to illustrate how template founding documents cannot be relied upon as a one-size-fits-all approach to fitting the unique needs of a company and its shareholders. Specifically, the contents of this article ought not to be relied upon as legal advice.

Andrew Taylor is the co-founder of Legal Legends, a company that aims to revolutionise the legal industry by being Africa’s first eCommerce website for quality legal services aimed specifically at start-ups and entrepreneurs

Start-up Advice

Entrepreneurs! Do You Know What Your Customers Want?

Take off those rose-tinted spectacles and start looking at your business the way your customers do.

Chris Ogden

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Do you know what your customer’s need? Have you really looked at their problems and challenges and asked yourself how your product or solution helps solve them? Do you even know if your business addresses any one of the myriad pain points they face every day in their personal and professional lives? If your business talks to other businesses, are you speaking in the language they want to hear? If you don’t answer a definitive YES to every one of these questions, then you need to start paying attention…

Put in the effort

Research, research, research. Find out what people need through all the myriad of digital and physical research channels available to you. And when you engage with your customers in person, ask them questions and write those insights down. Listen.

Related: 5 Reasons Why Your Business Is Losing Customers

Bad feedback is great feedback

If clients are unhappy, they talk to you. This is good news. Use this feedback to build solutions that change these issues into advantages. This is when you should consider building an open feedback loop or mechanism into your business to ensure that you are getting the best possible insights from your customers. I

It’s also a good idea to check their criticism against reality before you spend thousands on fixing a problem that doesn’t really exist. For example, if they complain about poor customer care, assess your process and see how many complaints you have. It may be that one customer happened to deal with that one unhappy employee.

Understand their business

Your client has their own clients who have their own clients, and so on, and so forth. Take the time to get to know their business and their market. Often entrepreneurs don’t get to know how their client’s businesses work and they miss a crucial trick. By spending time with them and listening to them you get to understand their pain points and their needs. This way you can be the one who helps to fix their problems properly.

Related: How Well Do You Really Know Your Customers?

Don’t stop innovating

Don’t fear the ability to change something to suit a client’s needs. Your products and services have to evolve constantly as your market and consumers are changing constantly. You need to add value, change features or adjust your services dependent on the business you are in. Pay attention and innovate.

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Start-up Advice

Why Failing Is A Necessity Proven To Guarantee Success

We should always have this at the back of our minds whenever we have that nudge to give up on our dreams.

Matthew Mordi

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There comes a time, especially after a terrible defeat, when we feel like giving up or even quitting. The defeat clouds our minds and make us forget completely what victory feels like. We forget the successes and judge ourselves solely on the defeats. This feeling isn’t unique to a single individual as even the most successful businessmen, inventors, politicians, world leaders have experienced failures at different points in their lives.

We all love success stories. It’s a matter of fact that behind every success story is a large amount of failed attempts. The notion of overnight success is a myth. It took the Wright brothers between four and seven years of scientific experimentation and several failed attempts before their maiden flight covering a distance of 852 feet which lasted a mere 59 seconds was achieved.

History is replete with instances of individuals who were written off after a terrible fall from grace. These individuals, against all odds, didn’t give up.

Related: Having The Perfect Product Isn’t Enough To Keep You In Business

Tiger Woods, for example, has for the most part of his adult life being in the public eyes. That’s why when he went to his very public divorce, tales of womanising, dabbling with prescription drugs. Also plagued by injuries, his golf was seriously failing and in danger of being a “has been,” analysts advised he should just retire. It was obvious Tiger had a different plan up his claws by winning his first PGA tournament in five years.

His recent resurgence in form is testament to the fact that no one has the stop button to our life or life’s dreams and ambition. No one but you. It’s only when we stop innovating and trying that we’ve failed. Having lost a business deal that had the chance to change our lives positively forever isn’t the end of the world. Hence we need to reinvent and innovate.

If achieving success was easy, the vast majority of people would be successful. We have to put in the work and our skill to be able to achieve success because the most worthwhile things don’t come easy.

Defeats, if seen from a positive perspective, bring out the best in us. Victories don’t. Victories swell our egos, fill us with the air of invisibility, and this is dangerous. Hence we need a large dose of failures and defeats to bring us down to earth, to make us learn and better appreciate success the moment we’re able to achieve it.

What then do we do when we experience a poor run of defeats that make us doubt our abilities. Being fixated on the defeats for one, isn’t the solution. It has the tendency of making us forget what it felt like to win and totally derail us from our set goals. This, in itself, is a problem as it may lead to a state of unhappiness.

Related: Why Small Businesses Are Unable To Pay Staff Salaries

The bad results we might have experienced isn’t an indication of our inabilities, it’s an opportunity for us to look at the venture from a different perspective and take necessary action to improve or try a different approach towards achieving our aim.

Defeats can be depressing when we have dependents who rely on us for guidance and in some cases sustenance. Dependents could be in the form of a spouse, children, wards, parents, even staff. The pressure can be enough reason for some to give up and settle for the safer option.

With the decision to settle comes the likelihood of regret which may be more depressing than the expectations of dependents. Fortune they say favours the brave and nothing worthwhile was ever achieved without the possibility of failure.

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Start-up Advice

Why You Need Smart Legal Foundations For Your Start-up

The legal background to a start-up might not be the most exciting area for an entrepreneur, but it’s your foundation for growth. Are you aware of everything you need to have in place?

Kyle Torrington

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One of the best parts of what we do is helping start-ups — the right legal foundations can mean the difference between a start-up that’s geared for scale, and one that needs to retroactively put agreements, checks and balances in place. If you’re aiming for growth, you want to get these foundations right from the get-go.

When Benji Coetzee launched EmptyTrips, a hot up-and-coming start-up 16 months ago, Legal Legends was on the ground floor with her. Although your start-up trajectory may not be identical to that of EmptyTrips, many of the foundational principles canvassed in this article will apply at some point in the lifecycle of your business. They highlight what you should be thinking of from the word go.

Laying the right legal foundation

By the time we were introduced to EmptyTrips, they had already registered their entity as a company and had started to prepare for their first beta public launch in April 2017. When our dealings with the start-up began, the business had already enjoyed a quick and accelerated cycle.

As with all start-ups, the founders had a clear vision and objectives. Unlike too many start-ups however, Benji understood how important the right legal foundations would be, particularly as the business matured and required different support structures.

The following three actions are a good example of the legal foundations all businesses should consider, particularly if growth is a part of the founder’s vision:

1. Why you need trademark protection

Given that EmptyTrips is a digital solution, with limited physical assets, protecting intellectual property as ‘soft’ assets was critical to its differentiation and valuation given the recognition of brand value over time.

At first, we set out to ensure that EmptyTrips’ marketing materials and properties, such as company name, slogan, and product names were protected sufficiently from use by others. This was done by filing for various trademark registrations.

A trademark is a sign or symbol that is unique to your business, and which distinguishes it from other businesses. The most common forms of trademarks are business names, product names, logos and slogans.

By registering a trademark you are granted exclusivity over the use of the name, slogan or logo, and may prevent others from using similar names, slogans or logos in their business in the future.

Related: [PODCAST] Benji Coetzee, Founder & CEO Of Empty Trips – How To Disrupt A $8 Trillion Logistics Industry

When it came to EmptyTrips, they had already filed a trademark for their business name, so we focused on protecting the names of the different service offerings on the business’s platform as the solution evolved and pivoted. These included Trip Exchange; Freight Open Exchange; SureFox and RailFox. As the business grows and product lines are added, we will continue to update this list.

2. The importance of website legal documents

EmptyTrips is predominately an online marketplace solution to enterprises. It is a digital transport brokering agency that has been developed to source, match and market available transport capacity (empty space on trucks, trains, vessels and so on) to commercial freight with on-demand supporting financial products (insurance etc).

Our next task was to prepare the documents that would govern the relationship between EmptyTrips, its users and service providers. These documents, as with most websites, consist of both a terms of service and privacy policy.

Each company’s Terms of Service will be unique to that business, market and customers, but privacy policies are universally required by law.

A privacy policy is a written document available for all users to inspect on your website and which they are required to agree to. It sets out the different kinds of personal information that you collect, coupled with how you store that information, and what you do with it. A privacy policy is required by the Protection of Personal Information (POPI) Act No 4 of 2013, and the General Data Protection Regulation (GDPR) (EU) 2016/679 if you are collecting personal information from European citizens.

In the case of EmptyTrips, their pick up and drop off address, business information to cater for the pick-up and drop-off of goods by carriers, personal information such as the name of the carrier, and payment details, need to be recorded in the privacy policy. In addition, certain elements of the information, such as pick up and drop off locations being shared with potential transporters, need to be mentioned.

If you do not have a privacy policy in place on your website, Legal Legends has a cheap automated version available at the following link if you would like to order one: www.legallegends.co.za

3. The legal frame work around outside investment

Like many high-growth starts-ups, Benji and her team reached a point where outside investment was needed. This is an area where your legal partner is key. Apart from attending to various due diligence meetings and ensuring proper governance controls, we were tasked with ensuring that the contracts for external investment were prepared in a manner that sufficiently protected the interests of EmptyTrips and its founding members.

It’s common during a seed or series A round of funding for an investor to present the start-up with a term sheet detailing the nature or basis of the intention and extent of their investment, as well as all the terms relating to the governance of the company that they would like to put in place.

In this case, the institutional investor presented EmptyTrips with a term sheet that detailed the monetary investment that the investor would provide over a number of years, the monthly draw-downs of the investment that EmptyTrips would be entitled to, the number of shares that the investor would be issued for their investment, as well as the manner in which the governance of the company would be changed in order to protect their investment.

Often, and this applied to EmptyTrips, the terms contained in the term sheet require a new shareholders’ agreement and/or memorandum of incorporation in order to protect the interests of the minority shareholder (the investor).

A shareholders’ agreement governs the relationship between the shareholders of the company and their ability to administer the company.

A memorandum of incorporation governs the relationship between directors, shareholders, prescribed officers and the company.  A standard memorandum of incorporation is issued when a company is registered, but it will often need to be amended at a later stage if, for example, measures to protect the minority shareholders are introduced.

A memorandum of incorporation can regulate the same aspects as a shareholders’ agreement, however, the main difference is that it is a public document available for inspection by anyone, whilst a shareholders’ agreement is a private document.

In addition, if there is any conflict between a shareholders’ agreement and a memorandum of incorporation, the shareholders’ agreement will not apply and will be voided to the extent of its inconsistency.  This often means, as was the case with EmptyTrips, that certain aspects of the shareholders’ agreement that provided for protection of the investor required a redraft of the memorandum of incorporation so that the two documents were aligned.

A shareholders’ agreement might not be enforceable until a memorandum of incorporation has been aligned with it.

Read next: 5 Lessons From The Legal Legends On Pivoting

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