9 Tips for Legal Structure and Set up of Lebanese Startups
At ArabNet Beirut 2017, Roula Abou Chabke, Partner at Kobeissi & Frangié Attorneys & Counselors at Law gave startups valuable insight into what they need to take into consideration from a legal standpoint and overall issues they need to think of in advance. Here are 9 tips that she shared on Prototype Day:
1- Clarify the Deal with Your Cofounder
“Think of it as a form of pre-nuptial agreement – not doing so can have enormous problems later.”
Abou Chabke gave the example of the Facebook ownership lawsuit that resulted in a $65 million settlement. To avoid such misfortunes, startup cofounders need to be in sync and must discuss and agree in advance on the goal and vision for the business, roles, responsibilities, shares, what each founder is entitled to (salaries and how can that be changed), who will take the key day-to-day business decisions (majority vote, unanimous vote, or certain votes in the hands of the CEO?), who is the CEO, when can an employee be removed from a business, and what kind of assets are being contributed within the business.
2- Choose the Right Legal Form for Your Startup
“Not having a lawyer while choosing the right legal form for your startup would incur in very high taxes. One must think of reducing liability and avoiding it by starting the company as a limited liability company.”
Abou Chabke advises entrepreneurs not to form a company until the idea is already settled and when the capital is ready to start it. It is worth noting that bearer shares (anonymous owners) were recently banned in Lebanon and a SAL (Societe Anonyme Libanaise) should have nominative shares. For a knowledge-based startup in Lebanon to benefit from the Circular 331 program, it has to be a joint stock company (SAL). Abou Chabke notes that the cost for forming and operating a joint stock company are often greater than those of SARL or other types due to legal, tax, and accounting issues. But SAL offers advantages to founders or subsequent investors including significant liability protection from business creditors and ease in raising capital compared to SARL or other types.
3- Get the Right Standard Form Contract in Favor of Your Startup
“Almost every company should have a standard form contract when dealing with consumers or clients. But, there really isn’t a “standard form contract” as every contract can be tailored to be more favorable to one side or the other.”
The key to tilt the scale in one’s favor is that the other side doesn’t negotiate it much. Hence, Abou Chabke advises that startups must get an experienced lawyer to help with the drafting and standard printing typeface and font size, being abrupt, clear about pricing, when payment is due, and what penalties or interest is owned if the payment isn’t made. She also advises startups whose product or service might not meet expectations to limit or liability, minimize warranty, include a “force majeure” clause relieving parties from breach if unforeseen events occur, and include a clause on how disputes will be resolved.
4- Comply with Regulatory Requirements When Issuing Shares to Angels, Family, Friends
Sale of share must comply with certain disclosure, filing, and form requirements to avoid hefty fines. Failure to comply with such requirements can result in significant financial penalties for the founders and the startup company. Abou Chabke believes that in order to avoid such fines and penalties, founders must hire knowledgeable lawyers to document the sales of shares in compliance with the Lebanese laws.
5- Prepare Employment Documentation
Startups should prepare for a ‘core group of employment documents’ to be signed by most, if not all employees and consultants and choose the right type of contract to hire people (limited or unlimited term) for there are consequences either way. It is further advisable to draft startups to draft ‘internal regulations’ or employee handbook setting the company’s common policies on vacation, conflicts of interest, internet usage, etc.)
6- Choose the Right Name for Your Startup
“The Average cost to register a trademark in Lebanon is 400 dollars for 15 years, and it is renewable.”
In order to avoid ‘causing confusion’ among consumers, trademark infringement, or domain name problems, startups must conduct a proper research before picking a company’s name. And this search must include the Intellectual Property Department at the Ministry of Economy and Trade Office, the commercial court or registry records, and the Official Gazette. Steps to avoid naming issues include making the name distinctive and memorable, having the lawyer conduct a professional trademark search worldwide, hiring a naming expert, searching GoDaddy.com for domain name availability. Abou Chabke advises to avoid unusual names or spellings, explaining that the success of unusual Google or Yahoo names is often the exception, rather than the rule.
7- Protect your Intellectual Property
“If you have developed a Unique Product, Technology or Service, you need to consider the appropriate steps to protect the intellectual property you have developed.”
Some common protective measures taken by startups: Patents are issued for preventing others from making, using, or selling the patented subjected matter. Copyrights cover original works of authorship such as art books, movies, software. Trademarks protect the symbolic value of a word, name, symbol, or devise used in distinguishing a good from another. A company doesn’t have to register the mark to get rights to it, but registration does offer some advantages. A Trade Secret right allows the owner of the right to take action against someone who breaches an agreement (avoiding illegal disclosure of secret information and without permission – ranging from computer programs, to a customer list, or a formula for a drink, for example.
While Abou Chabke admits that we are living in a world where “confidentiality has practically vanished”, she still advises startups with confidentiality agreements (NDAs) and confidentiality and assignment agreements for employees and consultants obligating them to keep confidential the proprietary information of the business, both during and after employment.
9- Engage the Right Lawyer
“People want to reduce the cost as much as possible, hence they would go to a friend or relative and end up hiring inexperienced legal counsel.”
Abou Chabke’s final advice is for startup founders to interview several lawyers or law firms and determine the level of expertise in corporate and commercial law (including M&As), contract, employment, intellectual property, and tax laws. She further stresses on finding a lawyer that one feels at ease with, because this is a long term relation that is close to the relation among cofounders.