In the first part of this series of articles we had discussed the birth of a start-up. In this second part, we discuss the next steps in the growth of a start-up.
Taking the First Baby Steps
So you have incorporated your start-up. The founders’ equity has been sorted out. Funds have been raised from family and friends. What next?
You need to engage external contractors and hire employees. Dealing with employees first.
An employment letter is actually a contract in letter form between the start-up and the employee. In fact Singapore’s Employment Act requires that key terms of the employment must be set out in a written document called “KETs” or Key Employment Terms. The form in which the KETs takes is left to the employer; it can be a letter or a ‘formal’ contract. The Act also requires that the employer must issue to the employee an itemised payslip. Details can be found in the Ministry of Manpower’s website at http://www.mom.gov.sg.
The key employment terms include: (a) name of employer; (b) name of employee; (c) job title, main duties and responsibilities; (d) start date of employment; (e) duration of employment, if fixed term; (f) working hours, working days and rest days; (g) salary period; (h) basic salary; (i) fixed allowances; (j) fixed deductions; (k) overtime payment period; (l) overtime rate of pay; (m) other salary related components (eg bonus and incentives); (n) annual leave, sick leave, hospitalisation leave, maternity leave and childcare leave; (o) medical benefits (eg insurance or dental benefits); (p) probation period; (q) notice period; and (r) place of work.
In addition, it would be prudent for a start-up to include in the employment letter clear terms about: (a) confidentiality and IP rights; (b) entitlement to share options; (c) restraints from joining competitors; and (d) termination procedures.
Do not forget that working shareholders/directors are also employees who should be given employment letters and itemized payslips. They should be paid a reasonable salary for the services that they perform for the start-up as an employee. Such services must be differentiated from their contribution as founders for which they would have received equity.
In addition to the Employment Act, there are also other regulations governing the relationship between the employer and the employee. One example is the Central Provident Fund Act that mandates an employer to contribute funds (over and above the salary payment) and to deduct a portion of the employee’s salary to pay into the employee’s CPF account. The entitlement to holidays, annual leave, sick leave as well as working hours are regulated and the employer has to meet these standards. The employer is also mandated to have insurance cover for injuries and occupational diseases suffered by employees that occur in the course of their employment.
It may be tempting for a start-up to ‘treat’ employees as external independent contractors to avoid having to meet these various regulations. It might even save on CPF payments. Basic advice. Resist the temptation. Crafting the independent contractors’ agreement so that they won’t be considered as employees is complex and risky. Remember an earlier advice, keep things simple. Also, the law is not stupid. If a person “looks like an employee and sounds like an employee”, the law will treat that person as an employee, no matter what the documents say.
External Contractors & Service Providers
A start-up is not going to be hiring everybody whom it needs for its operations. Some of the services a start-up needs will genuinely be provided by external contractors or service providers. Contracts will have to be entered into with such external parties. Often they have their ‘standard contracts’ for the start-up to accept. Usually there is nothing wrong with that. You just have to know what to watch out for. Look out for the commercial terms: like how much to pay, when to pay, what are the services or products that you are paying for, and when those services are to be provided. At the very least, they have to be acceptable to you.
Also look out for the ‘fine print’. Often the detailed terms are set out on the reverse side of an invoice or in a web link referred to in the invoice. Read them. Ask questions of your contractor if anything is not clear. If any clause is not acceptable to you, negotiate to amend them. There is no such thing as a non-negotiable clause, only that the contractor is not prepared to negotiate. Remember that you are the customer. If the contractor wants your business, they should be prepared to negotiate. As a customer, you have to be satisfied before signing on the ‘dotted line’. If you believe that the terms are so onerous that you cannot accept them, be prepared to walk away and find another provider. Don’t sign in the hope that the onerous clauses won’t be invoked.
Another thing to look out for are the indemnities that the contractor is asking from you. An indemnity is when you agree to cover any claims that the contractor will face because they are doing work for you. In general, you should not be giving any indemnities since you are the customer. However, in some cases, the contractor may properly require indemnities from you. One example is an indemnity to cover claims against the contractor arising from any wrongful use by you of other people’s intellectual properties that the contractor is relying on to provide its services.
For a start-up, sometimes it is important that the contractor maintains the confidentiality of the information that you provide them and that you own the intellectual property rights of the product that they are doing for you. Make sure the appropriate clauses are included.
Your Teenage Years
You’ve got your employees. Your contractor has completed your key products which are up and running. Let’s say that you are providing online services with a SaaS model to your customers. You begin to explore your surroundings and test your horizons. You seek out your first customers. Potential competitors are taking notice of you.
Just as your service providers or external contractors needed you to sign a contract before they begin work for you, you now require your customers to sign your contract before you provide your services to them. You should do this even if you are provided your services without charge to your customer, say during the trial stage. The contract between a start-up and its customers governs more than just payment, it sets out the scope of the relationship, and hence the respective obligations, between you and your customer.
Unfortunately, drafting a be-spoke contract is a costly business. If funds are tight, and particularly while your products or services are only at the early trial stages, we believe that most start-ups can make do with generic contract templates that cover about 80% of common use cases.
We will be happy to customise any of these documents to suit your particular needs. Every start-up’s need is different (or so the founders think), and the start-up’s contracts are similarly diverse (or so the lawyers think).
As your business grows into adulthood, you will fall in love and think about getting married. Just as in life, bringing in new investors and acquiring other businesses that complement your core business is tricky. In our third part, we will explore the issues that arise when businesses get ‘married’.