By | Mason Birbeck | Head of Corporate Law at Parslows
Starting a company is all about ferocious optimism. As such, no startup wants to kill their own excitement by worrying about corporate law. The ins and outs of the legal system can be complex and the language is nowhere near as inspiring as the mission statements of an ambitious startup.
Of course, the point of the law isn’t to be inspiring. It’s to be legally clear, fair, and able to stand the test of time. The language of startups — by contrast — is about being dreamy, ambitious, and completely part of the moment.
In an attempt to heal the rift between startups and corporate law, here’s a guide to some of the most important things startups should know about corporate law.
1. Know When to Tell The Truth
If a string of fraudulent scandals in Silicon Valley has taught us anything, it’s that no startup should ignore the truth. Faking it ’til you make it is one thing, but straight-up lying to your investors is often illegal.
For the Bay Area, this is a difficult idea to wrestle with. Built into the DNA of every Silicon Valley startup is the idea that you generate lots of capital by making big claims and then back it up later down the line. There should be a fine line between having a rose-tinted view of your company’s future and knowingly telling utter falsehoods, but more and more cases in Silicon Valley show startups blurring this line.
The results are often lawsuits. Investors have a right to sue a startup they invested in if the information they were presented with turned out to be a lie. If an investor lost money simply because the startup had a big idea which failed, that’s one thing. If an investor lost money because a startup was inflating their sales prices by buying their own product back from the shelves, that’s quite another.
2. Take Responsibility for Company Culture
If ex-CEO of Uber Travis Kalanick’s downfall can be summarised in one expression, it would be “company culture”. Since revelations about the sexual harassment and sexism at Uber started, further revelations about the company’s sexist and aggressive culture pretty much haven’t stopped.
This issue will undoubtedly linger on for Uber, and the takeaway for startups should be to tackle issues like this from day one. A company culture that promotes sexism or any other kind of intolerance doesn’t emerge from nowhere. Neither does a company culture which promotes tolerance or other positive values.
In order to build a great company culture, your values should be clearly defined from the beginning. Not only will aspiring to these values help to keep your company well inside the law, but people who veer from them will be seen as the exception and not the rule.
3. Deal With Issues Now, Not Later
The world or startups is so full of buzzwords that it’s not always clear what a company means. When a startup says, “We want to be disruptive, scale, and then create a more stable infra,” what they really mean is that they want to break the law, make lots of money, and deal with legal issues later.
This is what many startups have done. Uber, Airbnb, and Deliveroo all started off by operating in legal grey areas and are now facing lawsuits to iron out whether or not their business model is legal or illegal. Their aim is not to work within the law but to mould it in their image.
The advice from many corporate lawyers at a recent tech conference is that these companies should be seen as negative examples, not positive ones. In short, the party’s over. If your business model is currently illegal, continuing to grow in the hope that it will one day become legal is not an option.
This is precisely why Tacocopter, the startup which wanted to deliver tacos by unmanned drone, never took off. Using unmanned drones for commercial purposes is against the law in the United States. It was then, it is now, and no amount of wishful thinking from a Silicon Valley startup is going to change that.
About the author
Mason Birbeck is the Head of Corporate Law at the Jersey-based law firm Parslows. He deals with Jersey company law issues ranging from trusts to pensions.