The 5 most common mistakes made by startups in Asia

March 2, 2016

In the case of legal, most businesses don’t realise what they need until it’s too late. In an era where a search for “free contract templates” delivers 28,600,000 results on Google, it is inevitable that fledging founders and entrepreneurs choose to go for the easier way out.

The Client Servicing team at Dragon Law works with countless numbers of early-stage founders and entrepreneurs everyday. We asked them about the most common legal issues they encounter with startups in Asia. These ones topped the list:

1. Not incorporating their business

In a free market, it is easy for any individual to start supplying goods or services as independents. As a result, one may conveniently choose to do so without first setting up a separate business entity in order to avoid additional administrative hassle and tax burden. While this may seem viable at the beginning, it could expose the individual to unprecedented legal liabilities when conflicts arise in the long run.

The most common motivation for setting up a business entity is the recognition that the owner shall not be personally liable for the actions of the corporation. Providing services in one’s personal capacity could put his/her personal assets at risk in the event of a lawsuit. It is also worth noting that incorporation procedures in pro-business hubs like Singapore and Hong Kong have been made relatively straightforward in the government’s attempt to encourage more entrepreneurship and economic development. For example, qualifying startups in Singapore enjoy tax exemptions in their first three years of operation. Hong Kong’s Budget 2016 further announced the waiver of business registration fees for the next two years, an initiative believed to benefit 1.3 million business operators.

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2. Lacking of a Shareholders’ Agreement

A Shareholders’ Agreement outlines the rights and responsibilities of each shareholder and dictates what decisions have to made by consensus and discussion. Failure to set out a Shareholders’ Agreement at the start of the business, especially in the event of an exit, can heavily impede the fundraising process. A well-prescripted Shareholders’ Agreement should help answer these questions:

  1. What roles will each Founder play?
  2. What are some of the key metrics or goals that must be achieved by each Founder at each phase of the startup?
  3. How much decision-making power does each Founder possess?
  4. What happens if a Founder decides to exit the business?
  5. How will Founders go about splitting ownership of the business?

Learn what clauses to look out for in a Shareholders’ Agreement:

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3. Not owning their Intellectual Property

Intellectual Property protection is what prevents the commercial exploitation of your hard labour – as the author you want to claim the exclusive rights to any reproduction, publishing, performance communication and adaptation of your work.

Just earlier this year, Global Yellow Pages lost a suit against Promedia Directories despite a claim that the latter had copied from four of its directories from 2003 to 2009. Justice George Wei dismissed Global Yellow Pages’ claim, citing that plaintiff did not own the copyright to some of the works cited. With no copyright, there was no infringement. The tables took an unexpected turn when Promedia was awarded damages instead, in its counter-claim against Global Yellow Pages for groundless threat of copyright infringement.

Types of Intellectual Property(Read more: The different types of IP)

Learn more about protecting your IP:

Event: Legal Startup Academy

4. Not creating a Privacy Policy

Never in history has personal data been collected, analysed and used at the magnitude it is today, thanks to technology. With such a trend comes growing concerns from individuals about how their personal data is used. In order to maintain individual trust in organisations that manage data, government bodies have begun to take a protective stance to govern the collection, use and disclosure of personal data.

Singapore, for example, is protected under the Personal Data Protection Act that came into effect in 2012. Simply put, organisations will now have to seek the consent of individuals (with some exceptions) before they collect, use or disclose personal data – all of which are provided for in a Privacy Policy. Tech in Asia recommends using clickwraps, just as Redmart has done on their website:


Build your Website Privacy Policy for FREE:

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5. Not having the right legal documents in place when raising finance

There are various legal considerations and documents involved when raising capital through a private investor. If an angel or VC wishes to invest in your company,depending on the type of investment structure, you will need one or more of the following documents:

  1. Term Sheet
  2. Seed Investment Agreement
  3. Convertible Note Purchase Agreement
  4. Simple Agreement for Future Equity
  5. Shareholders’ Agreement
  6. Board Resolution
  7. Share Certificate for the new Investor

Learn all you need to know about early stage funding:

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Has your organisation given serious thought toward the above? Many entrepreneurs try to shortcut legal processes by printing documents they find on the Internet, and then attempt to make contract edits by themselves. This puts the legality of such documents into question. By the time they decide to seek legal assistance, it may cost even more to have to go back to undo the damage done.

Get serious about legal without having to incur exorbitant legal fees. For an inexpensive annual fee, Dragon Law’s technology makes it easy for organisations in Singapore and Hong Kong to identify, create and customise the legal documents required at every stage of the business.

Find out how Dragon Law can help you:

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Dragon Law’s technology helps companies in Singapore and Hong Kong build legal documents they need at every stage of the business. Its intuitive platform allows users to create, customise and store legal documents in the cloud for sharing and signing online.

Founded in 2013 in Hong Kong, the team at Dragon Law boasts 20+ years of experience in leading law firms, tech companies, and consulting firms across Asia, Europe, and the USA.

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