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  • Writer's pictureCassandra Diamantis

The legal insight every start-up founder needs to know

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In this article, OnMarket interview Alex Solo, co-founder of Sprintlaw, to extract valuable legal insight based on Alex's experience in the start-up legal space.

legal insight for founders

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To start, can you please walk us through your entrepreneur journey and how it led you to building Sprintlaw?


Sprintlaw has been around since 2017 - we're about six years old and I'm one of the founders. Prior to starting Sprintlaw, I had a career both working as a lawyer and as a tech entrepreneur. I started my first business when I was still at university, as a fun side hustle, and it was an online digital marketing agency. I provided website design and app development services to small businesses. It became quite popular and I ended up growing it to a small team and then selling the business.


So, I had, at a very young age, experienced entrepreneurship whilst I was studying a law degree. I then went to work at one of the top tier law firms in Australia as a corporate lawyer. I learned a lot about how big companies operate, and I learned a lot of technical skills about how to be a lawyer. I worked there for about five years, but the whole time I was there I was thinking “I have so many ideas as to how one could build a different kind of legal business, one that's a lot more of entrepreneurial spirit, more technology enabled.” I was seeing traditional law firm processes that could easily be automated and streamlined.


In 2016, just before we started Sprintlaw, I'd met my co-founder Tom at the law firm. Tom has a background of legal technology and the two of us bonded over Law and Tech ideas. In 2016 a few studies came out that said something like 75% of small to medium businesses in Australia weren't going to see a lawyer when they had a legal problem, which is a massive failure of the legal system. Australia has two million small businesses, and based on the insight from those studies, most of them are not using lawyers - so we knew we had to build a scalable legal model where we become the law firm for smaller companies.


How does your product and service differentiate from larger industry players?


What people like about our model is that traditional lawyers charge by the hour - they're expensive, time-consuming, and confusing. Our model is simplified. We’re called Sprintlaw because we're fast. We're simple, we're easy.


All the legal work we do is for a fixed price, so people know what they're getting and what they’re paying. There are no surprise 6-minute bills. Because we've automated so many processes, operate online, and have lower overheads, we have a low cost but high quality business model.


Sprintlaw is growing fast, we have clients and we're doing things at scale. The great thing about that is that we're collecting legal data about what's normal for small business owners. For example, things like capital raising. For start-ups, we see so many different term sheets, so we know what's normal. That then feeds back into the legal documents that we create. We're always looking at trends, looking at patterns. We have software that analyses trends and patterns to improve our legal documents - this means that clients who work with us receive market informed documents, BUT they're not paying a premium because of our low cost high quality business model. I think that's the core of what differentiates us and why people choose to work with us.


See the video below to hear what Provider Choice (recently rebranded to T-Shirt Ventures) has to say about Sprintlaw.

Using the insight that you have from your trend-analysing technology, can you outline what you think is necessary in a constitution for a company that's looking to raise capital, specifically via an equity crowdfunding campaign?

Over the last six years we’ve seen the law of crowd-sourced funding (CSF) pass and the space grow. CSF has gained traction and is becoming quite popular, so we’re in a position now where we have a standard approach to creating CSF documents. Documents like the constitution and shareholders agreements. An interesting aspect of designing the constitution for a CSF company is that it’s slightly different to a non-CSF capital raise.

In non-CSF capital raises you often have two documents - one is called a shareholder's agreement and the other is called a constitution. The shareholder's agreement is a private contract between a small number of investors. Then, the constitution ends up being a template document that you don't use that much.

In a CSF environment you have many more shareholders, and typically you'd have a customised constitution which includes everything that you would normally put in a shareholder's agreement - as well as things you'd normally put in a constitution. It covers a bunch of different topics. For example:

What happens if you know the company conducts further capital raises? What rights to existing share shareholders? What happens if the company is sold? To what extent do shareholder have an input on things?


The approach to having a single document, the constitution, that covers everything is a really clean way of doing things and it makes life a lot easier – for the company and the shareholders. It's something that I think that the old school way of capital raising can learn from – having a single document where people can turn to. Whether they're a small or a large shareholder to learn how things work.

There are a few specific legal issues to consider with combining the shareholders agreement and constitution into one document. For example, how do variations to the document work? What if you have some big investors who are not part of the crowd sourced raise, but are involved and want special rights or more rights? How do you balance that with keeping all the rights of your thumb? What if the company wants to restructure in the future? So, there are some considerations to work through, and that's what Sprintlaw does. We help companies navigate some of the complexities.

Earlier you mentioned that many start-ups don't consult legal assistance when they're starting their company. Can you highlight the common downfalls for these companies and founders, that don't seek legal advice, which becomes obvious when they look to raise capital?

Absolutely. I think the biggest issues that we see are around the company structure and intellectual property protection. Those are the two biggest mistakes that I see early-stage companies make. One is that they're just not set up correctly, for example they might have just registered accompany themselves online. That might be fine for some, but if you're a start-up company that has big growth ambitions and want to take over the world, there are many ways to structure organisation and it's best to get advice on them.

We often recommend dual company structures with holding companies and subsidiaries. We recommend Founders set up personal trust to hold their shares. These things can help really reduce the risk of going into adventure and make things simpler as you grow, take investment, and try and do more creative things with the business. From a cost standpoint, the cost of restructuring later, if you don't do it early on, is very high and can be a big headache regarding opening bank accounts, signing contracts, and having to go through the rigmarole of having a new entity. Much of this can be avoided if you get the company structure right early on.

The other downfall is intellectual properties. Way too many brands are not registering trademarks for their name, their logo, and their products. At the beginning they think that they own it because they came up with it and they can't find it anywhere else on Google or because they've bought the domain name or because they registered their business name online - but they're not aware of this thing called a trademark. A trademark is its own special right that you have to go and register with in Australia. With IP Australia, the process takes 9 or 10 months to get approved at minimum. Owning a trademark gives you the exclusive right to use your name, your logo, your product name, or whatever it is in Australia and in your industry.

For example, Sprintlaw have a trademark for the word 'Sprintlaw' and our logo. That means no one else in the legal industry can use the word Sprintlaw or something like it, such as Sprint legal. Therefore, we own the brand. If we hadn't registered that early on, and this is what happens to a lot of start-ups, it's very possible that someone else would have had a similar logo or name and we would have gone happily along running our business, only to find two years later, when we started to get a bit of traction, that someone else owns the trademark and they can sue us or force us to rebrand. In that case, we would have lost two years of goodwill that we've invested in the in the brand name. There’s been a surprising number of companies we've had to help through this process.

Talking about protection, how do you protect yourself as a founder, specifically, when you're looking to raise capital?

The advantage of setting up an organisation as a company is that we have this concept in the Australian legal system called ‘limited liability’. Limited liability means, in a general sense, when you're running an organisation the founders, or the directors of the company, will not have personal liability for issues that happen in the business. So, that's a clear advantage of setting up another entity in an organisation and why people choose to go into business. To note, that is a very general statement. I use the word generally because there are exceptions and it's important that founders are aware of what those exceptions are.

For all companies, there's exceptions around if, as a director of a company, you are breaching certain duties - you have a responsibility to use your position to act honestly, fairly, and diligently, and discharge your duty of care.

It's important that founders who are directors of companies realise that when they are elevated to this position as a director they know: are there certain obligations they need to be aware of and so they don't breach them? If they do, can they be personally liable?

Specifically with CSF, there's a few extra personal liability areas that apply, particularly around disclosure requirements and things that you must tell accurately to people that are investing. So again, it's important people going through that process are carefully checking statements and making sure that they're ticking all boxes because these are areas where if you get it wrong, there can be personal liability consequences.


One thing we often recommend to founders is directors liability insurance. It's a simple measure you can take to protect against exceptions if risks happen and things go wrong. Another is setting up trusts, as I mentioned earlier, which is a useful way of using your company structure to put some barriers between you, the company, and shareholders. This can help reduce certain risks, although it won't solve some of the problems I mentioned around directors' liability.

Aside from personal liability and IP protection, are there any other common founder traps you would like to highlight?

If you're an entrepreneur, you're probably a little bit of a risk taker. That's why you decided to start a company... you have a healthy risk appetite. The job of lawyers is about risk management. It's better to be educated and knowingly working around risks rather than doing it unknowingly, because you can plan and mitigate.


Some things that we often see founders do is download template legal documents online to complete their terms and conditions, and privacy policy. They'll look up their own service or sale agreements to customers, thinking that it's a simple template and they can do it themselves. For some types of legal documents, like a basic web terms and conditions, or even some types of NDA, it can be fine to use a template and do it yourself. But for your critical business documents, things like your client agreements, or collecting personal information, your privacy documentation, you just want to make sure that you get that stuff right because it's critical to your business model. The document that your customers are signing every single day to do business with you is your client agreement, and in terms of conditions you want to make sure it's airtight and supports your processes or systems.


So in general, investing a little bit of capital into legal where it really matters. The recent Optus data breach has led people to become more aware of the importance of privacy and cybersecurity. Customers are asking more often 'what are they doing with my personal information and and how are they managing it.’ It's smart for founders to turn their minds to what their privacy practises are. Get skilled on it, get knowledgeable, get compliant if nothing else, to build credibility in their brand with customers, but also to reduce risks.

Can you describe SAFE Notes and CON Notes in terms of legalities and how it affects capital raising?

Absolutely. A simple way to understand what safe notes and con notes are to consider them as early bird tickets to a capital raise.

They're the presale tickets to the capital raise, so when you're raising using con notes or safe notes, what you're doing is you're speaking to investors and you're saying to them “look, we're going to be doing an equity crowdfunding raise at some point where we're going to be issue shares in our company to you and you can become a shareholder of the company. Right now, we're just doing the pre sales, so because you're coming in earlier, we're going to give you a discount of X amount on the price that people are going to be paying later to become a shareholder.”

So, safe notes and con notes will typically include a discount percentage of some amount that says, ‘you will get a 10% or 20% discount on the price per share paid by future shareholders’ - or whatever that percent is. That’s the main feature of these documents. Safe notes are slightly different in the sense that con notes often will have an interest rate, so if the company takes a long time to do the actual capital raise, the person who's paid the pre-sale price will receive interest on the amount invested. Whereas a safe note typically doesn't have that feature and is a simpler in the way that it works. There's a couple of other features to them, but one real big advantage of these documents, and why we're seeing it be popular with start-ups is, you may be planning to do a large capital raise, but you may want to just get a little bit of what we call bridging capital. Or capital to get you enough cash to the to the point that you can invest the time it takes to raise proper capital.

The good thing about these documents is that you don’t have to issue them all at the same time. You can issue one in one month and then one the next month. You can collect a few earlier Angel investors who will use them. So, many start-ups will issue convertible notes or safe notes and have several shareholder investors who are invested in the company and funding them from an early stage.

We do them a lot for our clients and we think they're a really good way of getting some early capital. Now, where things get a bit complicated is when you get to the equity around, because you'll need to work out how to manage the promises you’ve made to new investors and existing investors. The solution is to get some assistance in building your cap table from lawyers, accountants and so on, to work out exactly what you're going to need to give to these earlier stage investors. Particularly in the CSF regime, the way that safe notes convert is different too.

With your founder hat on, can you tell us about your journey scaling Sprintlaw? Any hiccups you may have experienced that you could work as learning curves for other founders?

One of the good things about Sprintlaw is that we help start-ups but we are also a start-up that has been on a growth journey. We've raised a few rounds of capital, so my first piece of advice on raising is that it takes longer than you think. There's a lot of work to be done in terms of preparing the materials, the decks, and then working out how to best present your business. It forces you to think about your business model and how your business will run long term because that’s what you’re pitching.

Something smart we did in our second capital raise was that we viewed our pitch deck as an operational document and said, ‘this is going to be our business strategy’. Yes, we're going to make it pretty as our pitch deck, but it's going to be our business strategy and so this work is not a one off that we're completing solely for the purposes of raising. It's the same articulation we're going to use internally.

That made capital raising a lot easier because we always maintain that document. It's a central business strategy document. There shouldn’t be, or doesn’t need to be, a difference between your pitching documents and what you're using to run your business. Yes, one needs to have a slightly different purpose, it needs to be presented in a way that makes sense and attractive to potential investors, but if it articulates your strategy well you will be able to talk to it.

My biggest lesson in scaling a company from a two-founder business into where we are now is agility. A concept of don't think too much and do. I think we spent a lot of time over planning in the early days. Ultimately, just get something out there and sell - start generating revenue in some way. Once you start generating revenue, everything else you need to do will fall into place. You'll open your bank accounts, you'll to collect the money that you just sold. You know you'll do all the admin you need to do. You'll get your contracts in order, but ultimately what drives an early-stage company is being able to sell something that people want to buy. Whether it's a good or a service, that approach has fed into everything we've done more and more.


Lastly, can you explain the promotion Sprintlaw is offering to founders related to OnMarket?

We have a product called ‘Sprintlaw Membership’. Roughly 75% of our clients are signed up to this membership and it's a great offering. It gives people that sign up access to unlimited quick calls with lawyers, so you can just book in a call whenever you have a legal question.


You get discounts on any fixed fee, legal services if you need documents drafted and so on. It's a valuable bundle of services, and for early-stage companies that not wanting to go through the headache of finding a lawyer because they just have a quick legal question, it’s a good way to break down the barrier between you and legal advice. Normally the service costs $799 a year, but we're happy to do a limited time offer where it's available for $99.00 for the first year, so that's $99.00 for 12 months of basically unlimited quick legal support.


 

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