The dangers of using “standard” or template legal documents

This post is a part of a series based on my Law for Startups workshop at MaGIC in September 2015. It’s a basic introduction to legalities for startup founders. You can access the slides here.

Read the earlier posts for context:

  1. Law for startups in Malaysia — building on the best foundations.
  2. The legal landscape in Malaysia for startups — a hybrid of traditional corporate practices and Silicon Valley models.
  3. Choosing the right business vehicle for your startup or small business in Malaysia.
  4. When should a startup hire a lawyer?
  5. Oversights which could destroy your startup or small business.

Template and automated legal documents are increasing in popularity.

For years there have been many websites offering standard contracts for download. Most of these have a US/European law focus, but the past couple of years have seen some similar services launched in Asia.

Some of these websites offer a very comprehensive collection of legal documents which address the needs of startups and small businesses in particular — everything from NDAs to equity investment agreements are available for download, usually with a fee.

Say no to cookie-cutter contracts.
Say no to cookie-cutter contracts.

My cover slide for this part of the workshop reads: “Be very very very very careful when using standard contracts” — I’m not sure whether I should have added a few more ‘very’s to statement.

Business owners should be extremely cautious when using these legal documents.

There’s really no such thing as a standard contract

There’s actually really no such thing as a standard contract — a good standard contract. Even the most basic NDA would require some form of customisation to be of good use to a business.

Bear this in mind — most of you are founders of businesses which are unique, or at the very least have some unique characteristics. There is surely no way that a standard document available for download can cater for all the nuances of your business, and all the other businesses out there.

You should never ever enter into a contract because someone says “this is standard” — there really is no such thing. When approaching negotiating a written contract, always rememember the principle of freedom of contract — a written contract is freely negotiable between the parties.

The template contracts are usually not startup-friendly

Many free contract templates which are available online are investor/VC friendly.

In 2011, SeedSummit — a grouping of 20+ European investors — came together to agree on standard financing documents for seed investments. The overall aim was to enable European startups to take part in seed-stage investment activity, similar to those in the US. They then made these documents available online for free.

The documents available on their website include founders agreements, advisor agreements, IP assignment agreements, and termsheets.

The SeedSummit documents (and other similar “templates” which have been made available by VC groups around the world) have actually been criticised in legal circles.

Investor groups have been occasionally accused of trying to set “market standards” or “standard terms” which are investor-friendly, under the guise of providing a service to entrepreneurs.

It shouldn’t take much deep thought to accept that business owners should be cautious when using standard contracts created by investors. Using an investor-provided template means that you would sometimes essentially be using a contract created by the party which you are entering into an agreement with. Documents created by investors are inevitably going to be investor-friendly — there are many elements in there which can, and should, be negotiated.

How to use standard contracts

Having said the above, template agreements do play an important role in the market. For a market like Malaysia, in which hybrid legal structures (between the traditional investment models and the Silicon Valley standard practices) are still developing, these templates which are adapted for use in Malaysia are a useful evolutionary step.

It’s fine to use standard documents as a base to work off, or as a reference point, but some startups have been known to print off the templates and go straight to signing without negotiation.

Business owners should start from the original position — where founders have 100% control of the business and the company — and every time you have to give up some rights, ask why and pay very careful attention to those contractual clauses.

I’ve already explained why startups should always engage a lawyer before signing a contract. Some startups or investors may think that this is unnecessary, as they think they know the commercial terms better than most lawyers — those who hold this view need to bear in mind that while there may be some startup founders who are very experienced, the vast majority would definitely benefit greatly from legal advice.

Many of the better platforms which offer template legal documents (either for free or at a fee) will recommend engaging a lawyer to review the agreements prior to signing.

My previous post explained the importance of bringing all the issues to the surface — this principle is very important when reviewing contracts. My next post will explain how to strive for clarity in contracts.

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