Lack of corporate governance, IP can devalue startups – legal panel

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Startups need to think about corporate governance and intellectual property (IP) right from the outset in preparation for success, according to legal experts.

Speaking at the U-Start Africa conference in Cape Town, South Africa, members of the legal panel agreed that startups need to run their businesses in accordance with defined corporate governance structures from the beginning of their operations, despite these being perceived as superfluous and costly for an early stage startup.

“Even if you start with a very simple structure, it’ better to evolve from that from the outset,” said Nicolene Schoeman-Louw, of Schoeman Law.

Failure to implement corporate governance structures may see startups lose out financially when looking for investment, the legal experts said.

“If you arrive at your due diligence without any prep, at best it will take you six months, but at worst your investor will use this to discount your value, because your corporate governance will be a mess,” said Adrian Domisso, of Domisso Attorneys.

Turning to consider South Africa’s exchange control regulations – often described as overly onerous -, most of the panelists agreed that the regulations place a huge burden on startups and small companies trying to build and scale businesses from South Africa to new markets.

“One of the worst side-effects of our ex-con in South Africa is that people liquidate and leave,” said Domisso, noting that the country has become an exporter of entrepreneurial talent as a result.

“The unintended consequence of ex-con is that you actually destroy South African IP,” said Leanne Mostert of Webber Wentzel, explaining that startups which secure patents in South Africa may not then be able to scale to new markets, as the ex-con regulations scare away investors.

However Domisso feels the main problem for entrepreneurs in South Africa lies not in governance requirements or ex-con regulations, but in the lack of business skills.

“The problem is not so much the regulation around products, but that startups in South Africa are generally completely untrained in business,” he said.

According to Domisso, in order to run a big and successful business, “you have to run it right”.

Nonetheless he concedes that it is difficult to convince passionate entrepreneurs to give up their time to deal with governance at a time when their startup is just getting off the ground; and further, startups by their nature are “risky” so it is difficult to ask entrepreneurs to keep risk ledgers.

Overall, the panelists said the tech entrepreneurial environment in South Africa is booming, but entrepreneurs need to support their own work through bearing in mind legal, financial and governance issues.

“I find myself needing to “remind” myself that the South African economy is apparently not flourishing, because it seems to be flourishing based on the deals and the ideas I see,” said Mostert.

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Inspired and excited by the African tech entrepreneurial scene, Gabriella spends her time travelling around the continent to report on the most innovative tech startups, the most active investors, and the latest trends emerging in the ecosystem.

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