In brief
Founders spend most of their time thinking about growth: customers, products, funding and hiring.
Many of the decisions that create the greatest risk are made early, when the business is small, resources are tight, optimism is high and no-one is paying much attention to you.
Here are some practical lessons every tech founder should keep in mind as their business scales.
Key takeaways
- Growth puts the spotlight on you. Understand how legal and regulatory risks grow with you.
- Revisit early decisions. What worked when you had five customers may not work when you have 5,000.
- Good record-keeping wins arguments before they start.
- Bringing in advisors at the right time is almost always cheaper than fixing problems later.
In depth
1. Get it right from the start – understand that your legal and regulatory risk profile grows with you
With some exceptions, the legal and regulatory obligations that apply to a startup are the same obligations that apply to a scale-up or established business.
Some regulatory requirements only switch on once your business reaches a particular threshold. For example, a growing startup may become liable for payroll tax once its wage bill exceeds applicable State or Territory thresholds. However, most legal obligations, such as the obligation to maintain proper books and records or not engage in conduct which is misleading or deceptive, apply at all stages of the corporate lifecycle.
What changes is that as you grow, and hopefully become financially successful and famous, the legal and regulatory spotlight naturally turns on you. You become the tall poppy and your competitors and regulators come after you. If you have not established good practices from the start, when that happens it will be much harder to: (a) defend yourself; and (b) turn the ship around and fix things.
Put another way, the early stage decisions that receive the least scrutiny can sometimes create the greatest long term risk.
In the first year of a startup, speed and growth is everything. Founders are focused on solving immediate problems, creating opportunities and earning revenue. That often means making sensible short-term decisions that sometimes survive far longer than intended.
A spreadsheet becomes a critical business system. A temporary process becomes permanent. A shortcut becomes "the way we've always done it".
Cybersecurity is a good example. Early-stage businesses often defer implementing time-consuming cybersecurity practices while focusing on growth. Yet poor cybersecurity practices, such as a password-sharing practice, an unmanaged administrator account or the absence of multi-factor authentication, can remain embedded in the business years later.
The same principle applies well beyond cyber. Contracting practices, intellectual property ownership, employee onboarding, customer terms and governance arrangements all need to be considered at the start and should all be revisited as the business matures.
What made sense when no-one from the outside was paying much attention to you may not withstand the attention of investors, regulators, potential investors or a court later on when you are the hottest thing in town.
The good news is that getting things right from the start and staying informed has never been easier. Australian regulators provide free "how to" guides, alerts, newsletters and update services that notify businesses of significant legal and regulatory obligations and developments.
Call to action: understand the key legal and regulatory obligations in your market, create a simple "regulatory milestones" checklist and review it periodically. The compliance obligations you don't know about are often the most expensive ones. Schedule regular, and ideally independent, audits of core functions as you grow.
2. Keep a paper trail
Sometimes, bad things happen to good people and disputes are not won by the party who was right. They can be won by the party who can better prove what they say happened.
As businesses grow, memories fade, employees move on, and relationships with customers and vendors evolve. Documents are essential to provide a contemporaneous record of decisions, expectations and events.
When investors, regulators or courts are trying to understand what happened years earlier, they usually start by reference to what the documents record. That is not to say that you need a running documentary record of every employee's inner monologue or every email or text message that was ever sent. That would be a terrible idea for lots of reasons. But it is critical to maintain proper records necessary to support the enforcement of the company's rights and defend the company from external threats. That means having a proper system for keeping critical documents such as:
- Board papers, meeting minutes, shareholder agreements, communications with shareholders or investors
- Contracts with customers or counterparties as well as key communications that led to those contracts such as RFPs and RFP responses
- Employee records
- Supporting documents for taxation purposes
It is also important to implement (and enforce) systems and processes set out how employees are to communicate with external parties in particular. There is nothing worse than trying to defend a dispute years later to hear that a now departed employee (and key witness) used some obscure and now deleted external messaging system on his personal device to communicate with a key customer with respect to a major contract that is now in dispute.
Call to action: document significant decisions as they happen and store records safely. Future you will be grateful.
3. Know when to call in the experts
Most founders do not want to spend money on lawyers, accountants or consultants. Nor should they engage advisors simply for the sake of it.
The key is knowing when advice will help the business grow, move faster or avoid costly remediation. The right advice can unblock a major negotiation or prevent a budding problem from becoming an expensive distraction later.
As a rule of thumb, consider bringing in experts when the business is making decisions that will be difficult or costly to unwind, such as:
- Launching a new product (particularly AI-related products) or entering a new market/jurisdiction
- Negotiating key commercial agreements
- Collecting and storing new types of commercially-sensitive or personal information
- Raising capital
- Pursuing acquisitions or major expansion opportunities
The goal is not to eliminate risk. It is to make informed decisions that support long-term business growth.
Call to action: before making a decision, ask yourself: will getting advice now be cheaper than fixing the issue later? If the answer is yes, it is probably time to pick up the phone.
Growth is exciting. But as businesses grow, as do the risks. The founders who navigate that transition successfully are rarely the ones who avoid mistakes altogether. They are the ones who recognise a changing landscape, adapt their approach and put the right foundations in place before they are tested.
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Lucy O’Brien, Graduate at Law, has contributed to this legal update.