Risk management for start-ups: The four legal risk areas you need to know about
Earlier this year, the team at LegalVision gave us some helpful tips on the legal basics of starting a new business.
Over the coming weeks, we’ll look at legal matters that can arise for a new business once it’s up and running.
Here, Lachlan McKnight, chief executive of LegalVision, sets out some of the risks that can crop up that need to be managed.
Legal risk management is one of the jobs most start-up CEOs would like to leave to someone else. Unfortunately, in most start-ups there’s no internal legal department! The CEO often ends up in the hot seat. Spotting risk management issues early is important. In this article, you’ll get a good idea of some of the issues to look out for and how to deal with them.
1. Contract risk
One of the biggest legal risks start-ups run is contract risk. Many start-up CEOs enter into a myriad of contracts, both oral and written, without seeking legal counsel or even thinking too much about the ramifications of such agreements. It’s very common for start-ups to regret such contracts. If you decide to pivot, are quickly acquired, or even decide to shut down, you may want to be able to cancel any contracts you’ve entered into. Furthermore, if you enter into contracts without properly reading them, or better yet having a lawyer review them, you’re likely to end up paying the price down the track.
If you can’t afford to have a lawyer review every contract you enter into, try and make sure a clause is included which allows you to cancel the contract quickly after a short notice period. This is an effective way to inexpensively reduce your contract risk. There is, however, no better way to manage your risk than to work with a contract lawyer.
2. Regulatory risk
If your start-up provides services in a heavily regulated industry, such as finance, education or chemicals, then regulatory risk is likely to be the biggest risk management issue you’re facing. Generally, as the CEO of a start-up, you will also be a director of the company, meaning complying with all relevant regulations is doubly important. Directors or companies can, in certain circumstances, be liable for criminal penalties if the company breaches certain regulations, particularly in the financial industry.
Setting up a business in a heavily regulated environment therefore requires specialist legal assistance.
3. Human resources risk
It’s not at all unusual for start-ups to be forced to deal with HR issues. One of the more common issues faced by start-ups involves founders falling out. Although such disputes are not employee/ employer relationships, and would generally be dealt with in the companies’ shareholders agreement, it’s one of the first issues you could have to deal with from a legal risk perspective.
The more common type of HR issues relate to employees whom you wish to terminate or make redundant, or who allege discrimination, bullying or underpayment within the workplace. It’s important to deal with such risks by providing a clear employee handbook to all employees, and making sure it is adhered to at all times.
It’s also very important to ensure that you’re employing your employees under the correct arrangements, whether award of non-award. Fair Work Australia sets out various rates of pay and benefits for employees that employers are required to pay. You must comply with this, and even as an early stage start-up you need to make sure you get things right. The penalties for breaching the Fair Work Act can be severe.
4. Environmental risk
Finally, it’s important that you consider any potential environmental risks related to your start-up. Most tech start-ups will of course not need to consider environmental risk, but if you’re running a business in the agricultural, chemical or water industries, you will. Try and work with a sector specialist when setting up your business, whether a consultant or a lawyer.
Risk management in a start-up is an important job. It is rarely assigned to a lawyer due to cost factors, so the CEO of the start-up needs to take an active role in managing the risk. Seeking out specialist legal advice when necessary is a must, but you can reduce costs by being vigilant and sensible. Managing your legal risk before an issue arises is much easier than dealing with a crisis!