Technology Disputes Involving Founders and Startup Companies in Asia

Startup disputes can vary in complexity from basic contract disputes to billion-dollar tech transactions, among other conflicts. As technology and innovation develop, the businesses become more global, and startups are likely entering into cross-borders agreements not only with customers and employees, but with contractors, business partners, and stakeholders.

KEY TAKEAWAYS

Often conflict arises in the venture capital sector when there is a fundamental mismatch in expectations among investors, management, and/or the founder of the company. This could be driven by such factors as an investor’s lack of deep knowledge about the startup company, or a lack of trust in the broadest sense—not just relating to competence or business acumen, but in the sector and jurisdictional expertise of a founder or investor. Founders can also sometimes feel there is excessive management oversight, and may actively try to curtail investor control due to the investors’ lack of understanding of the business and its aims.

Typically disputes might occur when investors would like to remove the founder and replace management. There might be an investigation into misconduct if the founder has too much control. Fraudulent accounts are often a reason for conflict. Convertible loan defaults and a breach of contract or fiduciary duty are other common reasons for disputes. We consider some risk mitigation tools:

• Create strong contractual documentation at the time of the initial investment. This can be negotiated during subsequent funding rounds, and also include terms to curb founder powers with a “gross misconduct” clause.
• Have strong corporate governance controls and ensure these are revisited and amended.
• Appoint and retain independent lawyers that are not linked to the founder to advise the company and the board. Also, keep lawyers who are involved in contentious reviews and investigations separate from the company’s normal corporate counsel.
• Include the provision for an independent audit/review in documentation, which can help to shift fact finding and financial irregularities to a more neutral forum. It can also form the basis of misconduct review in the context of a leadership change.
• Keep the lines of communication open with the board and chairperson, with regular updates to spot any signs of irregularities.
• Ensure whistleblowing can be safe and, if necessary, anonymous. Allow direct access to board members for certain categories of complaints.