Is a startup's corporate strategy as important as a marketing plan?

By: Francisco André
Francisco André

What causes a Startup to succumb is reason for analysis of the specialized publications. The global leader in investor and startup data processing, cbinsights.comlisted the top 20 reasons that led startups worldwide not to achieve the expected success or even to fail completely.

Among these, two of the problems are directly related to legal issues. One concerns essentially legal issues, such as compliance with privacy laws, copyright, intellectual property, trademark dispute, tax regulation, etc. and the other is linked to the lack of harmony between partners or between partners and investors, whose origin of such problem is linked to defects in corporate design or a clear position of expectations in the investment contract.

In light of this, the title of this article is suggestive, because in the ranking mentioned the issue “problems between partners and investors” was mentioned by 13% of the surveyed entrepreneurs, while marketing problems was mentioned by 14%. Let's say technically tied. Of course, the investments in marketing and the attention usually paid by entrepreneurs to advertising is substantially higher than that devoted to legal matters. And, I believe, it must be so.

Although investment in overt marketing strategies is sometimes focused on achieving results that match vanity metrics, as John Kepler teaches., which conceptualizes as "what does not bring any concrete and financial results to the business, ie, cause immense personal satisfaction, a sense of pride, ego up there and, of course, can also impress some unsuspecting investors." 

In this step, what CB Insights research imposes on the entrepreneur is a true reflection on entrepreneurial strategy, especially for our methodological approach, regarding the legal strategy adopted for corporate composition, under penalty of neglecting a determining factor for success. / enterprise failure while focusing on keeping vanity metrics up to date. 

It is almost biblical that teams of novice founders, when seeking legal advice on specific regulatory issues and being questioned about the corporate design of the company, state that rules among partners are established informally, that there is no agreement of quota holders (for limited companies). ) or memorandum of understanding, that the articles of association are “that standard”, among other statements that represent this understanding of corporate matters. 

It is cute to see them say “I don't care about that, my partner is like my brother”, this sentence allows us to make the diagnosis with 90% for sure that in the last year one of the partners will look for us to see how resolve the dissolution of society, the sale of quotas, conflicting decision-making without a majority in the capital stock and so on.

Ironies aside, I do not mean to say that law should be the center of attention for entrepreneurs, but it certainly should be one of the points to be observed for a company to be able to grow, be attractive to receive investment, to divest, to exit minority partners together with majorities and other corporate reorganization procedures.

In this context, I will address here one of the fundamental strategies that should be adopted by entrepreneurs when defining the corporate structure, with a view to turning an adverse circumstance into a resolvable situation through a technical procedure, predetermined and minimally harmful to the progress of the companies. ordinary activities of the company / startup.

This is a common but uncomfortable situation for many companies. Even give Caesar what is Caesar's. This point was inspired by a post on Instagram by João Kepler and I reproduce here as a way to exemplify its importance, because listening to the pains of those who do is more important than any legal doctrine.

One follower asked: “The partner does not correspond and shows disinterest for months. What to do?". To the question, John answered: “The partner problem is one of the biggest reasons startups fail. The shareholders agreement is important to be done at startup. Now if you have a current problem with your partner, sit down with him and talk, why can't you stay that way? ”

In fact, John's answer is not only the result of market sentiment, but is in line with the metrics of the CB Insights publication shared at the beginning of this article. The cycle of this case brought by JK is: the founders start their activities in full swing and do not define obligations, activities of each partner, division of tasks or other typical obligations of the business enterprise. In the course of startup development, one of the partners loses focus. It becomes a deadweight in the performance of the company's activities, requiring someone to be hired to perform its function, which generates capital expenditure on something that would be the obligation of the partner.

Incidentally, “losing focus” was also cited in the 13% survey of respondents as one of the causes for startup failure. That is, it happens in many cases. The perfect match is found for the company's failure - loss of focus and disharmony between partners.

However, what can other partners do quickly and pragmatically in a situation like this? If there is no provision in the bylaws or quotaholder agreement, nothing. Other than undergoing a lawsuit that can take 3, 5, 10 years trying to get the lazy out of society. Enough time for the startup to die.

On the other hand, a good social contract could foresee obligations and cases of extrajudicial exclusion of partner for just cause, according to the permissibility of art. 1.085, Civil Code. 

This provision of the civil code provides the hypothesis of extrajudicial exclusion of minority partner, which occurs when the majority of the capital stock understands that a partner is putting at risk the continuity of the company, in the face of acts of undeniable severity, and may exclude him / her out of court, through amendment of the articles of association, provided that the exclusion for just cause.

Therefore, in order for the partner to be excluded, it would be necessary to have the provision in the contract and, preferably, a conceptualization of what would be acts of undeniable gravity for that society, serving the purpose of transforming a concept that is broad and lawful. subjective into something predictable, determined and measurable.

Given the data presented, the reported situations and the legal response to these social facts, what emerges from this article is the importance that should be given to the legal structure of the company and the business activity, which is one of the points of attention of the Company. company so that resolvable situations do not turn into reasons for startup failure.

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Francisco André

Master student (LLM) in Business Law from the University of California, Berkeley (USA). Visiting student at the American University Washington College of Law in international trade.