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Avoiding frictions between founders and VCs? Work with lawyers who have right mindset

Conflicts often emerge between "aggressive" and "greedy" investors versus "financially conservative" startups

Entering the startup field is financially and intellectually rewarding for lawyers, says Hoang Minh Duc, special counsel at Duane Morris Vietnam, pointing to his experience in supporting and providing legal services for Vietnamese startups and global multi-stage investors over the past decade.

Last year, the Southeast Asian startup community witnessed a noisy lawsuit against Bui Sy Phong, who founded the Vietnam-based e-commerce platform Telio in 2018 off the back of his now-defunct fintech business OnOnPay. The Singapore High Court finally ordered him to transfer all of his shares at Telio to OnOnPay’s investors and acknowledged that Phong “did not act honestly or reasonably” in the setup of his new venture in relation to his previous company.

This is not the first time a Vietnamese founder grabbed headlines over his tension with investors. The KAfe founder Dao Chi Anh was said to sign a term sheet with investors without fully understanding the unfavorable and unfair terms against her when the company faced a down round, forcing her to leave the restaurant chain after holding the reins for three years since its inception.

As a result, as a lawyer is often hired for the purpose of forming an investment contract between a startup and its investor, an experienced lawyer will not only sort out the current legal issues but he or she can also anticipate problems that may arise down the road and work accordingly to help prevent such misfortunes.

“Working with a lawyer is similar to taking a doctor’s treatment,” said Hoang Minh Duc, special counsel at Duane Morris Vietnam. “If you use the wrong one, it will kill you and your business sooner or later.”

Put oneself in startups' and VCs’ shoes
Having a nearly 20-year stint as a lawyer specializing in foreign direct investment and merger and acquisition, Duc has been immersed in the local startup ecosystem since 2014 when the concept of startups started generating interest in the regional business community.

Even though venture capital (VC) is considered a form of private equity (PE), inexperienced lawyers may inadvertently make a mistake by applying the PE mindset in forming VC investment documents, discouraging the cooperative nature between two parties in a startup deal.

In practice, while private equity firms mostly buy mature companies that may be operating inefficiently, VCs bet on risky and early-stage startups with high growth potential. After the buyout, PE firms often streamline operations to increase profits and aim to take control of the invested company. Meanwhile, VC firms take stakes in a startup but give a great deal of freedom to the original founder and management team to develop the new venture and optimize its business model.

“On the one hand, VCs are friends of startups, they have no reasons to hinder the healthy development of the company,” said Duc. “On the other hand, as the founder is the soul and the source of energy for a startup, if he or she is not happy with any settlements, the business will surely have problems later on and it is not beneficial for VCs.”

For this reason, lawyers who are aware of this win-win culture in the startup field can review transactional documents in a way that could help prevent potential conflicts between “greedy” and “aggressive” investors versus “financially conservative” founders, maximizing the constructive aspect of the cooperation instead of fully following either side’s requests.

However, inconsistent and non-transparent business practices that are still existing in several local startups after sealing a deal. It triggers recent scandalous and unfortunate events that are detrimental to the image of Vietnamese startups.

“Those cases prompted reflective reactions within the whole community but at the same time, sent a message that those who are not following the rule have to pay the price,” Duc said.

On the bright side, the field can be a fertile land for local lawyers to develop their expertise. Vietnamese startups, Duc believes, are still undervalued in a dynamic and fast-growing market of nearly 100 million people with e-commerce booming and still many underdeveloped sectors such as fintech, edtech, or healthtech.

“We are not looking into the value of startup investment deals in comparison with other M&A, FDI or PE deals that local business lawyers have long been working on for decades,” Duc stated. “The point is that transactions in the startup space entail a lot of complex, quickly-evolving, and cross-border legal issues that require a systematic approach and enormous experience from legal counsel.”

In fact, a lawyer who can accompany a startup or a venture capital firm since its early stages, even with minor financial gains, is more likely to be introduced and selected to follow up in other sizable investment rounds as well as future business aspects including employee welfare, IP registration, conflict settlements, and more. In Silicon Valley, law firms even create startup-dedicated packages and might serve as early-stage investors in several potential cases.

However, a large part of the job is still in the hands of Singaporean lawyers as founders are prone to set up their startups overseas. Once Vietnam can simplify foreign investment requirements, as well as enable quicker exits and attractive tax incentives for venture capitalists, local lawyers in particular and the country as a whole can capture even more resources for growth.

Lawyers’ role in a “shaky” but burgeoning business environment
Telio and The KAfe are just some cases that come to the surface. A more common legal issue often arises when Vietnamese startups are forced to set up their entities outside of Vietnam to avoid falling down local regulatory rabbit holes. The enforcement of new rules such as the 2018 decree on the formation of local venture capital firms also gives rise to new practices in the field.

“The startup and venture investment community have been encountering a lot of challenges but they are still moving forward at an unprecedented pace in Vietnam. Lawyers like Duc are professionals who can accompany and contribute significantly to this fledgling startup ecosystem, especially when the local legal framework is not mature and friendly enough to the development of venture activities,” said Tran Tri Dung, Program Manager in Hanoi & Central Region at Swiss Entrepreneurship Program (Swiss EP) Vietnam.

With a shared understanding that an unclear legal framework will hinder the development of impactful startups in society, key ecosystem stakeholders have joined hands to gradually break down regulatory roadblocks in the past few years.

Lawyers like Duc have actively participated in discussions with law-makers and experts, contributing to notable regulatory reforms such as the abolishment of a criminal law’s article that deterred companies from doing business in new industries not clearly defined yet by law, the approval of tax incentives for software producing companies, or the 2018 decree on the establishment of local venture capital funds.

At the Swiss EP Partner Summit 2022, Duc provided his legal perspective to the conversations, as well as shared his experiences from investment deals of startups in innovative fields that have not been legalized clearly, such as buy-now-pay-later or cryptocurrency. Accordingly, lawyers’ role is to help startups and other stakeholders perform feats legitimately even within a vague and ‘shaky’ legal framework.

In the past three months, Duc has joined Swiss EP’s Entrepreneurs-in-residence (EIR) program to support the Swiss EP partner Women’s Initiative for Startups and Entrepreneurship (WISE Vietnam)’s senior leadership group to explore the angel investing process theoretically and practically.

“While we still have accelerator programs for women-led startups on a rolling basis with intensive expert training on various topics including legal aspects, I believe that when WISE, as an entrepreneurship support organization, understands the legal issues around the investment process, we can better and closely advise founders on when and how to work with different players to achieve desired results along the road,” said Tu Thu Hien, founder and CEO of WISE.

This is just one example of Duc’s constant sharing to educate the market on fundamental legal issues around the startup environment in an effort to foster its sustainable development. He wants to build a new capitalist class in Vietnam, a class that is distant from getting rich by exploiting real estate and natural resources, a capitalist class that has aspirations and relies on intellectual properties.

“Looking at those entrepreneurs facing a dilemma of wanting to do something big but lacking supportive resources, I hope more and more lawyers and firms can contribute and support them without considering initial financial benefits,” Duc said.