Law 101: Exploring legal fundamentals and corporate governance at the HatchX Fintech Accelerator

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At the heart of the stark colonial buildings that line the streets of Fort, resides one of the biggest hubs for all things startup, Hatch. Once a week, a group of thinkers, creators, and innovators come together for an accelerator program for fintech startups, HatchX. Its vision is to help local fintech startups make banking more efficient and accessible across South Asia. These weekly sessions connect a series of industry experts to increase the capabilities of startups accepted into the initiative. 

Inside Hatch’s auditorium, a guest speaker and a crowd of passionate fintech founders gather to understand legal processes and requirements in the world of business. Dathika Wikramanayake, Senior Associate at Nithya Partners stands in front of a wall projected with the words that read “Law 101”.  As notebooks flip open, pens click and the small gathering settles into silence, the energy in the room shifts and focuses on the topic of discussion for the next 2 hours; the fundamentals of legal procedures in a venture. 

Business structures and understanding the fundamentals 

Law 101: Exploring legal fundamentals and corporate governance at the HatchX  Fintech Accelerator 1
Dathika Wikramanayake, Senior Associate at Nithya Partners

Dathika paces across the floor as he begins his presentation and raises the question, “Why is it of highest concern for startups to understand their chosen business structures and its fundamentals?”.  As he aptly broke it down; to understand a business structure is to also understand its respective merits, disadvantages and any related agreements entered into. Moreover, allowing fintech startups to gather insight into the existing laws and myths that carve out the terrain industries navigate within. 

To begin with, your relationships with stakeholders depend on how you choose to run your business. Pretty self-explanatory, and those willing to risk collateral would be familiar with the cost-benefit analysis of running their ventures. Ranging from sole proprietorships to partnerships, the workshop highlighted instances that entrepreneurs take for granted ever so often, those small blunders that can set off a butterfly effect. An example was to recognise the importance of limited liability when setting up a venture. This allows investors to treat their venture as a separate entity so that personal assets would not come under attack in the case of fire. 

Intellectual property rights and staying ahead of the curve 

Fintech | Startup | Legal
When it comes to source code written by an employee, Dathika shared that the copyright will vest in and belong to an employer unless otherwise specified in contracts of employment (Image credits: Marc Mueller)

Where do proprietary agreements and NDA’s come into play? Concerning fintech startups, Dathika went into detail as to the principles and safeguards that exist when it comes to protecting a company’s all-important Intellectual Property. For example, where employees write and develop source code within the scope of their employment, the copyright therein will vest in and belong to an employer unless otherwise specified in their contracts of employment. 

Intellectual property rights carve out the fintech world. Projected on the auditorium wall were how agreements can be drafted, the regulations and best practices, and ensuring agreements are lawful and scalable. Why is this critical? When drafting agreements, promoters must keep in mind that clauses are fair and equitable to all parties.  As an employer, you would need assurance that your employee would not up and leave with your work, and in the case of an independent contractor, you would be assured due credit. 

Corporate governance; deal with it, or hire a pretty reliable company secretary to do it for you.

Simply put, good governance is the rules, practices and processes that direct a company.  The first point highlighted under the section of corporate governance was the importance of a good company secretary – particularly, in ensuring that a company’s administrative statutory obligations are duly complied with.  For a startup, the cost of a company secretary can be tough to take on, but, competence must be given more value than cost, therefore, ensuring smooth administration. Emphasizing on competency, Dathika made no mistake when he went over the importance of being aware of one’s statutory duties. A promoter cannot claim ignorance and should make decisions diligently and in the interest of the business. 

Good governance also encompasses good relationships with shareholders. The importance of shareholder agreements and structuring your interactions and relationships covers an array of features from dividend policies to access to information. Cases were given to explain how disagreements can be settled and instances in which parties can exercise their rights. 

Post-COVID responses 

Fintech | Startup | Legal
Due to COVID-19, businesses have shifted all aspects of their operations online. This includes AGM’s, which are now being conducted virtually using video conferencing platforms like Zoom (Image credits: Aitken Spence)

COVID-19, needless to say, has changed the world of business, and it further exacerbated the complexities of how involved stakeholders are in the day to day runnings. From investors to employees, how each entrepreneur decides to deal with the circumstances differs. For fintech startups, the pandemic had a silver lining as the general public shifted towards digital forms of transactions. 

The shift of operations almost overnight to the online realm was experienced by all levels. The WNPS claims to have had the first-ever virtual AGM in the island during COVID-19, and major organisations, such as Sampath Bank,  followed suit. Zoom and other virtual meeting rooms have defined the new normal in terms of communications, and this jump into virtual spaces opened up an entirely new world of dealings with stakeholders. 

Raising funds in the time of a pandemic is an obstacle course that still requires skilled manoeuvring and innovative ways that allow employees to invest in the business were discussed at the seminar. ESOPs ( Employee stock ownership plans) as Dathika vividly explained, are an increasingly useful option for businesses seeking to incentivize and compensate employees, while he engaged with the audience’s questions on vesting periods and structuring conditions that can be set.

The Mexican standoff and the art of avoiding an impasse

This session through HatchX was set to inform and improve the understanding of statutory requirements for the chosen fintech founders. The program was encased by the fundamentals of business structures, employee contracts and good corporate governance, with the takeaways being what to do, what not to do, and what to keep in mind from a legal perspective.

Despite the downpour outside thanks to the monsoons, within the auditorium, the room was bright and energetic. Dathika’s humour and professionalism seemed to captivate and make a technical area of teaching palatable to the audience. Law 101 detailed the thought processes regarding matters of statutory concern.  Laying the groundwork for entrepreneurs, the session succeeded in building capacity, empowering individuals with the know-how of what to look for, and things to keep in mind when making decisions for their venture.

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