Business lawyer on a legal design approach for startups
Focus on Legal support to startups
Interview with a Business Lawyer: how to help startups with a tailored approach
Let’s meet Fabio Azzolina, Business Lawyer for startups
Fabio Azzolina is a Business Lawyer specialized in Corporate Law, M&A and IP and supports Italian startups throughout their growth path.
Founding Partner of the LA&P law firm and founder of StartUp Legal, Startup Mentor and Advisor, he supports startups on legal matters.
Hi Fabio, you are a Business Lawyer, tell us about yourself and your passion for the world of startups where you provide legal and tax support to founders. We know that you have created, within your law firm, a division specialized in assisting startups, how did this project come about?
My passion for the startup ecosystem stems from the fact that I have been a startup founder myself. Everything went according to the script: the birth of the idea, the enthusiasm, the search for a team, the refinement of the idea – perhaps too much time was spent on this point -, the first contacts with some investors – with related shutting doors in my face -, but with whom I still have incredibly good relations, even if we now work together in a completely different way. It was a time in my life when I had yet to decide whether I wanted to be an entrepreneur or a lawyer, while I was doing my legal practice. In the end, all things considered, I found myself doing both in what is now StartUp Legal.
StartUp Legal was born well before LA&P, of which it is now essentially a vertical division dedicated only to startups. It was in 2013 when I chose the brand and the new law on innovative startups had just been issued. In its first version StartUp Legal was a sort of network that gathered some (few but good) professionals with vertical expertise on the newborn legislation: there was a lot to study and a lot to “understand” at a practical level. To tell the truth, even today, when StartUp Legal is certainly more “structured” and defined as a team and as a vision, we have never stopped studying and experimenting with legal solutions applicable to the business models submitted by the startups we assist in the most diverse sectors. I would say that this is one of the points that most motivates me and my colleagues to continue investing time and resources in StartUp Legal.
Why should a startup turn to the right professional right away, even before its legal set-up and make a legal risk assessment of the project?
Speaking of innovative startups, we know that specific skills are important because a series of tools borrowed from the Anglo-Saxon legal systems are applicable only within them and not in our system, and not all professionals have these specific skills.
We are not only talking about instruments borrowed from Anglo-Saxon legal systems. On the contrary, for a long time this transposition of overseas practices has become a consolidated practice: just think that for more than fifteen years Prof. Giorgio De Nova has been defining the so-called “alien contract”, referring to contracts coming from “outside” and used in our legal system. In addition, we should be paid attention to those instruments that are typical of larger and more complex entities, e.g., joint stock companies, and that have been extended – with some adjustments – to innovative limited liability companies.
Today, for example, startups can decide to issue debt securities, equity instruments (SFP), different categories of shares incorporating more or fewer rights than ordinary shares, etc. It is not obvious that everyone has the necessary skills and experience to fully understand these instruments, how to structure them, what consequences they will have in the medium/long term and what risks and opportunities may arise from them.
Why is it so important to be supported by a professional, as a Business Lawyer, for the establishment and management of investment rounds?
There are many serial entrepreneurs who have been through a few operations and are familiar with the tools and characteristics of an investment round. Having said that, as many as an entrepreneur may have seen, a professional lawyer has reasonably seen and explored more. Often the very same wording of a clause can make a difference in one case, and, at the same time, be totally inadequate in other apparently similar cases. Sometimes the evolution of the domestic case law leads to the need to reconsider and readjust, at least for reasons of prudence, wordings that were considered optimal until then. Moreover, a good professional, with the right set of skills and specific experience and with the right mental elasticity, will be able to recommend alternative ways, ‘tailor-made’ solutions for the specific case: this is because only those who fully know the tools available from the technical point of view are able to ‘work’ them to give the necessary shape to the concrete case. Unfortunately, I have often seen tools and solutions applied in an uncritical way, trying to adapt tools, with contours considered fixed, to specific situations, On the contrary, a professional should try and go into depth to adapt those contours, which, within certain limits, are not fixed, to the specific situation.
From the point of view of a Business Lawyer, why are shareholders’ agreements important to attract future investors and who should prepare them?
Shareholders’ agreements can be a particularly good tool to establish clear and streamlined rules concerning the relationships between the founders. We could summarise it this way: contracts, not only shareholders’ agreements, are usually made while you “get married”, when everyone gets along well and there is a lot of enthusiasm for the future, but they are useful in times of a “couple crisis”, when relations are not necessarily constructive. The example is deliberately extreme to give an idea of the usefulness of a shareholders’ agreement between founders: their purpose is to predetermine, as far as possible, the rules for the strategic and operational management of the company, to have a steady corporate structure and set a clear organisation of the operational roles. Everyone knows, by now, that the criteria for an investor’s choice are mainly related to the team, its skills, and its ability to execute. It is easy to understand, therefore, how a set of ad hoc rules, helping to make the team more stable and committed, cannot but be perceived positively by an investor. Beware of overdoing it, however: the investor, especially if he/she is the first one, will want to propose its own shareholders’ agreement which will come into force once the investment has been made, and, in almost all cases, will expect this shareholders’ agreement to be the only one in force. For this reason, it is important for founders to sign a shareholders’ agreement which, at least in its main parts, can be merged with the one subsequently proposed by the investor. It is therefore useful to seek advice from someone who has not only already seen, negotiated and drafted a good number of agreements between founders, but who also knows the best practices and the most common investment terms for investors potentially interested in startups.
How to address the need for “Work for equity” or incentive plans in the life of a startup? What to watch out in order not to make mistakes?
Implementing an incentive plan requires strategy. A well-designed incentive plan should have a vesting period of a few years, set clear procedures and rules for granting the options and their subsequent conversion. I often see “improvised” plans consisting of simple private agreements between the company and the individual beneficiary: this is a shortcut that risks having rather unpleasant implications. I would like to mention a real case of a team that approached me because one of their investors (with casting vote over new capital increases) refused to agree to a resolution that would have executed a private agreement previously entered by the founders, assigning new shares based on the achievement of certain agreed milestones. It was difficult to get out of that impasse. If the founders had proceeded at a shareholders’ meeting with the approval of an incentive plan with clear rules on the identification of beneficiaries, on the vesting objectives and the procedures for revoking the allocation, the investor would certainly have had less power to “block” the will of the founders.
Speaking of corporate governance, we would like to ask you, as Business Lawyer, for some examples, you encountered more often, of disputes between founders and investors.
Fortunately, I have only rarely seen real ‘quarrels’ between founders and investors. Much more often, there are initially very distant positions on the balance of rights, duties, guarantees, and risks imposed on each other. The extent and intensity of this distance often derives from the ratio between the value of the investment and its risk. Unfortunately, it often happens that small investor (I define as such those who invest sums of between twenty thousand and fifty thousand euros) propose investment contracts with governance rules and powers that are disproportionate. In such cases, I usually invite founders and investors to the table and discuss their respective concerns and objectives: in doing so, you often manage to build a good balance, and, even more often, you realise that many of the guarantees requested in the first instance were not necessary. On the other hand, the founders should not take it personally when they receive a “heavy contract”: in my job it often happens to start with a contract inherited from some other transaction and then go on to tailor it to the specific case, so much so that the first draft is often quite different from the text that is signed.
Fortunately, virtuous practices such as the use of contracts based on the so-called SAFE, the contract drawn up and circulated by Y Combinator, have recently become widespread in Italy as well, even if, for now, mainly for small / exceedingly small investments.
Among the first activities that must be addressed in a startup is the protection of IP assets (trademarks, patents, etc.): how do you support founders, as Business Lawyer, in these activities and why are they so important?
Every startup worthy of the name has two fundamental assets on which it must focus its attention and resources: intellectual property and data. This is one of the points I stress most with the startups I am lucky enough to assist. While it is true that in the first few fund raisings it is unlikely that investors will engage in extensive due diligence on these assets, it is also true that, when the going gets tougher, these are the points that will attract the most attention. The more assets are protected and valued, the greater the value of the startup.
It must be understood that the protection of intellectual property is a continuous and lasting process: one cannot think, for example, that a trademark is protected by a single registration, nor that the filing of an application for registration is enough to be safe. Obtaining the title (registration) is only a first step. We could look at it this way: registration marks the territory, but it is particularly important that there is constant attention to the defence of the borders of that territory. This statement, which, I am aware, is very general, also applies to other titles such as patents, design, copyright, etc.
What I try to do is to support startups in the preparation and implementation of the strategy for the protection of IP assets by training the founders too – and why not –, so that they can follow up and participate in the protection activity with greater awareness.
If you are interested in Business Lawyer, please read also the interview with Chiara D’Antò Lawyer supports startup founders during their journey , the interview with Daniele Costa Lawyer for startups: from education to consultancy and the interview with Marco Corica Business lawyer helps companies and startups with his team