Start Up Founder Oversights That Become Ticking Time Bombs

In advising a number of start-up companies, I have often come across issues that founders ought to address but frequently overlook, for various reasons. Some overlook them out of mutual trust, some because they keep putting things off, and others because they feel they do not understand the issues and so cannot be bothered to dig deeper into what needs attention before setting up a start-up. Yet if founders were more critical about these matters at the outset, conflict could be kept to a minimum, allowing them to focus on running the business rather than on resolving disputes within their start-up. Here I have tried to summarise the oversights start-up founders most often make.

Conflicts of Interest

Start-up founders are usually fellow professionals, university friends or acquaintances who share the same idea, goals and desire to set up a business and make a profit. Typically, one will act as the investor or fundraiser, another will handle research and product development, and another will manage the finances. Profit sharing will, of course, be a priority topic. The problem is that none of these arrangements is put in writing. There is no clear record of what was agreed or how it will be carried out, and even the division of responsibilities becomes blurred. Eventually, someone will feel that the division of work and income is unfair; another will feel that, having brought in investors, they deserve a larger share; or someone will feel that, because they built a product that many people have embraced, the start-up could not function without them. These issues can be mitigated from the outset, for example by drawing up a) a Founders’ Agreement; b) a Shareholders’ Agreement; or c) a combination of the two.

Not Understanding the Articles of Association

When setting up a start-up, whether as a limited liability company (PT), a limited partnership (CV), a general partnership (Firma) or a civil partnership, preparing Articles of Association is essential. It is an absolute requirement for establishing a business, and all of the company’s operations must be consistent with the Articles of Association. Many start-up founders, however, neglect to study the purpose and meaning of the Articles they have adopted. As a result, activities that contravene the Articles may well occur, which could amount to a breach of the law. Given this risk, founders need to fully understand the purpose and content of the Articles of Association before the entity is established. The Articles of Association are the “rulebook” that founders must master and be guided by, and they must be respected by everyone.

Neglecting Research into Business Activities

Most start-up founders focus only on market research and product development, without looking at how their business activity is regulated. Business activities in Indonesia are currently classified into four risk levels: a) low risk; b) medium-low risk; c) medium-high risk; and d) high risk. Knowing the risk level of the intended business allows the company to identify which licences it needs before commencing operations. Failing to obtain the required licences amounts to a violation that may be sanctioned by the Government, with sanctions ranging from administrative to criminal. So, in addition to researching the market and developing their product, start-up founders also need to research their business activity to understand its risk level and the licences required to avoid sanctions the Government may impose.

Paying Little Attention to Legal Matters

Another oversight is paying too little attention to legal matters. This often happens because founders focus solely on the market and product development, treating legal issues as something that can be postponed or a cost that can be saved. Yet neglecting legal matters can affect business continuity and investor confidence. Examples of the consequences include:

• ownership disputes between founders;

• infringement or lack of protection of intellectual property;

• disadvantageous or invalid contracts;

• legal claims arising from non-compliance with applicable regulations; and

• a poor understanding of investment agreements, which can lead to losses for the founders.

Legal awareness from the outset is therefore no longer a mere formality but part of a start-up founder’s initial capital. A proactive mindset towards potential legal risks allows founders to identify, assess and mitigate threats before they grow into bigger and more expensive problems. This awareness encourages founders to focus not only on innovation and the market, but also on understanding the legal limits and obligations attached to their business. Well-planned preventive steps can also include consulting legal experts for guidance. Investing in legal advice early on is far more efficient than bearing litigation costs or business losses caused by legal problems later.

Lack of Transparency in Financial Reporting

Finances are a sensitive matter: if they are not managed well, they breed mutual suspicion and erode trust. In extreme cases, a lack of transparency in financial reporting may even point to unlawful conduct. Start-up founders therefore need to put a financial reporting mechanism in place. Financial reports can be presented once a month at a coordination meeting. Planned income and expenditure should also be set out so that whoever is responsible for managing the finances knows the limits and extent of their authority.

Weak Oversight of Operations

Weak oversight of operations can become a ticking time bomb, given the typical start-up work culture of frequently changing roles, flexible working hours and a high level of responsibility placed on each individual. This can drive innovation and rapid growth, but without an adequate oversight system it can also open the door to fraud.

• Constantly changing roles can blur lines of responsibility and accountability, making irregularities hard to detect.

• Flexible working hours, while offering freedom, require clear reporting and performance-monitoring mechanisms so that they are not abused or exploited for dishonest purposes.

• A high level of trust and responsibility given to individuals without oversight can give certain people the opportunity to commit fraud over a long period.

Start-up founders therefore need to build an oversight system to ensure healthy and sustainable business growth.

Documentation and Record-Keeping

One oversight start-up founders often underestimate is a weak documentation and record-keeping system. Yet neglecting documentation and record-keeping can have serious consequences. An excessive focus on fast execution and limited resources often means that tasks such as recording important information and storing documents are neglected. The consequences may include:

• the company losing information when the team changes;

• inefficiency due to duplicated work;

• difficulty making decisions because there is no accurate data;

• hampered product innovation due to a lack of historical information; and even

• legal problems from being unable to show evidence of compliance.

Disorganised documentation and records can also become a stumbling block when the company seeks funding or undergoes due diligence. Building an effective documentation and record-keeping system early on is therefore an essential step that must not be overlooked, to ensure efficient operations, sound decision-making, legal compliance and sustainable growth for the start-up.

Besides the matters above, other aspects such as strategy, vision and mission, the team and human resources, management and revenue, and product development certainly cannot be ignored. I would therefore advise start-up founders to consult more experienced advisers first, so that they can avoid these “ticking time bombs”.

Illustration: Gemini AI