Last Thursdays for an Entrepreneur: Partnership Issues faced by Startups in Nepal

‘Last Thursdays for an Entrepreneur’, under its new format held its 3^rd event on May 25^th at Ventures Café, Baluwatar. The topic of discussion was “Partnership Issues faced by Startups in Nepal.” Arjun Singh Thakuri, founder of Access Keys, Om Adhyaya Resort and other three IT companies along with Semanta Dahal, partner and advocate at Abhinawa Law Chambers and also the legal advisor for Nepal Investment Board and Business Oxygen, were invited as the panel speakers. Vidhan Rana, Founder and Managing Partner of Biruwa moderated the event.

Mr. Rana gave a brief background of Biruwa Advisors (the event organizer) and the changed modality of the event.  Having had the experience of communicating with over 400 entrepreneurs, Mr. Rana has personally encountered many success and failure stories of startups. Since one of the primary issues faced by startups was partnership, Biruwa picked this topic for the event in order to make startups aware of possible partnership issues. This can help them be intellectually and legally prepared before problems arise.

Mr. Rana shared his own story about Biruwa. He started Biruwa Ventures in 2011. Four months later, when the need of a partner arose, he approached an old friend and discussed a potential partnership. They negotiated a deal with the agreement that they would set out 3 years milestones to assess individual contribution in the company and would not divide the stake of the company solely on monetary investment. Three years later when his friend/partner went abroad to pursue further education, it was easier to come to an agreement. It was agreed that his stakes would gradually reduce every year he was abroad, as he would not be able to contribute to the growth of the company. Having had this discussion at an initial stage before forming a partnership, it did not affect their partnership or friendship.

Mr. Rana then asked Arjun Singh Thakuri to share his story and partnership challenges he faced during his entrepreneurial journey. Mr. Thakuri grew up in a remote village in Makwanpur and moved to Kathmandu in 1998. He started his first IT business with two other partners who were living abroad. In terms of work, it was only him who was contributing full time to the company from coding to hiring and training employees. He recalled working strenuously for six years with many days where he slept in the office to save commute time from home. Later on, when he felt that it was his sole effort running the company, he raised the issue about raising his partnership stake but was only given 15% of stake in the company and the rest was divided between the other two partners. Discontented by the settlement he took the value of his share and left the company and began his own independent ventures.

Mr. Arjun Singh Thakuri (right) sharing his story and partnership challenges he faced during his entrepreneurial journey.

Currently, he has four independent ventures and one successful partnership in Wilson Academy, a school he previously taught. He said his partnership in the school has worked out due to mutual respect for each other and having his mentor as a partner. From his experience, he advised entrepreneurs that it is not only monetary contribution that is important when starting a new venture. Responsibilities in all terms including time, commitment, effort, and network should be more or less equal for a healthy and lasting partnership. If the work balance is not equal, problems will arise sooner or later. This is also one of the often-heard reasons behind startup failure.  He also advised entrepreneurs that even when startups initiated with friends fail or while leaving any job, one should never burn bridges, as you never know, when you may venture out together again.

Mr. Semanta Dahal (left) advised that entrepreneurs should try to anticipate problems at an initial stage to prevent them from impeding the business later.

Semanta Dahal was asked for his advice from a legal standpoint while forming partnerships. Mr. Dahal advised that entrepreneurs should try to anticipate problems at an initial stage to prevent them from impeding the business later.  Many people opt to go into partnership to compensate their capital or skill limitation, which is justifiable.  If entrepreneurs do form a partnership, most people go in a company model, as the shareholder have limited liability in this model. The disadvantage of this model is that companies have more compliance requirements. Entrepreneurs can also go into a partnership model, where their financial liability does not end with the investment made in the firm however this model has fewer compliance requirements and simpler paperwork to go through.

He also gave a brief description about MOA (Prabandhapatra) and AOA (Niyamwali), which are documents required during the registration of a company. It contains provisions related to capital investment, the number of shares, details of board members and general meetings that are to be conducted. However, the scope of these documents is limited.  The complications that may arise between partners, details regarding individual’s rights in the company, obligations of the shareholder and duty towards the company are not included in these documents. To address these topics, a shareholders’ agreement, which can be made after a company registration or a joint venture agreement, done before company registration, can be formed to mitigate future problems that may arise in a partnership.

A shareholders’ agreement can include a wide array of things such as how much monetary contribution /capital each partner contributes, the installments the capital will be put in, shareholding structure, the order of contribution to be made for future investments, individual skillset/knowledge that each partner will bring in and how it will benefit the company. This will prevent or to the least minimize future problems.

The shareholder agreement can include further details, which are not considered in MOA and AOA. It can help protect minority shareholder’s rights. Even as a minority shareholder, one can put forward in the agreement that the company cannot move forward with big company decisions without their agreement such as increasing capital, increasing someone’s salary in the company etc., so their rights are not infringed by the majority shareholders. Mr. Dahal noted that most startups do not use shareholder agreement but this can be used as a precautionary measure for almost all startups, especially in consulting services, where even hourly contribution of each partner in future projects can be specified for equal workload distribution.

After an initial round of discussion with the panelists, the floor was opened for the Q&A session. One of the questions from the participants was regarding knowledge contribution. His query was if knowledge or skill could be translated or reflected in the capital structure.  Mr. Dahal responded that if the skill is quantifiable into a monetary value such as how much a certain skill/knowledge can add to the revenue of the company, knowledge could be translated into shares even when a shareholder is not putting in cash contribution. Other participants shared different stories about their partnership issues and consulted with the panelists regarding possible conflicts that may arise in their situation and ways to avoid them.

The event floor was then opened for casual networking session, where the participants could ask further questions to the panelists. Some participants had queries regarding valuation of their companies and how to bring in new investors to their existing companies. Although some queries were beyond the expertise of the panel members, the participants got a chance to communicate with other attendees and members from Biruwa team on ways to approach their issues. Overall, the session was very informative, where both real case scenarios and possible future scenarios and legal hassles associated with them were discussed.

Overall, the session was very informative, where both real case scenarios and possible future scenarios and legal hassles associated with them were discussed. Biruwa hopes to have such lively discussions around relevant issues with entrepreneurs in the coming sesssions.

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