A beginner’s guide to incorporating tech startups in Singapore
If you fancy your chances to be the next Facebook or Google from Singapore, here’s a step by step guide to the processes you need to go throughBy Cheryl Lee 21 Aug, 2014
Singapore is already the playground of Asia — a preferred destination of foreign investors and entrepreneurs to work, live and play. Now the government here has decided to develop Singapore into the world’s first truly “Smart Nation”.
The Infocomm Development Authority of Singapore (IDA), which is the government’s premier agency for technical/technological sector “is seeking to build an innovation driven economy where technology startups play a core role in injecting the necessary innovation and vibrancy into the tech ecosystem”. That’s why the focus in the city-state has turned to home-grown tech startups, which are able to scale globally and generate valuable knowledge-based jobs.
So if you’re a tech genius looking to be the next Facebook or Google from Singapore, what should be your considerations, what are the processes you need to go through, and what are salient points you should always keep in mind?
Below, we present a comprehensive to-do guide on starting a tech company in Singapore.
Why start another tech company?
There are several factors to consider before making that call.
First is to determine if there’s a demand potential in the core technology, which you plan to develop, across markets and product opportunities. Then, identify the competition or other companies offering similar solutions. In the era of mergers and acquisitions, considering the likelihood of existing companies licensing the technology is also important.
Also, look for available avenues for raising funds and grow the business. If likely investors are identified, gauge the level of their commitment and involvement.
Finally, experience, expertise, and enterprise nature of the startup’s executive team is the core determining factor in the success of a tech startup.
Now that you have decided to be a tech startup in Singapore, comes the minute details and preparation of the business blue-print. Following questions will aid in that:
1) What are the risks associated with this startup? Does the technology have clearly defined applications and a definable market?
2) Will the invention be a disruptive technological innovation? If not, then it fits into which category?
3) Who will own the intellectual property (IP) rights?
4) How soon the first commercial product can hit the market?
5) What role will the founders (if more than one) play in the existing set-up, as well as in the long run?
6) Whether the startup will be a small yet sustainable business, grow as a company, will position itself for acquisition, or will go public?
7) What will be the initial valuation of the company and will private investments be needed for future growth?
When you are ready with all the answers, follow the below steps diligently.
Six steps to launch
Step 1 – Approach a company formation specialist to discuss your invention and ways to protect the intellectual property (IP). The specialist will also help you in deciding whether a startup company is a good option. And if it is, out of the five available options in Singapore, which type of business entity would be the most suitable for your business, is an important consideration too.
Step 2 – Work with the incorporation specialist to file a patent application on the invention before it comes public. As the major asset of a tech startup is its IP, neglecting this step may damage your future profitability.
Step 3 – Network with like-minded entrepreneurs, review ideas with potential investors and evaluate the commercial aspects with targeted customers.
Step 4 – Plan your business in detail by developing an understanding of the competition, funding needs, road-map of productisation, and profitability.
Step 5 – If the startup is assisted by an incubation centre, funded either by the government or private entities, make sure to negotiate the license or option agreement. A license agreement provides a company the right to commercially use intellectual property such as a patent or copyright, while an option agreement provides a company a time-limited right to obtain a full license agreement by “exercising” the option to obtain this license.
Step 6 – The final step is to pursue funding full throttle as commercialising technology typically requires external capital. Apart from the usual fund raising methods adopted by startups world-wide such as equity fund raising, angel investors, private financing, and venture capitalism, there are various government financing schemes available for tech startups in Singapore.
Singapore specific aids for tech startups
Accelerator: As part of IDA’s Smart Nation strategy, the agency and its investment subsidiary, Infocomm Investments Pte Ltd (IIPL), groom high growth tech startups at the seed and early stages through partnership with the industry — both local and overseas — to run accelerator programmes.
“The accelerator programme provides promising tech startups with intensive mentoring and targeted advice from a network of successful entrepreneurs, domain specialists and investors. It culminates in a demo day where founders get an opportunity to pitch to investors and CEOs who are seeking promising startups for their businesses,” informs IDA.
IDA Labs: Another initiative is the IDA Labs, which are physical lab spaces for individuals, companies and government agencies to collaborate, generate new ideas, develop new technologies and test out new concepts.
Accreditation@IDA: Third and final initiative by the IDA is called Accreditation@IDA, which is aimed at accrediting innovative Singapore-based technology product startups to establish their credentials and position them as qualified contenders to government and large enterprise buyers.
Technology Enterprise Commercialisation Scheme (TECS): TECS is an initiative by SPRING Singapore, which aims to catalyse the formation and growth of tech startups based on strong IP and a scalable business model. Under this, SPRING provides early-stage funding for R&D efforts towards the commercialisation of proprietary technology ideas.
IP registration under PIC: The Singapore Government has also enhanced the Productivity and Innovation Credit (PIC) scheme to allow IP in-licensing costs incurred to qualify for PIC benefits.
The costs to register patents, trademarks, and designs can qualify for 400 per cent tax deduction now. Till 2015, such companies also enjoy a PIC Bonus, which is a dollar-for-dollar matching cash bonus of up to US$15,000 given on top of the 400 per cent tax deduction.
Important note for future technopreneurs
Often, a tech genius while dreaming about launching the next “in-thing” of the tech world, overlooks an important aspect of being a startup — the shareholders’ agreement.
This agreement defines the relationship between shareholders and specifies their respective rights and obligations. A shareholders’ agreement does not only look at how the company is managed, but it also sets down guidelines for eventualities like say, future fund raising (including shareholder loan) and dilution, dividend policy, breach of obligations by shareholders, protection of minority shareholders, death of a key shareholder etc. One of the most important points pertains to the “controlling rights” of the company.
It’s always advisable to protect your interests and have “controlling rights” of the company if you are the main brain behind the idea. Consult a company incorporation specialist in Singapore to know in detail how it can be done.
Particularly where there are more than two shareholders, or where there is a minority shareholder, provisions restricting management may be an important protection mechanism for those who can be out-voted. Typically, the shareholders’ agreement will provide that certain decisions require unanimous approval and others a specified percentage in excess of 50 per cent.
Also, make sure that the agreement provides the clause for default. This means that certain acts or omissions by a shareholder can be considered as a breach of the agreement and result in special rights being conferred on the other shareholders.
An ideal but unusual example of a shareholders’ agreement for tech startups is what Mark Zuckerberg, Facebook’s Founder and CEO, struck with some key investors during the social networking giant’s early years.
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Before Facebook went public two years ago, Zuckerberg, while owning only 28.2 per cent of the company’s shares, controlled a majority of its voting rights. This was because some of the company’s most powerful shareholders had ceded their voting rights to him by giving an “irrevocable proxy”.
According to the Faceboook’s Securities and Exchange Commission (SEC) filing in the US in 2012, the additional “shares subject to voting proxy” gave Zuckerberg an additional 30.6 per cent of the voting power, leaving him with a total of 56.9 per cent of the shareholder voting power and an absolute control of the company’s decision-making.
Ideally, this is what every tech startup should strive for. Or else you may face the fate of one of Singapore’s better known tech faces, Firdhaus Akber, who founded streetdirectory.com.sg — an online web mapping and business directory service — in 2000.
Just after three years of operations, when the company’s sales were very good and it had expanded its businesses in neighbouring Malaysia and Indonesia, Akber was voted out of streetdirectory.com.sg. The official reason given was that the company’s board felt Akber not contributing enough to the company.
But as luck would have it, he re-joined the company a year later, when one of the co-founders wanted to sell his shares and move on to other ventures. Akber bought the co-founder’s percentage and came back to the board. Not everyone may be that lucky though. Thus, it’s always prudent to protect your interests at the stage of company incorporation itself.
Remember, a shareholders’ agreement can be a cost-effective and efficient way to minimise disputes between shareholders including future investors and may come in handy in the longer run.