Startups in Vietnam need to prioritize legal counsel from formation: shareholder structure, vesting, IP, fundraising, and founder protection.
This article summarizes the most important legal issues startups in Vietnam need to address early, based on VDD LAWYERS' practical experience.
1. Shareholder Structure and Vesting
Most startups start with multiple co-founders sharing equity. However, reality often sees members leaving after 1-2 years, taking equity they haven't fully earned. This is the biggest issue that destroys many startups.
Solution: vesting mechanism — shares are allocated over time. Common structure: 4-year vesting with 1-year cliff (no vesting in first 12 months, then monthly/quarterly vesting). If a founder leaves before fully vested, unvested shares return to the company.
2. Founders Agreement
Most important document in early stage, governing:
- Each founder's equity percentage and vesting schedule
- Specific roles and responsibilities
- Decision-making mechanism (regular vote, supermajority)
- Rights and obligations when leaving
- Non-compete clauses during and after departure
- IP ownership — all creations in work belong to company
- Dispute resolution mechanism
3. Intellectual Property — Startup's Most Valuable Asset
For tech startups, IP is the main asset. Address from day one:
- Trademark registration: brand name, logo must be registered within first few months
- Source code ownership: all developers (including freelancers) must sign NDA and IP assignment
- Patents: consider patenting major technical inventions
- Trade secrets: implement confidentiality policy, sign NDA with all employees and partners
- Content copyrights: articles, videos, marketing images need clear ownership
4. ESOP — Employee Stock Option Plan
To attract and retain talent, startups typically allocate 10-20% of equity for ESOP. Legal issues to address:
- ESOP legal structure: in Vietnam typically through joint stock company
- Employee vesting: similar to founders, usually 4 years 1-year cliff
- Strike price: option exercise price
- Trigger events: when options activate — IPO, M&A, deadline
- Tax: handling personal income tax when employees exercise options
5. Fundraising — Term Sheet and Due Diligence
When raising from angels, VCs, startups encounter complex legal documents:
- Term Sheet: summary of investment conditions, non-binding but sets foundation for official contract
- SAFE / Convertible Note: popular early-stage investment instruments
- Share Purchase Agreement (SPA): official share purchase contract
- Shareholders Agreement (SHA): agreement after investor enters
Key terms requiring careful negotiation:
- Liquidation preference: priority payment at exit
- Anti-dilution: investor protection from dilution
- Drag-along / Tag-along rights: rights to force or follow sale
- Board composition: board structure post-investment
- Veto rights: investor veto on major decisions
- Information rights: rights to receive periodic reports
6. Choice of Entity
Most startups should establish Joint Stock Company (JSC) from start instead of LLC because:
- Easy to issue shares when fundraising
- Can have ESOP
- Can IPO later if successful
- More transparent structure for investors
Downside is slightly more complex procedures than LLC, but worth the long-term investment.
7. Tax Planning From Early Stage
Startups should strategically plan taxes from start:
- Identify industries with tax incentives (high-tech, high-tech agriculture)
- Register in areas with incentives (high-tech zones, economic zones)
- Holding structure if planning international expansion (Singapore is common)
- Transfer pricing management if transacting with foreign related parties
This article is for reference only. Please contact a lawyer for accurate advice on your specific startup situation.
Frequently Asked Questions
Should startups engage legal counsel from formation?
Yes, especially startups with multiple co-founders or fundraising plans. Initial cost (VND 10-30 million for founders agreement and basic setup) is very small compared to later risks. Many startups only hire lawyers after disputes — usually too late.
Is vesting really necessary when all founders are close friends?
Yes, the closer the friendship, the more necessary. Because when relationships break later (very common in startups), no vesting leads to bitter disputes. Vesting is insurance for both staying and leaving founders — ensuring fairness by actual contribution.
Should we register trademarks immediately upon founding?
Register as early as possible, at least the main brand name. Vietnam applies "first-to-file" — first registered gets protection. Many startups had competitors register their names first, causing major losses. Registration cost is very reasonable (VND 3-5 million/mark).
What equity should founders retain after Series A?
Depends on stage and goals but general rule: after Series A, founder team should retain minimum 50-60% for control. After Series B-C may go to 30-40%. More important than percentage is voting structure and special rights retained in charter.
Should legal counsel accept payment in equity instead of cash?
Some law firms accept partial payment in equity (equity for legal services) with early-stage startups. This is win-win: startup saves cash, lawyer has upside if company succeeds. However, clearly agree on valuation and vesting similar to employees.