Glasgow Tech Week - is it worth the risk for technology businesses to use legal templates?

It’s Glasgow Tech Week, and in the second of our series of insights for the tech sector, we look at the use of legal templates.

We live in a digital world which values speed and efficiency. Therefore, it is no surprise there are multiple websites and platforms which offer templates for legal documents instead of professionally educated lawyers with years of experience to draft such documents. While using these legal templates and documents may seem attractive, there are many risks and problems this can create. While technology has no doubt increased the speed and efficiency of many processes in the legal sector: emails, online data rooms, virtual meetings, submissions for Companies House, DocuSign, etc., there are some things that cannot be rushed or produced efficiently solely through technology.

Before we mention the reasons against using templates, it is important to consider why and when templates seem to be appealing in the first place, so we can then compare these benefits to the risks. Firstly, using online templates can be quicker, as all you have to do is download a document from a website. Secondly, there are financial advantages to using templates as some websites provide them for free or low cost. We can understand why that can be attractive and, in some instances, templates may well be reasonable.  Examples of where templates could be useful can be in areas such as simple IP assignations, junior employment contracts or confidentiality agreements.

However, there are certain risks that come with using templates for more complex issues particularly areas relating to share capital, shareholders agreements or share options for employees. We’ll explain some of the issues we’ve seen recently with well-known platform documentation and how template documentation can cause significant problems when raising equity and/or selling your business.

One of the biggest disadvantages of using templates is they can be generic; they are not tailored to your business and may be lacking certain provisions your business needs. We also often see the wrong document has been used completely.  These platforms allow founders to think they know what they need and then, through algorithms, provide a set of documents.  With most platforms, these documents are not then formally reviewed – they are just issued to the business.

The details are important when drafting documents that will become legally binding. In addition to this, there is nobody to walk you through, explain and help you understand the documents.  It’s common to find that entrepreneurs misunderstand or know what is in their template documentation when the documentation does not say what they think it says.  Many documents create obligations that you must understand so you can carry out these obligations. If these obligations are not carried out, you could be at risk of breaching the contract created.

Another issue is that you are not aware of who is drafting these templates. How do you know you can trust the contents of the templates? It is also important to note the law is not stagnant, it changes and evolves with societal and economic changes. You could be using an out-of-date template which is inconsistent with today’s law or more commonly, is governed by a different jurisdiction than you require. This could lead to a variety of legal problems.

In addition, you need to consider whether the document has been signed properly. Some documents need to be witnessed to be legally binding, which a lawyer would be able to inform you of, but a template may not. Using a lawyer, rather than a template, may help avoid legal ramifications and possibly save you having to spend more money on future legal disputes due to badly drafted documents.

Here are some real-life examples of recent issues for technology businesses:

• A fintech company terminated the employment of a senior employee. The leaver provisions in the shareholders’ agreement and articles of association were not tailored for the specific situation and the employee was not treated as a leaver, therefore retaining his shareholding. The company incurred significant expense and stress dealing with the ex-employee, and it delayed an equity investment while the issue was resolved. There was concern at some points as to whether the investor would go ahead with their investment at all but thankfully, it was only a delay.
• A health tech company used a platform to issue growth shares to advisers and consultants as the platform told them that the articles of association included provisions that allowed the company to buy back the shares if an adviser or consultant left the company. The articles did not provide for this so, despite having paid the platform for the articles of association, they also then had to pay further legal fees to update them to deal with the company’s particular grouping of growth shareholders.
• A software company used a platform to prepare a full set of EMI documents and also deal with all tax notifications (or at least purported to). During diligence by a foreign buyer, it transpired that the notifications had not been made correctly and there were also questions over the valuation for EMI purposes. The buyer reduced the price being paid.
• A tech company believed they had no IP issues as they had confidentiality agreements in place with all their developers. A platform provided this advice. What they needed was IP assignations from each of the developers transferring the IP across.  This is critical for any investment and/or exit.

Essentially, the only substantive benefit from using online legal templates is time and initial costs. In the long run, the costs of dealing with any problems can be significantly higher. Do you think these perceived benefits are worth the risks for your tech business?