Is it worth the risk using legal templates?

We live in a digitalised era that values speed and efficiency. Therefore, it is no surprise that there are multiple websites and platforms that offer templates for legal documents instead of lawyers who are professionally educated with years of experience to draft such documents. While using these legal templates and documents may seem attractive, there are many risks and problems that this can create.

Before we mention the reasons against using templates, it is important to consider why 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 monetary advantages to using templates as some websites provide low cost or free templates. We can understand why that can be attractive.

However, there are certain risks that come with this approach. This note will 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 that they are generic; they are not tailored to your business and may be lacking certain provisions that your business needs. We also often see that completely the wrong document has been used.  These platforms allow founders to think 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.

When drafting documents that will become legally binding, the details are important. 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 that the law is not stagnant, it changes and evolves with societal and economical changes. You could be using an out-of-date template that isn’t consistent with today’s law or more commonly, is governed by a different jurisdiction than you require. This could lead to all kinds of legal issues and 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 in future legal disputes due to badly drafted documents.

Here are some real examples of recent issues:

• Fintech – when an employee’s employment was terminated, the leaver provisions in the shareholders’ agreement and articles of association did not catch 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, plus 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.
• An apparel company purported to appoint additional directors using a platform that communicates with shareholders. However, the platform did not follow the correct legal steps and the whole process had to be unravelled, leading to a dispute among shareholders and directors. This will be an issue with a future buyer, and we are expecting an indemnity being included in any purchase documentation.
• A healthcare 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 documentation and also dealt 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 so as a result, 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 of their developers. A platform had advised that is what they needed.  What they actually 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, costs of dealing with any problems can be significantly higher. Do you think these perceived benefits are worth the risks?