How Startup Founders Can Avoid Legal Pitfalls Before Seeking Investment

Startup founders often overlook legal foundations until it’s too late—when investors demand due diligence. According to Adit from MDI, Telkom’s venture arm, legal issues are among the top reasons startups fail, even after securing market fit and funding. These challenges aren’t just bureaucratic hurdles; they can derail entire deals or lead to personal liability. Founders must act early to avoid costly surprises.

What Are the Most Common Legal Challenges in Early-Stage Startups?

Adit identifies eight key legal risks that frequently derail startups during due diligence:

1. Poor co-founder selection and lack of formal agreements
2. Weak or missing intellectual property (IPR) protection
3. Inadequate data privacy compliance
4. Unlicensed operations in regulated sectors like fintech
5. Misalignment with company purpose and governance
6. Conflicts of interest among founders and directors
7. Failure to register shareholder changes with the government
8. Use of informal or undocumented agreements

These issues may seem minor at first, but they compound over time. A single unresolved IP dispute or unregistered investor can invalidate a funding round or block an acquisition.

Why Is a Co-Founder Agreement Essential?

"You must be precise in choosing your co-founder. Often, disagreements arise later, and without a formal agreement, the outcome is uncertain."

Many founders rely on trust rather than contracts. But trust breaks down under pressure. A co-founder agreement establishes clear roles, equity splits, vesting schedules, and exit procedures. Without it, a departing co-founder can claim ownership of technology, code, or business ideas—especially if they were the technical lead.

"Hati-hati ketika keluar, kenapa? Ketika Anda keluar dan mendapatkan pendanaan, kemudian ternyata ada teknologi yang khas gitu kan, dan ternyata yang keluar tuh CTO-nya gitu. Dia punya teknologinya gitu, hati-hati."

A former CTO who leaves without a proper exit clause may later challenge the company’s right to use their code. This risk is especially high if the founder contributed the core IP. A co-founder agreement prevents this by defining ownership from day one.

How to Protect Intellectual Property and Data?

"Kalau misalnya teman-teman teknologinya memang khas, IPR-nya tolong dijaga benar-benar."

Startups with proprietary technology must register their IP—patents, trademarks, and copyrights—early. This includes source code, algorithms, and branding. Without registration, the company may lose legal standing if someone else claims ownership.

Data protection is equally critical. If the startup collects user data, it must comply with Indonesia’s data privacy laws. Failure to do so can result in fines or regulatory action, especially if the startup operates in fintech or health tech.

"Jangan sampai Anda diban sama OJK. Begitu sampai Anda sudah lewat pendanaan, dapat funding, ternyata Anda enggak berizin. Itu bahaya sekali."

Operating without a license in regulated sectors can lead to immediate shutdowns. Founders must verify whether their business model requires a license from OJK (Financial Services Authority) or other regulators.

When Should Founders Hire Legal Counsel?

"Kalau agreement-nya sangat material dan itu membutuhkan yang hal yang rumit, itu Anda perlu didampingi oleh penasihat hukum."

Not every agreement needs a lawyer—but material ones do. This includes:

• Customer license agreements (especially for B2B software)
• Investor agreements involving large sums
• Joint ventures or partnerships
• Contracts with third-party vendors handling sensitive data

A simple online form may seem sufficient, but it can become legally binding without proper clauses. Legal counsel ensures that agreements include:

• Data protection clauses
• Jurisdiction and dispute resolution terms
• Termination conditions
• Liability limitations

"Takutnya nanti ketika ada hal tertentu, gugatan dan sebagainya menjadi bermasalah, bisa jadi digugat, bisa jadi dibangkrutkan kadang-kadang."

Without legal review, a poorly drafted contract can expose the company to lawsuits or bankruptcy.

What Are the Three Core Governance Bodies in a Startup?

"Untuk menjalankan perusahaan itu ada tiga organ yang bertanggung jawab. Pertama adalah BOC, BOD, sama RPS pemegang saham."

Under Indonesia’s Company Law (UU Perseroan No. 6/2007), only three entities can be held legally accountable:

1. Board of Directors (BOD) – Responsible for day-to-day operations
2. Board of Commissioners (BOC) – Oversees the BOD and ensures compliance
3. Shareholders (RPS) – Own the company and approve major decisions

No other party—incubators, mentors, or investors—can be held liable for the company’s actions. This means founders must uphold fiduciary duties and avoid conflicts of interest.

"Jangan sampai Anda mendirikan perusahaan untuk memperkaya diri sendiri. Itu enggak boleh."

Founders who use company funds for personal gain risk personal liability. The law holds them accountable even if the company is incorporated.

Why Is Shareholder Registration Critical?

"Pemegang saham ini selain kita bikin list-nya, nanti juga didaftarkan di Kemenkumham."

Equity ownership must be formally recorded with the Ministry of Law and Human Rights (Kemenkumham). This includes:

• Initial shareholder list
• Any changes in ownership
• New investors joining the company

"Kalau dia enggak bisa membuktikan bahwa share-nya itu adalah share-nya investor yang itu, dia akan kalah."

If an investor’s stake is not registered, they have no legal claim. Even if money was invested through a founder, the law recognizes only the registered shareholders. This is especially dangerous if the startup grows into a unicorn.

"Kalau nanti founder-nya berniat tidak benar, gitu kan. Tapi di mata hukum dia benar. Kenapa? Karena secara hukum nanti pemegang sahamnya atas nama founders."

An investor who funds a startup through a founder’s name has no legal standing unless their ownership is registered. This creates a high-risk scenario for both parties.

When Should Agreements Be in Writing?

"Makanya butuh yang namanya tertulis. Dan notaris itu sebenarnya untuk hanya untuk meregister aja."

While oral agreements can be binding, they are nearly impossible to prove in court. Written agreements are essential for:

• Proving intent and terms
• Resolving disputes
• Supporting legal claims

Notarization is not required for all agreements—but it is necessary for certain documents like shareholder agreements or real estate contracts. The notary’s role is to verify the existence of the agreement, not to draft it.

For customer agreements, Adit advises using offline (hard copy) documents in Indonesia due to legal requirements. However, the content can be digital—just ensure the final version is signed and stored securely.

Key Takeaways

• Draft a co-founder agreement early to prevent disputes over equity and IP.
• Register all intellectual property and comply with data privacy laws.
• Never operate without a license in regulated industries.
• Register all shareholders with Kemenkumham to protect investor rights.
• Seek legal counsel for material agreements to avoid future liability.