Good Faith

for Startups and Tomorrow’s Billionaires

I got tons of email after this post on the other blog. Mostly people just want to gossip, others want to know how small startups can protect themselves against greedy investors.

Well, the short answer is, No, you can’t. Not in Indonesia, or other emerging markets with enforcement and regulatory issues. It applies not only to foreign investors, but also to local ones as well as employee/employer relationships. Startups workers or factory laborers, you’ve very little to bargain with. After all, you, do need the capital (unless of course, you don’t need the capital and keep the company privately closed to yourself).

There are many ways to go around the laws — the legal services industry is only second to the financial services in the US — there are people out there whose sole business is to tell people how to go around laws. So if someone is out to get you, if they can, then they probably will.

Mostly for this simple primal capitalist nature of men, there’s a thing called Good Faith. If you ever signed a corporate document, even the simplest one and in Indonesian, then chances are this thing is relevant.

Below is a description, from Wikipedia with emphasis added:

In contract law, the implied covenant of good faith and fair dealing is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract. It is implied in every contract in order to reinforce the express covenants or promises of the contract.

The first important part is that it is implied. Meaning that it covers the whole thing and contains also the explicit (commercial terms). You enter the agreement — most contracts — in Good Faith, by giving the benefit of the doubt to the parties. The implicit here is that everyone actually intended to carry out the (commercial) objectives spelled out in the contract. You know, like you borrow money, meaning that you intend to return it at some point and not steal them.

So how do you prove good intent? Well, you can’t. Trust is the basic currency of contract and you just need to trust your decision. Only over time and as the agreement matures into execution, you will be able to evaluate those decisions. An investor that might look great and loaded with flashy Powerpoint may turn out to bogus, a producer/partner who boasted outrageous number may not be able to deliver and so forth. People make mistakes all the time.

However, there will be unfortunate times when you will deal with consistently questionable practices. Like failing behind scheduled payment terms — would send alarm bells to banks/creditors, to check what the matter was. Failing in a single incident usually goes into the grace period, or maybe administrative errors, but repeatedly failing to deliver on your commitment will damage your credit over time.

A single case of oversight failure for example, can be explained by (maybe) a lapse of judgement from a Board member or C-level executive, but when the oversight failure extended to a lengthy period and repeated over time, then one might argue that it maybe more than just lapse of judgement. Perhaps, they were not exactly acting in good faith.

By its very nature, the good faith clause contains everything explicit in the contract, including but not limited to its commercial clause. When you can no longer assume good faith, everything else breaks.

So what do you do? Well, common sense dictates that you start with the basic courtesies. Inquiring for more detailed information is always useful. Make such inquiries in writing so you would have references in the future. If you weren’t able to obtain accurate records, then a second source verification might be needed.

In one case in the past when an overseas fund/investor was dissolved, we spent a few weeks chasing the different individuals in different countries and repurchase their investment, because their consent was required for an impending Serie A round. For an Indonesian small startup with limited resources and experience, any such tasks could be rather tiring and quite irritating, but it was absolutely necessary.

Next, you want to make sure that your company operation is not going to be too much disrupted. Make sure whatever mistakes made were remedied and a mechanism in place to ensure that it will not be repeated. Most commonly, when people in the very high level of companies make mistakes, it came from the lack of oversight. So in the future, you want to have a better structure and oversight, to catch any such potential before it becomes a problem.

For internet and technology startup in Indonesia, I’d say this governance issue — corporate and capital structure — is probably the biggest detrimental factor prohibiting startups from growing to the next level. Most companies simply lack the structure to achieve growth or absorb capital

All companies require a good structure to build from and a strong one to accommodate the anticipated dream coming to fruition. You started with good faith and great ambitions, then you build the structure and expand on it. Without it, you won’t ever get anywhere at all.