Edtech's Real Buyers, Startup Law Traps and Why Founders Need Better Equity Deals - E593
“So the first agreement that I have to talk about is what I call the founder's agreement, and this is quite key because founders often have a very messy birth process or conception process for what the startup looks like. So what I mean by that is that founders are often meeting new founders, they're hiring new employees, they're attracting customers—they are often doing this without a company. So there's no legal company, there's no legal agreement technically, so it may be two people working in a room and they're just saying ‘I want to work with you.’ And sometimes those teams break up, and then a new founder comes in or a new employee comes in. So what often happens is that the founder's agreement is quite key.” - Jeremy Au, Host of BRAVE Southeast Asia Tech Podcast
Jeremy Au breaks down the hidden risks in Southeast Asia’s edtech sector and early-stage startup law. He explains why edtech often fails to scale, how founder disputes emerge without early agreements, and why choosing the right jurisdiction like Singapore matters for survival. From investor alignment to taxation nightmares, this episode guides founders through the hard truths of building legally sound and scalable ventures.
01:00 Misaligned Edtech Incentives: “Kids use it. Parents, schools, or governments buy it.” Jeremy explains how edtech startups suffer from a split between the user and the payer, complicating both growth and retention.
03:49 Passion Subsidy and Investor Challenges: The sector attracts too many well-intentioned builders, creating a surplus of talent and capital but fewer underpriced investment opportunities.
10:57 Founder Agreements and Equity Clarity: Jeremy outlines how early documentation, even in a simple Google Doc, can prevent future equity disputes, especially when teams evolve before incorporation.
12:37 Tax Burden in the Philippines: He warns that taxing startups on gross revenue instead of profit creates startup-hostile environments and pushes founders to incorporate in more favorable places like Singapore.
(00:57) Jeremy Au: Okay, so what are common challenges for investing in (01:00) education tech?
(01:00) Education, tech has three major issues. The first is the buyer is not the customer or consumer. So in other words. I think kids in education are the people who are often consuming, however, the buyer is the parent or the school or the government. And so these can be very different dynamics.
(01:18) So it's like a nonprofit, right? It's the beneficiary is a prisoner who wants to go back to the workforce, but the primary person who pays for this is the government, right? In terms of the cost of prison or rehabilitation so forth. So there's a difference in that incentive structure versus the value, right?
(01:34) Versus if I was selling you a luxury handbag, that is very clear, right? You are very happy to have luxury handbag and I'll pay for it because either capital for it. So it's a much simpler purchase process, but education tech is one of those that tends to be there. The second problem tends to be there is that obviously it's not necessarily very easily, it is not homogenous. So what I mean by that is the Singapore education system is very different. The Indonesian education system, (02:00) which is very different from the Vietnamese education system. And yes, I think obviously we want kids to learn math and English and so forth, but there are significant curriculum and legal definitions about what's available, what's not available.
(02:13) So for example is a lot of education tech has been supplementary or complimentary to school. If in Singapore, for example you can homeschool your kid but you have to make sure that your kids pass Singapore local exams, right? For example. Now. And also if you think about it, your competitor and or your incumbent is a local school, which is effectively free, right? For locals. 'Cause it's subsidized by everybody's taxpayer money, right? So I think it's a social contract that people have. So what I'm trying to say here is that, when you have a tutoring agency, et cetera you can't replace the school easily, but you had replace the school, then you need somebody to take care of the kid, et cetera.
(02:49) But if you take a giant step back, actually you can imagine that startups and the latest technology devices can actually provide very fast or accelerated learning outcomes for kids. So to some (03:00) extent, the classic school model, having 30 kids in a class versus having a super genius AI that is reading your kids' eyeballs while they, answer questions on math, on a screen, obviously is one-to-one algorithmic training versus a group situation.
(03:16) Probably, and I think you see in the US a lot of historically homeschooling was done for personal or religious purposes, but now you see that a lot of high performers are starting to work on homeschooling to use the latest technology 'cause they believe they can get better outcomes for their kids who may be who may want a more enrich or more accelerated curriculum.
(03:35) So I think that's number two. And now of course, the last problem that we have here is that I think that there is quite a lot of a passion subsidy for education tech. So obviously there's a lot of people who are subsidizing it in the sense that people want to work on it because it's a.
(03:49) It's a worthwhile and problem. So it's a subsidy to the sector because everybody wants to help out and provide support. But from a investment returns perspective, actually, if there's an (04:00) oversupply of talent or capital to for space, then there's less opportunity to fight for you to find underpriced opportunities in a space.
(04:07) So in other words some tougher problems that are less compelling or less purposeful may have less talent and there may be more arbitrage opportunities or investment opportunities for upside potential from a VC perspective. So yeah, so that's the three things. I think generation one of startups back in the 1970s, 1980s, 1990s, everybody would've told you that government support is very key for startups.
(04:29) So I think you have looked seen. We talked about how ARC, which was the founder for venture capital was actually US government program. Obviously we saw dapa the American Defense Agency and research side do a lot of subsidies. So I think government grants were super key. I think everybody would've agreed on it.
(04:47) I think the last two thousands to 2020 where a lot of the internet was moving to software I think that there was a reversion to the thinking where people started thinking that government grants are not (05:00) supportive or, it needs to be a much more. Competitive or government grants are not supportive.
(05:04) But I think there has been a drift back maybe in the current geopolitical component where governments recognize that startups are key for bringing innovation from universities to commercialization towards the industrial capacity and productivity of the whole country. So for example, if you look at the US for example, Harvard, MIT obviously they do a lot of research at a PhD level and that they have a lot of support from the government funding.
(05:29) And then one of the things they have to do is they actually have a licensing and commercialization office where they are looking for startup founders to take that technology and negotiate agreements or licensing agreements, or take the technology to market, right? And so both of these programs you can think about it, are subsidized by a government.
(05:44) One is the basic science of research being subsidized by a government at another level. The universities are being subsidized through, being classified as a nonprofit so they don't pay taxes, they receive a lot of subsidiary support to support that as well. I think government grants will continue to not only be a feature for (06:00) startup activity but will continue to accelerate actually as a percentage as countries focus on that.
(06:06) So I'm gonna go through the legal side. When we think about navigating a solid landscape, I think we need to think about three things. Is that, first of all, there's obviously the founders and there's investors, but I think we need to be mindful of, three major principles.
(06:19) I think the first major principle is that founders do have a duty and fiduciary duty as officers of the company to do what's best in the interest of the company. And investors who come in, obviously to invest in it also have a shareholder responsibility to act in the best interest of the company.
(06:34) At the end of the day, a startup is still a company. They have to. Be thoughtful. They have a good faith in the decision making. They should not misrepresent their comp, their company, neither should they, conduct illegal activities as an officer of the company. So as a company that the second thing, of course, is that we had to be aware that is really about risk and reward sharing.
(06:52) So founders in the early days are taking on a hundred percent the risk. And then as a result, they get a hundred percent of the reward, when they first incorporate a (07:00) company. But as investors come in they put money in to capital knowledge time, and as a result, they will take on more risk as well, and return for having more rewards as well.
(07:13) So I think startups have to find that balance where both sides are respected, but it's not overly lean towards one end or the other end. So for example, if it's overly aligned towards investors, then for example, you may find that the startup founders are no longer incentivized or not interested in building company any further because they don't have enough reward or skin in the game for them to keep going.
(07:34) Vice versa. Obviously, there are founders who are acting in the best interest of the founders and not acting as good offices or directors of the company, and so they're not taking care of the shareholders. And that's actually a lot of angst that's happening in Southeast Asia is because this is really the first generation of founders who have to deal and work with this set of parameters.
(07:52) Lastly of course, is that startups are very young. Obviously when a company is a public company that is very large with several hundred million dollar revenue, they can (08:00) all the bells and whistles in terms of shareholder agreements, board directors, checks and balances, et cetera. But there's way too much legal compliance for a company that started, for example, this year.
(08:11) And when a company starts out, there needs to be that thoughtfulness about the company and having the right size of legal compliance and requirements for the right size of the company. And in other words, not choking off their ability to grow and become a home run. And actually that's really quite key because to some extent there is an understanding that startups that are pushing for home run returns may actually have less legal obligations or less reporting obligations that they would for.
(08:39) A same size company, for example, but is not aiming for home run outcomes because the investors are making a decision. Say we want our founders to be spending more time outta the business and pushing as hard as is, and we'd rather give them as much risk, but also give them as much reward as possible so they're motivated, so they're motivated economically to pursue this.
(08:58) But we don't need to use legal (09:00) controls that have a high compliance and reporting requirement that will distract them from actually pursuing the big pot of gold at the end of the rainbow. So I'm gonna walk you through some of the legal agreements, and obviously this is I would say a high level set of parameters across all of them.
(09:15) That's available, but it's not meant to be exhaustive in terms of a very tar and deep conversation. So the first agreement that I've talked about is what I call the founders agreement. And this is quite key because founders often have a very messy birth process or conception process for what the startup looks like.
(09:33) So what I mean by that is that founders are often meeting new founders, they're hiring new employees they're attracting customers but they are often doing this without a company. So there's no legal company, there's no legal agreement technically. So it may be two people working in a room and they're just saying, I wanna work for you.
(09:51) And sometimes those teams break up and then I. A new founder comes in or a new employee comes in. So what often happens is that the founder's agreement is quite key. It's made (10:00) normally a piece of paper or Google document, but basically it's a documentation of the in principle or high level agreements between both parties or three parties about how the reward should be split, but also the roles and responsibilities.
(10:14) And again, it's not a legal agreement in the sense that it's a, there's a, a stamp or whatever it is, but it can be some kind of documentation that's there. And this is often consulted many times. Because there are often disputes that happen afterwards. So it's very common, for example, that when the startups begins to succeed, a lot of former founders may come out the woodwork and say, Hey, I played a role in these early days.
(10:37) I should receive a slice of the equity or upside. And so this agreement, one of the men minimum requirements that you should really cover is two parts, is agreeing that if you leave the company within a certain period of time, you're not gonna get anything. And that the longer you stay in a company, the more equity you get in the company.
(10:57) So these are like the biggest chunks, I would say (11:00) that's most common and most recurring as problems in terms of legal agreement. This, of course, will get drawn up into the next stage which is the, when the company's incorporated. So for example, some founder agreements, they may take one or two years or three years even before they incorporate a company.
(11:13) And one of the things that people have to think about is obviously what kind of company you are incorporating. So for example one of the big ones would be, where's your jurisdiction? Are you incorporating this in Delaware as a US company? Are you incorporating this in Singapore because you're in Singapore or maybe you are, an Indian or Indonesian company you may choose to incorporate in Indonesia, India directly.
(11:33) That being said, the jurisdiction you have obviously as you imagine has big impacts. For example, there are many funds who are American funds that would not invest in Singapore domicile company, but they'll only invest in American domicile companies. So it's very common, for example to hear about Singaporean or Indian companies or Indonesian companies who are re in the US.
(11:54) Two or three years after, setting up because they wanna access American capital, right? And so maybe set up a holding company (12:00) in the US as part of that process, which you can imagine is some work, but it could be justified for the right capital base, right? There are also the converse of that.
(12:08) There could be also different tax implications for that as well. So for example, if you were to set up a company in the Philippines. You are tax based on your revenue and not tax based on your kind of like profits, right? And so that's actually a big problem for a lot of Filipino startups that there, there's a current lobbying by the startup community for that to be redone because you imagine that if you're a startup, let's just say, and year one you're making a billion dollar revenue but you're losing, you're burning $2 million.
(12:37) So your net loss is $1 million by you're being and paying tax on the $1 million of revenue. And let's just say you're paying 10%, then you have a hundred thousand dollars tax bill. At the end of the year, so this would be very, this would be a jurisdiction that be considered startup unfriendly.
(12:51) And that's why you often see that many startups in Southeast Asia actually domicile themselves in Singapore. So Singapore is very much the Delaware for Southeast Asia and South (13:00) Asia. So you imagine that in Pakistan, in Bangladesh, a lot of these companies are also domicile in Singapore because they are able to access the right lawyers who understand the jurisdiction, but also they can tap capital networks that are based in Singapore, comfortable Singapore as a jurisdiction and they can work with accountants and so on and so forth.