Formation To Funding: Legal Considerations for Tech Startups in Vietnam
Vietnam’s technology startup ecosystem has experienced tremendous growth. With a supportive business environment, access to talent, and a burgeoning local market, Vietnam is an attractive venue for entrepreneurs and investors. It is crucial for startups to ensure compliance, protect their interests, and foster sustainable growth. Some entrepreneurs may delay compliance with the rules until their business is commercially successful. But, to protect achievements, putting the business on a commercially and legally sound foundation is important.
Company Formation and Registration
- Choosing the Right Legal Entity
The common mechanism is to form an offshore entity which parents the Vietnamese entity. The most common Vietnamese entity is the limited liability company (“LLC”). A joint-stock company (“JSC”) can be a less common option. Each legal entity has its advantages, disadvantages, and specific legal requirements. For instance, LLCs, the most common choice, offer flexibility and simpler governance structures, while JSCs are suitable for larger-scale operations, employee stock ownership plans (“ESOPs”), public listing and accessing capital markets. Startups should evaluate their business needs and consult professionals to determine the most suitable legal entity for their venture.
- Registration and Licensing
Registering a technology startup in Vietnam involves several steps. The process includes obtaining an enterprise registration certificate (“ERC”) [and an investment registration certificate (“IRC”) if there is foreign ownership], tax registration, and any required sector-specific licenses or permits, depending on the nature of the startup’s activities – for example, a special license is required to operate an e-commerce platform. Professionals can often provide legal guidance to make sound business decisions.
Intellectual Property Protection
Intellectual property (“IP”) protection is crucial for technology startups, as it safeguards innovations and establishes competitive advantages. It’s important to understand the application process, legal requirements, and the scope of IP protection in Vietnam. In Vietnam, startups can seek copyright protection, patent protection for inventions and register trademarks for their brand identity. Professionals can also be helpful when IP is involved.
Software is often the key asset of a startup. Copyright protection is automatic in Vietnam. It arises upon the creation of original works. But who actually owns the software? This can be a matter of discussion. Voluntary registration provides evidentiary benefits in case of disputes. Startups should consider registering their software, digital content, and other creative works to enhance IP protection. Additionally, implementing robust internal measures to protect copyrights is essential, such as using appropriately drafted licensing agreements and enforcing data security protocols.
Employment Law and Labor Contracts
As companies grow, they require additional human resources. Hiring employees entails obligations and requirements under the Labor Code. Startups must work with local labor authorities, comply with social insurance and labor tax obligations, and adhere to employment contract regulations. Additionally, employing foreign nationals has specific visa and work permit requirements.
A common employment consideration is whether to create an ESOP. ESOPs may be created at the beginning or may be created later when the company has achieved some success and wishes to retain or attract employees. ESOPs are regulated and when they are issued by a foreign parent, they should be documented and registered with the State Bank.
- Labor Contracts and Employee Rights
Labor contracts are legally binding agreements between employers and employees. Startups should familiarize themselves with the essential components of a labor contract in Vietnam, including terms of employment, job descriptions, salary and benefits, working hours, leave, and termination procedures.
Data Protection and Privacy
- Overview of Data Protection Laws
With the increasing reliance on data-driven technologies, a tech startup will need to prioritize protection of data it gathers and uses. The rules cover customers, suppliers and partners, the public, and employees. Vietnam has implemented laws and regulations to safeguard personal data, including the Law on Cybersecurity and the newly issued Personal Data Protection Decree. Startups will need to be aware of the rules for data collection, processing, storage, and transfer. Most of Vietnam’s data protection rules are consistent with international standards.
- Best Practices for Data Protection
Startups can adopt several best practices to ensure compliance with data protection laws. Steps being used in the market include implementing robust data security measures, such as encryption and access controls, conducting regular data privacy impact assessments, obtaining consent from individuals for data collection and processing, and establishing data retention policies. Startups can also develop data protection and privacy policies, educate employees on their responsibilities, and provide training on data handling and security protocols. A legal data audit often proves invaluable to a company collecting and processing the personal data of its users, employees, etc.
Funding and Investment
- Investment Regulations
Securing funding is often the critical milestone for startups. There are a few restrictions, but generally funding rules are permissive. Importantly, there are incentives for certain sectors (eg, high-tech manufacturing). Compliance with regulations makes it easier to attract domestic and international investors.
In addition, several organizations and institutions have been created for the purpose of supporting the growth of startups. One is, the National Innovation Center (NIC), which was established under Decision 1269/QD-TTg. The NIC plays a central role in Vietnam’s efforts to foster the local startup ecosystem. It offers training and assistance to emerging enterprises to forge partnerships with global technology giants such as Amazon and Google.
- Contracts and Agreements with Investors
When entering into investment agreements, startups should carefully review and negotiate the terms to protect their interests. Key aspects to consider include valuation of the startup, the equity structure, rights and obligations of the parties, including key employees, exit mechanisms, and dispute resolution mechanisms. Again, experienced professionals can help.
Tech startups in Vietnam have immense potential for growth and innovation. However, navigating the landscape is essential for startups to thrive in a competitive environment. By understanding and addressing the considerations discussed in this article, startups can establish a strong foundation, protect their intellectual property, comply with regulations, safeguard data privacy, and, most importantly attract investment.
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