5 Critical Legal Mistakes Malaysian Startups Make (And How to Avoid Them)

Malaysia’s startup scene is booming, with entrepreneurs launching innovative businesses across fintech, healthtech, e-commerce, and beyond. Yet amid the rush to build and scale, many startups unknowingly commit serious legal mistakes. These early missteps can cost founders their businesses — whether through IP theft, messy shareholder disputes, regulatory fines, or unfavorable investor deals.

In this article, we break down five critical legal mistakes Malaysian startups make — and more importantly, how you can avoid them to protect your venture’s future.

1. Failing to Protect Intellectual Property (IP) Early

In the startup world, your most valuable assets are often intangible — your brand, your technology, your content, and your ideas. Yet many founders delay or neglect protecting their intellectual property, exposing themselves to theft, copycats, and internal disputes.

Under Malaysian law:

• Trademarks are protected under the Trademarks Act 2019.

• Patents are governed by the Patents Act 1983.

• Industrial designs are protected by the Industrial Designs Act 1996.

• Copyrights (for software, content, designs) fall under the Copyright Act 1987.

Common mistakes include failing to register trademarks early or not having formal IP assignment agreements with employees or contractors. This can cause serious problems when you seek funding or exit.

How to avoid it:

• File trademark applications for your brand name and logo as soon as possible.

• Register any patentable inventions early, especially before public disclosure.

• Execute IP assignment deeds with co-founders, employees, and third-party developers.

• Maintain clear documentation of your IP development.

Protecting your IP isn’t just a formality — it can dramatically increase your startup’s valuation and attractiveness to investors.

2. Poorly Drafted (or Missing) Founder Agreements

Many startups begin with a handshake among friends. But without a formal Founders’ Agreement, even the closest friendships can turn into bitter disputes when money, ownership, and decision-making power come into play.

Key issues a founder agreement should address include:

• Equity ownership and vesting terms

• Roles and responsibilities

• Decision-making authority

• Handling exits or disputes

• Confidentiality and non-compete obligations

Without this, founders risk messy breakups, paralyzing deadlocks, or expensive lawsuits — all of which can derail fundraising or operational growth.

How to avoid it: Work with an experienced corporate lawyer to draft a customized founders’ agreement at the outset. Define ownership, expectations, dispute mechanisms, and exit strategies clearly while everyone is still aligned

3. Ignoring Compliance with the Personal Data Protection Act 2010 (PDPA)

Startups often handle large amounts of user data — whether through apps, e-commerce platforms, or SaaS solutions. However, many founders are unaware that they must comply with Malaysia’s Personal Data Protection Act 2010 (PDPA).

The PDPA regulates how businesses collect, store, and process personal data. Breaches can lead to fines of up to RM500,000 and/or imprisonment or BOTH.

Common PDPA violations by startups include:

• Collecting personal data/sensitive personal information without consent (section 7 of the PDPA, read together with regulation 3 of the PDPA Regulations 2013)

• Not securing customer data adequately (section 9 of the PDPA, read together with regulation 6 of the PDPA Regulations 2013)

• Cross-border data transfers without safeguards i.e. transferring data to countries which do not have data privacy laws substantially similar to the PDPA (section 129 of the PDPA)

How to avoid it:

• Draft and display a compliant Privacy Policy on your website and app.

• Obtain clear consent from data subjects (customers/vendors/employees) when collecting data.

• Implement proper cybersecurity and data handling protocols.

• Understand if your business needs to register with the Personal Data Protection Commissioner (Section 14 of the PDPA)

Data privacy is increasingly a customer trust issue — getting it wrong can cost you both legally and reputationally.

4.Signing Investor Term Sheets Without Legal Review

When a potential investor offers a term sheet, it’s tempting to sign quickly. However, many Malaysian startups fail to appreciate that term sheets — though usually labeled "non-binding" — often contain binding clauses such as exclusivity, confidentiality, or break-up fees.

Common mistakes include:

• Accepting restrictive terms like aggressive liquidation preferences or full-ratchet anti-dilution clauses.

  
  

  Aggressive liquidation preferences means:

  • When investors put money into your startup, they often want a guarantee they'll get paid back first if the company is sold or shuts down. A liquidation preference sets the rules for this

    
    

  • An aggressive liquidation preference means the investor gets back much more than what they put in — sometimes multiple times their investment — before the founders or employees see any money.

    
    

  • Example -- If an investor puts in RM1 million with a 2x liquidation preference, they must be paid RM2 million (double) before you (the founder) get anything if the company is sold.

    
    

  Full-ratchet anti-dilution clause means:

  • When your startup raises new money later (especially if at a lower valuation), early investors don’t want the value of their shares to go down.

    
    

  • A full-ratchet anti-dilution clause protects them by adjusting their shares as if they had originally invested at the new (lower) price

    
    

  • Suppose an investor bought shares at RM10 each. Later, if you sell new shares at RM5 each (because the company’s value dropped), under a full-ratchet, the original investor’s shares are recalculated as if they had paid RM5 too — giving them more shares for free to protect their ownership.

    
    

  • Why it's bad for founders - It heavily dilutes your ownership — meaning you end up owning a much smaller piece of the company

• Overpromising rights to investors without understanding long-term consequences

• Missing hidden obligations or penalties (too common)

How to avoid it:

Always engage a corporate lawyer to review any term sheet or investment document before signing. Understand the commercial and legal implications of each clause — because what you agree to early can significantly affect your company’s future fundraising and exit strategy.

5. Overlooking Sector-Specific Regulatory Compliance

Certain sectors in Malaysia — such as fintech, healthcare, education, and e-commerce — are heavily regulated. Ignoring licensing or regulatory requirements can result in shutdowns, fines, or bans.

For example:

• Fintech startups may require approval from Bank Negara Malaysia (BNM) or Securities Commission Malaysia (SC).

• E-commerce players must comply with the Consumer Protection (Electronic Trade Transactions) Regulations 2012.

  
  

• Educational platforms may need registration under the Private Higher Educational Institutions Act 1996.

How to avoid it:

• Conduct a legal audit of your business model to identify applicable regulations.

• Seek early advice on licensing, approvals, and compliance obligations.

• Factor regulatory compliance into your fundraising and operational timelines.

Ignoring regulations isn’t just risky — it signals poor governance to investors and partners.

Conclusion: Build Legal Foundations Early to Scale Sustainably

In Malaysia’s fast-paced startup landscape, legal mistakes are often overlooked in the race to market. Yet the cost of fixing legal problems later — lost IP rights, founder disputes, regulatory sanctions, or investor exits — can be fatal to a young company.

Treating legal matters as a strategic investment, not an afterthought, gives your startup a solid foundation for sustainable growth, successful fundraising, and eventual exit.

If you are building or nurturing a startup and want to avoid costly legal mistakes, reach out to a corporate lawyer experienced in startups. A little preventive legal work now can save you millions later.

If you're a startup looking for support on your legal needs, drop us an email at rajvin@rajvingill.com or Whatsapp us at 012-6582798 and one of our lawyers will get back to you within 24 hours.