You’re an entrepreneur who has recently come up with a business concept and are beginning to think how best to monetise your idea. Before you start trading, it’s worth considering how you’re going to structure your business. We appreciate that when time and resources are scarce, legal concerns often take a back seat. However, getting the legal basics right from the start can go a long way in smoothing the road ahead.
Below we set out some practical tips for entrepreneurs to reflect on:
1. Shareholders’ Agreement
If the company is going to have more than one shareholder, it may be advantageous to draft a shareholders’ agreement, which would govern the running of the company, dealing with issues such as the issue and transfer of shares, consent matters and directorships.
We would recommend that prior to the company’s incorporation, discussions take place between the company’s founders as to the company’s share ownership, and that such shares are issued to the founders at the beginning of the company’s life.
If you are creating the company with other founders, it may be sensible to have the awkward/hypothetical questions about the company’s future at the outset (i.e. what happens if one of the founders wishes to leave after a couple of years, or would the founders be open to outside investment in a few years time). Although there is no reason why such matters cannot be discussed in the months to come, it is often helpful to have all the founders in agreement as to how the company will approach such matters in the future.
2. Structuring and Fundraising
You should reflect upon the most efficient tax structure of the venture – for instance, instead of the entity operating as a company, it may be more efficient for it to be run as a limited liability partnership.
It is worth noting that tax reliefs may be available for entities/investors, the most notable of these is the Seed Enterprise Investment Scheme (SEIS). This is designed to help small, early-stage companies raise equity finance by offering a range of tax reliefs to investors who invest in shares in these companies. For instance, income tax relief is available to individuals who subscribe for shares in an SEIS company, and any gain realised on the sale of these shares is exempt from capital gains tax. Due to these significant tax advantages, do consider whether the company can be registered under the SEIS regime.
Although it may be tempting to approach friends or family to see if they want to invest in the company, please be aware that there are strict laws outlining who can communicate such offers. In summary, a person must not in the course of business communicate an invitation or inducement to engage in investment activity unless he is a person authorised by the Financial Conduct Authority (the FCA). Being authorised by the FCA can be a lengthy process.
There are however various exceptions to this rule, such that you will be able to make promotions to, amongst others, investment professionals, sophisticated investors and certain high net worth individuals.
3. Share Options
Having an Enterprise Management Incentives (EMI) options scheme in place is a tax efficient way of incentivising staff. Often many senior employees will not consider joining a start-up (particularly in the technology sector), unless there is a commitment to offer share options in the company. Although the options can be granted to employees at any time, they may only be exercisable on a specific event occurring (i.e. the sale of the company, or a revenue/profit milestone having been reached).
It is common that the service agreements of employees receiving options will contain ‘good leaver’ and ‘bad leaver’ provisions, which relate to the reasons why the employee left the company. Often, employees who are deemed ‘bad leavers’ are penalised, for instance by withdrawing any share options they are entitled to, and being forced to sell their shares at par value.
4. Intellectual Property
Depending on the nature of your start-up, the protection of intellectual property may be crucial to its success. Whilst you can’t protect an idea, you can however protect how that idea is applied, by seeing whether you have a product that can be patented, or registered as either copyright or as a trademark.
Further, consider who specifically owns any intellectual property used by the company. It may be a good idea to ensure that the intellectual property to be owned by the company itself, and not by the company’s directors or shareholders. This will be particularly important for any future investors, who will want certainty as to the company’s rights in relation to the intellectual property it uses. The simplest way to achieve this is to put in place documentation outlining who owns the intellectual property, and where necessary, drafting any assignments/licence agreements.
5. Standard Terms and Conditions
Many companies have difficulties with their customers or suppliers, and without a contract it is more difficult to understand what obligations each party owes the other – instead we have to look at the relevant laws and the course of dealings between the parties. However it may not be cost efficient for you to have comprehensive agreements with each customer that you deal with.
As an alternative, the company should consider putting in place standard terms and conditions, which will regulate its relationships with its customers and suppliers. Having written terms in place helps avoid any uncertainty or any implied terms that may be duly onerous. It may also give the company an advantage in relation to important commercial issues such as delivery of products/services, payment terms and the consequences of breach of contract. These can be fairly simple in their content, and should be no longer than a few sides of A4.
It is important that the company has in place service agreements with its key employees, which will outline, amongst other things, the employee’s salary, restrictive covenants and termination notice provisions.
If the company is going to be engaging non-executive directors or consultants, consulting agreements for these individuals should detail matters such as the number of days per month that they will work for the company.
Before the company even begins to trade consider whether it needs to apply for any particular consents or approvals. Sectors which are heavily regulated include financial services (where often both the company itself and the persons running it may need to be authorised by the FCA) and certain businesses operating within the food industries (overseen by the Food Standards Agency and local authorities).
Further, depending on the nature of the company’s business, various specific rules and regulations may need to be adhered to. By way of example, if you handle personal information about individuals, you have a number of legal obligations to protect that information under the Data Protection Act 1998 – for instance everyone who is responsible for using data has to follow strict rules called the ‘data protection principles’.
8. Running before you can walk
At the outset of the company’s life you should be careful not to commit the company to any long-term liabilities. At this point, the company is in its infancy, and its needs will be difficult to foresee as it continues to grow. You should therefore afford the company with the maximum amount of flexibility by restricting its long term commitments where possible.
An example is office space: if the company is looking to rent an office, consider entering into a lease that is only for 6 months or a year, thereby preventing the company from committing to renting a property for a longer period that is strictly necessary. Even better may be to rent desks in a serviced office, as such contracts can often be terminated on 1 month’s notice.
Joining networks, such as East London’s Tech City may offer you and the company various benefits – you will have the opportunity to meet likeminded people to bounce ideas off, and possibly be put in touch with potential investors. Do be careful and choosy and make sure you join the right networks – there are many networks out there and not all will be appropriate for the company’s needs.
Also, to the extent that networks do not enable you to meet the ‘right’ people, try to approach entrepreneurs directly. They are likely to have made mistakes that you can learn from, and because they were in your shoes not too long ago, they may be willing to give you some friendly advice.
10. Professional Team in Place
Being surrounding by a strong and competent team will not only make your life easier, but will also increase the company’s chance of success. This not only includes the company’s key employees, but also consider putting in place the right set of professional advisers (e.g. accountants and lawyers).
Although the above pointers are not an exhaustive prescriptive list, we hope you will consider the matters raised.
Having been founded by entrepreneurial lawyers, Fox Williams LLP is uniquely positioned to help you set up and grow your UK business. We are experts at advising entrepreneurs and businesses setting up new companies, and have a specialist Start Up team on hand who can assist you with all legal aspects of your venture.
As we understand that budgets are often limited, we are also happy to discuss the services which we can provide on a fixed price basis.