Record numbers of new businesses are setting up amid the Covid-19 pandemic as entrepreneurs show a determination to work their way out of the financial crisis.
The stories behind many of those newly formed businesses is revealed in a special report, Starting A Business In A Pandemic, published by Harper James Solicitors. Here the national law firm, designed to support new businesses from start-up to scale-up, share eight legal considerations that every entrepreneur should be aware of.
1. Founders Agreement
You and your co-founders may start out as best friends, but nothing can sour a relationship more quickly than differences about business.
A founders’ agreement will clearly set out all the answers to essential questions such as: what is the company’s mission and what is your ultimate goal? What are the roles and responsibilities of each team member? And how will equity be owned and when will shares vest? As businesses grow, the formalities tend to multiply and having a clear founders’ agreement will make these formalities easier (and cheaper) to complete.
2. Shareholder and investor agreements
Setting up a shareholders’ agreement can help take your start-up to the next stage. If you are funding your start-up yourself, then a shareholders agreement won’t be necessary. But the moment co-founders are involved, or you have outside participants then you’ll need to be careful how much of the company you give away in return for their contribution. If you anticipate further rounds of investment, future investors’ demands can end up eating a big hole in your own share of the company if you’ve given too much away at the start.
It’s crucial to think about this detail early on. While an investor who takes an active role and a seat on the board may seem like a great idea if they’ve lots of experience, you may find yourself giving up too much control to an outsider in return for funds that you could have borrowed.
Your shareholders agreement should set out a shareholding structure and shareholder rights that are fair for all involved and that represent the true value of the investor to your business. It shall also contain confidentiality provisions and have a process for resolving disagreements.
3. Articles of Association
Every company must have Articles of Association. The purpose is to regulate the rights and duties of every person who participates in the ownership or running of the company, such as its directors and shareholders.
The Articles cover five main areas:
- The liability of the shareholders to the company. Normally this is limited to the nominal value of their shares
- The number of directors, how often they meet, their powers and duties, and how their meetings are run
- Shares and dividend rights, and any other rights attaching to the shares
- Decision-making by shareholders, the annual meeting, voting procedures and dividends
- Administrative detail
Your legal advisor will help you draft your Articles – if you’ve used an agent to set up your company ‘off-the-shelf’, this will have standard or model articles that will likely need amending once your company grows.
4. Attracting investment – the EIS and SEIS schemes
Government-backed schemes such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme are designed to help small, high-risk businesses raise finance for their enterprises. Because they attract tax benefits such as income tax and Capital Gains Tax (CGT) relief, they’re extremely popular. Your company needs to qualify as eligible under the scheme, and you’ll need to use the money raised for a qualifying purpose.
The SEIS allows a funder to invest up to £100K each year, for which they get a 50 per cent income tax break. This is more generous than the EIS scheme, as seed companies are higher risk. Under the EIS, someone can invest up to £1m every year, for which they receive 30 per cent income tax relief. Provided investors hold the shares for a qualifying period, no CGT will be payable.
If you’re aiming to attract EIS or SEIS investment, your Articles and any existing shareholder agreements will need to be amended to accommodate the requirements of the scheme.
5. Terms of business
Start-ups, like all other businesses, must have a standard set of terms that apply to the sale of their products or services. Even if you solely trade online, your customers need to know what to expect from your company when they deal with you.
Your terms and conditions of business should be totally clear on what is being provided, what’s being paid, and the other terms of the sale. They need to describe what will happen if there’s a problem. By fronting up potential issues, you can save a lot of money and hassle later on.
6. Initial contracts and licenses to trade
Whether you’re dealing in mattresses or micro-processors, you can be sure there’s a regulation that covers your sector, so understanding what standards you need to follow to stay on the right side of the law is essential.
While applying for a licence might seem a burden, the consequences of not having one can be severe, from fines or worse. Your local authority may be able to provide advice (if you’re starting a restaurant for example), and an internet search will likely provide valuable information about other regulations and licences that apply to your sector. A lawyer can help you submit an application for a license.
7. Intellectual property and confidentiality
Getting on top of who owns your intellectual property rights (IPR) is primordial to doing business. The value of your IPR will likely be the cornerstone of your company’s valuation, and whether you’re looking for investors or looking to sell, you’ll need to nail down who owns what.
If you have already engaged staff on employment contracts, then you’ll own the IPR in whatever they create. But if the technology you depend on to operate has been created by a mish-mash of the founders, friends or contractors, you’ll need to sort this out or you risk impacting your company’s value.
Lastly, make sure your team knows that you value their confidentiality. Protect your business secrets with non-disclosure agreements (NDAs) or confidentiality provisions in your employment contracts that have been drawn up by an expert.
8. Privacy agreements
If you’ll be handling customer data as part of your business, then you’ll be subject to regulations relating to the privacy of data (the General Data Protection Regulations or GDPR).
It can be tough to navigate the ins-and-outs of the GDPR, but here are the overarching principles:
- You need to register as a data processor or data controller with the regulator (the Information Commissioner) if you hold or process customer data, either directly or through subcontractors
- You need to notify the regulator promptly if you think there’s been a data breach and information about your customers could have been compromised
- Your contractors have to be tied into contracts that put them on the hook if the data they hold on your customers is not secure
Nick Owens is PR manager at Harper James Solicitors.