Lifecycle of a tech startup series: The basics

30 October 2020

Last time we met the founders of a wearable tech startup, who wanted to take the next steps towards establishing their business. Cutting straight to the chase, we suggest these are as follows:
1. Choose a name for your business, and check it is available. This sounds obvious, but do carry out a google search before you commit to a name, to check that no one else is using it. Do also check the name is available on Companies House and check that no one has trademarked the name/word by also checking the trademark register here. Bear in mind that there are rules around company names, it cannot contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you get permission. As an example, you can’t use ‘British’ without permission.
Our founders wanted to use the name ‘KNetic’ but on a search, this is already being used. They have therefore settled on the name KNow Wear Limited (available as at September 2020).
2. Incorporate a company. For most startups (assuming you are planning to be profit making and unless you are planning to run a consultancy business or offer professional services), a private company limited by shares in the right entity to incorporate. You can do this in about 30 minutes on the Companies House website for £12.
Before you start, do make sure you have in front of you: the intended registered office address for the company (this is where mail will be sent), each proposed director’s name, DOB, nationality, country of residence, job title (as they wish to appear on the register), correspondence address (we suggest using the registered office address) and their home address (this won’t be made public). You will need the same information for each intended shareholder. You will also need, for security purposes, each intended shareholders’ town of birth, mother’s maiden name and passport number (there are other options here, but these are the most straightforward).
As part of the application, you will also need to choose the nominal (AKA par) value of the company’s shares, and determine how many shares should be issued to each shareholder. It is generally a good idea to incorporate with one class of shares (ordinary) with a nominal value of £0.01 per share. Remember that each shareholder is expected to have transferred to the company the nominal value of their shareholding, so be careful not to incorporate a company with 1,000 shares of £1.00 each, as you will be expected to have transferred
£1,000 to the company.
If you don’t have all the details, don’t worry. You can transfer or issue shares post- incorporation, or appoint directors after incorporation, but it is easiest to get this right now.
Each of our founders is a director and a shareholder of the company, and (having not followed our advice) each one holds one share of £1.00.
Incorporating a company means that the business is now its own legal entity. This means that our founders’ liability is limited to any of their £1.00 share value which remains unpaid
– which means if the startup fails, their personal finances and assets aren’t on the line. It also means that it is the company, and not the individual founders, that will enter into contracts and the company that will make money and pay tax. To extract value from the company, the founders will need to pay themselves a salary and/or a dividend.
3. Diarise key filings to be made at Companies House and write up your company books. The two key filings to diarise are the confirmation statement and the accounts, both of which need to be filed every year. English companies are also required to create and maintain a collection of registers which are known as the company’s statutory registers (or the company/statutory books). There is a statutory obligation to keep and maintain the following registers:
a. register of directors;
b. register of directors’ usual residential addresses;
c. register of secretaries (if applicable);
d. register of the company’s shareholders. This is the key one as it is this which is the definitive record of who a company’s shareholders are; and
e. register of people with significant control over the company.
Company books may be kept in hard copy or electronic form (provided that they are capable of being reproduced in hard copy). They must generally be kept at the registered office of the company.
4. Open a bank account. Now that the company is incorporated, start the process of opening a bank account. Banks have quite stringent ‘know your client/anti-money laundering’ rules, so we suggest that you put together a pack of certified copies of each shareholder’s passport and driving licence sooner rather than later. If your driving licence doesn’t have your most up to date address on it, you can also rely on an original or certified personal bank statement and on certain utility bills, provided they show your full name and address.
5. Buy a domain name(s). The company now needs a website, so ensure you buy a web domain name for the same. Ideally buy a number of them, to avoid someone else using them in the future. Do also think about what markets you are planning to operate in when doing this. It would seem a no brainer to buy .com and now but if, for example, the intention is for the business to operate in France and Italy in the future, it makes sense to get your hands on .fr and .it domains now as well.
6. Apply for a trademark. If you have a unique company name or logo, consider applying for a trademark. This can be done online here and takes about 4 months and costs circa £170.
7. Tax. Following incorporation of the company, HMRC will send a letter to the company’s registered office address which will detail the company’s unique tax reference number (UTR), which is the reference required to register for corporation tax. Most of the time the company will be registered for corporation tax automatically. You may also need to think about registering for VAT. You can do this immediately or once the company’s VAT taxable turnover reaches £85,000 (which is when you must register for VAT).
8. Find accountants. Linked to tax, you may now wish to find an accountant to act for the startup, to help with general queries and preparing the company’s annual (and management) accounts going forward. An accountant can also help with employment taxes and payroll.
9. Insurance. Think about what insurance you might want to have in place to protect the business. Note that you will need to take out employer liability insurance as soon as the company becomes an employer.
10. Business plan. If you haven’t already, start working on your business plan. This should include clear objectives and, at this stage, take into account the next 12/18 months.
Although very early stage, it is good practice to include forecasted earnings in the business plan. This is a working document and should be revisited often.
11. IP. Sit down and think about who has created any intellectual property the business is using and who created it. Generally, under English copyright law, the person who created the content owns it.
Our founders have produced design and code before the company was incorporated. They will need to now arrange for this to be transferred into the company (more on this in a subsequent blog).
12. Personal data. If the company is going to hold and process personal data, you should notify the Information Commissioner's Office (ICO) of the same. You can do this here. We will discuss data protection in a subsequent blog too.
That’s all for this one! Check out the next blog in the series, intellectual property.

Lifecycle of a tech startup series

Episode 1

Case study

Welcome to the first blog in the series on the lifecycle of a tech startup.

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Episode 2

The basics

Last time we met the founders of a wearable tech startup, who wanted to take the next steps towards establishing their business.

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Episode 3

Intellectual Property

As part of the incorporation process, our founders started to think about any intellectual property rights (IPRs) the business was using and ownership of the same. In this blog we shall be exploring the IP considerations founders should be considering in a bit more detail.

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Episode 4

Preparing to raise investment

In the last instalment we talked about the ways in which the founders of KNow Wear Limited could protect the intellectual property in their business. Since then, the business has been progressing well and our founders have been working on developing a prototype.

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Episode 5

Tech in Two Minutes/Lifecycle of a Tech Startup - Essentials for e-commerce businesses in the UK

Alex Torpey speaks about the legal notices and key points to note for online retailers and platform operators in the UK.

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Episode 6

Tax reliefs

After a brief detour to consider the essentials for e-commerce businesses in the UK in episode 5, you and the other founders are now once again focusing your efforts on raising investment.

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Episode 7

Seed raise

Having decided in episode 4 on targeting angel investors to raise £500,000 investment in the business, the founders of KNow Wear Limited researched various angel investor networks which aimed to connect startups like yours with angel investors. You applied to pitch at a couple of events and were invited by one network to interview with them in person.

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Episode 8

Employees and Consultants

Having completed the raise, you, Sarah and Chris have decided that you need more help in developing and marketing the product. You are looking to create two new roles in the business - the first is a Software Developer to support Sarah’s work and the second is a Head of Marketing.

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Episode 9

R&D tax relief

Knowledge of the UK tax system is valuable for any UK business owner, start-ups can dramatically improve their chances of success by ensuring they claim the various tax reliefs and incentives available.

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Episode 10

Obtaining a Sponsor License

Following their seed raise and having secured some additional capital through an R&D repayment claim KNow Wear Limited have identified some overseas talent that they would like to hire to help to expand the business.

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Episode 11

Directors' Duties

As a director you owe duties to the company and in certain circumstances to the company’s shareholders, employees and creditors. Breaching these duties can lead to civil or criminal penalties and so you have asked the company’s lawyers to remind you of the duties that apply to you as a director.

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We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

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