Top tips for startups - getting to grips with legal issues

3 December 2014

There’s no getting away from it - lawyers like making lists.  Over the last 12 months or so, we’ve seen a number of lists setting out “top tips” for startups and entrepreneurs, but most have related to specific areas such as securing third party investment.  Not wanting to be left out, we’ve put together our own list of top tips for startups.

But first, a confession.  No one in our team has actually run a startup.  Despite this, we do have many cumulative years of experience providing startups and established businesses with advice in relation to corporate and commercial legal matters.

Our top tips for startups are based on this experience and are directly relevant to many of the legal issues which you are likely to encounter.  We can’t promise that entrepreneurs who follow these tips will find themselves at the helm of a flourishing and investable business, but we’ve seen many cases of otherwise successful startups becoming bogged down with legal issues.

These issues will certainly slow the growth of an early stage business, and may be the difference between securing a competitive advantage or ultimate failure. It may not be an obvious priority for you, and will never be as exciting as developing your ideas, but those entrepreneurs who are prepared to understand and engage with the legal process will reap the benefit in the long run.

So here are our top tips for startups:

  1.  Have a Business Plan

    This seems obvious but you would be surprised how many people have not set down on paper their short (12-18 months) and long term plans (including exit strategies).  Your business plan will help you set your priorities and milestones in terms of your financing, capital structure, customer base, suppliers, staffing, premises and other elements. Potential investors and banks will expect to see that you have a plan from the inception of your business, and if you can show that you have already fulfilled some of your milestones, then all the better.
  2. Tailor your Company’s constitutional documents

    A company’s articles of association set out the formalities relating to the composition of the board of directors and the means by which directors and shareholders make decisions.  Shrewd investors are likely to insist upon certain protections which will mean producing bespoke articles of association and a complementary shareholders’ agreement. However, having the right constitutional documents in place when just the founders are on board could be key to avoiding any disputes which may arise before securing third party investment.  We often see founders who have built a business together fall out once revenue is generated. What happens to a founder’s shares when they resign from the business?  How can you stop a key shareholder selling shares to a third party and potential competitor?  How can you issue shares to key employees, but then make sure that the shares are not retained when the employee leaves?  All of these issues and concerns can be addressed in tailored constitutional documents.
  3. Produce standardised written terms with customers and suppliers

    Should a supplier fail to deliver or a customer fail to pay, having a legally enforceable agreement in place will be invaluable to the business to ensure that its rights can be enforced.   Your suppliers and customers may try to impose their own standard terms. Having a set of terms and conditions, or a set of standard clauses which will be used in all your contracts (even if these are partly bespoke) will mean that you are more comfortable in finalising contracts quickly and without protracted negotiations.   
  4. Protect your Intellectual Property (IP)

    Ensure that you have protected your brand by registering your trading name as a trade mark.  Stay one step ahead of cyber squatters by registering a domain name in respect of all potential web addresses you would like to be associated with the business.  Understanding the provenance of your IP is also important e.g. if a founder creates some key IP in a personal capacity, ensure that he assigns it to the company, otherwise it will stay vested in him personally.  Ensure that any contract dealing with IP (whether with customers, suppliers, contractors or employees) is carefully reviewed prior to signing. 
  5.  Formalise your employment and consultancy arrangements

    Having written contracts not only satisfies certain statutory requirements but will also assist in the protection of confidential information and trade secrets, knowhow and intellectual property rights.  You may ask certain key employees to agree to be subject to post-termination restrictive covenants to prevent them from competing with the business should they move on.
  6. Make sure you have strong financial reporting, controls and procedures in place

    Produce periodic budgets setting out projected operating budgets and capital expenditure.  Ensure that you have appointed an accountant to prepare your company’s accounts and that you, and the rest of the board, understand them.  When pitching for investment, an understanding of your historic and projected financial position is likely to be critical.
  7.  Keep up with housekeeping

    Making Companies House filings, updating the company registers, keeping minutes of board meetings and ensuring that your bookkeeping is accurate and up to date may rank low on your list of priorities. However, carrying out these tasks will ensure that you adhere to your statutory obligations and potential investors will expect all such records and filings be in order.
  8. Think about insurance

    Given the nature of your business and its risk profile, do you have the necessary insurance in place?  If you employ any staff, you will need employee liability insurance, if customers visit your premises you may consider public liability insurance, and if your business provides an advisory service, professional indemnity insurance will give peace of mind.
  9. Familiarise yourself with your obligations under the Data Protection Act 1998 (DPA)

    You may need to notify the Information Commissioner’s Office if your business is a ‘data controller’ under the DPA.  Businesses processing personal data are also under a legal obligation to take appropriate technical and organisational measures to protect such data against data security breaches.
  10. Don’t forget tax

    Instruct an accountant or tax advisor once you start trading to ensure that you properly account for PAYE and NICs, to register you for VAT if required, to advise you on the most tax efficient means of remunerating yourself and ultimately to stay on the right side of HMRC! 

Some useful things to think about from a legal perspective if you are a budding entrepreneur, but there are many more.

If you would like formal legal advice on any corporate or commercial issue, please contact Roberta Draper.

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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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