Lifecycle of a tech startup series: Preparing to raise investment
We will help you to take the necessary steps to establish your business in the UK, whether you wish to set up a new venture or expand an overseas operation. We know that funds may be tight for you, so we’ll provide you with competitive quotes and give our view on what you should prioritise and what can wait.
In setting up your new business, you will be faced with a number of key choices with regard to structuring, funding and taxation. We will explain the differences between operating as a sole trader or partnership, or incorporating as a company or limited liability partnership (LLP). As tax and accounting considerations are often the primary drivers behind this decision, our lawyers work closely with our other practice areas and other advisers to ensure that you get the right advice at the very beginning.
Once you have chosen a business structure, we will advise on the best means of regulating relationships between a company, its directors and its shareholders, and between an LLP and its members. We will draft bespoke documents to reflect your priorities and to best protect your interests, including your shareholders agreement, articles of association, LLP agreement and all ancillary agreements and resolutions.
Our lawyers regularly advise companies on corporate governance issues, and advise directors, shareholders and LLP members on their ongoing obligations, duties, and potential liabilities.
In conjunction with our employment department, we can also advise you on the options for incentivising your employees and on the drafting and implementation of an appropriate scheme. We regularly draft bespoke HMRC approved employment management incentive (EMI) scheme rules and option agreements.
As well as providing technical legal advice, our lawyers will give you their commercial view (and will not provide you with lots of options and sit on the fence). Our aim is to be the corporate/commercial legal team for all your current and future business interests.
Before you decide to set up a company, it is important to consider what legal structure is right for your business. The time and cost required to set up a company will depend on the degree of customisation required. A simple ‘one size fits all’ company can be set up for under £100, and in some cases on the same day. However, this approach can lead to costly issues in the future. We would recommend that you take careful advice at an early stage on the capital structure of the company (ie on the rights which are associated with each share class, the denomination of the shares in each such class and the parties to whom shares will initially be issued) and on the nature of the articles of association (a public document which is filed at Companies House) which are adopted.
Once your company is up and running, there will be administrative costs and obligations which will vary with the size and nature of the business. These will include tasks such as keeping accurate records, submitting annual accounts and other returns to Companies House, registering for VAT and completing a tax return.
Operating as a sole trader or in partnership may be the right choice for many businesses, particularly when they start trading. However, operating in this way may give rise to significant personal financial risk. For sole traders and partners, there is no distinction between the assets and liabilities of the business and personal assets. The owner or owners of a business may have unlimited liability if anything should go wrong.
For example, if a contract with a third party is breached and damages are awarded in favour of the third party by a Court but the business has no means of paying these out, then the third party may well pursue the partners for the debt. It is therefore important to ensure that all contracts include appropriate limitations of liability, and also that insurance is put into place to cover all areas of potential risk. Even if such measures are taken, there can be no guarantee that they will be effective in shielding the partners from all personal liability.
In partnerships, a further risk can be the death of a partner. In the absence of a suitably drafted Partnership Agreement, the partnership is automatically dissolved. Further, a beneficiary of the deceased’s estate may demand the sale of business assets or force the business to adopt an unwanted approach.
The key differences between a limited company and an LLP include how they are taxed, how they allocate profits and how they can obtain capital.
Unlike a company, an LLP is tax transparent. This means that the members of the LLP will be taxed on the profits and gains of the entity as if they were self-employed. On the other hand, a company will be subject to corporation tax on its profits and shareholders pay income tax on any dividends. Choosing the most tax efficient structure will depend on the nature of the business and its owners.
An LLP can offer greater flexibility in how it allocates profits, losses and rights over capital to its members. Members can agree on how the income and capital profits and losses are distributed in an LLP agreement, and what happens to capital on a sale or liquidation, the terms of which which can easily be varied if required. Conversely, companies must declare the same dividend for each share of the same class and varying the rights relating to different share classes will require shareholder approval.
Companies are able to raise capital by offering external investors the opportunity to subscribe for shares. An LLP can also offer investors rights over its capital, but the executive board of the LLP often has discretion to vary such rights, and they are less easily transferred between members and third parties.
A company’s articles of association and a complementary shareholders’ agreement set out how a company is run and the means by which directors and shareholders may make decisions. The documents may deal with similar issues, and it is important to understand how they relate to one another.
Articles of association are required by law for a company formed in the UK. They are filed with Companies House, and are therefore a public document, and are relevant to any person who may be a shareholder or director of the company, whether now or in the future. The articles include the procedural requirements for board and shareholder meetings, removing or appointing members of the board and issuing or transferring shares.
Unlike the articles, a shareholders’ agreement is a private contract between those signing it which is not required by law. As well as being confidential, a shareholders’ agreement offers the ability to treat individual shareholders of the same class differently. Common provisions include enhanced rights for minority shareholders, a right for certain shareholders to remain as directors, a mechanism for resolving disputes and safeguards against the sale of shares. A shareholders’ agreement may also impose restrictive covenants on shareholders which may well run for a period after they have sold their shares. New shareholders may be required to sign a deed of adherence, whereby they agree to be subject to the terms of the shareholders’ agreement.
To find out more, read our blog 'Articles of Association, Shareholders' Agreements and Investors' Agreements - what's the difference?'.
A share will be issued once the directors of the company make a valid decision to take such action, and the statutory registers of the company (known as the “company books”) have been written up to show the new issue. The individual to whom the share has been issued will then be a registered shareholder of the company. They will therefore have an ownership stake in the company.
However, when a company grants a share option, the holder of the option merely has the right to acquire shares at a specified price at some point in the future, provided other criteria (such as the performance of the company) have been satisfied. Therefore, the holder of the option does not become a shareholder unless and until they are able to exercise the option, and choose to do so.
A share option scheme can be used to incentivise key employees and to encourage them to remain involved with a company. Further, they are highly flexible, easy to implement and avoid some of the complications which may arise if shares are held by employees directly. Importantly, share option schemes can also bring significant tax advantages for both the employer and the employee.
There is no ‘right time’ to set up a share option scheme and every company is different. A scheme can be a useful tool for all businesses, large and small. For example, startup businesses can use an option scheme to provide a means of attracting talent by granting rights to subscribe for shares when the company valuation is low, and as an alternative to paying high salaries and bonuses. Nonetheless, careful consideration should be given to the rules of the scheme and how these fit with the future of your business.
Partner and Head of Department
"...sensible, realistic view of cases - seizing only the points worth arguing..."
Chambers UK, A Client's Guide to the Legal Profession
"We have worked with James and his team for many years and whenever we refer a client across we know they will be well looked after. Not only are James and his team highly technically able, they understand the importance of working to get a deal done. We always know we can trust their judgement."
Janet Paterson, Charter Tax
Many businesses lack comprehensive in-house IT expertise and resources to fully implement and manage all of their IT infrastructure requirements. IT managed services providers (“MSPs”) and IT consultancies plug the gaps by typically offering a diverse range of IT services and products to lighten the burden on their customers’ in-house IT teams (or to even remove the need to have an in-house IT team).
Having raised £500,000 and, in episode 8, hired a software developer, KNow Wear Limited is starting to flourish. As Ben Franklin wrote when the USA was in its infancy, nothing is certain except death and taxes. 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. Episode 4 looked at the valuable tax reliefs a company can offer its investors, your focus today is on the tax relief (or repayment) available to companies carrying out research and development activities.
Social media has revolutionised the way in which we interact with businesses and each other and has shown that it can be a generous friend to business owners and entrepreneurs, helping them to harness a following, build their brand and grow a worldwide customer base.
In our previous blog in our Lifecycle of a tech startup series, KNow Wear Limited secured investment of £500,000. 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.
In Part 1 of our two-part series on the Department for Business, Energy and Industrial Strategy's (BEIS) White Paper on audit and corporate governance reform (Restoring Trust in Audit and Corporate Governance), we focussed on whether the proposals regarding corporate governance are likely to make the UK a more or less attractive destination for investors.
Yesterday the FCA announced new rules, the majority of which come into force today (3 December 2021), which are intended to prevent smaller companies obtaining admissions to the Standard Segment of the Official List.
In its Perimeter Report for 2020/21 the FCA has raised concerns that unauthorised persons are increasingly using, or purporting to use, exemptions from the Financial Promotions Order (FPO) to sell high risk investments and potential scams to ordinary consumers without their rules applying.
Potential reforms to UK data privacy laws will change the way that cookies work on websites - businesses need to prepare now.
AQSE is consulting the market about some changes to its rules relating to SPAC admissions.
Currently SPACs are eligible for admission to the Access segment of the AQSE growth market, as long as they have a minimum capitalisation of £700,000 and a free float of 10%. AQSE is concerned that this can result in a disorderly market and excessive volatility because a lack of liquidity arising from low market capitalisation and limited shareholder numbers.
We are pleased to announce that Matt Spencer has joined the firm as a partner to help build a new Tax practice. Matt joins from DAC Beachcroft where he has worked for the last 9 years. He advises on the efficient structuring of a wide range of corporate and real estate transactions including M&A, land transfers, developments and leases. He is also expert in employment tax issues and the structuring of employee incentive schemes as well as VAT issues in the public and private sector.
Having decided in episode 4 of our lifecycle of a tech startup series 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 start-ups 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. The network was very impressed with the business and invited you to pitch at their next event.
In 2012, as a recently elected MP, Kwasi Kwarteng co-authored “Britannia Unchained: Global Lessons for Growth and Properity”, a political pamphlet which championed risk-taking and innovation in the UK economy, and which ever since has led some to label him a fervent Brexiteer. Appointed as the Business Secretary in January 2021, only a few months later his department (BEIS) published one of the longest and most ambitious government White Papers in recent years.
If you are involved in investing, either as a startup or an investor, you are likely to come across an advanced subscription agreement. So what is an advanced subscription agreement and what do you need to consider when entering into one?
You are aware that the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two tax incentive schemes for individuals who invest in early-stage companies. What are the key considerations when determining whether a particular investment is eligible for SEIS/EIS relief?
In September 2020 the FCA published a statement regarding the listing of cannabis-related businesses (CRBs) in the UK. Since then several CRBs have been admitted to the London Stock Exchange (LSE) and appetite for investments in the medicinal cannabis industry continues to grow.
The FCA has launched a consultation on a technical note setting out guidance for companies applying for listing which have cannabis-related businesses. As with all companies applying for listing, those with cannabis related businesses must be assessed for eligibility for listing under the Listing Rules. Because of the legal complexities around cannabis businesses the FCA applies additional due diligence requirements to them.
The pandemic has changed the world – there is no doubt we are all “online” far more now than before. Social media now extends into every aspect of our lives, from those notorious repetitive baby pictures to those ‘should never have been posted university photos‘. We collect and share moments of our lives in the digital world.
Following the release of the Hill Report, the FCA has moved quickly to consult on proposals intended to provide an alternative route to market for larger Special Purpose Acquisition Companies (“SPACs”). The broad proposal is that if a SPAC can meet additional investor protection requirements the FCA will not generally require that the listing of its shares be suspended once an acquisition is announced.
Global financial markets are preparing to transition away from the use of the London Interbank Offered Rate (“LIBOR”) and adopt an appropriate alternative risk free rate (“RFR”) by the end of 2021. What are the reasons for the move away from LIBOR, the progress to date in terms of identifying the Sterling Overnight Index Average (“SONIA”) as the most appropriate alternative rate in the Sterling markets, and the steps still required to be taken to ensure such markets are ready for the phasing out of LIBOR by the end of the year
Following the release of the Hill Report at the start of last month, the FCA has announced that it is going to open a consultation into changing the Listing Rules and connected guidance with a view to encouraging the listing of Special Purpose Acquisition Vehicles (SPACs).
Skip to content Home About Us Insights Services Contact Accessibility