FAQs - Advice for tech startups, scaleups and public companies

Can I hire migrants part time or on a freelance basis to help grow my team?

Question:

I am a founder of an early stage start-up and happily I’m at the point where I need to start growing a team. The problem is I’m not sure I’m ready to commit to hiring a full-time employee! Can I hire migrants part time or on a freelance basis? Do I need a sponsor licence to do that? I’m especially worried given what I am seeing in the news… is it true that the minimum salary for sponsored workers is going to skyrocket?

Answer: 

Don’t worry about being scared to commit, it’s a very common problem! Even more so now that the government has announced that they are increasing the minimum annual salary for a sponsored worker by nearly 50% from £26,200 to £38,700. That’s a pretty significant financial commitment!

Good news – there are a number of UK immigration visa categories which allow people to work flexibly without the need to be sponsored. These include:

• Spouse visa
• Status under the EU Settlement Scheme
• Graduate visa
• High Potential Individual visa
• Global Talent visa

You can also employ someone who already has a Skilled Worker visa if they will be working for you for less than 20 hours a week and if the role will be in the same occupation type as the job for which they are sponsored.

Although you will still have some duties as an employer (keeping orderly HR records and up to date right to work checks) you won’t have the same onerous duties as a sponsor would. So, if you find a suitable candidate with one of the above visas you can avoid confronting your commitment issues a little while longer!  If you would like more information on becoming a sponsor, our guide for employers is a good place to start.

 

What should we think about when it comes to IP rights protection?

Question:

I’m a founder of an early stage tech start-up and things have been going well so far. Having deferred certain matters whilst bootstrapping and starting a family, i’m starting to worry about whether the IP rights in the software platform we’ve spent so long creating are protected. What should I be thinking of in terms of protection – is it too late and who owns the IP? I also have a friend whose been helping me to develop some code. Do they have any IP rights in our code?

Answer:

It’s not too late to take steps to protect your IP. Your IP is your most valuable asset, so it’s great that you’re thinking about how best to look after it. The first thing to do is to carry out a ‘stock check’ of the IP you have created. Key types of IP include:

1. Copyright – this covers new/original literary and artistic works and includes things like the code in your software platform and the designs for the look and feel of your platform. The great thing with copyright is that you don’t have to do anything to register it, as original works are automatically protected by copyright. Just FYI, copyright can only protect the expression of something, not the idea itself. Copyright therefore prevents a copycat from copying the specific code used by your platform, but not from independently developing code which produces the same functionality as your platform.
    
2. Design rights – design rights exist in, and protect, new/original designs of the appearance of a functional product, such as the new texture and material of the strap of a wearable device (think Apple’s new titanium design). While unregistered design rights, much like copyright, arise automatically on creation, you will get better protection by registering an original design with the Intellectual Property Office (IPO). Instead of protection ending when your children are teenagers (10-15 years’ protection, as would be the case with an unregistered design right), you’ll have a monopoly rights over use of your registered designs at least until your kids finish university (25 years).
    
3. Trade marks – a trademark is probably the most well-known type of IP and protects names and symbols used by brand owners to differentiate their goods/services from those of others. However, you have to register trademarks with the IPO to gain protection. The hassle of going through the registration process is worth it as, if your application is successful, no other person may use an identical, or similar, brand signifier (e.g. a name or logo) to yours in the same field as the goods/services you’ve developed.

Your next step should be a check on who actually owns the IP used by your start-up. Is it you (in your capacity as a founder) or your company? As the default position is that IP vests in the person who created it, as a founder you may actually own your company’s IP, rather than the company itself. As a lot of the value of a tech start-up arises from its IP, if you haven’t already, you should seriously think about assigning to the business ownership of all the IP you’ve created. This can be done by you entering into a deed of assignment with your company. If you seek investment in the future, your investors are likely to insist that your company holds of all its IP, so stay a step ahead of the game and keep those investors sweet before you’ve even met them.

Finally, regarding the code your friend developed, bear in mind what we mentioned above regarding the default ownership position in respect of IP. If you don’t have a legally binding agreement with your friend which states otherwise, it’s likely that they still own the copyright in the code that they developed. If that’s the case, we appreciate it will be awkward, but you should ask your friend to sign a deed of assignment transferring ownership of the code to your start-up. And please, the next time you benefit from the creative talents of a friend (or anyone else), get them to sign a consultancy agreement with your business  which clearly states that all of the IP they create is automatically assigned to the business on creation!

 

Can you provide some guidance on how to decipher the key terms in a Venture Capital term sheet and what I should be looking out for to protect mine and my startup's interests?

Question:

I recently received a term sheet from a venture capital investor for my startup, and I’m feeling a bit overwhelmed by all the terms and provisions in it. I want to make sure I fully understand what I’m agreeing to before I sign anything. Can you provide some guidance on how to decipher the key terms in a VC term sheet and what I should be looking out for to protect mine and my startup’s interests?

Answer:

You are right to want to fully understand the provisions of your term sheet. Although a term sheet is not usually a legally binding document (save for specific provisions such as confidentiality), the term sheet will act as the framework upon which legally binding documents will be prepared. It is considered bad form to attempt to renegotiate elements of a term sheet once it is agreed except under exceptional circumstances, so it is important to make sure that you understand what you are signing up to.

Below are some of the provisions you should keep an eye out for when reviewing the VC’s proposed term sheet:

Information Rights

The VC will want the right to receive certain information about the company on a regular basis. As an investor in your company, this will allow the VC to monitor how their investment is performing. It will also allow the VC to satisfy any reporting obligations they may have to investors or partners in their business.

The information that a VC will usually require the company to provide includes regular updates on the financial condition and budgets of the company and a general right to visit the company and examine its books and records. It may also include direct access to the company’s auditors and bankers.

If you have multiple investors, you should ideally try and align their information rights and/or limit detailed reporting to major investors. This will reduce your administrative burden and limit the parties with whom you share confidential information about your company.

Board representation

Typically, a VC investor will also want the right to appoint a person of their choice to the company’s board of directors. This is another mechanism that allows the VC to monitor its investment and ensure that they are aligned with the strategic direction of the company. Although it dilutes the founder’s control over the company, it can also be a positive experience for the company, which may benefit from the board member’s investment or sector expertise.

Alternatively, a VC may choose to appoint a board observer. A board observer has the right to attend all board meetings, but does not participate in board decisions. They are usually appointed by investors who want to avoid the more onerous obligations that come with being a director or by a minority investor.

Consent matters

Even if a VC wants the right to appoint a person of their choice to the company’s board of directors, because decisions of the board are made by majority, the VC will not have control at board level. Therefore, a VC will often also want the benefit of consent matters, being a list of matters which the company cannot carry out without the investor agreeing.

As a founder you will want to ensure that this list of consent matters is appropriate and only relates to key decisions which could impact overall value of the company (and therefore the VC’s investment) and does not restrict the day to day running of the company.

Liquidation preference

Liquidation preference is another common right which VCs seek in return for their investment. It sets out the order and the amount that investors will be paid out if the company goes into liquidation or is sold. It is usually expressed as a multiple of the VC’s original investment. For example, if an investor has a 2x liquidation preference, they will receive double the amount that they initially invested in the company before returns are distributed to the other shareholders.

Liquidation preference is a protection for the VC investor, should the company fail or be sold for less than the VC invested. An investor taking a larger risk will typically seek a higher multiple in order to mitigate that risk.

Liquidation preference is an important clause to negotiate with your investor because it will affect how much return the other shareholders (including founders, employees etc.) will get at a later date. You should also bear in mind that liquidation preferences can become important in future funding rounds as future investors may be unwilling to accept a lower multiple than an earlier investor.

Anti-dilution rights

Anti-dilution rights are another common request from VC investors who seek to protect their ownership from being diluted when new shares are issued on a ‘down-round’ (i.e. at a lower valuation than when the VC originally invested) by being issued with further shares on the down-round.

There are two types of anti-dilution rights:

• Full Ratchet: the number of shares issued to the VC is calculated as if they had invested at the down round valuation.
• Weighted Average: the new shares issued to the VC are calculated by taking into account equity previously issued and the equity that will be issued in the down-round to give a weighted average price per share.

The full ratchet method is the rarer and more punishing method of anti-dilution protection for existing shareholders, as it will dilute their shareholding more. It may also put off future investors if they are not able to negotiate the same rights.

Leaver provisions

Leaver provisions determine what will happen to an employee’s shares in the company when they cease to be an employee. In VC agreements, departing employee shareholders can be categorised as either ‘good leavers’ or ‘bad leavers’ based on the circumstances of their departure.

Good leavers: Typically, a ‘good leaver’ leaves the company under favourable circumstances, such as departure due to death, disability, or termination without cause. Good leavers can retain some or all of their shares in the company and/or receive a fair value for their shares upon leaving.

Bad leavers: On the other hand, a bad leaver leaves the company under unfavourable circumstances, such as resignation or termination for cause. Bad leavers often forfeit some or all of their shares in the company or receive a reduced value for their shares.

A VC may seek to increase what can be categorised as a ‘bad leaver’, for example, by defining all leavers who are not ‘good leavers’ as ‘bad leavers’. This can be negotiated, along with other considerations such as who these leaver provisions apply to (e.g. if they apply to the founders or not) and how many shares the leaver provisions should apply to (e.g.  a reverse vesting structure could be negotiated).

VC Fees

You should also be aware that VCs may expect you to pay some, if not all, of the fees associated with their investment in your company. This will usually include legal, due diligence and administrative costs. You can manage this by negotiating a cap on the amount of fees your company will pay. VC investors may also ask for a ‘board fee’ or a ‘monitoring fee’ to account for their presence on the company’s board and the responsibility of monitoring their investment. These should be avoided where possible.

I hope that this has given you an idea of what to expect when you reviewing your term sheet and where you may have space to negotiate with the VC. I wish you good luck on this very exciting next step!

We have just raised funds and want to hire a software developer and marketing head. Should they be employees or consultants? Any pre-hire tips?

Question:

I am one of the founders of a tech start-up called KNow Wear Limited. We produce a wearable wellbeing device which is linked to a health, wellbeing and social platform. We have recently completed a raise and we want to put some of the money towards hiring a software developer and a head of marketing in order to help develop and market our product. As these will be our first hires, can you let us know whether we should bring them in as employees or consultants? What are the differences between them? And are there any other pre-hire actions we need to take?

Answer:

The first thing to consider is what type of working arrangement you plan to have with the individuals as this will determine what their employment status will be. UK law recognises three types of employment status:

• employees, which is your classic “master-servant” style relationship, where the employer determines what, where, how and when the employee’s work will be done; employees most commonly have set days and hours of work each week; and they must provide work personally, meaning that they cannot substitute themselves with anyone else;
• self-employed contractors (or consultants, as you refer to them), which is where an individual (either directly or via a personal service company) runs a business for themselves and takes responsibility for its success or failure; they often provide their own equipment; they can decide when they work and what work they complete (they don’t have to accept the work they are offered and the company is not obliged to give them work); and they are generally able to substitute their services (i.e. send someone else to do the work on their behalf); and
• workers, which is a sort of middle-ground between the two. This is a more casual arrangement, often without set hours or days of work.

Employment status is important because it governs an individual’s rights in employment law and the extent of the business’s responsibilities to them. For example:

• Employees have a number of statutory rights including the right to statutory sick pay, rest breaks, annual leave, minimum wage, minimum notice periods, redundancy pay and the right not to be unfairly dismissed (subject to a qualifying period of service). This in itself is important because it means that employers cannot easily get rid of an employee once they have been employed for a minimum of two years – employers will need to have a fair reason (there are five potentially fair reasons for dismissal set out in law) and follow a fair process in carrying out a dismissal, which can present commercial challenges. The trade-off for this more prescriptive arrangement is that the employer has more certainty and control over these sorts of workers and can, for example, more easily restrict their outside business interests and post-termination activities.
• Workers are also entitled to certain statutory rights including minimum wage, holiday and rest breaks. As with employees, the employer will need to deduct tax and national insurance from their wages. However, they have no right to a statutory minimum notice period on termination or to a statutory redundancy payment if made redundant. They also have no ability to claim unfair dismissal.
• Self-employed contractors have even fewer rights. They are responsible for their own tax (they often agree a specific price or fee for a piece of work or project) and they have the ability to work for multiple businesses at the same time. As such, it is much harder to restrict the outside business interests and/or post-engagement activities of contractors.

Ultimately, KNow Wear Limited will need to consider what the commercial realities of the working relationship will be based on what its key priorities are. For example, if what you really want is certainty that once you have made these hires, the individuals will provide services to the company for set days and hours each week; they will be fully integrated into the organisation and act under your direction and instruction; and you will be able to restrict their activities outside of work both during and after employment in order to protect the business’s intellectual property and confidential information, then you will most likely employ them as employees (as opposed to engaging them as workers or consultants).

In terms of pre-action hires, KNow Wear Limited will need to:

1. Ensure that the individuals have the legal right to work in the UK. To do this, you must complete a right to work check on the prospective hires before employment begins. You should also set out in the offer letter that employment is contingent on the individual having the legal right to work in the UK.
2. Register as an employer with HMRC. You are able to do this up to four weeks before the new employees are paid for the first time.
3. Obtain employer’s liability insurance. You need to have this in place from the employees’ start date.
4. Set up a workplace pension schemeand establish whether the new hires need to be automatically enrolled in the scheme.  If so, make arrangements for them to be enrolled and for the company to make the relevant minimum contributions to the scheme on their behalf.
5. Draft the employment contract (or other appropriate contract if they will have a different employment status). Employees are entitled to a statement setting out particular key terms of employment from the first day of employment.
6. Draft a basic staff handbook. This will contain key employment policies and a privacy notice.

We hope this helps and wish you the best of luck with your first hires!