Legal Issues When You’re No Longer a Start-Up

Without you even realising it was happening, your business has got a lot more complex. It’s hard to focus on what’s important because you always seem to be dealing with what’s urgent. You just can’t do everything yourself any more. You need more money; you need more people; you need more space.

And what about all that intellectual property you’re creating? Who owns it? Should you be protecting it? What about your terms and conditions? Have you thought about tax risk – the business’, and your own?

It’s an exciting phase in your journey as an entrepreneur, but it can feel overwhelming. It’s also the time when you may find that you have outgrown your advisers – the accountants, solicitors and business gurus who helped you get off the ground – and need more bespoke advice.

Seeking investment

You can’t do much in business without money. Whether you’re stocking a shop or developing complex software, you need to have a product to sell before you can go to market.

Investment – and the terms of that investment – are among the most important issues facing you at this stage in the business. There are complex regulations that govern the marketing of investment opportunities, and it’s easy to fall foul of them. Ensure you understand these rules before you start approaching family, friends or contacts for investment.

Moreover, the terms of your shareholders’ agreement, company articles and directors’ service agreements are critical to how much control you exercise over the business, and how much money you can make from it. There is always room for negotiation on investment terms, and you should never enter into such critical agreements without taking specialist advice.

These documents will govern some hugely important issues: how much input your investor will have on key business decisions; how key people are remunerated and incentivised; how any profits are distributed among shareholders; and who benefits when and if the business is sold.

They will also address what happens if one of the founders leaves, whether voluntarily or because of ill health or death; this is often the most contentious part of the negotiations. And what if one of the investors wants out? Can they sell their stake on, leaving you saddled with an investor you didn’t choose?

Hiring staff

To employ or not to employ? Salary, equity, or a mixture of the two? What does it make sense to outsource?

Employees, workers and contractors have very different rights, and operate under different tax regimes. As an employer, you will need to familiarise yourself with the relevant regulations, take out the necessary insurance, and operate a payroll system – though this can usually be outsourced to your accountants.

As a high-potential company, your people may find the idea of holding shares or share options very attractive. An Enterprise Management Incentive Scheme (EMI) is a tax-efficient, and relatively straightforward, way to achieve this, but if you’d prefer to keep your share ownership streamlined, a phantom share scheme (essentially a cash bonus, taxed as salary, but tied to share value or sale price) may be worth considering.

Protecting what you value most

If your business is based around intellectual property – software, design, innovation – protecting your rights is paramount. You wouldn’t leave a warehouse full of valuable stock unlocked, but it is astounding how often IP-based businesses take inadequate steps to assert or register their intellectual property rights.

Your employment and outsourcing contracts should specify that any IP generated is the property of the business. Your terms and conditions may need to include a licence of IP rights. You may want to consider registering patents or trade marks, and should take specialist advice on what is possible and appropriate for your own circumstances.

Selling your product

What you should include in your terms and conditions of sale will depend on what you are selling and who your customers are. B2B or B2C? If it goes wrong, do they just get a refund or can they claim for consequential losses? If they breach the contract, what are your rights against them? Can you, or can they, terminate part-way through?

But you should also beware of the “battle of the forms”; if you send out your standard terms, and your customer accepts your offer under cover of their standard purchase terms, you may find that their contract, and not your carefully worded agreement, prevails.

Getting it right

As your business develops, it becomes more and more important to get the right advice, from accountants, solicitors and mentors who understand what you are trying to achieve and have helped others to get there before. It will need your attention, when all about you are clamouring for it. But it will be worth it in the long run.