Starting a business can sometimes feel like a legal minefield. How can you protect your role as founder? What steps do you need to take to prevent someone from stealing your ideas? And how can you mitigate late payment risks? These are some of the common questions founders may be asking themselves.
1.Use a share capital table to keep track of your equity
As a startup founder, it can be difficult to plan for long-term share allocations. One of the biggest problems startups face is a lack of bargaining power, for example due to poor cash-flow. It can be tempting to offer shares instead or sign an options agreement. However, this can lead to issues in the longer term. For example, during venture capital stage founders may have to demonstrate they own the majority of the business. If you lack ownership of the majority of shares, the investor may question your motivation to drive your business forward.
To plan equity allocation, Sintons recommend managing a share capital table in Excel. The table should include information on the amount of shares you have and how many you are comfortable giving away – ideally with percentages alongside them. This will help you gain a better understanding of how much percentage of your business you own and can help you make decisions as to what benefits your business the most in the longer term.
2. Protect your business ownership with shareholder agreements
Starting a business with a co-founder can be exciting; someone else is actively sharing and contributing to your vision. However, whilst things might be rosy at the start, what happens when it gets rocky?
To protect your business from falling-outs, it is recommended to have shareholder agreements in place which can support deadlock resolutions should founders not reach a ‘peaceful’ informal agreement.
“I use the example of two people setting up a company. They own 50% in equity each and they both take a seat on the board. They got no shareholders agreement.
[There is a falling-out]. In that situation, to remove a director, you need a majority of votes. You don’t have that. Even if you could get rid of the director, you’ve still got someone who owns 50% of the economic value of your business.
All of that can be avoided if you pursue an agreement in place at early stage that provides a deadlock resolution.”– Lucy Carlin & Luke Philpott from Sintons Law at Founders’ Friday
3. Prepare for due diligence
At some stage in your business journey, particularly when you are looking for investment, you may have to answer due diligence enquiries. Depending on the deal of structure or the type of the business, these can run from 4-5 pages through to 40 pages. This can be highly time-consuming and, where files are missing, lead to fees or missed opportunities. One way to prepare yourself for these enquiries is to keep your files in order and, ideally, scanned in.
“People always think ‘my statutory registers are kept at Companies House’. Unless you elected them to be at Companies House, they’re not. This is on you; to have a physical book that says ‘these are my shareholders. This is how many shares they own. These are their addresses.”– Lucy Carlin & Luke Philpott from Sintons Law at Founders’ Friday
4. Read the T&Cs
T&Cs can be tedious but when it comes to important financial or business decisions, the small print can really make a difference to your business. Sintons have shared some common clauses to look out for in supplier agreements. The list is not exhaustive:
- Is there any exclusivity that means you are tied into that supplier for a period of time?
- Are you going to be able to incentivise performance? For example, if you’re paying up front, you will probably have lost your bargaining power whereas if you have staged payments you probably have some power left.
- If your only real recourse is termination and this is a key supplier contract, you’re probably not in a great position. It might be nice to have a remediation process which means you have to explore resolutions prior to resorting to discontinuation of the contract.
- Information on what happens if the supplier doesn’t meet service levels (service credit regimes).
- Information on intellectual property.
“I had a client recently who signed up to standard terms and conditions of a manufacturer. In those T&Cs it said that the IP in the recipes moved to the manufacturer from the client. So they were losing their IP by signing up to that.”
– Lucy Carlin & Luke Philpott from Sintons Law at Founders’ Friday
5. Prepare for late payments
Late payments is a big problem. 61% of invoices issued by SMES remain unpaid within the debtor paid period. There are formal solutions to protect founders but these are expensive, time-consuming and can destroy long-term relations. They often involve court, threats and disputes. Instead, preparation is key. This can include:
- Adapted payment T&Cs to facilitate debt recovery. This can include:
- Personal Guarantee from a director.
- Contractual right to recover legal fees.
- Contractual interest.
- A statement indicating that the final delivery of the project outcome (e.g. software or report) will only be shared upon payment – or you could request payment up front.
- Due diligence. What is the financial health of the company? (you can look up their accounts on Companies House). What does your network say about them? Do they seem trustworthy in person?
- Shortening of your payment terms.
“Why not payment immediately on receipt of invoice? Because, let’s be honest, you’re not going to chase them immediately. You’re probably going to leave it 14 days. But they’re more likely to pay you within 14 days if you say ‘I want payment now.’ But if you were to say ‘I want payment within 14 days’, when will they pay you? 21 days later?”– Robert Burns from Sintons Law at Founders’ Friday
These are some of our key legal takeaways. Have you picked up on any? Let us know in a comment!
Please note all insights mentioned in this article regard general applications. If you are looking for specific advice, please consult specific lawyers.
Interested in more legal insights? Attend one of Sintons’ masterclasses at our Founders’ Friday events, pop by one of their weekly drop-ins at TusPark Newcastle Eagle Labs, or hear them speak at Newcastle Startup Week!