A Guide for Start Ups
Starting up your own business? Vincent’s top ten tips from a legal perspective
The key legal aspects of a start-up business typically faced by entrepreneurs are often overlooked in the initial burst of energy and enthusiasm to get the business off the ground. Here we offer top-ten tips on Disciplined Entrepreneurship to ensure the right foundations and structures are put in place from day one.
There is a tendency on the part of many entrepreneurs to think that they can put the legal issues of starting a business to one side and that it’s all about getting the first customer and generating cash. In error, they think that their solicitor can handle the legal issues and delegate too much to them.
While the language of the law can be intimidating, the concepts are quite straightforward. The difference is that entrepreneurs are risk takers, and solicitors tend to be risk averse, and consequently if you delegate to them you will usually stay out of legal trouble but can often compromise your business objectives.
It’s a balance, between giving the entrepreneur sufficient comfort and understanding with the legal concepts to feel confident in driving their business forward, and to understand the ways in which the law is a necessary constraint, but also the ways in which it is a tool that can help them create, capture and protect value.
To manage the relationship with a solicitor, it is important to know what they do, how they can help you, and how they think. These tips are intended to highlight the key practical issues and help guide you and to prepare you for your discussions with any legal specialist.
How do I start a business while employed by a potential competitor?
The law is clear that if someone is currently working for a company, particularly if he or she is a key employee, they cannot operate a competing business. Even just incorporating may spark a legal claim from the current employer. Would-be entrepreneurs should first go to their current employer and either resign or tell them what they're doing and ask them if they'd be interested in investing. Amazingly, that's often a very smooth way of ending that relationship.
What is the impact of restrictive covenants?
Even after leaving your current employer, you still cannot use or disclose the company's trade secrets to your own advantage. If someone has been exposed to trade secrets at their job and leaves to work for themselves, they could face an injunction prohibiting them from working in the same market until a number of months go by and whatever trade secrets they had are stale. Use this time for research, devising your strategy and plans.
What’s in a name?
One of the first legal decisions you must make when starting a business can also be one of the simplest - the business name. You cannot use the name of a business that already exists, or use an established name with a slight change Check with businesses listed in your local area, as well as online and at Companies House to determine whether the name you want to use for your business has already been legally registered by someone else. If so, you will have to consider an alternate name.
What legal structure should I chose?
Perhaps the second legal decision you must make when starting your new venture concerns the legal structure. There are three basic legal forms of business: sole proprietorship, partnership and limited company. The right legal structure for your business can save you money, help you get more money, and save you from future headaches. The wrong one can take years to unwind, especially if the corporate documents are not in order.
What do we do about share capital and shareholder agreements?
More often than not, the lack of clarity on capital structure and share ownership is an unforeseen train crash waiting to happen between founders. A common problem that arises here is the so-called ‘forgotten founder’ - a partner involved in starting the venture subsequently drops out. When the venture gets financing or is ready to go public, this partner returns, perhaps with an inflated view of what his or her contribution was, demanding equity.
Day one it’s essential to document and agree the allocation of equity shares between the initial investors into a Shareholder Agreement. This is important in terms of ownership, voting rights and control, dividends and ultimately the value of individual holdings in the business today, and on exit.
How do I hire staff without checking their agreements with their current employer?
It helps to know whether potential recruits are subject to covenants not to compete. It varies in terms of how enforceable they are, but one shouldn't assume they are not. One should also check to see what assignments of inventions might have been signed. Recruits should check that a covenant not to compete wasn't tucked into a signed non-disclosure agreement. Know how to handle non-solicitation clauses, and equally, how you will manage intellectual property issues in your own new venture.
Who are the directors, and what does this position/title involve?
The legal status, duties and responsibilities of a statutory director should not be underestimated and advice should be taken to understand the formalities of being a company director. From this, the constitution of the board and the governance required follows, in order to comply both with legislation and also best business practice. Equally, an effective board is a key asset to help growing a business.
How do we open a business bank account and start trading?
Besides a business plan detailing financial projections, there are a number of key documents the bank will need to see, including legal documents registering the business at Companies House, to VAT registration & certificates. Most banks have a small business advisor specialising in handling the opening of the bank account, so pop in and get some free advice.
I get all this, but I think any legal problems can be solved later, ok?
There's a tendency to think, once I get my funding, once I'm up and running, then I've got time to hire a solicitor; right now, I'm running as fast as I can to get my business plan done and winning customers This is shortsighted logic. Many of the points made here are problems that can't just be patched up later. Does that mean that you should devote all of their time, effort, and money to the legal issues? No. That's a good reason to hire a competent solicitor. It will cost much less to get it right at the beginning than to try to sort it all out later and correct it
How do I find a solicitor experienced in dealing with entrepreneurs and give me all the support and advice I need to set up and run my business?
Solicitors who have no experience working with entrepreneurs and start-up ventures will most likely focus on the wrong things while failing to recognise some of the more subtle potential traps. It's better to hire someone who has played the game, who knows what's essential and what isn't, and who will get you up and running promptly.
Vincents Business Advisors provide a legal advice service for entrepreneurs starting their first venture, called V1! This includes company set-up, customer contracts & agreements, employee agreements, copyrights & trademarks to protect intellectual property, and a suite of personalised documents depending on the specific style and type of business. For an initial conversation about Disciplined Entrepreneurship, contact Vincents on 0800 310 2000 or email preston@vslaw.co.uk.