Fox Williams attorneys represent businesses of all shapes and sizes, including early-stage startups with founders of varying levels of experience. While most founders struggle to save time and money, getting the right legal advice at the right time can minimize headaches, and potentially even contract breaches, in the short and long term. Major events in the startup’s life that could be helped by legal expertise include handling due diligence requests on a new investment round and departures of co-founders or senior employees.
Five Common Startup Mistakes
Below are the five most common legal mistakes startups make and tips on how legal expertise, early on, can make all the difference:
1. Neglecting your company’s books
Understandably, many founders view keeping their company’s records as a purely administrative task and therefore don’t make it a priority. However, it is important to ensure that your company’s statutory books (for example, its register of members, its register of persons with significant control and its register of directors) are in order. Indeed, as well as being required under company law, these registers reflect the matters set out therein and can therefore be essential in establishing key details of a company, such as its shareholders and directors. .
Most investors carrying out due diligence on your business will ask to review these statutory books to ensure they correctly understand the key details of your business, which will help them confirm the price at which they will be investing. Naturally, a cap table and Companies House filings are important to an investor’s due diligence exercise, but are generally not enough to make an investor feel comfortable about the share capital position. from a company ; statutory books are essential to this analysis.
If your statutory records are inaccurate, out of date or simply non-existent, this can give rise to a number of potential issues in the context of a transaction, such as a delay in the transaction timeline and post-completion claims. the part of investors. . Therefore, it is advisable to ensure that they are correct and up to date before undertaking an investment cycle.
Where a lawyer can help you: Although you will need to guide us as to the factual position of these matters, we can provide you with advice on establishing, reconstituting and updating your statutory books.
2. Waiting to plan the allocation of stakes to co-founders and employees
It’s common for startups to incentivize founders and employees with ownership stakes in the company. For founders, this capital often takes the form of shares issued in advance, while for other employees, it is often preferable to grant stock options, if possible using a tax-advantaged regime.
As your business is expected to gain value over time, it is generally a good idea to grant these equity interests early in the business life cycle, to minimize potential tax complications for the business and individuals in question.
It is of the utmost importance to successfully complete these share issues and option grants. As mentioned above, there may be tax issues if not done correctly. Additionally, you need to think about what happens to these shares or options if your co-founders or employees don’t perform well or decide to leave the company.
Where a lawyer can help you: Our experts can help you with this process, including advising you on whether shares or options are more suitable, whether there are favorable tax regimes that the company and employees can benefit from, and the terms of any allocation of shares (e.g. voting rights and vouchers/provisions relating to bad leavers).
3. Adoption of model statutes without consideration
The statutes of your company constitute, in essence, a public regulation regarding the corporate governance of the company (such as the rights attached to shares and the provisions relating to the convening of meetings of the board of directors and shareholders). Companies sometimes, but not always, supplement their articles of association with a shareholders’ agreement, which may make additional provisions relating to corporate governance if it is preferable for these terms to be documented privately. Unlike a company’s articles of association, a shareholders’ agreement does not generally need to be filed with Companies House.
Many founders will choose to use “model bylaws”. These are the standard and abbreviated articles of association that you can choose for your company to adopt as part of the Companies House incorporation process.
In some cases, model articles will be perfectly adequate. However, you will need to consider whether you are comfortable with their fairly basic provisions, which do not address issues such as founder departures (meaning any exiting founder-shareholder will be entitled to retain all of their shares, even if he leaves to work for a competitor) and may not take into account the unique dynamics of your company with respect to its shareholders and directors.
Where a lawyer can help you: We can help you determine whether producing a bespoke set of constitutional documents is appropriate in the circumstances and can produce these documents once we understand your needs.
4. Not protecting intellectual property
Most often, a substantial portion of a startup’s value is attributable to its intellectual property (IP), including trade names, trademarks, logos, patents, trademarks, and software.
As such, it is crucial to ensure that all material intellectual property is owned by the company and properly protected. Most potential investors will take this into account in their due diligence process.
If, for example, significant intellectual property was created for the company by a third-party consultant or contractor but no intellectual property attribution exists (meaning, most likely, that the company does not own the intellectual property), obtaining an appropriate intellectual property assignment may become a condition. to secure investments. It is not always easy to obtain such an assignment (for example if the consultant requests payment for it or cannot be located). It is therefore important to ensure that ownership and protection of intellectual property are addressed at an early stage and ideally as early as, or even before, the creation of the intellectual property.
Where a lawyer can help you: We can help you ensure that your business agreements and employment contracts contain appropriate intellectual property provisions, as well as providing advice on ways in which you can protect your IP.
5. Don’t put it in writing
We understand that in some cases a verbal contract or an agreement reached by email can provide flexibility to your startup and will be less expensive than having lawyers draft a contract – at least in terms of upfront costs, but almost certainly not in the event that a problem arises regarding the execution of this verbal or informal agreement.
However, most of the time it makes sense to put your agreements with employees, consultants and commercial counterparties in writing. As your startup grows over time, it’s common for misunderstandings or miscommunications to arise and relationships to change. In such a case, you will want to be able to refer to a formal written agreement that clearly sets out the responsibilities and rights of the parties involved.
Additionally, potential investors conducting due diligence on your company will want to ensure that the company’s most important relationships are properly documented. If the terms of your relationships with key employees, consultants and business counterparties are deemed inadequate by the investor, or have simply not been documented, entering into new or amended written agreements may become an objective of completion, meaning they could potentially delay the transaction timeline.
Where a lawyer can help you: We can help you document the terms of new and existing business relationships. OUR Employment Team can produce a bespoke contract or consultancy contract on market standard terms, addressing key terms of employment or engagement and matters such as post-termination restrictive covenants (including non-competition clauses). Additionally, our sales and technology team can help you close commercial contracts, including drafting service level agreements, licensing agreements, SaaS agreements, agency agreements and much more .
Conclusion
Given our wealth of experience working with startups and investors, our attorneys can provide pragmatic, cost-effective advice to founders on these topics (and many others) to help them overcome common startup mistakes.
We’re always happy to have a conversation with you about your business and any specific issues that may arise over time – not just when an issue reaches a critical point.
We recommend that you contact us as soon as you become aware of a significant or potentially significant matter (such as litigation or an investment), as obtaining advice at an early stage can be essential to the progress of the matter.
If you would like more information, please contact a member of the team or speak with your usual Fox Williams contact.
