The UK’s start-ups scene is positively booming, especially in the tech sector. Data from Companies House in 2015 showed that start-ups increased by 21% in just a year, with tech a key growth sector. However, starting and running your own business can be challenging. Here are our top five tips for start-up success in 2016:
- Founders Agreement – it is important to have a simple shareholders agreement in place between co-founders from the outset of the business formation. This will ensure that a number of key issues are agreed and documented, in particular relating to how the business is to be run, how decisions are to be made and, crucially, what happens to the shares held by a co-founder if he/she leaves the venture. Companies who have not invested in such an agreement run the risk of being ‘held hostage’ by a co-founder who leaves with a significant proportion of the shares, with no legal way to require those shares to be returned to remaining founders. This is potentially a deal-breaker in terms of being able to subsequently raise external investment, and the costs of negotiating a settlement without any legal documentation in place can far exceed the costs of putting a founders agreement into place in the first instance.
- Trade mark registration – another key step for early stage businesses is to invest time in protecting their brand and developing an intellectual property strategy. Trade mark registrations advice should be sought, in order to avoid potentially costly litigation and/or re-branding exercises at a later stage.
- Hiring – there is often confusion around hiring employees versus interns versus contractors. Companies should understand the differences between the terminology and ensure that advice is taken to ensure the most appropriate contracts are in place.
- Fundraising – Founders preparing for an investment round from angels or VC investor should familiarise themselves with example term sheets (that is, short summaries of the key investment terms which investors propose). This will put founders in a much better position of understanding of the legal terminology and commercial provisions involved when term sheets are received and need to be negotiated. While the majority of provisions in term sheets are not legally binding, it is very difficult to subsequently seek to amend the investment terms once they have been signed, so a detailed understanding is a must.
By Jonathan Snade, Partner, Thomas Eggar (recently merged with Irwin Mitchell LLP)