We understand that starting a business can be daunting so we’ve put together our top 10 tips to help you through the legal complexity.
1. Business name
Your branding will be vital as you look to grow your business so you’ll want to make sure that your business name is protected. Companies House will give you some level of protection once you’ve incorporated your company and it has its own procedure and tribunal if someone tries to incorporate a business with a similar name. This, of course, only relates to the company name – it does not stop them trading under whichever name they like.
There are also common law protections such as the ability to bring a claim for “passing off” but such claims can be very difficult as you’ll need to be able to show confusion in the market between the two brands. This means costly and uncertain consumer research. You can give yourself much better protection against this risk by registering a trade mark. With a registered mark use of your name alone is sufficient for you to be able to stop you competitor trading. Confusion in the market is not needed.
If you’re setting up on your own this may not be a practical challenge just yet. But if you are going into business with someone else or looking to incentivise key employees (who you may not be able to pay a “proper” salary to straight away) you will want to consider your Articles of Association or perhaps a Shareholders’ Agreement at an early stage. Things such as what happens if someone leaves and the balance of control will be vital. You may also need to negotiate certain veto items with investors if you are looking to raise equity (see below).
3. Raising Investment
If you need cash to get things really moving you might need external funding. Raising investment (rather than debt) can be great way to do this but you’ll need to consider what rights your investors will have as well as what protections are in place for you if things don’t go as smoothly as you had hoped.
If your investors would rather provide finance as debt, rather than equity, you’ll need to carefully consider the repayment terms and be aware of all of the events of default. With debt often comes a requirement for personal guarantees and, depending on your personal circumstances, this may not be something you want to give.
5. Commercial Contracts
Whilst at the bottom of most people’s list, your terms and conditions could be important to ensuring that your liability is limited if there is a significant trading risk. Many businesses can trade indefinitely without the need for formal contracts to be but in place, but you could assess the risk to your business when considering whether or not this is something you should, in fact, be sorting out.
6. Intellectual Property
Whilst we have mentioned the trading name of your business and how to protect it, there may be even more fundamental protections that you need to put in place. You’ll want to be very clear on the ownership of intellectual property, particularly if you are a technology business and if you are using external developers. This will be particularly important if you are raising investment and you may need to consider if, for example, you need to assign any copyright in any software developed prior to your company being incorporated.
7. Restrictive Covenants
If you have an employed team, who might have been with you from the start, you should consider including non-competition restrictive covenants in any contract of employment they have. This can be vital in protecting your customer and supplier relationships.
Any covenants will need to be reasonable so as not to be in “restraint of trade”. Things such as scope and duration will need to be carefully considered.
8. Share Incentives
If you’re looking to motivate your team to help you grow the business through share incentives this should be thought through at an early stage with professional advice. You could structure a share scheme that does not necessarily have to mean that they become shareholders immediately. You could grant tax-advantaged EMI Options giving them a right to become a shareholder in the future, perhaps simply vesting over time or alternatively this could be linked to performance targets.
9. What about leavers?
If you’re implementing a share scheme to reward and motivate your key employees you need to consider what would happen if they were to leave. There will be a distinction between when an employee is an option holder, and when they are a shareholder.
You could distinguish between good and bad leavers, which would then provide for what amount (if any) of the shares they could keep, or if you want to buy all of their shares, the price that would need to be paid for them.
10. Exit Planning
Yes, we know you’ve just started your business, but preparation and planning ahead is key when it comes to your succession plan. If you are incentivising your team through share incentives, or bringing external investors on board, they will also want to know what your overall goal is with the business you’ve created.
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