Legal WHERE START-UPS fall down - Russell-Cooke Solicitors€¦ · copyright protecting graphical...
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Rushed company set-up Founders of new businesses are often keen to seize the moment of maximum motivation and get going immediately. Their first step is often to set up a company using a formation agent or directly through Companies House. However the company set-up, particularly the allocation of shares, should not be rushed. We quite often see a business issuing shares to lots of people up front then struggling to recover those shares when people drop out of the project. We also see the opposite; people involved in a project are offered shares but by the time those shares are finally issued the company has some value so tax issues arise. Best practice is to start with a simple company (e.g. one director, one shareholder) and put in place a shareholders agreement or other written arrangements as soon as possible. Complying with employment law New businesses tend not to engage employees early in their lifespan. While the UK is relatively light-touch in terms of employment rules, there are a number of things you need to be aware of if hiring employees: minimum wage laws; statutory benefits; rules around payroll and pensions; and the requirement to issue a contract. Accountants can be helpful in putting in place staff payroll and pension arrangement. Data protection and data security The GDPR came into force last year. While it changed little of the underlying law, it has hugely increased awareness of privacy and data security issues. At a minimum virtually all new businesses will need a privacy notice or privacy policy (to tell users and customers how they deal with data), and an internal data protection and data security policy. You may also need data processing terms if you are processing data on behalf of third parties, especially in B2B. Terms of use and contracts If you are an app or website you will need some terms of use. Typically these will deal with liability, payment, intellectual property etc. If you are providing services or goods you will need standard terms of business. If you are dealing with consumers your terms must be written in simple language and be compliant with consumer law rules which ban unfair terms and give consumers certain rights. You often hear that “people don’t read the terms and conditions.” That may be true, but only until something goes wrong. If a problem arises, the terms will be scrutinised carefully. Contractors and interns Be careful with categories of staff who are involved with the business but who are not traditional employees. If contractors are subject to too much control they may become employees with associated rights. Any intellectual property developed by contractors will belong to them unless they have a written agreement saying otherwise. Unpaid internships are illegal unless offered as part of an official university programme or involving only work shadowing. If an intern is performing useful work they will need to be paid the minimum wage and they are probably an employee. Intellectual property A new business should think about what it needs to protect in terms of intellectual property. IP should be divided into specific categories of recognised rights: copyright protecting graphical designs, text and copy, software code, and the look and feel of a website or app; patents protecting unique inventions; trademarks which protect names, logos and other badges of origin; and design rights. Much of what you regard as IP may not be protectable. Many things which startups want to protect - concepts, ideas, knowhow - are not really IP are only protectable using the law of confidentiality. Confidentiality and NDAs Information which is genuinely confidential is protected by the law of confidentiality even without a non-disclosure agreement (NDA). For information to be confidential it has to be definable information, of limited availability (not in the public domain) and subject to an obligation of confidentiality. The purpose of an NDA is to ensure that the information is defined and the obligation of confidentiality is clearly set out. NDAs are difficult to enforce because it can be difficult to prove breach. An NDA cannot make confidential information which is not confidential. Use NDAs to protect your information, but use them with care. Business partners and co-founders Disputes between business partners or co-founders are the most painful and difficult issues we commonly see with early stage businesses. Often a dispute arises because shares have been split between partners without clear agreement as to expectations around time commitment, strategy etc. Sometimes shares are issued to one partner too early and without an agreement in place to govern what happens if that partner leaves the project. Or there may be a personality clash, a perception that someone is not ‘pulling their weight’ or a strategy disagreement. Once a dispute arises it is often the case that a partner wants out but is reluctant to give up their equity at a realistic price because there is still substantial “hope value” even if the current cash value of their shares is very limited. A falling out is always difficult to manage but a good shareholders agreement will usually have terms which allow the dispute to be managed. 12 | Business Connexions Legal russell-cooke.co.uk +44 (0)20 8789 9111 [email protected] WHERE START-UPS fall down by Guy Wilmot I have been helping new businesses and startups for years. While every business is different, similar legal issues tend to arise repeatedly.
Transcript of Legal WHERE START-UPS fall down - Russell-Cooke Solicitors€¦ · copyright protecting graphical...
Rushed company set-up Founders of new businesses areoften keen to seize the momentof maximum motivation and getgoing immediately. Their firststep is often to set up a companyusing a formation agent ordirectly through CompaniesHouse. However the companyset-up, particularly the allocationof shares, should not be rushed. We quite often see a businessissuing shares to lots of peopleup front then struggling torecover those shares whenpeople drop out of the project.We also see the opposite;people involved in a project areoffered shares but by the timethose shares are finally issuedthe company has some value so tax issues arise. Best practice is to start with asimple company (e.g. onedirector, one shareholder) andput in place a shareholdersagreement or other writtenarrangements as soon aspossible.
Complying withemployment law New businesses tend not toengage employees early intheir lifespan. While the UK isrelatively light-touch in terms ofemployment rules, there are anumber of things you need to be aware of if hiring employees:minimum wage laws; statutorybenefits; rules around payrolland pensions; and therequirement to issue a contract. Accountants can be helpful inputting in place staff payroll andpension arrangement.
Data protection and datasecurity The GDPR came into force lastyear. While it changed little of the underlying law, it has hugelyincreased awareness of privacyand data security issues. At a minimum virtually all newbusinesses will need a privacy
notice or privacy policy (to tellusers and customers how theydeal with data), and an internaldata protection and data securitypolicy. You may also need dataprocessing terms if you areprocessing data on behalf ofthird parties, especially in B2B.
Terms of use andcontracts If you are an app or website you will need some terms of use.Typically these will deal withliability, payment, intellectualproperty etc. If you are providingservices or goods you will needstandard terms of business. If you are dealing withconsumers your terms must bewritten in simple language andbe compliant with consumer lawrules which ban unfair terms andgive consumers certain rights.You often hear that “people don’tread the terms and conditions.”That may be true, but only untilsomething goes wrong. If aproblem arises, the terms will be scrutinised carefully.
Contractors and interns Be careful with categories of staff who are involved with the business but who are not traditional employees. If contractors are subject to toomuch control they may becomeemployees with associatedrights. Any intellectual propertydeveloped by contractors will belong to them unless they have a written agreementsaying otherwise. Unpaid internships are illegalunless offered as part of anofficial university programme orinvolving only work shadowing. If an intern is performing usefulwork they will need to be paidthe minimum wage and they are probably an employee.
Intellectual property A new business should thinkabout what it needs to protect in terms of intellectual property.IP should be divided into specific
categories of recognised rights:copyright protecting graphicaldesigns, text and copy, softwarecode, and the look and feel of a website or app; patentsprotecting unique inventions;trademarks which protectnames, logos and other badgesof origin; and design rights.Much of what you regard as IPmay not be protectable. Manythings which startups want toprotect - concepts, ideas,knowhow - are not really IP areonly protectable using the law of confidentiality.
Confidentiality and NDAs Information which is genuinelyconfidential is protected by thelaw of confidentiality evenwithout a non-disclosureagreement (NDA). For information to be confidentialit has to be definable information,of limited availability (not in thepublic domain) and subject to anobligation of confidentiality. Thepurpose of an NDA is to ensurethat the information is definedand the obligation ofconfidentiality is clearly set out. NDAs are difficult to enforcebecause it can be difficult toprove breach. An NDA cannotmake confidential informationwhich is not confidential.
Use NDAs to protect yourinformation, but use them with care.
Business partners and co-founders Disputes between businesspartners or co-founders are the most painful and difficultissues we commonly see withearly stage businesses. Often a dispute arises becauseshares have been split betweenpartners without clear agreementas to expectations around timecommitment, strategy etc.Sometimes shares are issued to one partner too early andwithout an agreement in place to govern what happens if thatpartner leaves the project. Or there may be a personalityclash, a perception thatsomeone is not ‘pulling theirweight’ or a strategydisagreement.Once a dispute arises it is oftenthe case that a partner wants out but is reluctant to give uptheir equity at a realistic pricebecause there is still substantial“hope value” even if the currentcash value of their shares is verylimited. A falling out is alwaysdifficult to manage but a goodshareholders agreement willusually have terms which allowthe dispute to be managed.
12 | Business Connexions
Legal
russell-cooke.co.uk+44 (0)20 8789 9111
WHERE START-UPSfall down by Guy Wilmot
I have been helping new businesses and startups for years. While every business is different, similar legal issues tend to arise repeatedly.
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