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

guy.wilmot@russell-cooke.co.uk

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.