We’re going to give you 5 golden tips for starting a start-up that can help you along your journey to an early retirement.
1. Think about structure:
Your choice of structure (sole trader, company, trading trust, group of companies etc) will have tax and liability implications. You need to think about what structure will work for you. A common option is a proprietary company limited by shares, which will protect your shareholders from liability. It is also common to consider putting any valuable IP in a related company that is separate from the “operational” part of the business. Of course, the best option will depend on your circumstances, but we’re going to assume you have thought about all of this and decided a shiny new company is the way to go. Right, onward.
2. If you are more than one, put a shareholders’ agreement in place:
If there are other cofounders or lucky you have a seed investor, you should determine what rights each shareholder has from the get go. It may not seem a priority when things are going along swimmingly but, when the money starts rolling in, or if things get a little hairy, the relationship may not be so congenial.
You should think about:
- Who get what percentages of shares in the company and who are the decision-makers?
- What decisions about the business and company require everyone to agree?
- What are the roles and responsibilities of each of the shareholders?
- What do they need to contribute (or what do they get to keep)?
- What do you do if one of the shareholders isn’t pulling their weight?
- What happens if a shareholder leaves?
- What if you want to sell the business?
Spending a bit of time early on in the piece setting out expectations will save you a lot of strife down the line.
3. Prepare a standard set of terms and conditions:
If your start-up involves supplying products or services, you should have a standard set of terms. The alternative is to let your customers impose their terms, which will leave you with inconsistent obligations across your customer base. The better way is to think about what terms are right for you. As a start, you should think about:
- What is the scope of the agreement (i.e. what are you agreeing to do)?
- How much and how often will you be paid?
- How can you get out of the agreement if things go pear shaped?
- Are you protecting your intellectual property rights? Don’t give them away!
4. Protect your intellectual property:
You need to consider the ways you can protect the IP, valuable ideas and know how that you develop. In the first instance, you might want a confidentiality agreement to use before you tell anyone anything. And maybe you should consider registering your name or logo as a trade mark, or register a patent if you have a new product. The way you protect the IP really depends on what it is you’ve developed.
5. Put contractor and employee agreements in place:
Many start-ups (being low on the cash front) give contractors or employees the right to shares in exchange for their work. Whatever you want to call this arrangement (sweat equity, option agreement, reverse vesting agreement because you are a Silicon Valley wannabe), just make sure everyone is clear about exactly what rights you’re giving the employee and what work they need to do to get those rights. If you are giving them shares (or options over shares), think about whether you will give them the same “full” rights as your shares - will they be paid dividends, but not given the rights associated with traditional share ownership (like the right to vote)? And what happens when the employee moves on from the company?
One of the main purposes of contractor agreements is to ensure that all the IP is owned by the start-up and that contractors don’t have claims to the IP later when you are making billions.