The journey from start-up through to scaling and eventually exiting with valuable shares can be a bumpy one. Hidden pitfalls and common oversights can send a young entrepreneurial business in the wrong direction.
Our workshop on 19th July at London’s unbound festival saw legal experts from Taylor Vinters and accounting and tax experts CBW, join forces with Tom Hoppe, a former MD of JP Morgan and now active angel investor.
There were plenty of questions from the audience during the workshop, so here is a summary of the main discussion points for avoiding the potential pitfalls on your journey.
Where should I trademark my brand? UK and globally?
Your trademark protection needs will depend on where you want to grow. If your business is going to be UK based, try and trademark your branding in the EU, which at the moment also covers the UK, but may not after Brexit.
If you’re going to be trading online, you may want to think about other key areas too, but that can be expensive. There’s no such thing as a global trademark, so you have to apply by jurisdiction.
It’s therefore vital that you develop a growth strategy to make sure you put your costs in the right place. This is especially important if you do want to operate overseas. The last thing you want is to become a victim of what’s called ‘trademark squatting’ which happens when someone else buys and registers yours trademark overseas and holds you to ransom as they own it.
Think about where you will be doing most business and prioritise these areas in terms of protection.
Also bear in mind that domain names are not trademarks, so you have to register those separately. If you want to develop a global business, consider registering domain names for that particular brand too.
Should employment policies be the same for start-ups as established companies and does the law treat start-ups any differently?
The law does not tend to differentiate between start-ups and established companies. Start-ups often have limited budgets and smaller workforces, so there is no need for a full suite of policies or detailed employee handbook at the early or growth stage. Focus on the issues that matter most to your business – all companies should have clear and concise disciplinary, grievance and equal opportunities policies. Depending on the nature of your activities, it might also be appropriate to put in place some clear ground rules for other areas, such as IT use, social media and/or data protection.
The key for start-ups is to have effective protection of confidential information and IP in the employment contract, together with bespoke restrictions for when key staff leave the organisation. Don’t use template wording which applies to everyone, but consider the specific threat that might be posed if an employee was to leave and join a competitor – particularly in relation to trade secrets, customer connections or workforce stability. For example, a Sales Director is likely to have deep connections with your main customers, whereas your Finance Director may have less customer contact, so alter your approach accordingly.
Less onerous restrictions are more likely to be enforceable, so think about the bare minimum protection that is necessary to protect your business interests. Do you need a non-compete restriction at all, or would a non-solicitation clause be just as effective?
Finally, if an employee isn’t doing what they’re meant to be, don’t cut them too much slack. Your business is vulnerable in those early stages, so don’t be afraid to grasp the nettle and have honest conversations about what is expected of them, with clear and measurable objectives.
"It’s vital that you’re honest with each other, know your strengths and weaknesses, and you’re prepared to be flexible."
Is there any way to spread or save costs in the early stages?
Find professional advisors that you can build a relationship with and who are the right fit for you and your business. There are specialist lawyers and accountants like Taylor Vinters and CBW that work with early stage companies and recognise the cost pressures you are under. Firms also run start-up surgeries in shared spaces who are expertly placed to help you deal with the legal issues your business is facing.
Once you’ve secured that relationship, keep your advisors informed and talk to them about your ideas and before you take any key steps. It’s important to take regular advice to make sure you don’t make potentially costly mistakes.
More generally, careful planning is essential to make sure you have enough money to achieve what you need at each stage. Also invest in putting in place measures to prevent potential issues that could cost a lot to rectify. A solid employment contract for example, with bespoke covenants could prove vital in terms of preventing an employee leaving the company with your IP.
At the start of your venture, work out what your critical success factors are going to be and prioritise what you need to spend based on those factors.
When agreeing terms with co-founders, how do I plan for potential changes down the road?
It’s vital that you’re honest with each other, know your strengths and weaknesses, and you’re prepared to be flexible. Recognise that things won’t always go smoothly and consider the concept of ‘good and bad leavers’ in shareholder agreements. A shareholder may leave for genuine reasons or due to a fallout or gross misconduct, so you need to agree how to deal with each scenario and what happens to their shares.
Work with a lawyer to draft a shareholder agreement including what each founder wants and what will happen if you need to change things in the future. It’s impossible to conceive every scenario but put in place the foundations for potential change and keep them simple.
Bear in mind that there are also tax liabilities regarding giving shares, but these can be minimised if share agreements are put in place from the outset. You can also encourage people to work harder by offering them options which can be very tax efficient and flexible. HMRC designed employee management incentives (EMI) options provide a very favourable tax result whilst meeting the objectives of rewarding key staff.
How do I value my company?
In simple terms, value it based on the equity you’re prepared to give away and how much investment you need to get to a certain point. However, in reality, your business is not worth anything unless someone is prepared to pay for it.
Should I consider crowdfunding?
Crowdfunding can provide an effective way to market your company at the same time as raising investment, but you need to raise at least 25 percent of your target before you can progress. Also, the investors coming through are generally not always interested in profit, but the journey, which can be good and bad, depending on your business. Remember, investors from crowdfunding will only be investing their money, and not their time into your business.
As an alternative, angel investors would have an active interest in your business and provide investment and strategic advice which is worth paying a lot of equity for.
I’ve been told by investors to come back when I’ve made more progress – what KPIs should I be achieving?
A leadership team needs to be able to sell its story and then prove that they can achieve what they say they’re going to. Once you can prove your financial figures and impact on the marketplace, investors will have confidence in what you do.
Be realistic if you’re seeking institutional investment as they won’t do any serious due diligence until your business is of the right scale and for less than a 20% stake.
What are the main factors an angel investor considers?
Very few angels are industry specific. Most want to see a good idea, good planning and a management team which is really on top of their game and can stand up to a good grilling.
Whether you’re at the beginning of your start-up journey or further down the line, there will be challenges ahead but also many opportunities. Strong leadership combined with careful planning and professional advice can dramatically increase your chances of success.
10 top tips to avoiding start-up mess ups
- Put the right documents and agreements in place from the outset to protect your business from future changes, but keep them simple and take professional advice.
- Find professional advisors interested in your company and be your partner throughout your journey.
- Talk to a tax advisor and get the procedures right so you can run your business without any distractions.
- Think about where you want to protect your IP and get advice on how to do this most cost effectively.
- Don’t let your key staff walk out of the door with confidential information. Your first hires are the most important so have a solid employment contract in place with tailored covenants.
- Work out what expertise you need and whether it would be more beneficial to employ someone or take on a contractor but put measures in place to protect data and your IP.
- Startups can benefit from tax reliefs but you have to claim for them, so if you don’t ask, you don’t get.
- Put down on paper what you want to do with your business and be grown up about it – don’t rely on simple handshake.
- Don’t give away too many share options because that could dilute your business and upset your investors.
- Take your proposition to different investors, argue your case and don’t be afraid to negotiate.
Co-authored by Nyall Jacobs and Thomas Adcock at Carter Backer Winter LLP.