To paraphrase Miguel de Cervantes - the start-up that is prepared has its battle half fought.
It may seem like a hassle (and, depending on who you are working with, it may not feel like you need to), but giving early consideration to the structure, funding, decision making and growth of a start-up can save you a lot of stress in the future.
What vehicle will you use?
Incorporating a new entity as the operating vehicle for your start-up can provide tax benefits and legal protection through the “limited liability” of the shareholders. But there are many factors that need to be considered when deciding what structure will best suit your individual circumstances. For example:
- What are the founders’ individual personal circumstances? Could they benefit from holding their equity interest through a trust?
- How can the rights to the company’s intellectual property be best protected and exploited?
- How do you plan on funding the growth of the company?
Documenting the rights of the owners
If your start-up has co-founders, there is usually benefit in having a document governing the rights and obligations of the owners and the legal entity itself, commonly referred to as a shareholders’ agreement.
A shareholders’ agreement typically sets out the rights and obligations of shareholders of a company and the company itself and commonly covers matters governing the management and structure of the company.
A shareholders’ agreement will usually cover matters such as:
- Who will be on the board of the company?
- Who has the right to appoint directors?
- What rights do founders have in relation to selling or transferring their shares (for example, is it appropriate to have limitations or restrictions in place in relation to who shares can be sold to)?
- How will additional funding be raised? For example, do you want to ensure that existing shareholders have the right to buy additional shares before any new third party does?
- How will any ‘deadlocks’ be resolved?
- In what circumstances might a founder be forced to sell their shares back to the company and what price would be paid for the shares in this situation?
- Should founders be prevented from setting up businesses that compete with the company, and in what area and for how long would such a restraint apply?
Documenting these matters early in the life of a company and before they become a problem can often result in more considered decisions being made and quicker and cleaner resolutions of any issues that arise if relationships break down or things don’t quite go as planned in the future.