The path to success for a fast-growth company can be exciting but hugely challenging. Along the way, there are many hurdles to overcome and unforeseen challenges that can send even the strongest companies off track.
But as highlighted at a recent workshop held at London’s unbound festival, there are common pitfalls that can be avoided. The event saw legal experts from Taylor Vinters join forces with accounting and tax experts CBW, to discuss the traps that entrepreneurs can fall into and how to avoid them.
Here are their top tips:
1. Draw up tailored employment contracts
International employment lawyer Scott Glacken from Taylor Vinters advises entrepreneurs to have proper employment contracts in place with the appropriate business protections.
“If your key employees don’t have written employment contracts, then it’s easy for them to walk out and set up in competition with your business. Eliminate this risk from the outset with a proper employment contract specific to the individual.
“Think about the specific threat that may be posed if an employee was to leave and join a competitor and then tailor restrictive covenants accordingly. Bespoke restrictions will have a better chance of being enforced than standard template covenants which are the same for everyone.”
2. Have written agreements in place
Geoff Dragon, Associate in Taylor Vinters’ growth team, says that written agreements are vital especially in relation to investments, shares and intellectual property (IP).
“It can be easy for entrepreneurs to overlook some of the formalities in the early growth stages as their time is so focused on growth and securing investment. But, founders need to prepare for all eventualities at the start of their journey, including if things go wrong or relationships breakdown.
“A shareholder agreement for example, will set out the relationship between each founder, and what will happen if you need to change things in the future. Also consider the concept of ‘good and bad leavers’ in these agreements. A founder may leave for genuine reasons, but it could also be due to a fallout or gross misconduct, so you need to agree how to deal with each scenario and what happens to the leaving founder’s shares.
“If there is ever a dispute, an investor, potential buyer and legal teams, will ask to see written agreements, so you’ll be in a much stronger position if you can access and present them quickly and easily.”
3. Get local advice when expanding overseas
Tax specialist Tom Adcock from CBW stresses the need to get local guidance when expanding or selling products overseas.
“If you are planning on global expansion, do your research and get professional advice as different countries have different tax, immigration and employment laws.
“For example, from a tax perspective, if you plan to sell electronic services to customers in other EU jurisdictions, you will need to register with the Mini one-stop-shop (MOSS Scheme). New rules introduced last year mean that the VAT rate will now be set by your customer’s location and be charged whether or not you are VAT registered.”
Scott Glacken adds that “a top tip from an employment perspective is to understand how difficult it will be to dismiss an employee and how much it might cost – before hiring them in the first place. Severance costs in some jurisdictions can be significant and dismissal processes can be arduous and time consuming.”
4. Beware of double dipping
Nyall Jacobs, Partner and Head of Dynamic Accounting at CBW warns of a situation viewed by HMRC as double dipping.
“Double dipping is where a company applies for UK grants and for R&D relief, resulting in the refusal of one of the reliefs. Both are considered to be a form of state aid, but as R&D relief is a relief that is claimable on advancement done in each year, it can be significantly more valuable than grant relief. However, what can be more important is the timing of the cash release, and grants have the advantage over R&D as they are often available prior to trading, whereas R&D relief is only available after the year end is completed.
“Companies are advised to talk to their advisers to assist them in working out the best strategy to claim so as to avoid making the wrong decision.”
5. Develop an IP strategy
Geoff Dragon says that a broad IP strategy is required to protect innovations.
“Whether you can protect your IP through patents or trade secrets (or both), should be carefully considered as part of a broader IP strategy.
“If you are relying on trade secrets then you need to consider the impact of the EU Trade Secrets Directive, specifically whether you are taking reasonable steps to protect your information as a trade secret.
“Entrepreneurs are advised to implement a trade secrets policy that is binding on your employees and contractors, to maintain a register of trade secrets and remind exiting employees and consultants of their contractual obligations. An IP audit may also be desirable to identify what trade secrets your company already owns.”
6. Incentivise your employees – tax efficiently
Geoff Dragon also advises founders to look at innovative ways to incentivise employees in the early stages.
“Attracting and retaining top talent in the early growth stages can be a challenge for entrepreneurs when they don’t have the cash flow to pay large salaries.
“However, if your company has assets of £30 million or less, it may be able to offer an Enterprise Management Incentive (EMI) share option which is also looked upon favourably by investors. EMI options enable you to grant your employees share options up to the value of £250,000 in a three-year period.
“They won’t have to pay income tax or national insurance if they buy the shares for at least the market value they had when the option was granted. If they sell the shares, they will need to pay capital gains tax but this is usually lower than income tax, and can also be subject to deductions in certain circumstances.
“The company and the employee must satisfy certain qualifying conditions and agree the exercise price with HMRC, so professional advice is recommended before setting up an EMI.”
7. Take professional advice on structuring your workforce
Scott Glacken recommends that entrepreneurs speak to professional advisors for guidance on structuring their workforce, especially if considering hiring freelancers or contractors.
“The media coverage of conflicts between “gig” workers, and the businesses that take them on, such as Uber, Deliveroo and most recently Pimlico Plumbers, demonstrates that the boundary between an “employee” (who has a full set of rights) and a “worker” (who has much more limited rights) is not always clear.
“Using contractors or freelancers can be very effective, especially for innovative tech businesses, but it is likely that the law will continue to evolve (perhaps through statutory changes) so businesses will need to stay the right side of the line to avoid the additional costs and liabilities that could come with engaging workers.
“The success of this type of model will largely depend on the type of activities you want your people to do. For example, if day to day control is required, then it may be more appropriate to recruit full-time employees.”