Starting your own Business and the Law

Andrea Cropley Stood in-front of the 'Founders Network' sign
Standard

This week I delved into the legal side of starting your own business, by attending the “Founders Network Masterclass on Legals” event, superbly put together by Tech North.

The event was held at the Chimney House, Kelham Island, Sheffield. A cozy little building that I haven’t been to since I wrote a report about the River Don Engine on a school trip with junior school, back in the 80’s (I feel old now).

It was a really great event, the topic of law can be a little dry (as one of the speakers admitted), but the relaxed format made the evening quite pleasurable. The venue was beautiful, and the food and drink afterwards was amazing!

Here are a few photos that I took at the event:

Technically still a start-up, I’ve been running a business now for a couple of years (I am one of the co-founders of the WordPress web design and development agency Make Do), but even still, I learned many things at the event, and things that I did already know were reassuringly reenforced.

The rest of this blog post sets out my thoughts and learnings from the event. Please be warned about the blurry photos. The iPhone camera on zoom is not the best, especially in poor light.

Introducing Business Law

First up Emma Chesire, CEO and Co-Founder of Dotforge (a pre-seed startup accelerator), gave us all a bit of background about the day, and our first bite of legal know-how.

Emma Cheshire

Emma Cheshire giving us an introduction to the event

Emma also encouraged us to “ask the stupid questions” to the panel members, immediately all the questions that I had were now acceptable. She had also managed to gather together four lawyers and an accountant in one room! Just like in the movies.

Emma taught us that all a business is really is an amorphous set of ideas, product and services that are changing all the time. This statement is especially true when applied to a startup business (I can vouch for this, Make Do has ‘pivoted’ several times since its inception).

The legal part of business helps to bind these ideas together and give them structure. Depending on the needs of your business you may only need a few legal “bits”, or a lot of legal “bits”.  Be warned that the paperwork involved can feel like just paperwork (especially in a modern tech based startup, where with the the aid of tools like Dropbox, paper is a dirty word), you need to have those pieces of paper in place (and yes, sometimes have to be on paper).

Emma told us that sometimes one kind of lawyer isn’t the answer, depending on your business you may need specialists.

Making Your Business Real

The real question is what do you need to have to make your business “real” in the eyes of the law? Making your business into a real (and legal) entity is important to your customers, your investors and anybody else that has a vested interest in your company.

Emma and Andrea Cropley (who I will introduce properly a little later), gave us a quick guide to the core documents that are required to make your company legal.

Core Documents

There are two core documents that cover the roles and rights of shareholders and the organisation.

These are:

  • The Articles
  • The Share Holders Agreement

Why Two Documents?

You could put the contents of both these documents into the Articles, but you have to make the Articles public. You may not wish everyone to see the agreements you have in place with your shareholders, so for this reason it is a good idea to keep them separate.

The Articles

When you setup your business one of the first things you will do is register with Companies House. Companies House will provide you with a standard set of Articles. You do not have to accept these, and you can change them to be more suited to your needs.

The Articles cover things such as:

  • Governance
  • Rights
  • Responsibilities
  • High Level Description of the Company
  • Mission

They should also include information about how you appoint directors, and the distribution of share rights.

Do You Need to Change the Articles Regularly?

No, they shouldn’t really need to change. There is no requirement to state what your company does in the Articles, but if you do state this, or if you limit your companies roles and responsibilities within the Article then you may need to change them if the direction of your company changes.

If any of the following areas change, then you will need to change your articles:

  • Income
  • Return on Capital (or Capital)
  • Voting
Changing Articles

To change your articles, you need the agreement of 75% of your share holders (that have voting rights) to vote on the change before it can be accepted.

If you have a small business, you can do this instantly (providing at least 75% of share holders agree in a meeting), however if you have more shareholders that may not be practical. In this situation you need to write to your share holders with a written resolution and give them 14 days notice, and you will need the signatures of 75% of your share holders to proceed.

Share holder agreement

The shareholder agreement and the articles work together, elements of them reflect each other but they should not duplicate each other.

People that invest money into your business (including the founders) generally will have shares in the company. The shareholders agreement contains the separation of rights for each shareholder, including their roles and responsibilities.

Contracts

The first panel speaker to talk was Andrea Cropley a corporate lawyer from Irwin Mitchell. Andrea delivered short but in-depth talk on contracts.

Andrea Copley Stood in-front of the 'Founders Network' sign

Andrea Cropley delivering a talk on contracts

Andrea taught us that a contract is not as clean cut as everybody believes, and about the four fundamentals that form a contract:

  • Intention to contract
  • Offer
  • Acceptance
  • Consideration

The offer and acceptance part are basically laying out what the company offers, and wether or not a customer agrees to it (pretty standard stuff), but the other two bits are slightly more complex.

Firstly the intention to contract is a slightly more complex concept, for example, if you are in the pub with your mates and you offer to buy something for a lot of money, you probably don’t really have an intention to enter into a contract, (even though you may have just entered a verbal contract). So to help demonstrate intent, it is best to write things down.

The law also states that some intentions have to be in writing. A good example of this would be if you were to buy a house.

Consideration is the payment method for the goods or services you are proving. This could be financial or in-kind.

Sometimes things do not have any consideration, but we still need them it to be legally binding. Legal documents in these scenarios are referred to as deeds.

Limits of Liability

If you add limits of liability to your contract, you need to be weary, especially if you are selling to consumers. It is very important to be aware of customer rights as these will take precedent over your limitations.

Sub Contractors

If you are a small company you may rely on sub-contractors to help you with larger projects. Be aware that a contract could prevent you from using sub-contractors, as they may only want to deal with you (the organ grinder, not the monkey as it were).

Emails as a Contract

Emails can form a contract, and can stand up in a court of law if there is a paper trail and an agreement. However they will not stand up as well as a legally binding contract would.

Mandatory Rules (Don’t be Anticompetitive)

There are mandatory rules you have to follow when forming a contract. One rule is that you are not allowed to be anticompetitive.

If you are restricting what others can do, such as stopping other organisations bidding for a contract or if you are price fixing, this is considered to be anticompetitive behaviour.

An example of price fixing would be if several supermarkets got together and agreed not to sell bread for under £1. This is unfair to the consumer, and obviously a big no-no.

Due Diligence

Andrea also talked to us about Due Diligence. She mentioned that the most important part of trading is checking for risk. Taking decisions around whether or not you should trade with another organisation is on you!

Make sure your customer is who they say they are. Unscrupulous companies have been known to form with similar names to well established firms and rip off their clients.

To ensure you enter a contract successfully, it is always important to:

  • Check who you are dealing with
  • Check why they are offering an amazing deal (if they are offering a great deal)
  • Make sure you define what you get out of the deal
  • Setup payment terms with payment milestones based on certain criteria
  • Assume the worst when writing a contract, so if things do go wrong, you are protected

Terms and Conditions

The next person to speak was Louise Handley, one of the partners law firm 3volution. Louise delivered a presentation on Terms and Conditions.

Louise Handley stood in-front of the 'Founders Network' sign

Louise Handley telling us all about Terms and Conditions

You need to have standard terms and conditions in place for your products and services (or a standard licence if you are licensing software for instance). These need to be in place, and agreed, prior to the formation of a contract.

No software is fit for purpose.

— Louise Handley, Partner, 3volution

You should never agree that software that you produce is fit for purpose, within these terms as no software ever is (all software has bugs and exploits).

You should tailor your Terms and Conditions to your product or service and never use parts of other Terms and Conditions (franken-terms if you will), as your product or service will be unique to your organisation.

It is important to note that not all terms can be upheld, there is a risk of the courts saying that you have unfair terms.

Will People Read the Terms and Conditions?

If they go on for pages and pages (I’m looking at you Microsoft) then in the case of your average consumer, probably not. For this reason you should make them as concise as possible.

Intellectual Property

Louise also talked to us about Intellectual Property (IP for short). The key message here is never give away your Intellectual Property.

When you make a purchase, never assume that the IP has been transferred to you (and vice versa). You also need to be specific about which parts of IP you are transferring as part of a deal. If you state you will transfer all IP this implies the transfer of the IP of any background tools or products that you may have developed to create the product.

Code will belong to a coder, even if you have paid for the code. This is unless you have specified that you will own the IP within a contract that you have agreed with that coder.

If you need to transfer IP after the work has been completed you will need to have the parties involved sign an ‘Assignment of IP’ document.

There are two types of IP:

  • Registered IP
  • Unregistered IP

Registered IP

To have registered IP you must register with the Intellectual Property Office (IPO).

One type of registered IP available from the IPO is a Patent. A patent protects an invention, and once registered a patent is protected for 20 years. Searches (checking if an invention already exists) are done against patents more then any other types of IP. Patents are a good way to attract investors.

If you want to register a patent it is important that you keep your invention a secret until the patent is registered. However, if you do not have the money to monopolise on your patent it may not be worth patenting it as patents are publicly viewable.

Despite common beliefs, you can take out a patent on software, however the rules around this are different in various jurisdictions.

Another type of registered IP is a ‘design right‘. These protect the shape, look, feel and functionality of your product and last for 10 years.

Trade Marks can be used to protect your brand. These stay with your business indefinitely.

Unregistered IP

Copyright is an automatic right. If someone copies you, you can take action against them. You need to prove that someone has copied you to do this however.

It is important to put the copyright symbol (©), the date and the word ‘confidential’ on everything you distribute to protect your rights.

Interestingly enough, you can also licence know-how. For instance instructions, processes, or guides on how to do things (e.g. how to manufacture a certain product).

Also databases are protected under copyright under a special area named ‘database rights’.

Employment Law

The last person on this initial panel was Paul Ball, another partner at the law firm 3volution. Paul gave us all an insight into employment law.

Paul Ball stood in-front of the 'We Are Tech North' sign

Paul Ball telling us all about employment law

Paul started off by telling us about the basic terms of employment that you are required to offer to your employees. These must comply with the ‘Section 1 Statement‘.

These terms of employment are not sufficient for all employees however. Company founders and non-executive directors will have their own terms.

Also it is important to state the ownership of IP within all employment terms and conditions.

Recruitment

All businesses will make poor recruitment decisions from time to time, to help protect your business should you part ways with an employee it is important to be clear about the role and the skills required in your recruitment documentation. You should make judgements on these, never about gender, race, colour, creed, age, etc…

You should remember that people have rights before they are even employed. Even if you have had no employment relationship with a person, if they belive they have been treated unfairly by your recruitment process, they have a case against you.

If you do have to let a member of staff go, to prevent them from taking your business with them it is important to have had them sign a confidentiality agreement, protecting things such as your client list, and any trade secrets you may hold.

It is worth noting however that if you do have an employee and they do not need to have access to these kinds of lists and secrets, it is easier to simply not allow them access to these documents, rather then attempt to restrict them with terms and conditions.

You can specify notice period, to prevent an important member of staff leaving with only one weeks notice (when it could take much longer to ensure they have passed their knowledge back to you and their team).

You may also need to place restrictions upon an employee, stating that they cannot work in a competing sector for a certain amount of months, or with certain suppliers or customers of yours. It is worth noting that restrictions such as this can be unenforcible for lengthy periods of time, but for shorter periods of time they can offer your business protection.

Finally, it is a good idea to have a probation period of around 3-6 months written into a contract, with short term termination options, and a clause allowing this probation to be extended.

Termination of Contract

Sometimes letting someone go is unavoidable, however there are other routes that can be taken other than a disciplinary approach. You could offer a confidential discussion, or off-the-record conversation and advise that if things do not change then it will go down the disciplinary route.

You could also agree an amicable termination, which could be a notice period and a settlement agreement that the employee may wish to take to avoid a termination on their employment record.

Contrators

If you have a short, or fixed-term project and not enough staff then a contractor may be more suitable for your business.

Contractors do not have the right to claim redundancy or unfair dismissal, so once the job is done you are free to move your own separate ways.

It is worth noting that contractors do tend to be more expensive then employees however (who can blame them, they have very low job security).

Policies and Procedures

Policies and procedures define the culture of an organisation. They are not needed immediately, but once you start to gain employees it is a good idea to start getting them together.

Various templates are available online for this, or you can hire a Human Resources (HM) company to draft them for you.

As an employer you have a duty to treat people reasonably, and policies and procedures can help you to do this.

Overseas trade

Before the panel wrapped up, Paul offered us a few words of advise on overseas trade.

Dispute resolution for cross-border trading is a whole topic in itself. If you are contracting regular overseas, then it may be best to talk to a lawyer.

A Lovely Stretch (End of the first Panel)

It was then time for a quick break before the second panel of speakers. I managed to quickly catch up with Kimb Jones (my business partner at Make Do) who had managed to sneak in just as the talks were starting. Soon we were back in our seats ready to take on board more excelent business law advice.

Basics of Governance

First to speak in the second panel was Toby Harper, CO, Founder and Corporate Solicitor at Harper James. Who gave us the lowdown on Governance.

Toby Harper stood in-front of the 'We Are Tech North' sign

Toby Harper giving us great advice about shares.

Toby told us about the various business structures available, however I selfishly only concentrated on limited companies (as I run one). These have limited liability (hence the word limited in the title), and the most investment options (IE they have shares).

A limited company can own other companies (or shares in other companies). This comes in handy for working within other jurisdictions, as your company could simply own a company that is trading overseas, reducing some of the risk involved in that area.

As a limited company, you can offer shares to your employees, however be weary of the tax implications of this, as shares have a monitory value and can affect income tax of an employee.

It is also worth noting that any investors in your company may request rights that normal share holders do not have, such as viewing company information that you may usually keep under wraps.

Cap Tables

The next person to speak on the second panel was Saf Ali (here I must apologise, Saf didn’t have any slides, so there is a very good chance I have spelt her name completely wrong, if I have please correct me in the comments section). Saf is a Chartered Accountant at PwC Financial Advisors, and delivered a talk about Cap Tables.

Saf Ali stood in-front of the 'Founders Network' sign

Saf Ali telling us all about Cap Tables

A Cap Table is essentially a breakdown of who in the company owns what share of the company (and is at its heart just a fancy spreadsheet).

Saf told us that 51% of the company is the magic number. As long as you hold on to that amount of shares, then you keep control of the organisation.

Investors will want to know about the dilution of the business (this is how many shares have been assigned).

Saf also told us about share options, which are a type of share that will give the holder a share of the company at a point in time. You can have a pool of share options that are unassigned to anybody. These are referred to as unallocated shares.

These unallocated shares all count towards the dilution of your company, and as such need to be captured in the Cap Table.

Finally Saf warned us about new types of investment that are available, such as  crowdfunding, as by raising finance in this way, you may be giving away equity in your business.

Business Plans

Finally Andrea Cropley a from Irwin Mitchell (the first panel speaker) came back to the stage to give us some great advise on business plans.

Andrea Copley - Reprising her speaking role

Andrea Cropley giving great advice on Business Plans

Almost every business plan that has been written by a company (and not advised), tends to be very introspective. The company focuses on their product or service, and about the company in general. They do not focus on what an investor wants to see.

Most investors only care about a return on investment, within a certain timeframe. It doesn’t matter how groundbreaking the product is, if your business plan does not include this information you will not attract investors.

It is important to look at your products through the eyes of your investors, identify your competitors, investigate the cost to market, etc… You must write your business plan as if you are the investor.

Never shy away from the hard questions, both in your business plan and when selling the product. Also be true to yourself, if you are not a salesperson, do not sell! You may need to hire someone to do this, and this information should go into your business plan.

Investors invest in people. They will weigh you up to see if you are trustworthy, and to see if you will work for your product/service. If you are not passionate, organised, or you do not fully understand your company (and its finances) they will not invest.

After the Event

Once the event wrapped up, I must admit that I had some of the best after-event food I have ever had (see the photo gallery for details). I also I had a couple of great conversations with some of the speakers and attendees. Some of which I hope will lead to great things!

If you run a startup business I suggest that you sign up to the founders network (if you haven’t already) and catch their next event. I will hopefully see you there!

Matt Watson

Technical Lead at Make Do
Matt Watson is the co-founder and technical lead of WordPress agency Make Do. Matt loves writing and learning about code, and considers himself lucky to be doing what he loves for a living. Find out more about Matt, or get in touch to hire Matt for your project.

Leave a Reply