Pay Attention! Don't Ignore Your Legal Risks
Clauses you should invest in.
Whilst there are many routes to building a successful business, a miscalculated legal step can put your business at risk and seriously damage your company’s growth potential. This article will walk you through the key steps and documents you’ll need in your first 100 days as a founder to protect your business in the UK.
It is vital to make sure that you own the Intellectual Property behind the business idea you plan to commercialise, especially if you are still an employee of another company. If this is the case, you will need to take additional precautions such as making sure the company does not own the intellectual property behind your business idea or that you are not violating non-compete provisions. To find out, you should refer to your specific employment contract for the specific non-compete and IP provisions that apply to you. If you intend to incorporate your company whilst still employed, make sure that you are not breaching a potential restriction on outside interests. You can try to negotiate a waiver of this restriction from your employer. Alternatively, you’ll have to incorporate once you are no longer employed and/or when the restrictions no longer apply.
You can register a company in the UK on Companies House for a £12.99 fee. All you need to do is choose a company name which doesn’t have to be your trading name and provide a registered address which can be changed in the future. When choosing a company name, make sure to choose a name which resonates with your target customer base and is not currently in use by another company. You should also make sure that the domain for your name is available. After incorporating your company, you will then need to file your Company’s articles of association to Companies House which are effectively the rules which affect how the company is governed.
You can open a business bank account as soon as you have incorporated your company. You will need a bank account to make and receive payments as well as receive funding from investors. This process can take time depending on the bank and is usually free so it is worth setting it up as early as possible.
As a founder you should know exactly what goes in and out of your accounts and you should expect your accounts to be audited by HMRC or future investors. Connect your bank account with an accounting platform which is compliant with Making Tax Digital like Sage so that you can effectively manage your books and make filings from day one.
Only companies with a VAT taxable turnover greater than £85k are required to register for VAT but it can be worth registering before meeting this criteria if you are likely to make significant VAT taxable purchases, such as office equipment. This will allow you to claim back VAT on those purchases as long as they exceed any VAT taxable revenue you might generate over that period.
After choosing a company name and securing your domain, you should protect your brand and future products by registering trademarks. A trademark will prevent people and businesses from misappropriating your brand or using it without your permission. Trademarks are granted by focus (e.g. software) and jurisdiction which means that you should consider filing international trademarks early on if ever you plan to expand internationally.
You should protect your confidential information and intellectual property when discussing it with prospective partners, clients or employees. Use non-disclosure agreements (NDAs) when possible and refrain from disclosing confidential information if you are not confident the recipient of that information will be able to keep it confidential, even under a non-disclosure agreement.
You can opt to protect your business inventions by filing a patent application. Patents also mean that competitors may not be able to copy your solution which therefore increases the value of your business. You will have protection from the date you file your patent application which means you will have protection when disclosing information to investors who are usually reluctant to sign a non-disclosure agreement. Patents, like trademarks, are granted by jurisdiction but can be scaled internationally via patent treaties.
Insurance protects your business and yourself from risks that could lead to a financial loss or damage. As a founder, you should make sure that you have sufficient protection in order to grow your business responsibly. Whilst all businesses will require some key insurance policies, others will require insurance tailored to the nature of their business, industry and where they operate. The main insurance policies are listed below.
As an early stage founder it is important to make sure your insurance is appropriately tailored to your risk level as over protecting yourself will lead to unnecessary costs and under protecting yourself will expose you to potential liabilities.
If you need funding to develop your business, you can choose to sell shares in your company to external investors. To do this, you will need a shareholder subscription agreement which defines the rights, obligations and restrictions of existing and new shareholders. Later stage investors will expect certain clauses so it can be worthwhile to start with standard documentation from the start to avoid changes and negotiations later on. The documents provided by the British Venture Capital Association are a good reference and widely recognised by the UK investor community. Since the subscription agreement is highly connected to your articles of association it can be worthwhile to adopt model articles which are compatible with model subscription agreements.
As a founder, growing your business often means hiring team members to scale yourself or fill in gaps outside your skill set. Different options exist based on the stage of your business and your requirements. Consultants are a great solution if you are looking to address a short term need and interns are a great way of tackling small projects cost-effectively and identifying future hires. Hiring employees comes with more obligations (e.g. pensions) than contracting consultants which is why you should do this if you can afford to and have a long term need for the role you are hiring for.
No matter which option you choose, it is important to make sure that your contracts have the right confidentiality, intellectual property and restriction provisions to protect your business. Employees should not be able to start a competitive business for at least a set amount of time (restrictive covenants) which will vary based on your industry. To contract consultants or hire employees you will also need a Privacy notice and GDPR privacy standard which will define how you will process their personal data as well as define the information they will have access to in the course of their work.
You may want to incentivise employees, advisors and long term consultants with stock options which will give them some upside in the success of your company. Various schemes, such as the Enterprise Management Incentive scheme, exist to grant stock options tax effectively but it is worth seeking legal advice before doing so as choosing the wrong scheme or not following the correct steps in the initial set up can lead to a tax burden for both the company and the stock option holders.
You will need a commercial agreement to establish a legal relationship with your customers. A simple terms and conditions agreement might be sufficient if you are providing off the shelf software with little or no customisation and for a relatively low charge. Higher value contracts will command a more formal agreement. Regardless of the product or services you are offering, it is important to have a complete contract which protects your business. The key areas to pay attention to in your agreement are liability, warranties indemnification which are important to keep under control in your potential negotiations with your customer. Bearing too much liability can breach your insurance policies and expose your company to a significant financial risk. It is therefore important to not sign a commercial agreement for the sake of obtaining a customer if the underlying terms will create a liability burden or if the warranties are too strict.
In this article we have provided a blueprint for establishing the necessary documents, policies and legals to protect your business and grow it confidently. As a founder it can be tempting to skip the paperwork as it can seem like an unnecessary cost and waste of time when there is so much to do to build a business and make it a success. Underestimating your risks can seriously hamper your growth potential as customers or investors might perceive your business as too risky to engage with. Equally, it is important to not over-protect yourself as this will lead to unnecessary costs and burdens. Finally, it is important to update your company’s policies, documents and procedures as your company matures, your risks evolve and the laws change. You can use Legislate to save time on your contracts without compromising your legal risk. To find out how, read a tutorial, book a demo or register an account.
The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.
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