Big legal issues for tech start-ups
Posted on May 22, 2017
If so, while achieving growth will be your priority, there are also some legal issues that you need to think about as early as possible to protect your business.
Many non-tech companies are acquiring or investing in tech start-ups, rather than starting their own software businesses from scratch.
So, it is important to ensure that your business is investment-ready, which includes getting the legal foundations right.
Smart start-ups prioritise the key legal issues they need to deal with to ensure that:
- their valuable business assets are protected;
- they look well-managed, organised and professional when scrutinised by banks, potential investors and potential purchasers; and
- issues arising during and after a funding round can be dealt with quickly and efficiently.
If you have already put the key protections in place it will make an investment or sale process much less painful.
The team at Artington Legal share their top five tips for ensuring your business has the legal foundations it needs to prosper.
Five key legal issues that every tech start-up should think about now
1. Business structure
It is important that you take advice on the best structure for your business as soon as possible and ideally before you start trading. Whether you choose to operate as a limited company, a partnership or a sole trader will depend on your circumstances and who will be involved in the business, what it is you will be doing and where, the risks you face and how you want to organise your financial affairs, including tax arrangements.
If you decide to operate as a limited company it is important that you have a strong shareholders’ agreement in place, which provides a framework for determining:
- who will make key decisions and how they will be made;
- how and when dividends will be paid;
- how shares will be issued or transferred;
- what will happen if a shareholder decides to leave or dies;
- how any deadlock in the decision-making process will be dealt with; and
- how any disputes should be resolved.
Banks and investors will expect to see a shareholders’ agreement, so having one in place as soon as possible can help in the event you need to raise capital. It can also help if you decide to sell the company, as potential purchasers will also expect a shareholders’ agreement to exist, and in decision making
2. Intellectual property protection
An understanding of intellectual property (IP) and how to protect and grow your brand and business ideas is vital for any start-up, but is particularly important for tech start-ups where IP may be your most valuable asset.
There are different types of IP – patents, trademarks, designs, copyright, databases and know-how (trade secrets). They are all protected in different ways, and for this reason it is important to develop and implement an IP strategy as part of your business plan.
If you operate as a company, it is important to ensure that provision is made for any IP created by third parties, such as a design agency or freelance supplier. This can be achieved by inserting an appropriate provision in contracts of employment or service agreements, or by way of formal assignment.
Any potential investor, or future purchaser of the business, will want to see evidence that all IP used by the company is owned by or properly licensed to the company.
3. Strong legal contracts
Robust and comprehensive legal contracts are necessary for all businesses, and those you deal with will expect you to have them.
All businesses need strong terms and conditions, which they understand and which offer the fullest protection possible. Terms and conditions can make or break a business so it is important to get them right.
You may also need other types of contract, such as a software licence or a website agreement, employment contracts or consultancy agreements.
If you are unsure of your requirements, we can help you determine what you need by considering what it is your business does, how it works and the key risks you face.
When you start to take on employees, you are legally required to give them a written statement setting out their basic terms and conditions of employment. This must be provided within two months of their start date.In any tech business, where your employees and the IP they create is of pivotal importance, it is vital that you take steps to prevent them from competing with you or exploiting your IP when they leave. You can do this by making appropriate provision in your contracts of employment to prevent employees:
In any tech business, where your employees and the IP they create is of pivotal importance, it is vital that you take steps to prevent them from competing with you or exploiting your IP when they leave. You can do this by making appropriate provision in your contracts of employment to prevent employees:
- competing with your business for a set period;
- poaching customers or suppliers;
- soliciting other employees to join them in any new venture; and
- providing for the payment of compensation in the event they do any of these things.
You can also include provisions to ensure that any IP created by employees while they work for you belongs to the business.
5. Supplier arrangements
If you plan to use, or have used, third party suppliers to develop your website, software or any other IP, you need to ensure that you have a clear written contract in place. This should cover key points, including the services that will be provided, agreed deadlines, costs and payment terms. The contract should also clearly state that the website, software or any other IP created under the contract will belong to your business.
You may be tempted to put off dealing with these issues because you are worried about tackling and paying for everything at once. This is a common concern among new businesses. Part of the service provided by the team at Artington Legal involves helping you to understand when such legal agreements are required, and to plan a programme based on priority of importance. As we are usually able to quote in advance we can also help you to plan and budget effectively.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.