Changing your life to launch your own business is a brave decision. Statistically, the odds are stacked against you but technology is a great support and enabler, helping people build businesses tailored to their interests and lifestyles. If you are part of this group, aching for your startup to succeed, this article highlights some of the crucial legal information – "the legals" – that you need to know about.
Cash generation is a priority, but it is a rare commodity for most startups. The question, therefore, is: given the acute absence of resources, what legals should you address and which can you put off?
To judge this, you need to ask: will my failure to address this issue give rise to a reasonable prospect of disaster? With this question in mind, here are five legals entrepreneurs need to know about in order to maximise the chances of success.
Understandably, many entrepreneurs have a tendency to be overly protective of their business. Be mindful that it's extremely rare to capitalise on a business idea without the help of others.
Although it may seem that your employees are doing run-of-the-mill jobs, they do become somewhat fundamental to the operation of the business. Before long, core team members can become as invested in the business as its founder, but it’s only the founder that owns the shares in the business.
As time goes by, and revenue increases, so does the resentment from those who are excluded from a share of the fortunes. One day, those core people might walk out of the door and there’s a good chance that they’ll take all their knowledge of your business and use it against you (either working for a competitor or setting themselves up in competition).
Legals can help you here if you put proper contracts in place to protect your IP and prevent this from happening. But this only solves 10 percentage of the problem.
To solve the remaining 90 percentage, you need to consider offering employee shares (or share options, or other guaranteed bonuses or inducements). If you align the commercial success of the business with the financial rewards of those that help grow it, you will supercharge the performance of your team and you will significantly reduce the chance of a walk-out.
Better to own 50 percentage of a big number than 100 percentage of zero.
Please believe me when I say that if you do not give up a little in order to align and motivate your team, you’ll be taking a monumental (and ultimately irrational) risk.
2. Personal liability
There are certain things that you can do which expose you to personal liability and, generally speaking, anyone (a bank or a landlord, for instance) who entrusts anything valuable to your business will expect you to take some personal liability just in case everything goes wrong. “Skin in the game” is how people sometimes refer to this.
Taking a personal risk is a price you often have to pay to gain access to resources so it’s naïve to suggest you should avoid it at all costs. But setting up a business is a gamble and you ought not to gamble more than you are willing to lose. So, limit any personal guarantees to an amount you can afford to lose.
Do not expose yourself to personal liability that is not strictly necessary. A good example of unnecessary personal liability is acting as a sole trader. It is neither difficult nor expensive to trade through a limited company and doing so limits your liability to the paid up share capital of the company, i.e., a nominal sum like £1).
3. Intellectual Property (IP)
Intellectual property is the product of the human brain and much of the value in many modern businesses is wrapped up in it. The most common IP rights are copyright, trade-marks, patents, and design rights and, broadly speaking, these rights allow the owner, to varying degrees, to stop others from copying or recreating the thing that is protected.
If you are creating things (products, designs, processes, websites, that sort of thing), it is helpful if you can align the creation to an IP right and not do something that disqualifies protection. Perhaps the simplest example is a business or product name. If you want to get a trademark, don’t call your business or product something descriptive. Descriptors fail the trademark test. “Cornflakes” is a good example; they are flakes of corn so Kellogg’s couldn’t get the trademark and now every supermarket sells its own cornflakes alongside Kellogg’s version.
Misunderstanding IP leaks value out of your business. This can be disastrous, not because it will necessarily lead to your insolvency, but simply because it is so easy to get right and never leak the value in the first place.
4. Patents (the right to stop others from making, using, or selling your invention)
Getting a patent means that you have to tell the whole world about your invention. It’s the deal you strike: a legal right to a territorial monopoly, in exchange for explaining just how clever you are. But having told the world what you’re up to, you need rather a lot of patents and this can prove costly.
Instead, many businesses choose to keep their “magic formula” secret and launch quicker in a bid for market share. After all, market dominance is another form of monopoly. Experience tells us that the latter approach (secret; bid for market share) is normally wiser than the former (patents; disclosure) but that businesses’ preoccupation with the former can often leave them mired in delay and cost. Of course, much will depend on the nature of the business or product.
Again, think about what information you are going to disclose and to whom. In an early stage business (particularly those that are pre-revenue), the idea is a large part of the value, so consider that, in disclosing the idea, you might be inadvertently giving away its value.
5. 'NDA’ (non-disclosure / confidentiality agreement)
If you have a business model or product idea that is exceptionally cunning and is going to make you lots of money, it is probably sensible that you limit the number of people you disclose it to. While NDAs can in certain circumstances be used to their desired effect, you should know that trying to prove that an NDA has been breached is notoriously difficult. Instead, just be cautious about which potential partners you make disclosures to.
As part of London Tech Week, I am hosting a free - 'Legal Essentials for Startups' session on 13th June - register your interest here.