1. Consider the legal structure of your startup. A limited company is the most common choice, and protects your personal assets (home, car, PS4) in the event that things go belly up. Ownership can be divided up into percentages with relative ease, and when you finally start sniffing around for an investor you’ll be able to provide a clear picture of who and what the company is comprised of. Companies can be formed online direct with Companies House (don’t use a middleman) and you can use the standard format articles of association when doing so. The articles govern how the company operates and you should be familiar with their contents if you are serious about starting up.
2. Protect the IP. In the tech industry, IP (intellectual property) is what it all boils down to. Endless nights of debugging might result in a killer app, but in order to exploit its potential you (and your future investors) really need to know who owns it. Once you’ve incorporated, ensure that all relevant IP is assigned over to the company so there can be no question over who owns the code/graphics/music/etc down the line. This has to be done in writing to have legal effect.
3. Protect yourself. You and your CTO might be the best of friends today, but who knows what could change down the line. One of the key documents to consider when starting up a new company in the tech industry is the shareholder agreement - the contract which governs the relationship between those who own the company. This is not a requirement for every company, but should be in place if you are sharing your fate with others and want to protect your interests. They become essential documents once an investor comes on board - for exactly the same reasons.
4. Don’t let the cat out of the bag. As a startup you’ll be looking to build connections and introduce people to your game changing idea - but what’s to stop someone ripping you off? Before you send any confidential data over to a third party, consider sending out a non-disclosure/confidentiality agreement first. Don’t expect everyone to sign it - angel investors often won’t bother.
5. Consider whether your service/product might be regulated. Fintech is an obvious one, and you should pay careful regard to the FCA and PRA’s rules on regulated activities and financial promotions. A less obvious example is Uber - it might seem like a simple app which books you a cab, but the company had to comply with the Private Hire Vehicles (London) Act 1998 and the Private Hire Vehicles (London) (Operators’ Licences) Regulations 2000 before it could start offering its services. You should undertake adequate research to ensure that your new idea doesn’t already have a wealth of regulation attached to it. Automatic assignment of IP by employees to the company and protection of confidential information are also essential for tech startups.
6. If you’re employing someone, use a contract. As your company grows you’ll inevitably need to employ people. Employees rights must always be protected adequately, but a properly drafted employment contract will also protect the company in the event of dispute. At a minimum, contracts need to specify the employee’s role, their start date, how long the role will last, the salary and other benefits, hours of work and location. There’s plenty of detailed information on gov.uk and you can buy precedent contracts from a number of websites.
7. When dealing with third parties and building your supply chain, understand contract law. You should have a set of standard terms and conditions which define the way your business operates and the way legal relationships are created with third parties. But you also need to understand the implications of getting into bed with someone else - no doubt they will have their own set of standard terms and you’ll need to be aware of whose (if any) take priority.
8. Consider data protection law. Some app developers wish to exploit collected data for analytics purposes to improve their products, while others might share the data with third parties for a fee. In fact, if you do anything with personal data you need to be aware of the legal implications of how that data is handled and processed. The ICO (Information Commissioner’s Office) can issue fines of up to £500,000 for serious breaches of data protection law.
9. Don’t forget about tax. As a separate legal entity, the company will pay corporation tax on its profits and capital gains. As a shareholder you’ll pay tax on any income or dividends you extract for the company. An investor will be looking at tax reliefs such as SEIS or EIS when considering your company, and will need to pay capital gains tax when they exit your company. All the while, your annual turnover might require you to register for and collect VAT. Tax is a complex area and you need to ensure you have the right advice. An experienced adviser is invaluable.
10. Understand what investors are looking for. The law might sound dull, but once you’ve managed to convince an investor to jump on board, legal issues take the forefront. A prudent investor will initiate a lengthy due diligence process which will unearth any potential legal problems, such as not owning the IP or not having complied with the requirements of the Companies Act. Any issues here could undermine the deal before any money changes hands.
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