Nesta’s top tips for start-up companies

More often than not those staring up a company often begin on a scrap piece of paper which can lead to an unsophisticated early existence with little time to worry about the more essential legal requirements.

Consequently, later on when you begin to raise money or enter into large commercial agreements, these overlooked points can lead to much larger problems.

Below I’ve listed a few things you should ideally get in place early on which could help you avoid costly disputes:

1.       Documenting your shareholding structure

Starting a company is quite straight forward as well as issuing initial shares as these shares have nominal value therefore having few tax implications.   However, where an investor comes along suddenly the company and the shares have added value and they are no longer free to move around.  The shareholders may have agreed to share the equity equally however this is not always documented from the outset and the shares are often still in the original shareholders name.  When trying to transfer these shares at a later stage this can become very expensive as there could be tax to pay on the transfer of the shares.  It is therefore important that shares and entitlements are documented from the outset to try and prevent such issues arising at a later stage.

2.       Ensuring there is a shareholder agreement in place

It is not uncommon for companies to overlook the importance of a shareholder agreement especially when starting a new business. However, failing to have this agreement in place can cause considerable problems in the future. A shareholder agreement is an agreement that structures the relationship between the shareholders of the company. A well drafted shareholder agreement should outline each party’s expectations with clear rules that describe the relationship between the shareholders and outline how the company is to be managed.

A shareholder agreement can also address and protect minority shareholder interests by prescribing a fair method of valuation and a course of action to be followed upon the sale of the shares.

Moreover, a shareholder agreement can include other basic measures to ensure a smooth process and fair outcome for all shareholders for example:

a.       Disposing of Shares; shareholders may agree that any transferor disposing of shares have to first offer them to the existing shareholders.

b.      Shareholder Approvals; shareholders may agree certain transactions within the business need all member approvals whereas other transactions may only need a smaller percentage of the members to agree.

c.       Restrictions; shareholders may think it sensible that all members should not carry on any similar business activities in any other company that is similar and or in competition with their company.  This would limit any potential conflict of interests.

d.      Dividend Policy; shareholders may want to agree to a certain type of dividend policy for example, dividends can only be paid after taxation payments have been paid, a certain amount of profits have been made or not before a business loan has been paid off.

3.       Roles;  Who does what? Who owns what?

More often than not new companies are never clear from the outset on who does what or who owns what.  One person may put in more money and the other may be the one putting in more time.  Sometimes a simple co-founder agreement could assist that clearly defines what the business does and who owns what.  In this instance a solicitor isn’t always needed.  Simply putting this on a piece of paper that all parties agree to and sign can be enough to get you started. If ever a disagreement arose this is something all parties could refer to and help clear up any potential legal disputes.

4.       Trade names and logos

Trademark registration is also something you should consider. It may be worth asking an expert to advise on whether registrations only in the UK and or other countries are also needed.  A company’s goodwill will become more and more valuable as a business grows and becomes more successful.  It is therefore imperative to protect this from the outset so you are in a strong position in stopping anyone attempting to use your company name or logo.  Trademarks can also open the way for business expansion over time from one industry to another.  It could also make your company attractive to others and could lead to the acquisition of your company by a larger corporation.

 

There are other intellectual property rights that should not be overlooked for example, design rights, patents and copyrights.  It is always advisable to seek legal advice early on to ensure your business is adequately protected from the outset.

 

If you have any questions regarding the best ways to protect your business, regardless of whether you have just started trading or not, please feel free to contact me where I would be happy to assist.

Contact Nesta Gresham on 01908 355770 or by email nesta.gresham@pictons.co.uk

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