Are you a Start-Up? Here are the keys to your success!

The Start-Up model allows individual entrepreneurs, innovators and creators to access to the market - however it is essential that they have the necessary legal tools in place from the start which will enable them to grow their business securely and move up to the next level – SME!

What is a start-up?

When we talk about a start-up, it’s a business that doesn’t have significant tangible assets or cash and is only financed by its equity.

Therefore, given that a start-up is usually operating in a precarious economic environment and has limited resources, it is quite often tempting for the founders to avoid the expense of building a strong legal framework.

Today more than ever, it is really important to be aware of the consequences of failing to secure you legal framework from the outset.

Making sure that your company is surrounded by the right people who can give you good legal advice enables entrepreneurs to not only establish a business, but most importantly - to allow it to flourish.

1) Choose the right legal structure

A business contract provides a framework for the future day-to-day relationships that the company will maintain with its suppliers, founders, partners and shareholders, as well as third parties. Since choosing the right legal structure is such an important task, and one which must be done in a timely manner, the opinion of a solicitor or an accountant should be sought.

The question of the undertaking of responsibilities by the founders and partners must be addressed. It is essential that the founders ask themselves if they wish to organise their social life around personal engagements or organise it solely around the start-up.

It cannot be stressed enough the necessity to outline responsibilities of the founders of the start-up regarding future customers, employees and third parties. Neglecting responsibilities can lead to great financial difficulties and, in the worst-case scenario, to the failing of the company.

In fact, a start-up is never safe from being prosecuted, even for negligent acts it might not have been aware it was committing. The best way to anticipate these problems is to set out clear responsibilities. Finally, the structure of the company will affect the distribution of stocks and shares, and therefore the weighting of shares to founders responsibilities plays a part.

Of course, it is necessary to ensure that the founder(s) or leader(s) of the start-up will be dedicated to the company and be willing to invest their time and money.The way the company distributes stocks and shares will have an impact on the way company members make decisions and the weight they attach to these decisions, and so this should be decided as soon as possible and advice from legal professionals is strongly advised.

2) Establish a legal operational framework

It's ALL ABOUT THE CONTRACTS

Before commencing any sort of economic activity it is important- if not, vital- for a start-up to protect itself by establishing legal agreements between its members, co-founders, shareholders, suppliers, customers and other stakeholders.

Often, the launch period of economic activity for a start-up is perceived as the most precarious time. It is a transitional period during which the founders limit their expenditure to purely economic and practical investments. However, getting your legal agreements in writing is so important to guarantee the future legal security of your business (and yourself!).

What sort of documents are we talking about?

You might often come across Heads of Terms, or Letters of Intent – these documents are more of an indication of an intention rather than a legal agreement.

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However, better than this is a legally binding contract. A contract is a way to establish a strong and solid legal framework as the terms of the agreement are binding on the parties who accept them. You can set out rights and obligations, what would happen if a specific event were to occur, and you can even set out how you might deal with any disputes. This is always easier to do at the outset when the parties are ‘friends’ rather than down the line when a dispute has arisen.

Finally, start-ups must also make sure that they create legal contracts of employment for all employees employees recruited, and also ensure that they have robust consultancy agreements in place for any freelancers used.

Contracts Offer You Protection

For example, in the UK if a breach of contract should occur, a party can seek the recovery of their costs caused by the breach, or the breaching company may end up in court where the court can order it to perform the contract or pay damages.

In the long term, whilst it might seem that seeking advice of a lawyer is costly, a properly drafted written agreement is a great investment. Indeed, it can actually reduce the legal costs that a start-up may face in the event of litigation – for example, simply producing a written agreement can settle a dispute without having to resort to court proceedings (which are long, costly and should be avoided wherever possible!).

3) Keep a Paper Trail

A start-up must have adequate document organisation and filing systems. It must keep a clear record of all its start-up activities from day 1, and make sure its legal documents are in order as soon as the company is created.

Keeping up with your admin is highly recommended.

For example, in the UK, in the event of a dispute, a party to litigation has a legal obligation to disclose all documents which are relevant to the dispute (whether they support or actually hinder your case). If you don’t have a proper paper trail, then it is going to be very hard for you to comply with this obligation. If through a start-ups failure to provide documentary evidence, a judge was to get the impression a company was hiding or concealing documents, this could be a big risk for the company; it could even lead to the company being accused of fraudulent activities in the long-term.

Sector Specific Requirements

Depending on your area of business, different bodies can regulate your actions. In the UK this might be the Financial Conduct Authority, the Advertising Standards Authority, or the General Pharmaceutical Council to name a few. These bodies will oversee your conduct and should they find you have broken regulations, they can issue sanctions. For this reason it is imperative you get legal advice on which body will regulate you and the regulations it will expect you to follow.

4) Ensure Protection of Personal Data

Nowadays it is almost inevitable that start-up companies will collect personal data, whether through websites, emails or on the phone.

When a start-up collects data it must comply with the General Data Protection Regulations (25 May 2018). GDPR sets out compliance regulations in relation to the use of cookies, privacy policies, and terms and conditions of use.

It is up to a company to ensure that it uses personal data in a way that is fair. It must be transparent in the way it uses data and it must be able to justify the lawful basis for the personal data it stores.

It is therefore important that start-up companies take good legal advice on this so that they establish good data practices from the outset. It is much easier to create healthy databases than it is to carry out a clean-up exercise down the line, and under full scrutiny of the supervisory authorities! Also, bear in mind that it won’t just be the bad publicity that start-ups would need to deal with should it breach the regulations; the penalties they can face can be 4% of annual global turnover or up to 20 million euros - whichever is higher!

5) Protect your Intellectual Property

The administrative procedures for obtaining protection of your IP rights (a patent application or filing a trademark) are essential steps in order to obtain an adequate guarantee of protection to your innovations and creations.

It is possible that others could exploit your intellectual property without your consent, and it is so important for start-ups to make sure they are also not unwittingly copying someone else’s idea! A start-up company must always use patent searches to check if someone else has already protected intellectual property, and should also regularly check the market and competitors to see if you can identify any potential copy-cat behaviour in respect of your rights.

Many people do not realise the level of secrecy required from them during the period of obtaining licenses or patents.

Although employees are bound by a duty of non-disclosure, founders should not disclose any ideas or strategies to third parties, certainly not without a robust confidentiality or non-disclosure agreement (NDA) in place.

Finally, once you have the benefit of registered IP, you need to make sure you accomplish all of the formalities for keeping that registration alive – for example, a trade mark must be maintained by paying the necessary renewal fees.

6) Get the Right Legal Advice

Last but not least!!

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Unless founders are legal professionals, failing to use the services of a good business lawyer specialising in the legal support of start-ups weakens the company during its launch, and tends to lead to founders being negligent in the management of their company. Worse yet, when start-ups give in to the temptation to make legal decisions alone without getting good advice, this can lead to their disappearance from the market.

A start-up must surround itself with specialist lawyers to help begin its formation and create it in a solid way. While this can seem like a heavy investment, it allows the company to avoid the long term costs associated with mismanagement of the company. Above all, it helps maximise its economic potential and continue to grow in the market.

Finally, a start-up can be assured it is complying with tax regulations when it follows sound legal advice of how and when to pay taxes as a corporation. For a start-up company, it is essential to be accompanied by an accountant or a business lawyer.

Article by Lily Morrison and Charlotte Gerrish @ Gerrish Legal, September 2018