I’m very pleased to introduce the first guest blogger on The Salient Point…
Dug Campbell is a lawyer based in Edinburgh with MBM Commercial LLP, a niche legal firm which advises entrepreneurs, technology companies and their investors. He also runs Tech Law For Startups, a monthly get-together for aspiring ntrepreneurs building new ventures. He is always happy to chat over new business ideas and can be contacted on Twitter (@dugcampbell) or by email (firstname.lastname@example.org)
It is commonly accepted that you need plenty of enthusiasm and drive as an entrepreneur to start a new business. Usually that dynamism is a positive force, helping you to overcome the inertia suffered by others within the economy and, without it, the chances are that you aren’t likely be travelling far from your launch point. Depending on your sector, it’s often better to get out into the market place and ‘pivot’ to fine-tune the direction of your business as soon as data from engagement with real customers starts to become available.
However, it’s all too common for entrepreneurs to focus their time exclusively on developing their groundbreaking product or service whilst overlooking basic legal issues – also known as “the boring stuff”. The good news is that, given the mass of available information across the web these days, it’s easier than ever to build an broad understanding of most critical issues yourself before you rush headlong at the first available customer. Whether your business can afford to deal with all of these immediately will depend on the depth of your pockets but it’s critical that you allocate scarce resources to the areas of greatest risk.
Here are my top ten tips for startups getting ready to enter into business:
1. Choice of business structure
Choose wisely as it will impact on many decisions that you make further down the line. Whilst setting up as either a sole trader or a partnership remains a viable option in some circumstances, the limited company is the weapon of choice for most startups with ambitions of growth. This is partly because it enables you to divide the ownership of the business by issuing shares – to other founders and investors whose funds may be the tipping point between success or failure.
In theory, having limited liability also means that the bank won’t come round to repossess your house if the business fails. But, as Ian’s blog Only Superheroues have Liability Shields rightly points out, be aware that the protection is likely to mean little in the early days of the business when founders are often forced to grant personal guarantees in the absence of solid revenue streams.
2. Be clear on ownership of intellectual property
For many technology startups, intangibles such as intellectual property rights constitute the majority of the value of your business. But how do you prove that the business owns these rights? As a rule of thumb, work carried out by an employee will be owned by his or her employer. But what if you’ve asked family or friends to help out, by designing your webpage or developing your logo? The ownership would stay with them so make sure you’ve got a signed document which proves that they’ve transferred all rights across to your company. It’s always better to do this at the time rather than in the future when a vital funding round depends on you contacting a consultant who may have moved on to pastures new.
3. Protect your intellectual property
Depending on the nature of your business, clear ownership of IP is likely to be mission critical. Whether you have the grounds (and more importantly, the cash) to pursue a full patent protection – in which case, total secrecy is of vital importance – you should certainly aim to protect your expression of ideas, brand, trademark and copyright. Be aware that any investor will expect you to transfer your IP to the business before funding it.
4. Be proactive, not reactive with IP
If you are innovating and creating intellectual property, step back on occasions and think laterally. Can you make money from intellectual property that you’ve developed by licensing it to another company – perhaps a business outside your target market which poses no competitive threat? You may have to set clear rules in the form of a licence to ensure that it doesn’t damage your target offering but, if successful, your business has suddenly found an alternative revenue stream – the holy grail of earning money while you sleep and a way to provide much-needed cash during the lean early days.
5. Protect your confidential information
Use non-disclosure agreements to protect confidential information whenever you are passing vital, commercially sensitive information to a third party. Always be aware of the risks – once you lose control of the ‘crown jewels’ into the public domain, the cat’s out of the bag and it doesn’t matter how good your documents are. So, more importantly, you need to build trust and relationships with early customers and potential partners. It also can’t hurt to carry out a credit check on significant customers or partners in the early days.
6. Show me the money
It’s an unfortunate fact of life that banks won’t lend to startups without evidence of secure revenue generation. So plan your working capital requirements as far ahead as possible. Don’t leave securing funding to the last minute when your negotiating position becomes weaker and money becomes more expensive. Build contacts now with investors, product champions and advisors who can help you with introductions to funders, such as business angels and VC’s.
7. Avoid litigation
A simple one – avoid. Litigation is expensive for the business, costly in terms of management time and disproportionately damaging to everyone unless the sums are significant. No-one’s saying that you should be a pushover but be creative in avoiding formal conflict wherever possible. Look at using cheaper forms of mediation to resolve conflict. They tend to be more likely to minimise the damage to the relationship involved as well.
8. Remember the director/shareholder split
When you make decisions in a fast-moving small business, it’s very easy to forget that you’re often making decisions in two separate capacities – as a director and as a shareholder. As the company grows, the roles will become more distinct but in the early days, unless you have a shareholders’ agreement in place, remember the magic numbers of 50% and 75%. Shareholders who can command votes in excess of these figures, hold powers to force certain major decisions. Contrast that with your position as a director on the board where in general there’s only one vote per individual, irrespective of the number of shares you hold.
9. Watch who you send your business plan to
When raising money, be very careful who your business plan goes to. By asking people to invest their money, you are making what is known as a “financial promotion”. In effect, you must be authorised to do this or regulated by the FSA. However, there is a exemption if you send the plan to high net-worth individuals or self-certified sophisticated investors. It is a complex area and the penalties can, in theory, be severe for what is classed as a criminal offence.
You may be working around the clock to launch your business but it’s critical to start building important relationships outside the business at an early stage. I’m now seeing a definite move towards entrepreneurs establishing advisory boards to help with guidance in the early days. These are often made up of experienced entrepreneurs, advisors and those who have been around the block a few times. If you go down this route, tap into their experience and use it for your benefit – the more they understand about you and your business, the more focused the advice is likely to be.