Just Starting Out? Shares & Shareholders
If you’ve only just started your business, you are probably far too busy focusing on what makes your business tick to worry about legals. That’s why the fantastic four from TW cleared up some of the law surrounding shares and shareholders:
- When you’re starting up, don’t issue one share to each of your shareholders. Even though this keeps it nice & simple at the beginning, it will make your life complicated when you’re looking for investment. Instead of issuing one share each, perhaps issue one-hundred!
- If you’re a new startup, perhaps don’t issue a shareholders agreement right from get go. They’re expensive and they have the potential to cause arguments.
- What is Liquidity Preference? Liquidity preference is a preferential right that you, as a founder, can give to certain shareholders. For example, Series A investors get their money back before any ‘other’ shareholder gets theirs.
- What are Negative Controls? If your shareholders would like to have the right to sign-off certain actions, then these are their negative controls. Your shareholders could ask that you come to them for approval before you spend of £5k on any one asset, for example.
- What are non-Competes? Non-compete-clauses that protect against any member of the cofounding team running off and founding a competitor.
- Before you sign on the dotted line with an investor, make sure that you’ve done your due dilligence on them! How do you do that? Speak to other founders that they have invested in. Find out whether they’re hands on or hands off.
Incentivising your Team: Shares & Employees
Next up were some tips for startups who have done some growing, and are ready to work with freelancers and, perhaps, take on a few employees. You want to get the best out of these guys, right? A great way to incentivise them is with shares.
- Firstly, a word of warning: be careful how you issue shares to your employees. You don’t want them to incur an income tax charge because of your mishandling! This wouldn’t incentivise them much at all...
- If you issue shares to employees, make sure you fill-in Form 42. Keep it legal!
- What are Share Options? Simply, they are when you give people an ‘option’ to take out shares in your company at a later date.
- You can put a ‘vesting schedule’ in place. This predicates a time when share options turn into shares. This is a useful mechanism as it guarantees that these shareholders will be involved with your business for an agreed period.
Who Owns What? Employees, Freelancers and IP
Intellectual property is a very important issue for startups. You, as the startup, need to keep hold of your IP, and make sure noone else ends up owning it by mistake.
- If you’re an employee, your employer gets the rights to what you create. That’s the law. So if an employee of a startup write some great code, it belongs to the startup.
- If you’re a freelancer, you own the right to what you create, unless there is an IP Assignment agreement in place.
- If you’re a founder, and you want to use freelancers to develop your project, make sure they sign an IPA! If they don’t, a random freelancer could have the legal ownership of ‘your’ key asset - investors would run a mile!
Thank you very much to the team from Taylor Wessing for delivering such enlightening legal advice, and for making it so digestible!