Tech start-up FAQs from a legal perspective

You’ve got an idea and a team, set up a company, have a promise of funding and are raring to go! But how do you get the ball rolling?

Ask yourself the following questions and it should make that step just a little bit easier.

Who are the team?

• What skills do you each bring to this enterprise? Are there any skills gaps that need to be considered going forward?
• Once the above has been established, you will need to agree between you the extent to which each of you participates in and benefits from the venture – what is your stake in the business?
• What is expected going forward? Are there clear lines of responsibility and do you each of you know what you are supposed to be delivering?

What is the idea?

• If it includes intellectual property rights (patents, trademarks, copyright, design rights etc.) – who created it and who owns it?
• Do you have a business plan that clearly demonstrates how you expect to create and commercialise the idea?

Thinking about these issues at the outset will help you to (i) identify issues early so you can protect against risk, (ii) give you a better understanding of what you are trying to achieve and ultimately what you are offering to investors, and (iii) shows investors that you understand your business. In addition, by being aware of the different intellectual property rights that exist in your business, you can ensure that they are appropriately protected, while also maximising your competitive position and avoiding infringing the intellectual property rights of third parties.

So now you have this information, what do you with it?

• Put in place a shareholders’ agreement between the founder team to cover areas such as:
  • Who is doing what?
  • How are decisions made?
  • What happens if someone leaves?
    • Should they keep their shares?
    • Should they resign as a director?
    • How do you protect against them using information about the company?

• Consider putting employment or consultancy agreements in place to formalise what is expected of individual team members.
• Get all the assets transferred to the company if they are owned by individuals. Any intellectual property rights that have been developed by individuals will need to be formally assigned to the company.
• In addition, it is possible to protect information which is sensitive to the business through rights in confidential information (which may include know-how and trade secrets). While know-how and trade secrets are not strictly intellectual property rights, they can protect sensitive information (both technical and commercial) and do not need to be registered. As such, we would typically recommend that you adopt robust processes to maintain the secrecy of key business information.  Such processes should include as a minimum:
  • only sharing confidential information with employees and third parties on a need-to-know basis;
  • ensuring that robust confidentiality agreements/NDAs are in place with any third parties before confidential information is shared; and
  • ensuring that employees have robust confidentiality provisions included in their employment contracts.

 Why is this so important?

One of the key reasons is that it will help you to attract investors who are assured that they are investing in a sound business and an investable team. It shows investors that you understand the issues affecting your business and that you have been diligent in addressing any areas of concern that might otherwise have arisen.

Investors don’t know you but want to be sure that the people they are investing in are a safe pair of hands who take their investors, and the risk they are taking, seriously. It means you will be in a better position to take investment quickly and efficiently when it’s offered.

As part of an early-stage SEIS/EIS investment round, you can expect investors to want to put in place:

• An investment and shareholders’ agreement;
• New articles of association;
• Employment contracts; and
• Intellectual property rights transfers where this has not yet happened.

Thinking about these areas means you are more likely to be able to address investors’ queries/concerns and be ready to take investment, possibly ahead of others chasing the same funds.