A City Law Firm, Awarded Most Innovative Law Firm, London 2016, take you through their voyage and how you can ensure your company’s growth runs smoothly.
Firstly, who are we and what would we know about expanding your business?
The firm was started in 2009 to offer clients a very different approach to instructing lawyers. We wanted to create a dynamic and friendly team that could take the journey with its clients, reach out to others when required to support them in areas we didn’t practice, afford competitive fixed fees and really get to know what it is our clients needed as well as wanted.
We started our journey with a suitcase full of client files and limited funds. Our founder often gives talks on the mistakes she made, the lessons she learned and the things she would have done differently. She has turned those lessons into our success story; our firm has grown significantly and is now a leading entrepreneurial firm in the city.
We act for an array of clients including start-up businesses, established businesses, SMEs, entrepreneurs and investors, celebrities and high net worth individuals. Each client relies on us for all their legal work and development. We move in the technology sector, retail , publishing , service providers and many more industries. We specialise in packaging and preparing clients for investment or sale. Those with investment we seek to carefully protect the founders interests; we advise on the options available to you, other than traditional equity sales, and understand the long-term exit strategies.
What are the most common mistakes that a business makes when starting out?
The biggest issue for many businesses is weighing up cash flow and getting the right advisors on board at an early stage.
Paying for a good lawyer and accountant often seems a lot when you first start out, but often they save you much more in the long run. When you are ready to invite in investment, expand or sell your business their paperwork is absolutely the key to your success. Choose those advisors carefully though because they must really understand you and your sector , if you need specialist advice make sure they really do have experience in these areas, read their testimonials to make sure their approach suits you. You must lead your business, with their support, a lawyer/accountant must never seek to control how you operate as their goals and outlook will always be different to yours.
Often we find the following mistakes have been made:
- Not making the plan for the business clear from the start between co-founders. Disputes then arise when a third party wishes to be engaged or one founder wants to sell (or take on investment) and the other doesn’t . A transparent agreement at the start is the only way to adequately prepare for the future and for that day when you move the company on to the next level;
- Not starting the business as a limited entity is more common that you may think. Being without this protection is a great risk to your personal assets, but also as you secure investment or wish to scale up the business this really holds you back as the accounts, IP, contracts will be in your name not the business.
- A lack of employment and contractual documentation in the early days could hamper your chances of successfully expanding or securing investment. If you don’t have the confidentiality clauses or restrictive covenants your business is exposed to significant risks.
- Not carefully considering intellectual property protection. The cost of registering trademarks and patents in the long run is far cheaper than trying to fight of infringement actions or re-branding if someone seeks to stop you using your own brand. Keeping what could be one of your most valuable asset protected and secure is not only essential but it makes your company far more valuable to investors. See further discussions on this below;
- Not understanding your finances and protecting cash flow. Often people secure contracts without real consideration of the terms and how they can perform the contract say for example when payment is an advance and the rest of the payment is made upon completion only. Few clients have a clear cash flow statement that they update regularly to understand their monthly out-goings and cash projections so they become reactive rather than proactive. If you are using sub-contractors make sure you agree that you will only pay them upon receipt of funds you’re your customer. Understanding the tax advantages and reliefs out there available to you can be the difference between making it and closing up shop. Also when you come to sell, expand or move out of the UK these tax structures can prohibit ,restrict or assist you but be prepared in advance.
How can you avoid these mistakes or if you are ready to expand how can you resolve any already made?
It is never too late to secure and concise legal agreements. Before you sell, expand, take on an investment or as soon as you can we suggest:
- You agree terms with your co-founders by way of a shareholder’s / Partnership agreement. Key terms should cover:
- Roles and responsibilities for each founder
- What happens if a founder leaves, retires or is medically incapable of working;
- How a sale, merger or investment will be decided.
- What happens if one founder is not living up to their expectations
- How will a dispute between you be resolved
- Ideally discuss how you set up the business with an advisor as early on as possible.
- If you are a sole trader understand the risks and protect yourself and if you want to expand or receive investment you should discuss incorporating a limited entity as soon as possible.
- Make sure your legal documents, such as your articles or share allocation, is done correctly and reflects your accounts and true running of the company. You would be amazed at how many companies make errors here that takes some time to unravel and if you get the attention of HMRC this may delay your plans
- Get a correctly crafted contract between you and your clients: Sounds obvious but it is usually the one thing that is done using a template or is out of date. As you expand or move into territories outside of the UK these can cause tremendous problems. There are many rules when contracting with consumers which can cause significant problems (including criminal liability and unenforceable terms) if not included. Any good contract will at least contain:
- How your services/products are delivered
- How disputes will be resolved
- Any representation and warranties
- Rights to cancellation, refunds and returns
- Who owns the Intellectual Property Rights and how these are to be used
- Payment terms and debt recovery terms
- Not Carefully Considering Intellectual Property Protection
Registered IP shows a potential investor the value of your company, offers them comfort in what they are investing in and can act as a collateral for their monies.
I have seen horror stories where monies have been spent on branding and logo’s but for example one client didn’t register these until 5 years later and the application raised a flag to an overseas company with the same trading name – who had registered this in the UK. The company tried to fight this, but lost and had to re-brand losing money and goodwill.
So how can entrepreneurs protect themselves from the risk of IP theft?
A trademark is any mark used in the course of trade and includes your logo, company names and slogans.
Register all important trademarks so that you can deter others from using your brand and if anyone does start using your branding without your permission this will give you the right to take legal action against them. You can also recover any losses suffered.
If you have invented something unique you should register this as a protected patent as soon as possible. Whilst awaiting registration it is critical that you do not disclose the invention to anyone or you may be precluded from registering for a patent. Always have a comprehensive non disclosure agreement in place.
Third party assistance
If you’ve hired a person or company to create your IP and/or products, it is vital you have a detailed and protective agreement in place. This should assign full ownership rights to you upon payment or completion, as these do not automatically transfer to you. It should also cover what that third party should do upon completion such as destroying any workings, maintain confidentiality and importantly being unable to use the IP themselves unless permitted to do so.
If your own employees create the IP during the course of their employment, this will automatically be your property, but you should ensure these provisions are outlined in their employment contracts for added protection. It also helps to cover IP created in their spare time as they may use your resources or knowledge. Having a non-compete clause also means, if they terminate their employment with you, they cannot take this knowledge and create new IP which they can themselves sell on. If you are unsure about whether you have employees or self-employed contractors, you should take legal advice.
Nondisclosure / Confidentiality agreements
If you are going to disclose any details about your business, IP or development of IP including staff, sub-contractors, investors and other third parties, you should have well-drafted non-disclosure agreements in place.
It is key that a legally binding agreement sets out the terms on which these third parties can discuss or disclosure your IP or confidential information to others, it keeps your ideas confidential during the development stages and prevents them using this information for their own gain.
You can, of course, permit someone else to use your IP and pay you a commission for this right. This is often the case for franchise arrangements. A license should be executed between you to protect your position as the IP owner. It should set out the exact terms the user can use the IP, on what basis you can withdraw this right and importantly to protect your full ownership.
If your IP is used without your permission or someone tries to copy your branding, there are legal steps you can take. Firstly, you can seek to resolve the issue amicably or take immediate action such as an injunction to cease use. You can issue a claim to seek damages for your losses and the immediate return or destruction of your IP or as is the usually the case, action of all these options.
If IP is a valuable part of your business we suggest you engage the services of a monitoring service. They check frequently to make sure no one seeks to use, infringe or register your IP. They notify you immediately of any concerns and give you notice to action immediately.
- A Lack of Employment and Contractual Documentation can cause you significant harm if an employee leaves with confidential information or clients or worse holds details of your IP. They can also cause you financial harm if a claim is issued at an employment Tribunal as you have no ability to recover costs even if you are successful.
- All Employees must have a statement of their employment terms within two months of employment and this sets the basic terms for clarity between you both.
- Dealing with staff is often one of the most problematic areas of any business and either you need to ensure you have the know-how , you hire a HR manager to monitor issues or you secure a good advisor earlier on to refer your enquiries to. Don’t try and handle everything yourself , if you don’t know the law, you could cause your business harm.
- Make sure you have key documentation in place:
- Employment or consultancy contracts that specifically contain IP protection terms, restrictive covenants , warranties and confidentiality provisions. Secure adequate probation periods for you to trial new employees and make sure you vet them carefully.
- Non-disclosure agreements and non-compete restrictions are paramount
- Disciplinary and grievance policies as you expand need to be bespoke to your company and you may need to consider the need for a staff handbook. Statutory provisions may simply not suit your business.
- As you hire staff overseas potentially if you move into another market abroad or as you start to use recruitment agencies and contractors ensure the agreements are clear, subject where possible to UK law and have all the provisions to protect you should matters not work out.
- Protecting your Finances & Cash Flow
Usually you would have secured a good bookkeeper , later an accountant , maybe a business manager. It is essential that as founders you keep a close eye on your cash flow, it’s protections and keep an eye on where the business is heading. Advisors and staff are essential to any business but they will not know, understand and dedicate themselves to the business as much as you , so simply have one eye on this at all times.
Things to watch out for:
- Watch out when giving personal guarantees. These should be avoided if possible.
- Protect any loans or credit you give out e.g. obtain personal guarantees and have in place written agreements, especially with directors;
- Credit check your customers and keep an eye on their businesses and make sure your payment terms are being met.
- Arrange suitable payment periods with suppliers & have clear written agreements
- Ensure you have a debt collection facility
- Understand your cashflow on a monthly basis
- Look at different financing options and investment options
- Ensure that you understand all agreements that you enter into
- If securing investment don’t get pressured into the wrong decision.
Meet different advisors, explore all the options and understand what is available and what each practically will mean for you. What may appear too restrictive to a lawyer or accountant may still be worth the risk to your expansion, but also what may appear a dream offer could come with too many strings – juggle advice against what you need carefully
You do not have to give control of your company away. If you are concerned about giving shares away consider there are other options available to you.
Consider all financing options such as:
- Bank loans with low interest rates presently available
- Debt financing such as corporate bonds;
- EIS/ SEIS as tax incentives for investors
- Joint venture agreements
- Government and social grants
- Tax reliefs
- Other investments
Getting this right from the start or before you take the next stage to expand or secure investment secures your business and your personal interests. The money you can save by getting your house in order and having the best possible tax and legal advice means you can develop and expand without the usual risks effecting other businesses.