Welcome > Blog > Advice > Start-up money is too tight to mention …. so spend wisely on legal documents
15th April, 2016
Running a business start-up, particularly at an early stage, is like being on a runaway decision train … every day requires business critical decisions, often based often on minimal visibility and even less money.
With so many decisions and so little time, an easy victim of the cost cutting process is the legals – often a false economy as getting solid legal foundations in place can be the difference between survival and failure, and these foundations will also be underpinning the (hopefully) growing value of your business.
But this is not a lawyer talking, instead it’s to provide a brief analysis of what you really, really need and … what can be left until later (or not required at all).
Take a pragmatic view on what is required:
Is it business critical?
Will it be underpinning crucial elements of the operation?
Is it likely to help cement value into your business?
Is it worth spending a little extra to get it right today, than suffer the risk of a problem with it tomorrow?
If the answer to these questions is “yes”, then get it drafted properly and without delay.
If the answer is “no”, then you might like to undertake the task yourself, or just shelve it. Classic example of documents that don’t need much legal input are NDAs, Heads of Terms, Low Value Contracts. With these types of documents it will be quicker and much cheaper, drafting something yourself and/or going for a low cost downloadable version.
But there are fundamental considerations and documents that you should definitely ask a solicitor to help you draw up.
One of the first things to agree upon is the type of business entity you wish to trade from – sole trader, partnership or company? Some types of business are more onerous than others and there are different legal, administrative and tax implications for each so it’s best to take advice early on.
For companies, it’s good practice to first consider whether you need special terms to suit the circumstances of your business. You can deal with these in your company’s articles of association or a shareholders’ agreement. Whilst there is no legal requirement to have a shareholders’ agreement, it is pretty crucial if you are planning on more than one shareholder, even if that other shareholder is family, friend or blood brother.
A carefully drafted shareholders’ agreement ensures that you formalise key strategic issues in your business. Areas worthy of mention include additional funding strategies if you need more money down the line and what will happen if someone wishes to leave the company – this latter issue is really important and has been the cause of serious friction between previously good friends.
For partnerships, consider whether you will trade under the names of the partners, or use a separate business name. You’ll need to advise HMRC and then look at entering into a partnership agreement.
Failing to prepare a partnership agreement can be disastrous. The parties will have to rely on the Partnership Act 1890 (yes that’s right, 1890 … Queen Victoria’s era!) which provides that the partners are entitled to share equally in the capital and profits of the business, regardless of how much time or capital each has actually put into the business.
Under the Act, a partner can withdraw from the partnership and this could lead to business closure if the partner insists on the return of their capital.
A partnership agreement looks at how the business is to be financed, how profits are to be divided, how decisions are to be made (and what to do if you fall out!) and what happens if a partner wishes to leave the partnership.
The agreement is also a prime opportunity to agree on broader issues, such as your business strategy. You should also agree on issues like holiday entitlements, whether you will employ members of your families – seemingly trivial at the outset but common cause of attrition if not organised at the outset.
Many partnerships structure their businesses under the limited liability framework since it offers the benefits of a traditional partnership (including taxation) but with limited liability. The process is more complicated as LLPs are registered at Companies House and annual accounts are required, but this option is particular popular with professional businesses such as solicitors and accountants etc.
Standard Form Contracts:
A standard form contract is another legal agreement to consider at the outset. The contract should succinctly deal with issues such as pricing, payment dates and penalties which will be incurred if payment isn’t made on time. You’ll need to deal with limitations on your liability, breach of contract and how to deal with disputes.
Start-ups often fail to create adequate employment documentation from the outset. Take on staff and you’ll need internal policies and procedures. You will also need to register for PAYE and organise employers’ liability insurance.
Intellectual Property Rights:
You will definitely need to consider IP rights. Do you have a business or brand name that you can protect as a trade mark? Are there any designs or inventions that you can protect via registration? Prevention is definitely better than cure.
So that’s just a quick gallop through the legal elements that you should consider.
The other thing to look at is how you procure these services of a lawyer. Sticking with what (or who) you know is not always a the best idea. If your current legal team are not delivering on value, cost and expertise, then maybe it’s time to think about reviewing your legal strategy.
You can approach law firms individually, or you could use a company, such as LawyerFair which puts you in touch with numerous law firms in one easy step. You submit your legal requirement, time scale, and budget to the LawyerFair website and within 24 hours three fee proposals will be generated from different lawyers competing for the work. The choice is then yours to make.
Comparing the services and costs of law firms on a regular basis ensures you are getting the best value for money for your business, putting you in control of the process …. in the driver’s seat where you belong.
A guest blog written by Andrew Weaver, CEO, LawyerFair
Find out more about LawyerFair and the services they offer.