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7th July 2017

Expert advice from Geldards: Five tips for start-ups and early stage companies

It’s often misunderstood how much work and consideration is required for start-ups and early stage companies to become successful. Here are 5 tips from our expert Healthcare & Life Sciences team, aimed at start-ups and early stage companies in the Healthcare & Life Sciences Sector to help you step forward on the right path.

1. HAVE A SHAREHOLDERS’ AGREEMENT IN PLACE

A Shareholders’ Agreement is an agreement entered into between the shareholders of a company with the purpose of regulating the relationship between them, the management of the company, ownership of the shares and ensuring the protection of the shareholders. Whilst it is easy to postpone putting a Shareholders’ Agreement in place whilst you are focusing on growing your business, it is an important document that can prove vital later on.

A Shareholders’ Agreement can cover a wide range of matters, and in some respects can be thought of as pre-nuptial agreement for business, but the key issues normally dealt with can include:

  • Dispute resolution mechanisms which can be relied upon in the event of a falling out between shareholders.
  • Providing for what happens if a shareholder leaves the business, including what happens to their shares (often the remaining shareholders will want the option to be able to purchase a leaver’s shares) and restrictions on divulging confidential information, competing with the business or poaching its customers, suppliers or employees.
  • Having restrictions in place to ensure that a shareholder cannot transfer their shares to a third party without the consent of the other shareholders and without first offering their shares to their fellow shareholders.
  • Setting out how the shares will be valued in the event of a sale by an exiting shareholder
  • Setting out the circumstances in which the company can be sold to a third party, perhaps based on a price threshold or a vote of shareholders in favour
  • Matters that cannot be undertaken without the consent of all or a certain number of shareholders, such as spending certain amounts, changing the Articles of Association of the company or declaring dividends.

2. MAKE SURE THE COMPANY OWNS ITS INTELLECTUAL PROPERTY

It is important to be absolutely certain that a company owns all of the intellectual property it has developed or which it needs to operate, particularly when such intellectual property forms part of the core value of the business.

If employees develop the intellectual property, it is reasonably straight-forward to ensure that any such intellectual property belongs to the company. However, if the intellectual property is developed by a founder before the company came into existence or by consultants who have not agreed that all intellectual property they create for the company will belong to the company, it is vital that they be required to transfer all such intellectual property to the company. This can be dealt with by a Deed of Assignment or a similar agreement.

3. SEARCH FAR AND WIDE FOR FUNDING AND KNOW YOUR BUSINESS INSIDE AND OUT

There are a wide variety of sources of funding, so don’t limit yourself to exploring just one or two avenues such as venture capital investment or government grants. The recent general election results and forthcoming Brexit negotiations may have knocked confidence slightly, but there are always plenty of options out there to help you find the capital you need to drive your business forward.

In addition to venture capital or private equity investment and government grants, you may also want to consider crowd funding, sponsorship, bank funding or business angel investment. It is also worth thinking about free or discounted office space, mentoring and R&D assistance via local councils and universities, all of which can reduce the amount of funding you will need to raise.

When you are presenting to potential investors, funders or customers, it is crucial that you know your business inside and out and that you can show that you have fully understood its future requirements and needs. I’m sure many of you will have watched Dragon’s Den through your hands when an entrepreneur fails to answer even basic questions about valuations, projections and costings!

4. MAKE SURE YOU HAVE YOUR EMPLOYMENT DOCUMENTATION IN PLACE

Recruiting staff is a key part of any new business venture and documenting the terms and conditions applicable to your employees is something that should not be overlooked.

Not only are there legal obligations upon you as an employer to do so, the purpose of an employment contract is to establish the rights, expectations and obligations between you and your staff. Your employment documents should clearly set out the employment status applicable to those working for you and the terms and conditions that apply to the work they are to perform. Getting this right, from the outset, is essential to avoid disputes and breaches of employment law. As a minimum, you must provide an employment contract within two months of employment commencing and there are specified details that must be contained as a legal minimum requirement when issuing employment terms. Failure to do so can result in claims to an Employment Tribunal and so it is important to address this at an early stage when taking on staff.

Alongside your employment contracts, we also recommend you have an Employee Handbook to outline your company’s key policies and procedures. This helps to keep the size of your employment contracts down and ensures that you are not giving contractual rights where you do not mean to. A separate Handbook will also allow you to easily update your policies and procedures as your company develops and grows and to meet legal developments in the constantly changing HR world.

5. THINK ABOUT TAX ISSUES AT THE OUTSET

It can be very easy to ignore tax when setting up a business because the business may be loss making at the outset and will not be paying tax. However, it is important not to forget the tax basics including some compliance issues:

  • All business must register with HMRC within 3 months of formation. Companies House notifies HMRC of all company formations so you may receive a reminder from HMRC
  • Don’t forget to register for VAT once you reach the VAT registration threshold, currently at £85,000. Failure to register can result in penalties
  • Claim all available tax reliefs that you are entitled to claim. There is no law against being tax efficient. In particular, consider whether you can claim Research & Development tax credit reliefs on any research the company has been carrying out
  • Take advice before offering or issuing shares to employees or directors. The tax consequences of getting it wrong can be horrendous for all concerned, while minor changes to an offer can result in tax savings for the employees/directors and the company

FURTHER INFORMATION AND LEGAL SUPPORT

If you would like more information about this development, please do not hesitate to contact our Healthcare & Life Sciences.