Founders face a range of complex legal issues and pitfalls that could derail their growth journey, and not giving them the appropriate consideration could quickly make a start-up un-investable.
Amy Pierechod, partner and head of start-ups and emerging companies at law firm Gordons, considers some of those pitfalls and how to navigate them.
One of the most common questions I ask when working with start-up founders – particularly those entering the growth stage and seeking investment – is ‘why are you doing that?’. Whether it is contracts, business structure or any other legal aspect of running the organisation, it is vital to have a plan – to know exactly why you are taking certain routes or making certain decisions.
Why? Because that’s what investors want. And when it comes to seeking funding for business growth, you need to be able to show that plan and frame it in a commercial context.
Here are four of the most significant legal pitfalls that may deter investors from supporting a start-up, if that plan is not in place from the earliest stages.
Business structure
Getting the business structure right from the start is one the most important early decisions a founder needs to make. It is not uncommon for unnecessarily complex structures to put investors off, such as holding shares in the wrong vehicle or trying to set up an Enterprise Management Incentive (EMI) without third party support. EMIs are a share options scheme that allow businesses to give options to employees in the most tax efficient way possible, but it can be tricky to navigate without prior experience.
Contracts management
One of the most common errors that early founders make is to agree initial contracts on a handshake. Contracts are crucial because they provide a legal framework that outlines the rights, obligations, and expectations of all parties, they limit the liability of a business and can help demonstrate a solid customer base.
Not only do they help establish clear guidelines and protect the interests of the business during critical early stages, but they will be vital to potential investors if investment is sought.
Intellectual Property rights
Another key legal aspect is being sure to assign Intellectual Property (IP) rights from people that contribute along the way. An IP assignment agreement will help to protect ownership of products, features and fixes that are developed in the start-up’s infancy, prevent ideas from being stolen or taken elsewhere by contractors and developers, and provide further confidence to investors that things are being done in the right way.
Data privacy and security
Finally, data privacy and security is often the area of highest risk for start-ups, particularly given the lack of clarity in a rapidly emerging and evolving legal landscape. This is particularly true for B2C start-ups in the med tech or fem tech space, because these are more likely to be involved in processing highly sensitive personal data. There have already been a number of cases where data was grossly mishandled and start-ups have been penalised under data privacy laws such as the GDPR (General Data Protection Regulation). It goes without saying that any breaches will not be looked on favourably by potential investors, particularly if there have already been financial and reputational repercussions.
The overarching message is to get support for key legal considerations early. Getting robust plans and policies in place from the outset will not give focus and structure as the business grows, but will give confidence to potential investors too.
