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When starting a business, there are hundreds of potential potholes to navigate. I’ve highlighted my top four – not my favourites but the ones I have seen happen most often. Each is easy to avoid.
Don’t accidentally give away control – understand this key thing about how UK companies work
If you only understand one thing about how UK companies operate, it should be this. Very simply speaking, control of a UK company sits first with the board (the directors) and then with the shareholders (the people who own the shares). The shareholders trust that the board will act in their best interests to build a company that hopefully delivers a return. If the board wants the company to take an action, either they have the power to do that thing right away, or it requires a vote to be put to the shareholders (known as a resolution).
Understanding that control of a company usually sits at board level, means you’ll understand any decision around the structure of the board can have a big impact. If you are sole director and an incoming investor asks for a board seat, in a standard set-up, she would have to agree with you on all board decisions for you to be able to progress many key matters, giving her equal control, which may or may not be your intention.
Also look out for sneaky provisions that allow the company’s chairman to have the casting vote in the event of a tie in the votes of the directors. Should one of the directors also be the chairman with a casting vote, this effectively gives them a second vote and with a 2 person board, control.
Don’t accidentally create leverage
Think about who owns your company’s intellectual property (IP) – the brand name, domains, designs and technology. Ensure vital IP is owned by the company. In the event of a dispute arising, if one partner had registered the domain names personally and not assigned the rights to any IP she created (e.g. your website code), she has gained some leverage in any negotiation, probably accidentally.
Registering domain names and other assets in the name of the company is straightforward but when it comes to IP creation, there is an important point to understand. Take design of a logo as a simple example. Where the logo is created by an employee (someone on payroll), the IP will automatically be assigned and owned by the company that employs him. Where the logo is created by anyone not officially employed by the company (e.g. a freelancer or contractor), the IP actually needs to be assigned in writing. There are plenty of standard IP assignment documents online to do this without needing to engage a lawyer.
Don’t delay writing things down
A common mistake is hand-shake agreements over fundamentals, usually around the promise of equity or options. This is fine when everything works out but you can be on shaky ground when it doesn’t, as verbal agreements are much harder to enforce. Although preferable to use a lawyer, this is not always needed, you can even agree these details over email. Set out what has been agreed and request a confirmatory reply. This takes just minutes and can avoid months of pain further down the line.
Don’t neglect yourself
Founders often invest large sums of cash into their business but do so under the radar. This could be through paying for business and set up costs personally, as well as covering living expenses in the early pre-salary days. Consider whether it would be better to put this money into the company as a loan and spend via the company, even if you do not want or expect repayment. It can be written off later.
The benefits are two-fold. Firstly, if you plan to raise external investment, it is hugely beneficial to be able to clearly show investors what you have invested into the company personally. When you’re asking them to write a fat cheque, it is helpful to show that you also have some skin in the game. Secondly, when you reach the stage that your company can pay you, those first payments can be used to pay down the loan, meaning there’s no income tax due. Every penny counts!
April 1, 2019 at 01:44PM
Forbes – Entrepreneurs