The Start up Legal Journey

9 Minutes

From your bright spark idea to your first fundraise, Avery Law have put together this short legal guide on what you need to know and prioritise when starting your business.

The Idea Stage

So, you have come up with a bright idea, you can see it disrupting the market and you want to turn it into a business – so where do you start legally? Once you have established your concept you are probably thinking about the brand and name of your business so that you can start to conduct market research and validate your idea with your target audience and potential investors.

As a first and simple step, you can run Google searches to see if the name you are thinking of already exists. After you have done some initial searches and you think you have settled on a name, the next key step would be to conduct a trademark clearance search – this is a search of the trademark registers for any registered trade names that already exist. You certainly don’t want to be using another owners registered trade name. If the results of the clearance search come back clear then you may consider applying for a trademark over your brand name so that others can’t use it. You may however decide to keep your costs down at idea stage and do this as part of the development stage.

If you are setting up your business with co-founders, you should put in place a founders agreement which will set out the terms of the relationship from the outset. Although it may be hard to think about at the beginning when everyone is excited, it is important to outline how the relationship will be work in the event you fall out or one of you decides to leave the business.

The Development Stage

Once you have validated your idea you will want to start developing your idea and creating a product or platform. The development will lead to the creation of intellectual property (IP). It is important to protect your intellectual property (IP) from the outset as with most tech startups the IP is the most valuable business asset. Most startups will seek external developers for this. It is critical to ensure that a clear agreement is entered into with any developer that the IP created belongs to your startup.

It’s likely you will require funding for development as it can be expensive. When it comes to funding there is a lot to take into consideration. The most common type of funding that startups achieve is equity fundraising but some will consider a form of venture or bank debt. Everyone has a different funding journey, so it is best to spend some time considering what funding option is right for your business and speaking to a good growth focused lawyer can help in this process.

You will now have likely built your pitch deck. Its important that you don’t just send this out to everyone you know. An offer for equity in your startup can only be made to certain types of investors – there are some strict laws around offers of equity. A pitch deck and any communication related to the fundraising should have some legal disclaimers to protect you.

If you are looking to raise money through equity fundraising, an important starting point will be ensuring you have an attractive business structure in place. Investors will typically invest in a private limited company structure that is SEIS and EIS eligible from the outset.

Other considerations which will impact the type of equity funding you choose to pursue are: the stage of your business and the sector; how much money you need to raise based on your valuation; how much runway the funds will give you; and the type of investor you are looking for.

The type of investor you are looking for is important – there are various investors you can obtain investment from, such as angel investors and syndicates, strategic investors, crowdfunding platforms and venture capital funds.

Angel investors are high-net-worth individuals and often passive investors. Angels are often attracted by EIS/SEIS tax reliefs and will usually want assurance that your startup is eligible for those tax reliefs before they invest.

Crowdfunding has grown in recent years and has opened opportunities for early-stage businesses. It involves raising small amounts of money from many investors via an online platform. Depending on how the platform is structured individual investors will either become direct shareholders in your startup or the platform may have a nominee structure which the investors invest into and that nominee will become a shareholder in your startup. These platforms typically have their own investment terms and provide a great reach, making them attractive for early-stage rounds.

Another option is obtaining finance from a VC (a venture capital fund). Traditionally VC’s weren’t looking at early stage startups but in recent years there have been a growing number of VCs with early stage focused funds that are looking specifically at investing in early stage startups. Most VC’s will seek to obtain a board seat, will require various consent matters and often liquidation preferences to provide protection for their investment which will all be included in the investment documentation.

The Growth Stage

Once you have raised funds and developed an MVP, it is now time to commercialise your product and focus on the marketing and sales strategy. Firstly, it’s best to start with a marketing strategy, which should set out your goals accounting for your target audience and how you intend to successfully communicate your message.

There are important legal aspects when bringing your product to the market and importantly include putting in place terms and conditions with your users. Going to market may also require entering into contracts with collaborators, partners, influencers or affiliates. There are important considerations with all of these contracts and they are often the most fundamental money making contract for your startup.

At this stage you will also likely be expanding your team which will require employment and service contracts. Option schemes are often an effective way for startups to further incentivise and retain employees. Option schemes allow companies to reward loyal employees by offering an option to acquire equity in your startup at a future date. EMI option schemes are the most tax efficient scheme and can be granted to qualifying employees.

With all startups and the journey of scaling, there will always be bumps in the road. However, if you put time and effort into ensuring you have strong legal foundations for your startup it will pay off in the future. Surround yourself and seek support from trusted advisers like Avery Law that are engrained in the startup ecosystem and specialise in supporting startups scale, get yourself good advice, make your startup attractive to investors, and you will grow and succeed.

Written by: David Turney, Jessica Conventry & Felicity Bull

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