Laura Peachey and Claire Corbin recently ran an afternoon workshop for early-stage technology businesses on behalf of Informatics Ventures in Edinburgh. In today’s post on the Startup Blog, Laura runs through some of the key information that was shared with the young entrepreneurs.
A Roadmap For Early-Stage Businesses
Claire and I were kindly invited by Informatics Ventures to speak to a group of budding entrepreneurs recently about how to establish a startup and seek investment. Two hours, and much chatter later, we thought that it might be helpful to share the some of the headline points of our whistle-stop tour more widely....
What Does Your Startup Want To Be When It Grows Up?
A sole trader? A partnership? A company? Choosing the vehicle for your business is a very important decision that you have to make before you even have an idea of the direction it may go in. There are various pros and cons of different legal entities which you should consider when making your decision but generally speaking, virtually all startups will be born as private limited companies for the following reasons:-
- Limited liability: directors shouldn’t lose their houses.
- Legal personality: a company can sign contracts.
- Flexibility: it gives you the chance to create different classes of shares with different rights.
- Tax: a company is eligible for certain tax reliefs which are key for investors (EIS/SEIS).
Incorporating your company
How do you do it? It’s quite straightforward and you can even incorporate online. You’ll have to:
- Choose a company name: one that’s not already taken or containing “sensitive” words (unless you’ve secured consent)
- File a Memorandum and Articles of Association with the Companies Registrar: either bespoke Articles or the ‘Model‘ (default) version;
- Appoint at least one human director: any other directors can be corporate bodies; and
- (Optional) Appoint a Company Secretary: even if there is no formal appointment, someone must take responsibility for the duties a Company Secretary would usually attend to.
Shortly after incorporation, you will receive a registered Company Number and Certificate of Incorporation. At this point you can then start to operate your company.
What Are The Rules?
The bad news: there are lots. At 1300 sections, the main legislation in this area, the Companies Act 2006, is the longest Act ever produced by the UK Government. However, it does contain provisions relating to public as well as private companies so not all parts of the Act will be relevant to you.
Don’t worry, you’ll not be expected to know the Act by heart! However, it’s important to be aware that in a private limited company, you must:
- Maintain statutory registers (a.k.a. company books): and keep these up to date at all times.
- Make regular filings with the Companies Registrar: annual returns, accounts and any changes).
- Get shareholder approval for certain decisions: either by ordinary (50% majority) or special (75% majority) resolution.
- Comply with various other Directors’ duties (see section 172). For more specific information in relation to these duties, please refer to our ‘Directors’ Duties & Responsibilities’ guide.
(Business) Planning for Investment
There are various ways to inject cash into your company, whether by way of grants, awards, bank facilities or equity investment (selling your company shares for cash). Whatever route you are currently pursuing and whatever the stage of the company, a good business plan is essential. In our experience, a short (1-2 pages) executive summary at the start of a business plan is vital. It is likely to be the first document a potential investor will read and will determine whether or not they decide to look into your company further.
The business plan (and particularly the executive summary) should be clear, concise, attractive, easy to read and drafted in user friendly language. Avoid the temptation to throw in technical jargon – an investor will not be tempted to invest in your business if they do not understand what you do.
Investment: The Legals
The following assumes you are receiving private equity investment, but much of the information which follows may be relevant regardless of the form of investment you secure. Documentation you should expect to receive from an investor includes:
- Head of Terms: to reach agreement on the headline terms of the deal (you can find out more information on Catriona Brown’s series of blogs looking at Heads of Terms in more detail).
- Investment Agreement: to regulate the relationship amongst the company, its directors and the investors.
- Articles of Association: investors will want to put in place specifically tailored Articles which give them certain rights and protections
- Service Contracts for directors
- Assignations of Intellectual Property e.g. from directors/others personally to the company.
Investors will also carry out due diligence in relation to the company and will ask for certain information and documentation to be provided (you can find out more information on this in a previous blog post on due diligence).
The due diligence stage leads into a similar but separate exercise called “disclosure”. Disclosure protects the company and the directors as it enables them to disclose information to qualify warranties they will almost certainly be asked to grant as part of the investment process.
Crowdfunding (raising small sums from a large number of people) may be an appropriate source of funding for some businesses and the investment process via equity crowdfunding may be “lighter touch” than that detailed above.
Working With Investors: Dragons or Angels?
As noted above, the Investment Agreement and Articles will usually contain certain investor rights and protections. You should expect investors to “carve out” a list of decisions which can only be made if the majority of investors consent. You also typically find that investors may wish to appoint a director to the board of the company, or at the very least, have the right to attend board meetings as an observer. This may seem an unwelcome prospect but a good Investor Director can bring a great deal of useful experience, skills and contacts to the board to help drive the company forward.
Thanks again to Danny Helson at Informatics Ventures for the invite to come along and speak. Hopefully if you’re looking to incorporate a startup, or seeking investment and are unsure of the next steps, we’ve shared something of interest. If you need any further details or information, please get in touch and either Claire or myself will be happy to help guide you through the process.