What advice should a lawyer give to a startup?

When a business comes to you with a legal enquiry, it’s generally a case of the more specific, the better – helping you narrow down whether you can help, the best options on the table, and the right questions to ask.

However, when a brand-sparkling new startup comes to you for general advice with no clear agenda, it can be a bit more difficult pinpointing which information is best to share – striking the balance between being informative enough and not overwhelming the clent.

We’d suggest focusing on five key areas – Framework, Team, Money, Property, and Processes. Let’s look at each in a little more detail.

Framework – start with the right foundations

When we say framework we mean all the critical building blocks that should be in place during a company’s startup phase, to ensure future success.

Firstly, this involves the literal framework of the business. Is the best choice being a sole trader, or is incorporation or partnership the best route? Potential tax and liability issues should be assessed at this stage too.

Drawing up an agreement between the founders (and other stakeholders) is an important point to push – many co-founders will insist that their relationship will survive come hell and high water, but as most lawyers know, this is not always the case. Drawing up an agreement detailing terms should future hypothetical situations occur is a prudent move.

Business registration is the next issue – even if the startup isn’t going down the incorporation route, it’s at this point that any requirements for licensing or other types of registration should be established, particularly for purposes of VAT and GDPR.

Finally, this is a good time to bring up the name of the company, reminding the client that registering with Companies House does not guarantee ownership of a name, and that registering rights as early as possible (by trademarking a business name or brand, for example) is wise.

Team – hiring effectively and correctly

Even if the startup is not yet at the stage of growing their team, it’s sensible to put plans and policies in place to ensure future recruitment success.

Many businesses are set up within a family, which can add many complexities – it’s not just business success that’s at stake in these cases, but the relationships between family members themselves. A Family Charter can help keep things clear, and on a commercial footing.

Clients also need to be made aware of their legal obligations towards employees, or future employees. Of course, this is a vast area of law, but focusing on the basics like having written, inclusive policies and procedures in place, adhering to Health and Safety requirements, and ensuring there is the means to accurately calculate and manage payments and records,  is a good starting point.

Given the current recruitment climate, it’s also important for companies to consider the ‘perks’ they can offer their employees – in the early stages these may be share options or similar incentives.

Money – keeping cashflow stable

Around one in five startups will fail in the UK. That’s why it’s important for startups to consider cashflow, and getting off to the right foot from the beginning.

This involves discussion of the potential funding options available, and how to best raise working capital – whether from loans and other debt, or equity capital. The importance of reading the small print can never be over-emphasised enough to the client!

Although cash flow issues are not the most pleasant situation to consider, the majority of businesses will experience them at some point, and it’s important to have a plan of action in place – with it being stressed that legal advice from an insolvency specialist is critical if things go beyond a certain point.

Property – acquisition and protection

Here we’re taking into consideration the legal issues surrounding both physical and intellectual property.

It’s important to underscore the importance of the client getting the right legal advice early if business premises are to be acquired, to avoid being tied into a lengthy, unsuitable, and ultimately costly agreement.

The fact that involving a lawyer early means negotiating from the strongest possible position is an appealing point to mention, along with the potential for technical questions (that could later have a great deal of commercial significance) to be addressed and answered.

Intellectual property is an area that the client may not have even considered. For many businesses, their main assets are not tangible ones, and the client might not have considered the implications of another company infringing on their rights, or how best to protect these assets through trademarks, copyright, or patents. Another risk they may need to be reminded of is confidentiality breaches, where restrictive covenants can be essential.

Operations – business as usual

A startup may not consider that routine purchase contracts justify legal involvement, which is understandable. However, the client should be advised that more valuable purchase contracts need to be individually considered on a risk basis, and a lawyer consulted if required.

Similarly, a reminder can be given that a failure to assess risk in the standard sales terms provided to customers can lead to all kinds of trouble, from litigation to reputational damage. Ditto large, one-off contracts, where any disputes may lead to a huge amount of expense, and a breakdown of relationships.

Dispute mitigation is another area where the client can seek advice early, and create a clear strategy of action to take should a dispute rear its head. Having a lawyer already ‘in place’ to assist will speed up the process and outcome, saving on costs in the longer term.

This idea of future proofing applies to all other areas of business operations too, which is why savvy startups will allocate a budget for legal issues from the beginning.

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