A strong foundation in a new or fledging company is essential for allowing that business to reach their full potential. Source Legal’s Victoria Coorey outlines key legal and business considerations for those starting a new business, for those thinking about starting a new business, or those who want a quick health check on their existing business.
Ownership and management structure: Typically, start-ups take the form of a newly incorporated entity, but an unincorporated partnership or a series of commercial agreements may be all that is required. However it’s still vital to set up a clear ownership and management structure, ideally in a document like a Shareholders Agreement.
When embarking on a start-up, some considerations include:
Commercial objectives and geographical scope: What are the business drivers? Where will the start-up operate?
Contributions: Who is contributing what? This could be a certain skill or expertise, IP, a product or piece of equipment, or providing business premises. Have this in writing, including limits of contributions or conditions.
Share types: Any voting/non-voting shares? Any preference shares? Will shares will be vesting shares or will the owners will hold equity from ‘Day 1’?
How will decisions be made? Generally, day to day operating decisions can be made by management, while other more strategic decisions should be put before the Board. The most significant decisions should be reserved for shareholders.
Employees: How much will the founders be involved in the day to day operation of the start-up and how will they be paid? Will the start-up have its own employees or will employees be contracted to the start-up entity from the founding parties? It is important that any independent contractors are not inadvertently considered to be employees.
Financing: How will the start-up be funded initially and how will it be able to meet ongoing funding needs? It is vital to get tax advice to ensure that all financing is structured in the most tax-effective way.
Non-competes: It is important to protect the business from competition from within. Set out non-compete obligations in the Shareholders Agreement as well as in employment contracts, or in a separate, binding deed signed by all relevant parties. Include the restricted activities, geographical location of the restrictions and timeframes. Restraints must only be necessary to protect the legitimate interests of the start-up, or they might be considered unenforceable by a court.
Dispute resolution: Set out an appropriate dispute resolution framework and avoid unnecessary grief. Disputes can often be resolved by a chairperson’s casting vote, or by referring the matter to an independent arbitrator. Engaging costly litigators is not the only way!
Exit and termination: It’s often unpalatable to think about the end at the beginning, but there is no better time to do it.
- Voluntary exit: How will a party sell its interest? Will other parties have a right of first refusal to buy that interest? How will it be valued?
- Involuntary transfer: What is the process if a founder becomes insolvent, breaches an obligation, or undergoes a change of control? Often it is handy to have agreed upfront that the remaining parties have a right to buy a founder’s interest in these circumstances.
- Dissolution: If a business is dissolved, the parties should decide how any surplus assets will be distributed
Documentation: It is vital that you ensure everything is appropriately documented in writing and backed up! This will ensure you start your operations in a professional manner and will help avoid (or quickly resolve) disputes later on.
Key documentation you should have and your lawyer can help you with:
- Employment agreements
- Funding agreements
- Constitution and Shareholders agreement
- IP licensing and customer agreements
- Budgets and Annual Plans
- Internal policies eg in relation to privacy, ownership of new IP etc, marketing materials, website/social media
If you need help with any of these matters, Source Legal has extensive experience as well as simple, practical solutions for start ups of all shapes and sizes