But there are also dozens of technical hurdles — from incorporating your company to issuing options to building a capitalisation (cap) table — that will cost you dearly if you don’t get them right at the start.
In the first of a series, here are all the essential documents you need to start a company — compiled with the help of Anthony Rose, founder of startup legal company SeedLegals.
1) Incorporation documents
As soon as your project changes from being a hobby to something substantial you need to incorporate, which will make your company a separate legal entity to you. This only costs £12 in the UK and takes around half an hour, so there is no excuse for not doing it.
2) Founders’ agreement
Next, make sure you establish a founders’ agreement, which is an agreement between each of the founders and the company. There are templates online for doing this (here for example) but you can also find lawyers (e.g SeedLegals).
The founders’ agreement (sometimes also called a shareholder agreement) needs to cover three key components:
- Share vesting: a system needs to be in place so that if a founder leaves they give back some of their shares. Without this, should a cofounder leave with half the equity, the company becomes uninvestable since no one is going to back a company where half the equity is non-performing.
- Intellectual Property (IP) assignment: This is to make sure that anyone that has worked on the project has assigned the intellectual property to the company, whether it be an advisor, developer or cofounder. This ensures an unbroken chain of IP ownership and will save you having to track down the freelancer that designed the logo three years ago while they’re on holiday and you’re trying to close a funding round.
- Keeping track of equity. The next thing is to divide up the equity between the founders, as well as their initial roles and responsibilities. Keeping track of equity through a cap table, especially at the beginning when some people might only be working on the project part-time, allows you to split the equity in a way that reflects people’s different commitments.
Once you have the founders’ agreement in place, you need to look at the double-edged sword that is trademarking.
Trademarking a name can help reinforce your brand, which is good. The disadvantage is that when you register with the trademark office everyone with a similar sounding name is alerted and given the opportunity to object, so you may find that suddenly people who wouldn’t have otherwise have been interested in what you are doing start paying attention.
It is also worth keeping in mind that trademarks are phonetic and done by industry sector, so don’t just try spelling Apple without an E on the end!
4) Employee Options
An option scheme is essentially how companies give employees, consultants and advisors equity in the company.
It helps to assign the option pool that is created (basically a placeholder of shares) and also outlines all of the rules related to that award e.g. what happens if they leave the company. In the UK, EMIs [Enterprise Management Incentives] are a tax-efficient way of giving employees equity in a business. In other countries, such as Germany or Spain, it’s a little more complicated.
The basic point is that you need to set one of these up. Our friends at SeedLegals will do it for you, but so will a traditional lawyer (normally at a higher cost). There are some great resources that go into detail about what exactly these options schemes are.
Venture Capital company Index Ventures published a whole handbook on the subject. Not to be outdone, fellow London venture capital company Balderton Capital has also written a guide to employee equity. This guide on option pools from Forward Partners is very helpful too.
Having all of these key things agreed from the outset prevents potential disputes later on, when the stakes may be higher.
5) Non Disclosure agreements
Non-disclosure agreements (or NDAs) are not essential, but they are a good idea in case you need to have a conversation with an outside party. You should think in advance about the terms of any NDA:
- Mutual or unilateral (i.e. if only one side is bound to secrecy or both)
- How long it will last
- What information is covered exactly
For more on this, there is a detailed guide here.
6) Employment contracts
At some point soon-ish you are going to want to hire some staff. It may be tempting to do this on a kind of informal basis, but it’s really important to draw up clear employment contracts and offer letters. These are key to ensure employees understand what’s expected of them. They should cover reporting structure, job terms, hours and other job-specific details.