So, your idea seems credible and you think it’s got legs. Awesome. Now is a good time to incorporate a company, which will most likely be a company limited by shares (there are other types, although that is a discussion for another day!). Setting up a company to deal with your business should help:
● limit your personal liability
● give other people a simple way to take a stake in the business
● provide a vehicle for growing the value of your offering
There will be issues to consider once it has been set up, such as making sure the idea and its value belong to the company and that everyone involved is on the same page.
Dealing with Intellectual Property…
Prior to incorporating the company, you and maybe some of the other Co-Founders own all of the IP (assuming you have followed my guidance at Stage 2 and got appropriate IP assignments from third-party contractors). Once the company is incorporated and becomes a legal person, all of the relevant IP should be transferred to the company.
What about Co-Founders?
In my experience, I have seen many Co-Founders fall out. It can be over big matters such as choosing funding options or defining the strategy of the business, or sometimes smaller matters, such as who gets to do the demo or pitch. Sometimes they just simply stop getting along. Business relationships need to be treated as business relationships from the start. This means planning for if things go wrong. Therefore, Founders should sign up to arrangements that restrict them from using IP, confidential information and client lists for their own benefit and stop them from setting up a competing business within a certain period of time if they leave.
Founders who are also company directors should be aware of their duties as statutory directors (essentially to act in the interests of the company) and their fiduciary duties (in short, to put the company’s interests before their own). I will expand on these in another post soon.
3 Key Tips to Avoid Legal Battles at this stage:
- IP Assignment Deed
You can use an IP Assignment Deed to transfer relevant IP from yourself or anyone else involved to your new company. I can provide a suitable template free of charge.
- Shareholders’ Agreement
A shareholders’ agreement is recommended when you have two or more shareholders, and they each have a say in the running of the business. A shareholders’ agreement usually sets out the terms governing the issuing and transferring of shares, rights for the shareholders to be or nominate directors, provides for certain decisions to require majority shareholder approval and contains provisions governing the relationship between the shareholders and the company, including non-compete clauses. If you need to put such an agreement in place, I can help with that for a low-cost fixed fee depending on what you need.
- Director’s Service Agreement
A director’s service agreement is an employment contract for executive directors. They should contain the usual IP, confidentiality, conduct and non-competition provisions. Non-executive directors are not employees, so they would need a separate form of a letter. I can help with both of those documents.
The above is intended as guidance only and does not substitute legal advice. Please get in touch with me via LegalDrop if you need assistance on such issues or to discuss my Start-up services.
I am happy to have an initial no-obligation chat and tune in soon for my fourth instalment – HOW TO: Develop and Launch your Product.
contributed by Declan Bradley, Doyle Clayton