The following are some issues to consider when seeking investment or growing a business. Addressing these as you go along can help you become a more valuable proposition and save a lot of time, money and energy later on.
Some companies do work without written contracts – but you should not be one of them. It is important that agreements are recorded in writing, so it is clear to investors/buyers what the terms are.
Investors/buyers will want to know the details of key contracts and whether you are locked into any long-term or unprofitable contracts. Look out for contractual terms that allow the other side to terminate easily but prevent you from doing so, or that place indemnities and large liabilities on you, and ensure you protect your Intellectual Property (IP).
Change-of-control provisions may allow the other side to terminate if you sell a specified stake in your business: these should be carefully considered, and avoided if you are gearing towards sale.
Best of all, have a proper standard contract that you can use.
Who actually owns the IP?
Generally, IP created in the course of employment is owned by the employer. Make sure your contracts do not alter this position and clearly define the employee’s role. Conversely, the default legal position for consultants and third parties is that they own the IP: make sure they transfer IP ownership to you by a written agreement.
Is your IP registered? If it is registered in the names of others (e.g. founders), written transfer or licences should be entered into.
Some forms of IP require registration, and securing this can increase value. Further, you do not want to broadcast your ideas and admit to others that you have not registered IP. Take steps to limit disclosure of sensitive IP, and make sure any parties to whom it is disclosed, or who have access to it (including investors/buyers), enter into written confidentiality obligations.
Management and Shareholders
Companies are required to keep shareholder and director information at Companies House and in their own registers. You should maintain these records so it is clear who the existing shareholders are and what shares and rights they own and consider whether there is anybody not recorded in there who have rights or expectations to acquire shares.
If there is more than one shareholder, the default legal rules governing voting and information rights may not be suitable and you may want to enter into a shareholders’ agreement to regulate the decision process.
Agreements with Key Personnel
Investors/buyers will want to know that key personnel are committed to the business, and may want to see written contractual obligations confirming this.
Is there anything to stop key personnel simply walking away? If they do, have you got protections in place to stop them setting up in competition and poaching personnel or customers?
This is an attractive relief for investors: check whether your company qualifies, consider applying for advance assurance from HMRC, and make sure shares are fully paid up upon issue.
Addressing the above from incorporation through to sale should help add value to a business, reassure investors and buyers, and achieve a successful exit.
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