June 4, 2015
A lot of startups come to us with part of their plan already in place, having taken the initiative and done things themselves. This is great in theory, as every cent counts when trying to launch a lean startup for success. However, sometimes this inadvertently leads to other problems that can become major setbacks in practice, both in the short and long term. Whether it’s a tax sting or the winding up of a company, unless you’re on the right footing from the get go, if a problem doesn’t destroy the business outright, it may have the potential to do so through the professional fees you’ll have to incur in fixing it. We thought we would share a few general tips to steer the hopeful entrepreneurs in the right direction.
1. Check licensing and regulatory requirements. Recently, after spending a fair amount of money registering intellectual property (“IP”) and commencing the app development process, a client of ours (although not at that stage) discovered that the licensing provisions in their industry specifically prohibited their core business function. Needless to say, all the blood, sweat, tears and money was completely wasted. In this day and age, the chances are that everything’s regulated. If you’re confident enough, it pays to do your own research as soon as you form your idea and before anything else, and even more so to run your idea past your lawyer.
2. Choose your brand wisely. Most people don’t realise that business names, company names, domain names, trademarks and so on are all different forms of (sometimes unrelated) property, and owning one doesn’t necessarily entitle you to another, or stop someone else from beating you to one of the others. Depending on the nature and extent of the particular business model and the industry within which it will operate, this area of IP can be a complex and tangled webb for a novice, and often see a business stepping on someone’s toes or having their own brand diluted down the track. As such, it pays to choose a name and branding strategy that is untouched, or at least not so in your specific class of goods or services. There are publicly available registries for this purpose, such as IP Australia’s ATMOSS for trademarks, so you can do some research yourself, but again, a good lawyer should be able to identify any grey area here quickly.
3. Choose the right structure. The first port of call should be a competent accountant that will provide good advice tailored to your personal circumstances. It’s important to get this right at the outset so the correct entity holds all assets and IP from the beginning or as and when they’re created or purchased. Otherwise, particularly if their value has grown, a transfer later on could attract unnecessary stamp duty and / or capital gains tax. The next step is to think from the perspective of risk management, operations and cost. Ideally, liabilities and assets should be separated and compartmentalised. In some cases, while it may be ideal to have a discretionary trust with a corporate trustee owning shares in a parent company with three subsidiaries, the costs may be prohibitive for a young hopeful. On the other hand, operating as a sole trader may give rise to too much exposure to potential liability, depending of course on the nature of the goods or services you’re offering, and will not provide the foundation to enable equity investments, such as the issue or sale of shares in a company would. Again, a good lawyer will be able to strike the right balance, and leave you with enough flexibility to transition as and when the business grows and needs change. A good lawyer working with a good accountant will be even better.
4. Set the record straight. No matter how small a business is or how close the co-founders or participants, this is arguably the most important aspect and it needs to be done right. In our experience, the bulk of shareholder and partnership disputes arise between ex-best friends and close family members. Mixing business with pleasure often fails for a variety of reasons, but that’s not to say that’s the norm or it will happen, and in most cases, it probably could have been nipped in the bud early on if an adequate framework was in place. If you’re a company, this means a shareholders’ agreement; a partnership, then a partnership agreement, and so on. They all need to be airtight, especially when it comes to dispute resolution and decision deadlocks, as in the case of an irreconcilable stalemate, the only alternative might be a winding up of the company and the auctioning of any assets to the highest bidder (which might not be you). In addition, any dispute can end up costing big money to deal with. Although it might be awkward or uncomfortable, it really pays to really think about things and be frank with each other from the outset, and to set concrete provisions to deal with these situations that are binding on both parties, and it can make all the difference in the end.
5. Protect your brand. Once you’re satisfied with your branding, you should assume you’ll make it big or get ripped off, or both, and get some protection in place. Of course, registering trademarks is easy, and patents may be available to you. In our experience though, we are finding that most IP these days is not capable of registration, particularly when it comes to mobile apps. However, the law of contract can help. For example, a good non-disclosure deed could save you from a potential angel investor or app developer beating you to the pump after you’ve revealed all your cards. Similarly, your shareholders’ agreement might save you from a rogue partner, as might actually negotiating your app developer’s terms and conditions or providing your own. In addition, there are also the various agreements startups have with their customers. A good creative lawyer will find a solution.
6. Be careful with capital raising. Depending on exactly how you plan to offer the opportunity to invest, to whom and in return for what, you could fall foul of particularly onerous disclosure and reporting requirements. The result could be severe if found to be in breach, and even if not, the costs of compliance can be crippling. If you require funds from elsewhere, unless you’re receiving a gift or loan from a family member, you should see a lawyer before taking any steps in this regard.
7. Make sure you comply. Apart from licensing regulations discussed above, there are other areas of mandatory compliance you need to be across. A general example is privacy, which will apply to most businesses in Australia. There may be other specific areas relating to your business in one State or another. Compliance may involve, for example, having your business policy on an issues such as privacy drafted and made available to your customers. Often the legislation and regulations governing these areas is difficult to interpret, even for the sophisticated entrepreneur, so get a lawyer to do it. For something fairly straightforward such as privacy, it shouldn’t take long or cost much to tick that box.
8. Tend to your flock. Employment is a key area, and we have been seeing a rise in disputes in this area for startups, especially when it comes to employee share schemes. As a startup trying to run lean, the temptation is always there to offer a stake in the business instead of incurring the risky fixed cost of a salary. This may or may not be accompanied by an instinct to overstate or over promise when it comes to growth projections or expected returns. Don’t think for a second that if it’s not in writing, it’s not enforceable, because it might be. Verbal agreements can still be enforceable promises, and even if the circumstances are insufficient to establish a binding agreement, the promisee may have an equitable cause of action, for example where they relied upon a promise to their detriment. As such, be very careful about what you say, and always qualify it as being an estimate only and made on the basis of real assumptions. Better still, say nothing at all, and have an agreement prepared. In the case of a third party providing one-off or project services, a commercial deed might work. In the case of an actual employee, for example taking a low salary early on in exchange for a greater return or payback later in one form or another, you will need an employment agreement before making any promises. This could also help to avoid a myriad of other potential claims if things really do go south.
9. The customer is not always right. Imagine a new app with a social user interface where anyone can post almost anything, much like facebook. Through the platform, a user can post images or text that might be defamatory, and as your business owns, operates and makes available the platform, it could be deemed to be the publisher of that material, and therefore liable for it. There are numerous other examples, such as breaches of pirvacy law. In the case of a business selling goods for a particular purpose, or providing services said to be of a professional or expert calibre, there may be potential exposure to product liability, professional negligence and so on. The list goes on. The important point to make is that this exposure can be minimised significantly if your obligations to third parties are imposed on your customers and mirrored, to the extent relevant and possible, and if your gaps are otherwise closed or narrowed as far as possible, through your agreements or terms and conditions with customers or clients. The same applies equally to your suppliers, including app developers. You should always remember that the terms of a contract are open to bargaining, and if someone wants something from you enough, negotiations can take place.
10. Master your marketing. This step is somewhat related to choosing your brand and also protecting your brand. Today, with most businesses relying more and more on their online presence, digital advertising and SEO are commonplace and competitive, as is deliberately choosing business names or slogans that assist with search results and rankings. Note that even this can amount to IP infringement in some circumstances, so it is worthwhile getting some decent legal advice in this regard too. On the other hand, you need to be very careful about the types of claims you make when advertising your goods or services, to ensure you don’t mislead, overpromise or otherwise breach any regulations. To do otherwise can have serious consequences, ranging from commercial disputes and even litigation through to bans from acting as a company director. Get it right and don’t overstep the mark, no matter how tempting.
Once you have ticked all the boxes above, enjoy the exciting time that embarking on a new venture brings, but note that this list is by no means exhaustive or applicable to every business.
For any related issues, as always, feel free to contact us.