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Legal Info for Startups

Looking at investment round, shares & options and employment law issues for startups

Declan Bradley

on 15 October 2013

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Transcript of Legal Info for Startups

The issues
prior to the investment round TravelmAPP should get a healthcheck...
As your company grows keep in mind...
shares or options?
Legal Aspects of Funding, Employment & Share Options for Early Stage Startups
For further details about the services we provide for startups and loads of free and useful information and documents please pop along to http://www.taylorwessing.com/twtechfocus/
Case Study
Mike Palin and Thomasina Cook founded TravelmAPP.com around a year ago. The company's business is its app, TravelmAPP. This allows users to rate and compare the best holiday destinations in the world based on their preferences, how close the user is to the destinations from their current location and recommendations by the TravelmAPP community.

The app is very popular in the GAP year market and has potential to attract other demographics. Revenue streams include advertising and commissions from suggested flights and trains, accommodation options and GAP year providers.

As TravelmAPP has grown:

it has attracted the attention of investors and the company is about to do a Seed funding round for £500K;
Mike and Thomasina are a bit concerned as all the shares are still registered in Mike Palin's name, although it was always agreed Thomsina should own 20% of the company - a short agreement was signed early on, but the shares were never registered as transferred at Companies House;
it is in the process of "transitioning" two existing full time consultant developers, who only work for TravelmAPP, into full time employees;
it has hired graduate interns to act in a developer role to help prepare the app to cope with the extra demand they hope to get from using the investment monies - they think this is a real saving as the interns are willing to work for their cool and well known brand for free; and
they would like to consider equity incentives for their employees using TravelmAPP shares.

Including the founders, no one providing services or working for the company has ever signed any contract with it. https://www.mentimeter.com/p/455620ba2d7c
the employment stuff
No employment contract or consultancy agreements
Who owns the IP?
little protection against post-termination competition
no protection against the consultants or HMRC claiming the consultants are actually employees
"free" interns
employment rights
national minimum wage
what should TravelmAPP do on the shares/options issues?
investment round
and on the employment stuff...
The founders sign up to service agreements that will be satisfactory to investors
The two "consultants" are brought on to the payroll system as employees and given appropriate employment agreements (ideally with a two week break after finishing as consultant)

Any future consultants sign up to appropriate consultancy agreement
The founders, the "consultants" and interns all sign IP assignment deeds transferring all rights in work done and to be done to the company
Service Agreements
IP assignments
Temporary graduate positions either offered as fixed term paid positions at minimum wage or the roles are structured as genuine internships
Direct involvement
Voting and dividends
Financial services laws
Tax – on acquisition for employees and directors (if full value not paid)
Section 431 elections – sign if shares restricted (e.g. leaver provisions in Arts)
Form 42 reporting
Beware of promises
Voting and dividends – not required
Leavers – easily dealt with
Vesting – easily dealt with
Financial services laws exemption for employee share schemes
No tax on grant (unlike acquisition of shares)
Unapproved options – Income Tax (and possibly NI and PAYE)
EMI options – CGT only where grant at MV (self-assessment)
Reporting: EMI1 form & Form EMI40 / Form 42
EMI Options
Tax efficient – capital gains tax on gain and qualify for ER
Company requirements
Independent and qualifying trade
Less than 250 employees
Less than £30 million gross assets
Option holder limits and requirements


£3 million

no material interest in company already held by option holder

working time requirement
Practical matters


EMI 1 form 92 days
Employees – EMI options (need option scheme)
Founder – effect share transfer as soon as possible
Understand obligations as an employer as you take on more staff

Pensions auto-enrolment obligations to think about by latest 2017

Ensure options compliance is dealt with, especially EMI1 filing

Once company outgrows EMI – consider CSOP options / growth shares

Keep on top of the paperwork regarding IP and agreements (commercial and employment)

Keep potential investors informed of what you are doing.
To ensure best practice followed

Reality check

Enhances view of investors
Payroll Services
TravelmAPP should engage a reliable firm to provide payroll services and to ensure the correct deductions are provided to HMRC

This can be done cheaply and we have contacts with providers
Types of Funding
Convertible Loan Notes
Terms on which funds provided
Floating Balance
Investment Term Sheets
Due Diligence on Investors
Due Diligence on Company
Two Stage Process
Liquidity Preference
Liquidity Events
Good Leaver/Bad leaver
Vesting Schedules
Investor Protection/Founder Motivation
Founder/Employee Shares
Share Issues/Transfers
Pre-emption on issue or transfer
Change of Control
Anti-Dilution Rights
Tag Along/Co Sale
Drag Along
Investor Protection
Information Rights
Consent Rights
Full transcript