You might be on your way to launch your new business idea to the market with adequate economics and financials but the legal aspect is just as important as any other dimension of your business and/or start-up. Start-ups and start-up law have many facets thanks to, you, the founders having perplexing and ground-breaking ideas.
The Necessary Evil of Start-ups: Recklessness ?
Start-ups are a challenge to the norm by their nature. Founders of start-ups usually risk a lot to realise their ideas and dreams. This creates a very tough environment externally and an all-hands-on-deck situation for start-ups internally. Almost always there is neither enough time nor money for a start-up to accurately assess the risks and adverse situations that they might encounter. And not only these risks have limited time attained to be assessed, they also differ quite in their origins and nature. A start-up might face a purely legal or financial risk or just a behemoth of a mix-up of these two, as the case might be with cross-default or cross-acceleration clauses. With the start-up’s very scarce resources, it is not realistic to expect an apt matrix for all of the risks that might be encountered from the start-up alone. Alongside, considering the early symbiotic relations in a start-up structure, it is no wonder that tempers can start to fray within the inner structure of the start-up.
Moreover, having a volatile environment, start-ups tend to have different working culture needs as the time passes. Skills that are needed at the very start of a business might quickly become irrelevant due to the reason that the business has evolved to not to need and benefit from that particular skill-set. These unneeded skills might just go over the top and become obstructions to the business’s future progress. An example of that would be having a very basic and crude understanding of the law. While at the start, such an understanding of law might be beneficial for a start-up to function in elemental areas, in later stages of the business, that understanding would be much more hazardous than it is beneficial, as things would get more complicated from an economical point of view, they would also need to be structured with a more sophisticated legal care. Thus, simple and crude legal approaches will leave many breaches in the start-up’s business structure. Especially in the area of corporate law, with many possible vulnerabilities that can be exploited to the detriment of the start-up in the later stages of its life cycle.
A further example would be the dangers of securities law. A violation of applicable securities law could impose unlimited fines, injunctions, prohibitions and/or criminal sanctions. Some of the most common securities laws violations by start-ups are (i) making materially false or misleading statements in connection with the offer or sale of securities; (ii) retaining unregistered finders that offer and/or sell securities on a start-up’s behalf for a commission; (iii) advertising, or improperly soliciting investors in connection with, the offer or sale of securities, including via email, Twitter or Facebook; and (iv) improperly offering and/or selling securities to “friends and family”. While not all of these may amount to a wrongdoing that is persecuted by the law, there is a very thin line between the good side of the law and the wrong side of the law. And always staying on the bright and shiny side of the law requires a clear-cut and precise legal care for your start-up. For example, according to Section 755 of the Companies Act 2006 a private company cannot; (i) offer to the public any securities of the company, or (ii) allot or agree to allot any securities of the company with a view to their being offered to the public. Nevertheless, section 7 para. 2 subpar. f of the Public Offers of Securities Regulations 1995 envisages a certain set of exemptions for this prohibition. For your start-up to raise as much capital properly and in accordance with the law, these regulations and many more of them that might be applicable to your unique case must be considered in expert hands.
The common logic for a start-up is that these are just some nuclear scenarios that legal counsels use to squeeze money and the aforementioned bitter situations will not be a reality for them. However, a risk is always a risk and they are best managed if they are identified and mitigated before they turn into reality itself. And what we have described in this article as legal risks are already happening and are already in the mind of a future founder of a successful start-up. As it is accepted that a start-up needs sometimes reckless behaviours in order to thrive and stand out in the crowd, it must also be accepted that being reckless when taking business decisions does not entail being reckless in regards to the law. If that distinction is not clearly set down then there might be many problems awaiting your business to strike in its most dire time of need. Back to our headline, it must be acknowledged that start-ups need to be agile and hasty for thriving. But there is always a cost for business actions. Let a professional consider the legal outcomes of your business actions. And by doing so let recklessness only thrive your business and not damage your start-up in foreseeable ways.
The Corporate Matters for Start-ups
The followings are some of the corporate legal matters that need to be taken into consideration throughout your journey:
Entity formation
Capital raising and financing
Governance, shareholder relations, and corporate housekeeping
Workplace and labour issues with employees, independent contractors, and service providers
Employee benefits and compensation
Acquiring and protecting intellectual property and managing software and information technologies
Commercial transactions, including product development, production, corporate partnering, advertising, marketing, and sales
Real estate and leasing issues
You always want to have the right and fertile foundation to nourish your business. And the key to that is having a strong corporate law basis for your start-up. It does not only protect you from any prospective problems and legal sanctions but also polishes your business for future investors. Your business will be lean and mean once the opportunity comes.
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