I'm currently helping a large US software company acquire a business set up by two UK individuals via an unincorporated partnership. The target technology is great, but the structures and choices made by these two entrepreneurs are making the process much harder than it should be.
It's never been easy to develop a technology business from origins to maturity – and potentially to exit. The rewards can be significant but the challenges are easily overlooked. There are lots of issues to overcome, from the seemingly continual need to raise financing and hire staff, to the marketing and selling of the product or service.
Not surprisingly, most early and growth-stage businesses focus more on the product and not on the less glamorous side of operations – their legal obligations. A common view is that tax, share ownership and intellectual property are all problems that can be ironed out further down the line.
It's important to realise that tackling key legal issues correctly up-front isn't just a question of compliance: doing so early builds the right foundation and can help capture and add value to the business.
"We're all friends here, share ownership can come later"
Partnership may seem like a good idea, but rarely turns out to be a good form of ownership model. Every organisation, regardless of size, needs to know who owns what. This can prove a challenging task when a business is growing quickly, but if share ownership is set out early on, it avoids potential headaches later in the process.
Likewise, development of a business can prove stressful, and there are moments when friendships will get fraught. In these situations, it's vital that everyone knows their rights and obligations, from profit distribution and business conduct to general decision-making processes. A degree of formality and structure helps to avoid disputes and allows business owners to focus their attention where it should be: on product and customers.
"We bought it, we own it"
Don't be so sure. Intellectual Property law protects the legal rights of creators. If you commission someone to create something in connection with any element of your business, it doesn't mean that you definitively own what they have produced. Make sure that you are granted full ownership rights and there is evidence (e.g., a contract) to back this up. An eventual acquirer will always want assurance that you own what you say you do.
In some cases, you will also want to register yourself as the owner of the creation at a central IP agency. And don't forget domain name registrations and social media handles.
"We don't make a profit yet, so tax advice can wait"
Tax is rarely the number one priority for a growing tech business. But confirming your tax position early can have considerable advantages. Potential investors can be provided with tax breaks through HMRC incentives, and key members of staff can be incentivised through share incentive schemes at no cost to the company. Some of these schemes are only available to start-up and small companies – it would be a shame to miss out. Also, make sure that you structure your company tax efficiently; otherwise you might get a nasty tax surprise on exit.
"Privacy is dead"
Data privacy laws are very much still alive. Fines and penalties for non-compliance are increasing. If a business collects any personal information from its customers and employees, it must comply with data protection law and regulation.
That means processing information fairly and taking appropriate measures to protect personal data. On a longer-term basis, every business must be able to demonstrate that it takes privacy and security seriously in order to reassure investors and customers alike.
There is no right answer to growing a small business. But, by paying attention to a few basic legal steps, any growth business will maximise its chances of creating and preserving value, and becoming an efficient and valuable business.