Protect your new business from the beginning

NOBODY starts a business with all the answers, but for startups and scaleups, your people are your business. They, and the things they create, are your primary asset, and when it comes to protecting it, the onus is on entrepreneurs to get it right. You can’t always rely on the law being on your side; you have to go out of your way to protect yourself.

In the early stages, founders and employees are understandably excited about the new product or service – nobody wants to think about things that could go wrong.

But it’s simply unrealistic to think that everyone who starts with you is going to be with you until exit.

It is therefore really important to agree at the outset what is going to happen when people leave the business: you can have so-called “good leavers” and “bad leavers”, and what happens to an individual’s equity depends on which one they are.

Sometimes things just don’t work out, so agreeing the principles and signing the right documents at the very beginning is of vital importance. The earlier you get the paperwork in place, the more likely you are to get the result you want. After all, it’s easier to negotiate with someone on the basis of principles when there isn’t a multi-million valuation at stake, and it’s certainly easier when you aren’t already in dispute.

Entrepreneurs also need to consider what happens after a disgruntled employee leaves. Nobody likes competition, particularly not when it threatens your fledgling business. To prevent a disenchanted former colleague from capitalising on what they learned from your business, you need to familiarise yourself with confidentiality provisions and non-competes.

Don’t assume, however, that what you write is automatically going to stand up in court. Non-competes are scrutinised very carefully because the courts take the view that people need to be able to earn a living, and if they compete within reason, so be it.

If you want to give yourself the best chance of having an enforceable non-compete, you need to tailor it to the particular individual and situation at hand. You as a business owner need to be able to justify what you’ve asked for. One size doesn’t fit all – if you take that approach it can leave you with no protection.

What about the things your people create? If you haven’t locked down your intellectual property, it’s going to be an issue when you try to raise funding. Angel investors may not have an issue with it, but by the time you get to Series A, investors will expect you to be able to demonstrate that their investment will be properly protected. They will want to see, for example, that you have filed your patents at the right time and in the right jurisdictions. If you haven’t, this could be a serious problem.

Investors will also want to see that the value isn’t just in you, the founder, and other key employees – it’s got to be in the company you are asking them to invest in. That, again, means you need to ensure that anyone who has created intellectual property has signed the documentation needed to transfer ownership of any associated intellectual property rights to the company.

The best time to do this is at the start. If you allow a situation to develop where an employee holds the keys to your business, you could find yourself having to negotiate from a position of weakness. In that scenario you might have to give away more than you would like in order to secure the intellectual property you need.

View the full supplement that featured in today’s City A.M. here.

Find out more about The Leap 100 2017 here.