Kerry Russell, legal director at Shakespeare Martineau, on how start-ups can make sure they are ready for investment.
With the pandemic creating a wave of entrepreneurialism, many new businesses may be seeking cash injections.
Product innovation, market size and strong financial forecasts will peak an investor’s interest in your business. When ploughing money into a company, investors want to know their outlay is a safe bet.
There are multiple steps start-ups can take to ensure they have the best chance of securing the cash needed.
It’s unlikely an investor will give money to an individual, so it’s important to have a corporate structure in place. Having a good idea is a great place to start, but most growing business are operated through a corporate vehicle that enables you to contract with other people – as well as eliminate personal liability for damages. Limited companies or limited liability partnerships (LLPs) are often used.
Investors will need to see you’ve got proper contractual arrangements established, so that everything you think applies to that relationship is agreed in writing. Supplier and customer arrangements should be governed by some sort of contract that covers limitation of liability, termination, price and deliverables, for example.
Confidential information – which is protected when someone owes an obligation of confidence to someone else – is also something that needs to be thought about. While an obligation may sometimes be owed under common law, it is better if it arises formally under a contractual arrangement with a non-disclosure agreement in place.
Ownership of intellectual property
Intellectual property (IP) – which might be, for example, copyright that exists in source code for software, patents that protect inventions or trademarks to safeguard brands – is a really important factor that people miss all the time. IP is usually the most valuable asset of a start-up business, so it’s crucial to get advice on what rights may be registered to get the best protection, particularly as investors will want to see this. Investors will also want to make sure that any IP is owned by the corporate vehicle into which they are investing, and that third parties do not have conflicting rights.
While not all start-ups employ people, if you do, make sure there are contracts in place so employees know the scope of their roles, their obligations to the company and that anything they create belongs to the business.
Even if you’re only holding customer or employee details, almost all companies will need to comply with data protection law. Depending on the sector there will be other regulations to be aware of.
The financial penalties for non-compliance can be significant. An investor may back out of the deal if you aren’t complying with the necessary regulations as the risk of severe fines is too large.
While an investor is unlikely to pull their cash straight away if none of the above actions are in place, it may negatively affect the investment as the risk profile will have changed. Carrying out your due diligence checks upfront is key to ensuring you secure the investment you need for future growth.