5 things you need to know about startup
- Before you can raise capital, hire employees or start selling to customers, you’ll need to set up your startup’s corporate structure. Startups can be set up with a dual company structure (a holding company and an operating company) to protect the startup’s major assets (IP and cash) from any liability that the operating company incurs. Founders can also use a discretionary trust to own their shares in their startup (rather than owning them personally).
- There are three possible structures for an equity capital raise: i) an equity round (either ordinary or preference shares); ii) convertible notes; iii) simple agreement for future equity (SAFE). An equity round involves founders issuing investors shares in the startup in exchange for cash. A convertible note is a hybrid of debt and equity. It involves an investor making a loan to the startup which converts to equity on a predetermined trigger event (generally the raising of a priced round or a liquidity event). A Simple Agreement for Future Equity (also known as the SAFE) is similar to a convertible note without the debt element.
- Your shareholders agreement is your startup’s most important document as it sets out the relationship between shareholders and directors. It will cover matters such as: i) issuing new shares; ii) sale of existing shares; iii) directors duties; iv) conduct of board and shareholder meetings; and v) dispute resolution. You can have your shareholders agreement drafted before looking for external investment or when raising a round, based on your term sheet.
- Startups are about teams. Although your team may begin with one or two founders, you’ll soon bring on board employees. Many successful startups scale quickly, so you need to plan for how you’ll help motivate your team members and ensure they stay with your company. Employment contracts and employee share schemes are two key legal matters that all founders will need to consider as teams grow.
- You should ensure that your startup’s intellectual property is appropriately protected and assigned when it comes to employees and contractors. All employees and contractors should sign appropriate contracts that include strict confidentiality protections. This will mean that they cannot use or disclose the startup’s intellectual property to anyone during their employment or after they leave.
