Legal

London’s status as a global tech startup hub was further backed today by the chief executive of Cooley – a Silicon Valley based law frim – who consider Google, Facebook and Linked-In amongst their clients. Joe Conroy, following the launch of the new London-based practice said, “Right now, it’s a fairly small and nascent community compared to the States, But increasingly our [private equity and venture capital clients] are coming over here and looking for the next big thing. For the first time, we think that community has real legs to grow.”

According to the promotional organisation London & Partners, British startup’s raised $1.4bn in capital funding last year, whilst increasingly attracting investment from overseas.

Tech City based in trendy East London is seeing rising interest from business support companies attempting to cater for the local startup community, amongst global powerhouses such as Barclays, KPMG and Taylor Wessing.

Initially launching with 55 lawyers, Cooley’s first Eurpoean Office will be headed by Justin Stock, former head of Morrison & Foerster’s London corporate practice. The firm will offer technology start-ups tailored services such as early-stage financing and data privacy advice.

“You can’t approach an emerging-growth company before it gets its first round of financing and say you’re going to charge £700 an hour to do an incorporation that is mostly form-driven,” said Mr Conroy.

Original article published on www.telegraph.co.uk

Owning the intangible stuff you have created (technically called “intellectual property rights”) such as source code, website content, images, videos and your brand is incredibly important. However, when you contract a third party to create sourcecode or a logo for you, you won’t automatically own the intellectual property rights in their creation. This is because intellectual property rights automatically belong to their creator unless they are transferred to someone else. Paying someone to design your logo does not mean that you own it!

Content created by employees generally belongs to their employer, though an IP transfer provision should always be included in employment contracts. Contractors on the other hand will need to sign an IP transfer agreement. This is a standard form document which states the following:

  1. all intellectual property rights created by the contractor for the business (both already created and to be created) belong to the business from the point of creation;
  2. in the event that the intellectual property rights don’t transfer to the business (which can occasionally happen), the contractor undertakes to sign any document to transfer them;
  3. in case the contractor is unable to transfer the intellectual property rights (because he is ill or being uncooperative), the contractor grants the business a power of attorney to sign in his name any document required to transfer the intellectual property rights to the business.

In addition, IP transfer agreements generally include a provision which waives “moral rights”. These are rights that automatically vest in the creator of copyright content and give him/her rights to prevent the copyright content being amended. It is always sensible to have these rights waived so that the business can amend the copyright content in its own discretion.

For more information, contact Buckworth Solicitors on office@buckworthsolicitors.co.uk or 020 7952 1721.

Investing for growth

Incentivising employees is key and often a startup does not have enough revenue to be able to pay employees market rate salaries. The alternative is to give employees a share of the equity of the business. However, this can give rise to very significant tax liabilities if structured wrongly.

In this post, Michael Buckworth from Buckworth Solicitors explains how EMI options work and how they can be used to give shares to employees in a tax efficient manner.

Enterprise Management Incentive (“EMI”) options are tax efficient options for employees in smaller, high risk companies. The intention behind the EMI  legislation was to help companies recruit and retain the highest standard of individuals.

EMI options can be granted by any company or any shareholder (meaning that the shares used to satisfy EMI options can be transferred by a shareholder rather than issued as new shares). The shares can also be granted over shares of a company incorporated outside the UK providing that the following requirements are met:

  1. the gross assets of the company must not exceed £30,000,000 at the time of grant.
  2. the company must be an independent company (meaning that it must not have any holding companies).
  3. the company must only have qualifying subsidiaries (meaning that they are owned and controlled by the company).
  4. the company must have fewer than 250 fill time employees.
  5. the company must have a UK permanent establishment (meaning that it must have a fixed place of business in the UK).
  6. the company must be a trading company (or the parent of a trading group) carrying on a qualifying trade.

Qualifying Trade

 A qualifying trade is one that is undertaken on a commercial basis with a view to making profits. It must not consist of certain excluded activities making up more than 20% of the trade carried on by the business.

The excluded activities are similar to those under SEIS and EIS (such as property businesses, lease and rental, financial services etc).

What type of shares can be acquired under an EMI option?

EMI options must grant rights to acquire non-redeemable, fully paid up, ordinary shares. The fully paid up requirement is important as it means that the exercise price for the shares must be paid in full at the time of exercise.

Shares are treated as redeemable if they may become redeemable at a future date.

Which employees can be granted EMI options?

Employees must spend an average of 25 hours per week on the business of the company or 75% of their total working time if they are self-employed for work elsewhere. Employees who have no other remunerative employment or self-employment of any kind are also eligible for EMI options.

EMI option holders must not hold 30% or more of the shares in the company or control 30% for more of the voting rights. The shares to be issued pursuant to the exercise of the EMI options are included in the 30% calculation.

Non-executive directors are not eligible for EMI options.

Requirements of the options

The EMI options must take the form of a written option agreement between the grantor (the company or the employee) and the employee. Options must be capable of being exercised within ten years after the date of grant.

Options must not be capable of transfer to third parties and must not be exercisable more than one month after the date of the death of the employee.

The maximum amount of unexercised EMI options at any point in time must be no more than £3,000,000. No individual employee can hold shares (and unexercised options) in the company with a market value in excess of £250,000.

Timescales

A company must seek an approval from HMRC of the value of the company (and therefore the value of each share prior to issue of EMI options. This valuation is valid for 60 days during which time the options must be granted.

The company must notify HMRC of the grant of EMI options within 92 days of the date of grant.

Tax Treatment

The company is entitled to a corporation tax deduction when EMI options are exercised. This is equal to the gain on exercise that would have been taxable on the employee has the option not been an EMI option.

On grant of the option, there should be no tax implication for the employee.

On exercise of the option, if the exercise price equals the actual market value of the shares at grant (as agreed with HMRC), there should be liability to income tax so long as the option is exercised within ten years after the date of grant or a disqualifying event has not occurred.

Disqualifying events include the sale of the company, the company ceasing to trade, the employee ceasing to meet the working time requirements, the employee ceasing to work for the business, certain variations to the EMI option and certain conversions of the shares under option.

Note that EMI does not provide income tax relief on any surrender of the EMI option for consideration.

On disposal of shares resulting from exercised EMI options, the difference between the market value of the shares at the time of sale and (at a high level) the exercise price paid by the employee on acquisition of the shares is subject to capital gains tax.

Entrepreneurs’ relief may be available to the employee so long as the options were granted more than 12 months prior to disposal and the company is a trading company between the date of grant and disposal of the shares. The option holder must have been an employee and director for the entire period between the date of grant and disposal.

Next Steps

Buckworth can advise on the suitability of, and setting up, EMI options. Please contact the team for more information.

office@buckworthsolicitors.co.uk

Tel. 020 7952 1721

5 Reasons SEIS is vital for a StartUp

The Seed Enterprise Investment Scheme (aka SEIS) is a tax relief scheme that allows investors to invest into a new company and claim up to 50% of the amount of their investment back from HMRC as a deduction from their income tax bills. StartUps often require a significant amount of financial investment in order to launch and grow. SEIS is a great way to attract investors and is increasingly driving the investment market in London.  So here are the 5 main reasons why SEIS qualification is vital for a StartUp.

1).  An Investor can receive initial income tax relief of up to 50% on the amount of his investment up to £100,000 into a qualifying company per tax year. The investor must have been issued with shares and must not have any preferential rights.

2). An individual’s stake in a company can be no more than 30% and he cannot demand onerous terms. This helps founders to remain in control of the company and its strategic direction.

3).  Investors must hold their shares in the company for at least three years if they want to retain their relief. This provides the company with a stable group of investors who hopefully are incentivised to follow on and invest in future rounds.

4). SEIS is only currently available for UK based companies. This is in turn drives investment into the local home economy and compliments the current desire for “British” commerce.

5).  The company taking the investment must not have prepared to carry on its trade for more than 2 years. This gives the highest tax reliefs to investors in new companies allowing new entrants access to finance.

For further information on whether your StartUp is eligible for SEIS, contact www.buckworthsolicitors.co.uk or call one of the team on 020 7952 1723.

Starting a business is an exciting, often stressful, yet hopefully highly rewarding venture for anyone to undertake. However many young entrepreneurs can feel intimidated by the complex terminology associated with running a StartUp; just what exactly does it mean to be a ‘Shareholder’ anyway? Well Buckworth Solicitors are on hand to help out in our Who’s Who Job Title Jargon Buster!

Director

The role you, as the brainchild of your StartUp, are likely to take.  In summary, the director oversees the operations of the whole company, its employees, reputation and practices. Typically, an executive director is considered to be a full time employee within the company. The directors constitute the  “board” where decisions are taken collectively.

Non-Executive Director

Also known as an NED, this person is a member of the board and is formally appointed as a director at Companies House. NEDs are genuinely seen as advisors who leave the strategic direction and decision making to the executive directors. NEDs should remember that they owe directors’ duties to the company in the same way as executive directors.

Board Observers

These are non-voting people who are entitled to attend board meetings. They may be advisors or possibly investors. The key point for founders is that a board observer does not have a vote and is not formally appointed as a director.

Shareholder

Selling shares is generally the most tax efficient way of introducing money into your company. To bring on investment, the company issues new shares to investors at a price in excess of their nominal value (called a “premium”). Shares are intangible assets that entitle the holder to a voting right at a meeting of the shareholders, a share of the proceeds of a sale of the assets and a share of the profits of the business (called a “dividend”). A shareholder can also sell his shares.

Founder

This phrase doesn’t actually have any legal meaning. However, it is widely used in the startup world to refer to the people who set up a business and generally who are active in running it.

Angels

Not the winged-backed halo-wearing creatures but heavenly nonetheless, angel investors are generally high net worth individuals who invest (by buying shares) in startups. In the London market, angel investors are often looking to secure tax relief on their investment (see “SEIS: 5 reasons why you can’t go without it“) and/or provide their experience and contacts to the business.

Employees

Employees are paid under the Pay As You Earn System (“PAYE”) via which the employer deducts income tax and national insurance contributions for the employee and pays them to HMRC directly. Employees are directly supervised by the company they work for and their job role and responsibilities are laid out in an employment contract. Employees are also entitled to some protections and privileges in certain circumstances.

In addition to being paid a salary, employees can be offered shares in the company (meaning that they become shareholders). Employees benefit from a tax efficient scheme through which they can acquire shares (called an “EMI Scheme”). For more information, see “How can I issue shares to my employees?”.

Consultants / Contractors

Contractors are people who provide services to the business but are not employees. As such contractors are not paid under PAYE and no tax is withheld when they are paid.

Contractors can include all service providers such as developers, lawyers, accountants, advisors etc.

Employees and Consultants

Often it will be obvious whether a service provider is an employee or contractor. For example, when you hire a law firm to advise you on an investment round, the lawyer is clearly not your employee. However, sometimes it can be harder to decide how to treat a relationship. Is a developer who plans to work 3 days per week for you in developing your smartphone application an employee or contractor? Startups should be careful when deciding whether to treat a worker as an employee or contractor as there are strict rules governing whether a relationship is one of contractor or employment. For further information, please see “Contractor or Employee: the relevant factors”.

If you have any suggestions for other “people-related” terms you find hard to understand, drop Buckworth Solicitors and email and they will be pleased to help you.

Whoever said imitation is the highest form of flattery is clearly not a StartUp owner. The London startup market is dominated by “tech” businesses for whom ownership of their “intellectual property rights” is vital.

Michael Buckworth, founder of Buckworth Solicitors, London’s only law firm specialising in startups: “For most tech startups, their main asset is the intellectual property rights in their source code and brand. Ensuring that the business owns the startup is easy and affordable. And absolutely vital.”

So how can you ensure your brand is protected from pillaging pirates in the StartUp seas? Here at StartUpRoar, we have a compiled a list of the three key things all StartUps should be putting in place to safeguard their intellectual property rights.

1. Make sure you own your IP.

In the UK, the creator of intellectual property rights is generally the first owner of those intellectual property rights. So if you contract a third party to develop your website or to design your logo, they probably own the copyright in the source code and logo.  This could be a very costly mistake if later they refuse to transfer it to you.  The solution is simple: make them sign an intellectual property rights transfer agreement (for more information on these, see this post).

2. Keep control of your IP.

Owning your intellectual property rights is one thing. But actually controlling it is something else. If a third party is developing source code for you, make sure that they transfer the code to a server under your control once a week. Then if you fall out, you at least have what they have done to date. Similarly, make sure you have all the passwords to servers and social media profiles. Finally, make sure that contracts for web domains and servers are in your business’ name.

3. Where possible get registered protection.

If you are trading under a brand, you may be able to secure a registered trademark for that brand. This gives you a monopoly on using that brand within your chosen classes for a limited period.

StartUps are often the front-runners in innovation, offering ideas that are unique and sometimes personal. Patents legally protect the rights and use of your idea/product (intellectual property) for an agreed period of time and prevent competitors from cashing in on your ideas.

For further information on patenting your brand, contact Buckworth Solicitors on 020 7952 1723

StartUp the conversation: Who you need to get the ball rolling

Starting a new business can be a daunting prospect. Taking an innovative idea and turning it into a tangible product or service is not without its struggles: ‘How do I register for government funding?’ you ask? Who’s going to advertise my brand?’ you wonder? ‘And how do I protect my company?’ These are often questions entrepreneurs ask. So where do the elusive answers to these pressing questions lie? In the words of an 80’s film classic ‘who are you gonna call’?

Lawyer:

Essentially your businesses’ best friend, the Lawyer handles all legal matters from patents and trademarks to privacy policies and data protection. Buckworth can provide legal support in all areas including the following:

  • Customer Contracts – The cornerstone of any business, this document sets out the relationship between a business and its customers. Customer contracts come in two main formats: terms and conditions (often agreed to by clicking a button on a website) and written agreements. The contract creates an obligation on the customer to pay for the goods and services being provided and limits the liability of the business if something goes wrong.
  • Privacy Policies and Data Protection – Data protection is increasingly relevant particular for tech businesses.  All business who collect and store personal information are required to publish a privacy policy stating what information they collect and what they do with it. They are also required to register with the regulator (who in the UK is the Information Commissioner’s Office) and pay a registration fee which is currently £35 per year.
  • Intellectual Property Rights (IP) – By this we don’t mean an incredibly smart house, rather the ownership of rights in regards to a company’s design, graphics, content and code. Securing IP ownership early on is crucial for a new StartUp. Applying for trademarks and patents offers a period of protection from competition for your brand and business.
  • Seed Enterprise Investment (SEIS) – SEIS is every StartUps best friend. This tax relief scheme encourages high net worth individuals to invest in high risk StartUp businesses and get a very significant tax relief from HMRC. For more information about SEIS, check out this post.

Accountant:

When it comes to handling money, and demonstrating to HMRC how your business has performed, you definitely need a smart accountant. Most StartUps operate to make profit and thus it is essential to keep track of the cash flow coming in and out of the company. For new businesses, accountants should be managing and advising on the following:

  • Tax Efficient Structures – The two most common structures for new businesses trade are limited companies and LLP’s (Limited Liability Partnerships). Accountants will be able to advise on the most effective tax structure on the basis of your individual company needs, intentions and predicted revenue.
  • VAT Registration – If your company (hopefully) exceeds revenue of £79,000 within a 12-month period, you are required by law to register for VAT. Accountants will correspond with HMRC to ensure all the appropriate documentation and compliances have been submitted and adhered to.
  • Annual Accounts – your accountant will be invaluable when it comes to pulling together your annual accounts, filing tax returns and calculating any tax due.

Insurance Broker:

Most businesses will need insurance to protect themselves if things go wrong. There are a huge number of different types of insurance, but  the following are the four are the most common insurance policies StartUps need:

  • Public Liability Insurance – This protects your company if a member of the public was to suffer injury, damage or loss (generally physical and mental) by reason of your negligence and filed a claim for compensation. This insurance should cover the cost of the compensation and all associated legal fees.
  • Employer’s Liability Insurance – This serves the same purpose as Public Liability Insurance but covers loss or hurt suffered by your employees.
  • Professional Indemnity Insurance – In the unfortunate case that your product or service fails to deliver on what it promises (production malfunction, employee mistake etc), Professional Indemnity Insurance should cover the legal cost and any compensation payout should a customer make a claim.
  • Specific Liability Insurance – This is tailored insurance to suit a company’s specific trading needs. For example if your business is working with children, you may need to obtain further insurance in respect of any harm to any child caused by one of your employees.

Social Media Specialist:

Whether you are looking to increase search engine exposure (SEO) or simply need people to “know” your brand, the Social Media guru is on hand to post, pin and tweet to their heart’s content:

  • SEO (Search Engine Optimisation) – This concerns how potential customers or even just members of the public come across your business. In short, the higher a website appears in a search engines results, the more exposure the website is likely to achieve.
  • Social Channels – The way in which people interact and communicate has rapidly changed in the last decade, largely due to the unprecedented growth in social media. With Twitter boasting 255 million, Facebook 1.23 billion and LinkedIn 259 million active users, it is vital that your StartUp takes advantage of the socio-global market.

Website/Software Developer –

If you’re a tech StartUp, the chances are that you have already got this position covered. If however, your business isn’t directly related to the technology market, you may need to enlist the help of a Website/Software developer to develop an online hub for your company. Already in the US, online shopping sales have exceeded that of their physical high-street counterparts; and with increasing mobile technologies, a software developer can help you tap into these lucrative “floating” markets.

Our resident startup solicitor, Michael Buckworth from Buckworth Solicitors, gives some advice on the process for incorporating a company in the UK.

This video is definitely worth watching, particularly for the tips on the right nominal value to use for shares (£0.01) and using Companies Act standard documentation.

Buckworth Solicitors is the only law firm in London focusing solely on startups and early stage businesses. The firm’s clients operate in a broad range of business sectors though the firm particularly specialises in tech, fintech and retail businesses.

Founded in 2011, Buckworth have provided quality legal services and advice to over 500 clients both in the UK and abroad. The firm is located in St Paul’s, City of London and makes a significant contribution to the London startup community including holding monthly free seminars and providing mentoring and guidance to young entrepreneurs.

Buckworth advises startups from incorporation to exit and operates at the cutting edge of legal innovation particularly with its tech and fintech clients. Buckworth has notable expertise in advising on startup investment rounds including facilitating compliance with tax relief schemes for investors such as SEIS, EIS and VCT. The firm also specialises in structuring and implementing share incentive schemes including EMI and unapproved option schemes.

“With unrivalled knowledge and expertise in the startup industry and with a level of commerciality that is seldom seen in lawyers, Buckworth has a reputation for being able to take a step back, see the bigger picture and get the deal done.”

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