Last week saw the launch of Converge Challenge 2015, which Morton Fraser is now sponsoring for the fifth year. Converge Challenge is a great opportunity for budding entrepreneurs to develop their business ideas for the commercial world. As part of our sponsorship, as well as providing legal support to the top 3 winners, on July 9th we're hosting the Converge Challenge Surgery, where the top 30 applicants can have a one to one session with one of the sponsors and ask their burning questions.
Here are the top 5 we're asked by many start ups:
My parents have been really supportive of me and my project, should I give them shares in my company?
We always advise not to hand out shares in your company too easily as investors don't like messy share structures. Remember, when an investor comes along they'll be looking for shares in your company too which will dilute your shareholding, so you don't want to give too much away to start with and lose control of your company.
It can be difficult when your company is at an early stage and there are limited funds available to pay people for doing things to help you out, but unless it's intended that that person will have a key ongoing role in the business, I'd advise you to hold on to your shares as long as possible, or consider Share Options. We've provided this note on tax-efficient share options.
How many shares should I have in my company?
This is a difficult one to answer, but it depends on how many shareholders there are in the company and how much you can afford to put in as capital. If it's just you, it's possible to have just 1 share in the Company - 100% is 100%.
A higher number of shares is better when there are more people to divide between, but remember that each share needs to be "paid up" at some point. This means that if the company has 1,000 shares of £1.00 each and you're the sole shareholder, then you essentially owe the company £1,000. Resist the temptation of allotting 1,000,000 shares of £1.00 to yourself - it doesn't make a difference in terms of ownership of the company and unless you can afford to put £1,000,000 in the company's bank account it can make the share capital very unwieldy.
Do I need to have a lot of people on the board of directors of my company?
No, it can be just you. It's worth bearing in mind that a director owes duties to the company and no one should agree to be a director without considering it seriously. We've written a note on Being a Director of a Limited Company.
My business partner and I have worked together for years - we won't need a shareholders' agreement, right?
Wrong. We strongly advise anyone setting up a new company with at least one other person to have a shareholders' agreement to regulate their business relationship. Examples of things which appear in a typical shareholders' agreement include:
Reserved Matters - a list of things which one member can't do without the consent of the other/all members, for example can't spend over £x in any one year, or hire any new staff;
Share transfers - can each member transfer their shares freely? What happens to their shares if that person leaves the Company?; and
Deadlock - this sets out what happens if the members can't agree on a fundamental issue.
It's difficult to imagine at the start of a new venture anything going wrong, but if the worst does happen and there's no agreement in place in advance of this it's a hugely stressful and costly process to resolve matters after the parties have fallen out, and is usually to the detriment of the company.
Woohoo! Someone wants to invest in my company! What now?
The first thing we would advise you to do is agree Heads of Terms with the potential investor. This, very broadly, is the "who, what, when and how". It's a non-binding contract which sets out the principles of the investment - who's investing, how much are they investing and what do they want in return (usually a percentage shareholding in your company). In addition to a shareholding in the company, depending on the amount invested, the investor will often look for additional controls - right to information and right to appoint a director are examples. The more detailed the Heads of Terms are the better - we've written this blog on Heads of Terms.
By sorting out Heads of Terms early on in the investment process you can get an idea of what kind of deal you're getting. It might be the case that the investor is asking for a level of control which is out of proportion to the amount they're putting in, or the investor isn't a good match for the company. Remember, an investor will be part of your company from now on and they need to be a good fit - the wrong investor is worse than no investor at all.
If you've got any questions to ask, feel free to get in touch with Katy Conlan or Austin Flynn at Morton Fraser LLP.
