Start-up companies have been urged to consider their structure, secure their intellectual property arrangements early and be “investment-ready” as quickly as possible.
McCullough Robertson Lawyers (McR) Corporate Partner Ben Wood said start-up companies had the capacity to grow quickly, so it was important to have the right structure in place to be ready for this.
Mr Wood, who heads the McR start-up practice, said early enterprises also needed to consider issues such as establishing a holding company and an operating company.
Creating both could be important in giving a “baseline level of protection” and ensuring that passive assets and the intellectual property (IP) were not sitting in a trading entity.
In addition, having a clear understanding of the ownership of the IP, particularly when multiple founders and participants are involved, could be important in avoiding disputes once a company grows.
“Founders will often come to us, and they’ve had three or four people involved in the development of an idea or a minimal viable product, and they haven’t necessarily secured the IP,” Mr Wood said.
“The other thing is a shareholders’ agreement if you have more than one founder or if you’ve got a couple of early-stage investors. That could include family or friends who are investing in the venture.”
Another important consideration was ensuring the business was properly structured to take on investors, so it could expand quickly if required.
Investors typically require that company structures are in place, the entity has received the right legal and financial advice, and issues like insurance cover and liability protection are sorted.
“Sometimes these businesses can move pretty quickly if you have the market interest,” Mr Wood said.
“You don’t want the legals to be overtaken by the growth of the business. You need to get all the structural aspects right, so you are prepared if you get traction in the market and experience relatively high growth early on.”
As part of this diligence, Mr Wood said entrepreneurs also needed to be careful about using templates, including shareholders’ agreements, subscription agreements and SAFEs, without getting some legal input.
He said sometimes these templates had been changed to meet a different purpose and might not be right for individual circumstances.
Early-stage businesses also needed to work on their cash flow requirements, to ensure they had sufficient runway to get to key inflection points for the business, as well as making adequate provision for tax.
Often start-up companies, without the means to pay high wages, use employee share options as a means of attracting and keeping good people. This also requires early advice, particularly to ensure they are set up in the most tax effective way for the business and staff.
Mr Wood said, in his experience, successful start-ups tend to do the following:
- They have a “savviness” around doing business and being investment ready
- The founder is across the operational details of running a business (IP, employment, insurance etc), not just the product or idea.
- They receive good advice and ask lots of questions
- They have the legals sorted upfront and the necessary documents signed
- They have a clear purpose and really understand what they are trying to bring to market, and whether there is a market fit
- They launch when the product gets to an 80-90 percent ready stage – they are content to start with a minimum viable product and not expect everything to be perfect at the start
Mr Wood said, while there was a “real mix” of people starting companies, many now recognised it as a legitimate work pathway, even when they were younger and potentially straight out of school or university.
