LawBite | How to Start a Tech Business | LawBite

Introduction

Are you a programmer ready to take your software ideas and expertise to the next level? Perhaps you have an amazing idea for an app or an ingenious product that the market would love? If so, we’ve created this guide for your inner entrepreneur to develop and grow your product safe in the knowledge that you understand your basic legal obligations. At the end of 2016, YouGov interviewed over 1000 UK SMEs and we had the stats analysed by the Centre of Business and Economics Research (CEBR). According to this research, the UK Tech Sector loses nearly £170 million per year through not taking care of their legal business. But fear not! In here you should find invaluable information around how to avoid many of the common pitfalls that blight today’s startup tech scene. It is worth noting that these stages vary from business to business and that there may be some overlap between guides or things that are not relevant to your business in particular. If you’re unsure whether or not something applies to you, just ask! And so, without further ado, let us begin…

Preparing for take-off

Develop a business plan

Having a solid business plan is the first essential, and not just if you require funding from investors as many people believe. It is great to have a plan of action from which to understand where that business should be going and to have ballpark figures showing the likely cost to get there. In reality you’re likely to stray from it, due to the nature of running a business in practise. However, cash is king and launching a new product can be an expensive endeavour, particularly in its early stages. Your business plan will allow you to visualise how much you’re likely to be spending, leaving room for error, against how much you’re going to have to make to cover that expense and hopefully turn a profit. From this you will also be able to articulate your motives and objectives and instigate a marketing strategy. It is better to think about potential problems early than come across them when you have already doled out the cash; we all know the saying ‘fail to prepare, prepare to fail.’ If you’re stuck on where to begin with this, there are plenty of template business plans online you could start with.

Company structure

Another thing you should be doing at this stage would be deciding whether to set up as a sole trader, limited company (Ltd) or as a limited liability partnership (LLP).

Setting up as a sole trader is certainly the quicker and easier option as there are far less complicated accounts to file. However, the major drawback is that you are personally liable for any losses accrued by the business. This means that creditors can go after your personal assets and your credit rating will almost definitely be affected, hindering your ability to borrow money.

To avert this heavy risk, many product launches take the form of a limited company and as such register or ‘incorporate’ with Companies House (which you can do so here), giving it its own company registration number and registered office address. As the company is registered at Companies House, certain business information must be filed with them and made publically available such as names of shareholders, directors and the company’s annual accounts.

Although there are many benefits to setting up your company as a Ltd, it is a more complicated status and you must comply with the Companies Act 2006. Benefits include:

Limiting your liability so your company is a distinct legal entity from yourself. Usually the only liability you have is the amount you invest in the company through buying its shares. So, as the name suggests, you receive legal protection from your company’s finances. If things were to go wrong, the creditors could not come after your own personal assets e.g. your house or that expensive painting handed down by uncle Geoffrey.
It is easier to expand your business if you want to grow. This is because some agencies won’t work with sole traders so having the ‘company’ status is valuable.
It is easier to raise finance if you’re trading as a company rather than an individual, again if you are looking to expand and need the extra cash.

It is advisable at this stage (if there is more than one person who is invested in the company as a shareholder) to have a shareholders’ agreement in place. This will govern how the company is run and who is meant to do what, preventing costly disputes later down the line. It will also dictate what to do in the case of a deadlock between shareholders. Prior to or in the course of implementing the agreement, you may also wish to consider amending the Articles of Association that ensure the terms of the shareholders’ agreement are reflected in the way directors run the company. This is a particular consideration when shareholders also act as directors.

Like a limited company, a limited liability partnership (LLP) is a separate legal entity in its own right. However, members of an LLP are taxed as self-employed individuals so the tax treatment of an LLP can be more beneficial than that of a limited company depending on the circumstances. It does, however, mean that a Partnership Agreement needs to be formed with another party and it will need a designated member who is responsible for making all the filings at Companies House. It is a legal requirement for there to be a partnership agreement which governs how this arrangement is run, which members of the partnership must stick to. You must also make sure to comply with the Limited Liability Partnerships Act 2000 as well.

Guarding your ideas

At this point in time, you’re probably excitedly talking about your endeavour with anyone who will listen, which is great as it’s a fantastic way to soundboard ideas and sense-check your vision. Perhaps your software will be particularly innovative and groundbreaking (all of which will be discussed and carefully planned for in your business plan of course) and you want to keep it secret until you’re fully established. The best way to do this is normally getting people to sign a confidentiality agreement or ‘non-disclosure agreement’ (NDA) before you start talking. Bear in mind they’re not only relevant at this stage but can be used whenever you want to secure some protection for your idea or intentions as you grow. For example, much later down the line you might want to expand your brand into new product lines and need to recruit people and/or agencies to achieve this but do not want them to pass this information on.

Your IP

You probably have an idea of what you want your software to do and to look like and might have even started writing the programme. You’ll also need to come up with a product name, logo and general designs for the software and website plus any marketing ‘collateral’ you might have. This is a three-step process: 1) Coming up with the ideas 2) Executing and 3) Protecting them. This is what’s known as as your ‘IP’ (intellectual property) and although it’s not usually the first legal issue that comes to mind it IS extremely valuable and therefore worth safeguarding.

Naming your product

It’s not already registered with Companies House and it’s actually allowed to be used in the marketplace. You can check this using their Company WebCheck.
It hasn’t been registered already as a trademark. You can check here using the Intellectual Property Office (IPO) ‘Search for a Trademark’ page.
The website address/domain name is available. (Okay this is not specifically a ‘legal’ consideration and you can actually buy these off the domain’s owner, but that can be costly and you might not want the hassle). Easily check here using 123-reg.

Do keep in mind, however, that you cannot trade mark certain things, so you might not be able to protect your brand entirely. Have a look at these brief guidelines on the government’s IP website before deciding on a name.

Logos and other designs

Another part of the ‘branding exercise’ is creating the look and feel of your product. Unless you have fantastic design and branding skills (and the time to utilise them) you might want to hire a freelance graphic designer or an agency to create a logo and any other marketing collateral e.g. a slogan for you. If you do hire a designer or an agency, make sure you have a contract in place which specifies precisely who owns the intellectual property in whatever they create, as well as stating a deadline for the project and the costs involved. A ‘Supply of Services’ style contract would be a good place to start.

Again, bear in mind some images and phrases will not be able to be trademarked (an important step outlined below) so check the government’s IP website before making any final decisions.

Once you have these lovely branding creations in your grasp, you really should think about protecting them and this means registering a trademark. Having a trademark allows you to:

Take appropriate legal action against people using your brand without prior consent
Sell and license your brand
Use the famous ® symbol next to images of your brand which will act as a deterrent for those wishing to use it without your knowledge

So how much does it cost to register a trademark?

It costs £170 to register a trademark in one class, which refers to the type of product or service the trademark refers to. Each additional class you need costs £50. These are the ‘official’ government fees though you might be interested in seeking professional help as the forms are quite complicated to fill out.

Protecting your software

Copyright

Copyright protects original artistic, musical, dramatic and literary works, including computer programmes and also broadcasts and recordings.
Copyright exists automatically when you create something original.
Copyright protects the expression of an idea, not the idea itself, it stops people “copying” another’s work.
If your business creates data, you might find it useful to know that the Courts have given copyright protection to certain types of lists of data such as tables, compilations and databases. A higher originality test does apply. The selection or arrangement of the data contents must be original and shown to be the result of the author’s intellectual creation. It is a difficult test to pass but it is worth bearing in mind.

Software and Copyright

Copyright is the most significant intellectual property right in relation to software and the Copyright, Designs and Patents Act 1988 (CDPA) expressly includes “computer programmes”. Aspects of your software may attract different types of copyright. Literary copyright may protect your source code and object code in your programme if they are original. Artistic copyright may exist in screen displays. Music created by a computer programme could be protected as a musical work. “Preparatory design material” for a computer programme can attract copyright.
A “computer programme” can be made up of a series of smaller interrelated programmes which may be protected as a compilation, which are subject to a higher test of originality if you can show that a lot of skill and effort has gone into the selection of the works included in the compilation.
A graphical user interface (GUI) between user and the programme can sometimes be protected by copyright as an artistic work.
Single words and single letters generally do not attract copyright. Nor do computer games get copyright protection as dramatic works.
But remember the “idea” behind the software does not attract copyright. Sometimes it is difficult to tell the difference between the “idea”, the “preparatory design material” and the “programme”. The Courts have had considerable difficulty in making these decisions as to which bits should or should not attract copyright.

Design Right

Another useful protection which can overlap with copyright is “Design Right”. Design rights protect the appearance of the whole or part of a product. They can be registered or unregistered and a registered design provides a legal monopoly. Like a trademark, you can apply for a UK registered design or an (EU) Community Registered Design. Your design must be novel and of individual character and protection lasts a maximum of 25 years, with registrations renewed every five years.

And always remember that whilst trademarks cannot protect a computer programme, the brands or logos relating to the computer programme may be protected.

Steps to protect your copyright

You can take a number of immediate, practical steps to identify and safeguard copyright works:

Identify all materials that are likely to have copyright protection
Ensure that the company is the owner of the work. In each case, this involves identifying the authors of the relevant work (check if non-employees such as contractors or commissioned artists/authors produced works) and obtain copyright assignments and waivers of moral rights from them in favour of the Company
Keep proper records of the results of the steps set out in the first and second bullet points above. Authors should sign and date their works and, where relevant to the term of copyright, the date of first marketing of articles should be recorded.
Apply a copyright notice in accordance with the Universal Copyright Convention, that is, “Copyright © The LawBite Blog Limited 2017”. Although this is not necessary as a matter of law to gain protection, it is a useful notice and warning to anyone using the work that copyright exists and that action may be taken if the work is copied.

Additional warnings. Additional text can be included with the copyright notice. This might include:

Text prohibiting the reproduction of any material whether by photocopying or storing in any medium by electronic means or otherwise (this does not affect the legal position but serves as a reminder and might also be useful in preventing any user from arguing that there was an implied licence in its favour permitting copying or storage);
warnings stipulating that the doing of any unauthorised act in relation to the work will result in both civil and criminal liability;
warnings that any copying will result in criminal or civil action; and
a form of disclaimer to provide protection for the author and the publisher if use is made of opinions or views expressed in written material

Patents

Patents provide inventors with a monopoly over their inventions and last for a limited period (20 years in most countries).
The invention must be new, involve an inventive step and be capable of industrial application.
The invention must be new, involve an inventive step and be capable of industrial application.
You must file an application for a patent with the Patent Office of the country that you work in.
Patents are expensive to obtain and maintain and it means public disclosure of your technology so a competitor could benefit without infringing your rights.

Whilst a patent will not be granted for “a computer programme” in the UK, the application of a computer programme might be patentable if it possesses a technical character. The test is whether the invention makes a technical innovation or a contribution to existing knowledge. For example, a telephone call prepayment system was given a patent because the contribution was the whole telephone system including hardware.

Exploiting your copyright and IP generally

Copyright can be exploited either by selling or transferring it (legally we call this assignment) or by licensing. You might use an assignment if you were entering into a joint venture where you were contributing the copyright or other type of IP in which case you would assign it to the joint venture company who could then own and exploit that IP. In publishing, authors will often assign their copyright to the publisher subject to the condition that they market the work. The much more common way of exploiting IP is by licensing. Licensing allows enormous flexibility in terms of licenses for different products or licenses for different IP rights in the same product. A licence does not need to be worldwide, it can apply to specific countries (territories is the usual term) and/or specific markets. Licenses can extend for short or long periods and incorporate a wide range of remuneration methods including up-front fees, revenue sharing, subscriptions and royalties.

There is no particular form for a licence of copyright and even oral or implied agreements can be effective. However, you are much better off having a written licence agreement for certainty and also because a written agreement gives you the benefit of extra exclusivity rights under the Copyright, Designs and Patents Act 1988 (CPDA).

Funding

Starting a software business is an endeavour that does require some seed capital (the initial money needed to start a business). Here are a few traditional and not-so traditional (‘alternative finance’) routes you could take (aside from using your own cash) to fund that initial investment and a few legal considerations to take into account for each:

Friends & family: Often the first port of call after your own investment. A good source, though conflict can arise when you bring money into any relationship. Make sure you have a loan agreement in place if you are borrowing the money or you may even want to give away equity (shares) here instead, bringing them more deeply into the business as a shareholder.
Banks: It is increasingly difficult to get a bank loan for a small business, though it is not impossible. You will have to provide the bank with very realistic cash flow forecasts, whilst proving that you will be able to pay back the loan with interest. Often – and here’s the important part – banks will want added security for their investment, which often means they’ll want to secure it against your possessions e.g. your car or house. Think carefully about how much you are willing to risk here. They will give you a contract for the loan which you should ensure you understand fully. One point to make here would be on the subject of your Credit Rating, which a bank will use to determine whether or not they’d like to lend to you. Services like Experian’s My Business Profile offer access to all your business report and score details along with the help and support you need to understand the information and investigate or correct anything that doesn’t look quite right. Have confidence when applying for a business loan or credit with suppliers, check your business credit score for FREE with Experian.
- Be smarter about how others see your business. Check your Experian business credit score. See how lenders, suppliers and customers see you.
- Improve your business credit score. See what’s affecting your score. Take steps to improve it, and make sure it’s as good as it can be – always.
- Create new opportunities to grow your business. Access preferential credit terms. Unlock new sources of finance. Grow your business.
Government loans: There are currently a few government initiatives who will lend to start-up businesses. One of the largest (that we work with) is Startup Loans, which has been developed specifically for start-up businesses who have been trading less than 2 years. You can borrow up to £25,000, with an interest rate which is currently set at 6% (Sept ‘15). As this is technically a personal loan, you will be personally responsible for repaying that loan and will have to handle the repercussions if you cannot.
Private investors e.g. ‘Angels’ or Private Equity firms: With this option, you will probably be selling shares in your company in return for investment or it might be a loan. They will bring tough investor/funding agreements to the table so make sure you know what you’re giving up and what to expect from your relationship with them.

Some key points you must consider and understand would be:

What is being paid, when is it being paid, and how it is being paid? E.g. is the money being paid all at once or in tranches?
What is the payment in return for? I.e. what is the the structure of the deal. This could be in return for shares or through a secured or unsecured loan. A ‘secured’ loan means it is secured against the company’s assets which gives more protection to the investor.
If you are giving away shares, you will need to work out the valuation of the company. Once agreement on valuation is achieved between you and the investor, it’s possible to work out what 100% of the shares in the company are currently worth and then to work out what the investor’s contribution is worth. Remember, if you give away more than 25% of your company (i.e. your shares are worth less than 75%), you are giving away a substantial amount of control since you cannot pass a ‘Special Resolution’ e.g. to change the company name
Next, you must decide what type of shares you are giving away, which is where it gets a little more complicated. The shares may be “ordinary” shares – but companies can have more than one class of ordinary shares. They may have “A” shares or “B” shares with different rights (e.g. the “A” shares carry voting rights but the “B” shares don’t). Some investors like to get “preference shares”, which carry a guaranteed return or “dividend” each year out of profits and usually are given preference in a situation if something is to go wrong. Some investors like to have “convertible” preference shares which they can convert into ordinary shares after a certain date so as to protect their position if the company starts doing well.
Keep in mind the future too. What happens to everyone’s shares if you want to give away more? There is the issue of dilution here which will need to be discussed and agreed upon.
Finally, what kind of operational control are you giving up in return for the investment? Sometimes the type of share you give away will mean you will have to consult the investor on key business decisions such as the desire to raise further funding or changing the nature of the business.

Remember, any big investor worth their salt will carry out a thorough due diligence investigation so you must make sure to have all your legals under control with the correct paperwork and that your accounts are in line.

Side-note: Something which will make your company more desirable to invest in is if you can provide them with tax breaks by signing up to the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). You can find out more information about registering your company for the scheme on the government website.

Crowdfunding: This is a popular way to raise for start-ups via the public mandate and is essentially lots of people putting in relatively small amounts of money. There are 2 main types for you to consider and to understand the implications of each:
1. Equity-based, for example Crowdcube (LawBite has raised twice on this platform) or Seedrs.Investors will receive a stake in the company via shares in the hopes you will grow and they will benefit. In this case, investors usually sign up to the company’s Articles and will receive a simple shareholding.
2. Rewards-based, for example Kickstarter or Crowdfunder. In this case, investors will receive a tangible item or service in return for their money e.g. ‘invest £50 and you will receive 100 organic snack bars, invest £1000 and you will receive 5 years’ supply.’
Peer-to-peer lending or ‘crowdlending’: This is for more established businesses but one to mention as a consideration for future growth. Often an unsecured personal loan, money is loaned via an online platform such as Funding Circle in return for interest. The interest rate is set by the lender or it is established by the intermediary company based on the company’s credit analysis.
Pension-led funding: If you have a pension pot, recent legislative changes to pension rules means that you can now use it to fund your business. In return, you can receive tax-free payments from your business to boost your pension. To see how this could work for you, visit our partner Pension Led Funding.

As you can see there are many ways for you to access finance to launch your product and this list is not exhaustive. If you go to Alternative Business Funding, for instance, you can compare many alternative finance options too. For almost all of these scenarios, you will be engaging with others in a contractual agreement and you need to fully understand the terms and implications of these arrangements or you could be putting yourself at risk.

Conclusion

We hope you’ve enjoyed our brief guide to setting up your tech company, keeping the organisation’s legal obligations in mind. We would recommend you seek professional advice if you’re confused about any of the above- don’t get bitten. LawBite can assist with your organisation’s legal queries for around half the price of a standard law firm, with relevant documents and advice. If you’re unsure of what you need, we offer a free consultation with one of our software experts too!