Starting up a business: Avoid the common mistakes

It is difficult for a start-up to determine what is important, read below about the most common mistakes and how we can help you avoid them.

Shareholders agreement, intellectual property, cashflow, start-up business, trademarks, business mistakes, confidentiality , employee restrictions, competition, poaching

I set up my business in 2009 and now I am 7 years in and growing strong, but I made many mistakes along the way. The secret to success was accepting this and learning from those mistakes. The road to success has not been smooth for me, but having survived I can now share the lessons I learnt to help my clients avoid and minimise the effects. So what are the top 5 mistakes made by most start-ups and how can you avoid them or be prepared to meet the challenge of surviving them?

1. The biggest issue for many businesses is cash flow and keeping your income stream alive.

Not understanding your finances and protecting cash flow is the number one start-up mistake. Often people secure contracts without real consideration on how they can perform these services. For example, large companies may stipulate payment is largely payable upon completion or delivery of the product. Few businesses have a clear forecast and cash flow statement that they update regularly to understand their monthly out-goings and cash projections so they end up becoming reactive rather than proactive.

A former App developer sadly wound up the company after only 2 years, despite winning a huge contract, with a top company worth millions. Why? The contract (that we advised against) had strict payment schedules attached to delivery and implementation dates. Unfortunately, it simply couldn’t meet ends meet to full fill the deadlines and secure payment. This contract allowed the company to control the relationship and ultimately the company closed. It is also important that payment terms applied to you are where possible passed on to any sub-contractors. You can agree that you do not pay any sub-contractor until and unless you are paid by your client.

How can you avoid this happening to you?

Things to watch out for:

a. Watch out when giving personal guarantees. These should be avoided if possible;
b. Credit check your customers and make sure your payment terms are being met;
c. Arrange suitable payment periods with suppliers & clients & have clear written agreements, which your solicitor has checked for you;
d. Ensure you have a debt collection facility;
e. Understand your cashflow on a monthly basis and forecasted profit & loss;
f. Look at different financing and investment options;
g. Ensure that you understand all nuances and risks of any agreements that you enter into; and
h. Have a Plan B and go into all contracts with your eyes wide open.

2. This leads on to the second point: You must secure good advisors at the onset & listen to their advice

Paying for a good lawyer and accountant often seems costly when you first start out, and often people try to use templates off the internet themselves. We only discover the implications of this when a problem arises and then it is often too late. Good professionals can save you much more in the long run.

Choose those advisors carefully though, because they must really understand you and your sector. If you need specialist advice make sure they have the experience in that area and read their testimonials to make sure their approach suits you. You must lead your business, with their support, a lawyer/accountant must never seek to control how you operate, as their goals and outlook will always be different to yours.

We appreciate tech development is usually an upfront cost so you need to make sure your contracts are designed with that in mind to avoid the pitfalls at point 1. A specialist accountant will know about the entrepreneur & R & D reliefs available to you to ease the tax burden and cashflow issues that these produce, these details are not to be down played.

3. Poorly drafted or non-existent documents

Reliable legal documents such as client terms, in your favour, are a must. As you grow these are increasingly more important and must be updated as your business changes or you have in-coming investors. We frequently find start up’s have handled contracts verbally on a handshake or have signed larger investors or client terms without taking advice, which causes serious problems at a later date.

Common mistakes:
• Not making the plan for the business clear, from the start, between its co-founders (especially friends and family) is something that we see all too often. Disputes then arise when third parties wish to be engaged or one founder wants to sell and the other does not. A Co-founder’s agreement is essential;

• A lack of employment and contractual documentation in the early days could hamper your future, if you don’t have the confidentiality clauses or restrictive covenants your business is exposed to competition.

It is never to late:
• Agree terms with your co-founders by way of a shareholder’s / Partnership agreement;
• Discuss how you set up the business with an advisor as early on as possible. You should discuss incorporating a limited entity as soon as possible if you want to minimise your personal risk;
• Make sure your articles or share allocation, is done correctly and reflects your accounts and true running of the company. You would be amazed at how many companies make errors here that takes some time to unravel and if you get the attention of HMRC this will delay your plans and they can charge penalties;
• Get a correctly crafted contract between you and your clients: Sounds obvious, but it can be the one thing that we see has bee done using a template or it is out of date. As you expand it causes tremendous problems. Especially if your client is a consumer and their statutory protection has not been carefully considered. A good contract will at least contain:

a. How your services/products are delivered;
b. How disputes will be resolved;
c. Representations and warrantees;
d. Rights to cancellation, refunds and returns ,if products can be sold;
e. Who owns the Intellectual Property Rights and how these are to be used;
f. Payment terms and debt recovery terms.

4. Intellectual Property: Not carefully considering its protection.

The cost of registering trademarks and patents, in the long run, is far cheaper than trying to fight infringement actions or re-branding if someone seeks to stop you using your own brand.
Register all important trademarks so that you can deter others from using your brand. You can also recover any losses suffered much easier.

Third party assistance
If you’ve hired a person or company to create your IP and/or products, it is vital that you have a detailed and protective agreement in place and assure all the IP assigned correctly over to you.

Nondisclosure / Confidentiality agreements
This should be in place with anyone you are going to disclose any details about your business or IP with.

5. Employees & Sub-contractors are not your friends – protect your business

A Lack of Employment and Contractual Documentation can cause you real harm if an employee leaves with confidential information or poaches clients or worse holds your IP.

• If you are not clear on who owns the IP this could destroy your business. A coding designer did not sign a contract and worked on a self-employed basis for a company, who paid for the development, office and marketing; A dispute arose and the contractor took the code with him and held it to ransom for his disputed invoices. The client had no choice but to pay the invoices as there was so little evidence as to who actually owned the IP until it had been completed and paid for. To argue this at court would have taken months and lost the investor and the launch date. An IP agreement would have secured the ownership and relationship deterring this kind of behaviour sadly seen all too often.

a. All Employees must have a statement of their employment terms within two months of employment and this sets the basic terms for clarity between you both.

b. Make sure you have key things in the employment contract and in contactors agreements to:

i. IP terms clarifying ownership, restrictive covenants to prevent people leaving and setting up in competition or poaching clients and tight confidentiality provisions.
ii. Secure adequate probation periods for you to trial new people and make sure you vet them carefully.
iii. Non-disclosure agreements and non-compete restrictions are paramount
iv. Disciplinary and grievance policies as you expand need to be bespoke to your company and you may need to consider the need for a staff handbook. Statutory provisions may simply not suit your business.

If you require further advice or assistance, please do not hesitate to contact me karen@acitylawfirm.com

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