Legal essentials to help your business grow

That’s a very good question! Many people are small business owners, but not all of them are startup founders. There’s many ways to differentiate between a small business and a startup, but for us, the key points of difference are:

– You’re aiming to disrupt a traditional business model, industry, product, or service delivery
– You need venture capital or other sources of external funding to scale
– Turning a profit as soon as possible, is not as important as making your innovative idea succeed
– You are working on an MVP (Minimum Viable Product) to showcase
– You say ‘to the moon’ a lot more than other people.

Before kicking off your venture – there are a few things for you and your co-founders to consider:

1. What problem are you solving?
2. How are you going to solve the problem?
3. Is anyone else already solving this problem?
4. If so, how are you different?
5. What competitive advantage do you have to help solve the problem? (coding skills, engineering skills, digital marketing skills, a large professional network)

If you can answer those questions, then you can consider:

6. What are your goals in the short, medium and long term?
7. What is each member of the team going to do get there?
8. How much money do you have to achieve your goals?

If you can answer those questions, and before you quit your job and swap the suit and tie for a black t-shirt, then it might be time:

9. Consider registering a Company; and
10. entering into a Founder Agreement or a Shareholders Agreement with your co-founders before you build the next big thing!

A Shareholders Agreement is an incredibly useful document for any startup – for two main reasons.

One, it sets the rules between you and your co-founders. Two, it sets the rules between the founders and the investors.

1. Co-founders
Shareholders Agreements set out who has contributed what to the business, what you are promising each other, and what the consequences for breaking those promises are. This is why a Shareholders Agreement is important from day one, and not just when you are ready to raise capital. Like a parachute or a life jacket – one of those things that we hope you don’t need, but if something goes wrong, you will be very glad you have.

2. Investors
Investors will want protection around their investment, and a Shareholders Agreement enshrines these protections. Two of these primary concerns include ‘who has a say on what’, and ‘how shares in the Company can be issued or transferred’.

As the saying goes… if it was easy, everyone would do it. That said, there are a few different options available:

1. Back yourself!
Salary, savings, investment income, inheritance – your money, or loans and credit cards, your debt (be careful!). Backing yourself to take the first few steps is often the first source to get going.

2. FFF
Friends, family and fools.. the second port of call for startup founders. Those who know you, who believe in you and might have the means to help you start out.

Angel investors also fit into this category – high-net worth individuals who make investment into very early stage companies.

There are laws surrounding capital raising from FFFs which you will need to comply with – this is something our Startup & Capital team can help you with if you go down this path.

3. Incubators and Grants
The Australian startup ecosystem is growing and there is early-stage funding out there. Two of the main avenues for early stage funding are startup incubator programs (like those run by universities and venture funds) and government grants and initiatives.

Once you have established a business, developed a product, gained some traction, then venture capital and bank loans may become viable alternatives.

It will depend on your industry and sector, but some things to consider:

– Have you got a Director ID?
– Have you set up bank accounts or merchant facilities? How are your customers going to pay you? How integrated do you need these facilities to be?
– Do you need any licences or permits to operate? This might include a liquor, labour-hire, financial services or credit licence – or even a permit to operate your type of business at your premises.
– Insurance – what are your risks? Professional indemnity, stock loss, data breach?
– Business name? You might want to call yourself something different to your company name, which you would need to register.
– Do you need any trade marks or patents?
– Do you own your domain name (website name)?

The short answer is, as little as is possible. If it’s a big salary you are chasing in the founder life, you are looking in the wrong place. Founders need to ensure that, for as much as is possible, funds (particularly when it’s ‘someone else’s money’) needs to be going to building and growing your product or service. Founders ‘make their money’ on exit, not on the payroll.

Following on from question 3 above, picking a co-founder or co-founders is one of the biggest and most significant decisions you will make in business and there are a number of factors to be considered.

Knowing and understanding your co-founders
Any co-founder really should be someone that you already know and trust. You want to know what this person is like, how they work, are they reliable, what are their skills, and what are their weaknesses? It really should be someone that you have history with – that you know and understand.

Friends, family, loved ones?
Equally, the stresses and strains of startup life can be really hard – so really consider going into business with close friends, family or loved one. If the business is struggling, there is a real risk of damaging long-term and important relationships. This is not to say that you shouldn’t start your venture with these people (noting these are the people you know and understand!) but think about what is at risk and if it is likely going to be a good fit.

Complementary skills
Touching on one of the earlier questions – keeping a startup lean and agile is key to success. One key way to achieve this is to make sure that any co-founder you bring on has skills which differ to yours.

For example, if you are looking at starting a fintech – it might be a good idea to have someone with a banking experience, or regulatory or IT background – if these are skills and experiences you don’t have.

Just because someone is a good fit culturally, they are going to contribute by playing a major role, so having someone who can do something you can’t is key.

The ‘investor’ reason
Investors at the early-stage are not investing in your business, they are investing in the potential of you and your co-founders to deliver on the potential of the business. When deciding whether or not someone should be a co-founder in your startup, put the ‘investor cap’ on and ask yourself the following – because these are the questions which will be asked of you when seeking to raise capital.

1. How long have they known each other?
2. Have they worked together before?
3. Can these people work together?
4. Are they likely to continue to work together on this venture?
5. Do they have the skills and capacity between them to deliver on this venture?
6. Do I trust them?

The startup and capital team at Burch&Co runs the Startup Hub, and is exclusively focused on serving startup clients. Of course, we have broader commercial and corporate M&A teams that can assist post-IPO or if your business has matured into a large corporate entity as well, but the Startup and Capital team is here, just for you.

S&C team deals with a broad range of commercial matters for startups, and with particular specialties in venture capital, fund raising, data and privacy, and IP commercialisation.

All of our services are fixed fee (unless you want an hourly rate – we’re flexible too) and geared towards helping you tackle the legal issues you most frequently encounter as a startup founder. Industry expertise and a passion for supporting entrepreneurs is what drives our team to help you kick goals.

We’d love to help out. For starters, please check out our Startup Hub resources or get in touch.