Future Space Guest Blog: Commercial & IP Risks – what should entrepreneurs consider?
"Be adaptable. If something isn’t working for your business or your contracts start to hinder your growth rather than support it, make changes."
We caught up with Charlotte Kingman from Ashfords’ commercial team in Bristol to talk about the key commercial and IP risks that entrepreneurs should consider before embarking on their start-up journey.
As a commercial lawyer, Charlotte supports start-ups from their initial setup phase throughout their entrepreneurial journey, using the law to help support the successful growth of their business. Charlotte advises organisations on commercial and data protection matters, providing pragmatic and tailored advice on the areas that matter most. In her spare time Charlotte is a co-founder of a specialised lettings company so she understands first-hand the pressures and challenges that entrepreneurs face, both from a legal, business and personal perspective.
1. What commercial documents do you need to prioritise when setting up a business?
This is a question that we are asked a lot. When starting out, the to do list (and expenses) can feel overwhelming. If you’re naturally risk adverse, you might decide to spend the time and money ensuring that your legal compliance is covered but for the majority of our start-up clients, this just isn’t feasible in the early stages. We understand that clients need to prioritise where to spend their money.
Every business is different, however, for the majority of start-ups, we suggest that you focus on the following:
- Customer contracts
This is the contract that governs your relationship with your clients or customers. It sets out what products or services you’re providing, the expectations of both parties, your liability, termination or exit and, very importantly, how and when you get paid. Without clarity, you run the risk of disputes with your customers. The contract can be used as a framework for incorporating the specification or scope of the product or service, which as the supplier is key to limiting your exposure (helping you avoid spending time and money without getting paid). The contract should reflect what you’ve agreed with the customer (possibly verbally or by email) so make sure you don’t over promise to win the work and ensure you’re happy to commit on paper to what’s been agreed when pitching for the work or advertising the product.
- Supply chain contracts
Your supply chain are those third parties that you rely on to deliver the products or services to your customers. These contracts may not be imperative to all start-ups (e.g. professional services businesses are usually less reliant on their supply chain in the initial stages) but it will certainly be important for most. If you’re a product based business, your suppliers may provide your raw materials, manufacture part of your products or lease important equipment. For tech businesses, you may be utilising cloud services through the likes of AWS, Azure and Google which forms a critical part of your infrastructure. It’s important to ensure you have contracts in place to govern these relationships and, where you are not in a position to negotiate such contracts, you need to mirror relevant risks in your own contract with your customers (i.e. what are the service levels in your supply contract? What happens if there’s a delay? How and when can they terminate and what impact would this have on meeting your obligations under your customer contract?). This is an area where expert commercial lawyers can add real value.
- Intellectual property
IP is often one of the most valuable assets of your company. IP registrations are key at a very early stage. Most entrepreneurs are aware of trade mark registrations but IP isn’t just your logo and trading name. Depending on the nature of your business, you may have a wide range of IP rights to protect. If you’re developing something that might be patentable, take specialist advice straight away as the application process is complex and time consuming, and successfully obtaining a patent could seriously impact the value of your business. If you’re a tech provider, your source code will attach copyright and you need to ensure that this is properly licensed and protected in your customer contracts. If you’re using third party IP as part of your services, you must ensure that you have the correct rights to do this and that the IP structure is sufficiently clear in your supply contracts (and then flowed down in your customer contracts). If you are building something for your client, are there elements of what you’ve created that will be owned by the client rather than retained by your business? Do you need a licence to continue using that IP? For example, as a graphic designer you may be producing materials for your customers which they will pay to own. In that scenario, you’d probably be happy to hand over the IP but think about whether you want to retain the right to use copies of your work in your own marketing materials. Again, this should be dealt with in your contracts.
- Privacy Notices
There’s no doubt that you’re aware of at least some of the obligations imposed on businesses by data protection legislation (specifically the GDPR). One of the requirements is to issue a notice to ‘data subjects’ (i.e. the individuals whose personal data you’re processing) explaining certain things about what information you collect, what you’re doing with it and how long it will be kept. For any personal data where you are acting as the data controller, privacy notices are a key part of your data protection compliance and its important that they are made available to the individuals at the time you’re collecting the personal data, not as an afterthought (as this doesn’t meet the legal requirements). This doesn’t just apply to customer data but also applies to employee personal data.
- Employment and Consultancy Agreements
There are legal requirements when it comes to taking on employees and there’s certain information that you need to give employees in writing (which form part of their employment contract). Not only does an employment contract need to satisfy the legal requirements, having well-drafted employment contracts (and consultancy agreements) in place means you are better equipped to protect your confidential information, enforce any post-termination restrictions and deal with things like who owns any IP created during the course of the engagement. The latter is particularly important for consultancy agreements as independent consultants will automatically own any IP that they create for you, unless this is otherwise expressly set out in a consultancy agreement. This can cause significant issues if you’re then licensing that IP to your customers, without a proper right to do so (and this can also be a major headache if you come to sell your business).
The above isn’t an exhaustive list but focuses on the key commercial elements for the initial stages of your business; it is important to always consider each in the context of your business, as well as your appetite for risk. If you’re working in a regulated environment (such as financial services), there will be different legal and compliance requirements to meet before you start trading.
2. What else should business owners think about?
The previous list focuses on the key commercial contracts which you’ll need to either draft or review (or instruct a lawyer to do that for you) but there are a number of other areas that you’ll need to think about:
Make sure you take out insurance that is tailored to your business. If you take on employees, you should hold employee liability insurance. If anyone attends your premises, you should consider public liability insurance. If you provide a service, look into professional indemnity insurance. Again, think about this in the context of your organisation – if you are a tech company that processes significant amounts of high-volume and high-risk data, you should consider specialist data and cyber security insurance. Speak to an insurance broker if you don’t know where to start.
- Employment considerations
If you’re taking on employees, think about the wider implications on the business. We’ve already mentioned the employment contracts which set out the relationship between you and the individual but there are wider compliance obligations. Make sure you register as an employer with HMRC, calculate and factor in national insurance and pension contributions as an overhead, set up a pension scheme (where you’re required to do so), and start thinking about internal policies such as an working practices and a staff handbook. An employment lawyer can support you with the latter but you should also be taking advice on some of these issues from your accountant.
- Register with the ICO
You must register with the Information Commissioners Office (the data protection regulatory body in the UK) if you are processing personal data. A lot of businesses don’t think this applies to them unless they’re collecting consumer data but that is incorrect. Even if you’re selling to businesses, names and business contact information you collect from your target clients can constitute personal data as well as any employee information or contractor details. You can find out more about this through the ICO’s website: link.
- Shareholder / Founders Agreement
If you’ve started the business with someone else, you probably can’t imagine a time when you can’t stand to be in the same room as one another. But unfortunately, it’s very common for co-founders to fall out when dealing with the ups and downs of growing a business. Make sure you have those difficult conversations at the outset, it's much easier to do this when you're enjoying a positive relationship – talk about where you want the business to go, buy-outs, investment, control, exit and document what you agree. This can help you and the business succeed, even if things between you and your business partner take a turn for the worse.
3. What should entrepreneurs look for in a lawyer?
Law firms can vary hugely. Finding the right professional advisors is crucial and can really boost the success of your business.
It’s important to instruct lawyers who understand your goals and have a strong understanding of your industry. It’s also really important to instruct someone you enjoy working with, as you’re likely to spend a lot of time working together.
Our top tip is try to find a law firm that mirrors your values but is also an appropriate fit for where you are in your business journey. If you’re a start-up that hasn’t started trading yet, you haven’t secured funding or aren’t sure about where you want to go, looking to instruct a top 10 London firm probably isn’t right for you. Likewise, if you’ve just been through a series of funding rounds, have a strong customer base and steady revenue stream, a one-man band probably won’t be able to provide you with the level of support you need and you’d benefit from instructing a full-service firm that can support you across various practice areas (e.g. commercial, corporate, employment etc).
At Ashfords we are specialists in working with growing businesses and ambitious founders. We also work with a good number of well-known and respected VC funds and other investors, so we are very familiar with the needs and desires of potential funders. Ultimately, we understand the market and we know that businesses work best when they are supported by advisors who are a good fit with the founders, so we aren’t going to take it personally if you believe another law firm might be the best fit for you!
4. Do you have any other tips or tricks for those thinking of starting a business?
Be adaptable. If something isn’t working for your business or your contracts start to hinder your growth rather than support it, make changes.
The law isn’t there to act as a barrier to growth or success in business; it’s there to protect businesses, customers and the industry. We often see business-owners trying to stick to the initial contracts or advice they received when they started the company. Legal advice is only useful in context, so if your business has changed direction, don’t be afraid to invest in where you want to get to and seek legal advice that supports that vision rather than obstructs it.
For more information about Ashfords' commercial team, visit https://www.ashfords.co.uk/business-legal-services/commercial or contact Charlotte directly at firstname.lastname@example.org
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