Tech entrepreneurs inevitably face a number of challenges as they scale tech businesses – sometimes these will seem overwhelming. Whether you are a founder or an investor, there are some legal tips to prioritise to give the business the best chance of success, writes Tom Torkar, Partner and Head of Technology and Information team at UK Law Firm Michelmores.
Understand the priorities
Founders perform a number of roles, and they won’t have the luxury of unlimited resources. There will be a flood of information and advice that will identify all sorts of areas that they need to address. However, the primary focus should be developing a unique and investible business and the items on the “to do list” should drive towards that aim.
Find the right advisors
Lawyers and other advisors must understand how to work with tech businesses. The advisor should demonstrate a shared enthusiasm for innovative and disruptive businesses. Try and find advisors that listen and understand the business’ unique needs.
Keep it simple
Entrepreneurs are often “blue sky thinkers” with a host of ideas about the various applications for their solution. Focus on developing the product or service for a core market or use-case. Founders risk spreading themselves thinly and increasing the complexity of the business if they don’t. Also, what they think is a unique and investible proposition may be lost on customers and investors without a focused pitch. Once the business is revenue-generating or has enough investment, then the product range can be expanded.
Make sure you have a unique brand
The business name and brand should represent its identity and the business will need to grow the reputation and goodwill associated with that name and brand. Aim to avoid a costly re-branding exercise at a later stage caused by third party challenges based on their own brands and names. Conduct searches to check no-one is using the chosen name or brand and then register trade marks for the core markets for the business.
Protect intellectual property assets
It will be critical to establish clean and clear ownership of business intellectual property so that the business can prevent others from stepping on its toes. It is also important to make the business as attractive as possible to investors.
Where possible, register patents, trade marks and/or designs. Protect proprietary “know how” and other confidential information. Make sure all agreements with third parties are reduced to writing and contain appropriate intellectual property assignment and confidentiality provisions.
Develop your approach to contracting
The customer contract is one of (if not the most) important contracts for the business. The terms will need to mitigate risk, for example through liability caps and disclaimers. It will also need to be reasonable and relevant for your target market to ensure the proposition is marketable. Consumer contracts need particular attention as they must be fair and reasonable and meet legal standards. Don’t ignore key supplier contracts; secure the timely supply of key components for the business to appropriate standards and service levels.
Understand the regulatory context
All businesses will have to comply with applicable laws and regulations to some degree. Some sectors are more onerous than others.
Those laws will also differ from country to country, so consider the geographic reach of the business. Your lawyer should advise you in that regard.
Most tech businesses will use data in their business, for example for analytical purposes, service improvements or artificial intelligence. Data protection compliance should not be disregarded – the rules are complex and any un-informed assumptions made at the outset will create unnecessary risk, which future investors are likely to uncover.
Ensure co-founders are aligned
Make sure co-founders are aligned and understand their responsibilities and contributions to the business. This will include formalising how shares are allocated using a shareholder agreement and potentially putting in place directors’ service agreements. A tech business which is well-run with simple and understandable corporate governance structures will be a more attractive investor proposition.
Find the right investor and business match
The best investors invest in areas in which they have experience. Founders should research individuals who have had financial success in the relevant sector and try and forge connections with them – they may invest as an angel investor and provide valuable support. Investors should, in turn, ensure that they understand the business.
Be flexible and resilient
The path to success is rarely straight and can be tough. The product development roadmap may need to change for any number of reasons including competition, changes in compliance requirements or changes in technology. The business may need multiple rounds of funding to progress its plans.
Don’t be deterred, this is not unusual, and it’s up to the stakeholders in the business to develop the resilience to meet these challenges.
Tom Torkar is a Partner and head of the Commercial team at the UK Law Firm Michelmores, running award-winning programmes for tech businesses and investors, including MiVentures and the MAINStream angel investor network.
