Legal Tips For Tech Start-Ups - June 2012

Author:Mr John Menton, Rob Corbet, Chris Bollard and Iseult Ní Ghallchóir
Profession:Arthur Cox
 
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The Irish tech start-up scene has never been stronger. There are dozens of incubators and accelerators active in this space and the government and state agencies are working hard to create a start-up friendly ecosystem.1Arthur Cox has a rich heritage of working with high potential Start up Technology Companies. We set out below some basic rules of thumb tha tare intended to assist entrepreneurs in circumnavigating the various legal challenges that typically arise.

Corporate Structure

Almost always the preferred corporate vehicle is a private company limited by shares. Unlimited companies are an "absolute no" for venture capital funds. The main benefit of this is limited liability for the shareholders while providing flexibility for future fundraisings. Getting the structure right from the start is considerably more cost efficient than commencing under a generic "shelf" company structure which may require considerable customisation later. Founder Directors and Shareholders

For maximum flexibility, the promoters should try to operate in as streamlined a fashion as possible. Allocations of shares, options and directorships should be carefully considered given the potential difficulties and costs that arise in trying to undo those appointments later. Avoid promising "percentages" of the company. Always deal in actual share numbers not percentages. Founders and "new founders" should carefully look at any tax implications of issuing shares to directors, employees or founders after value has come into the company.

Shareholders Agreement

A concise, clear and professionally drafted shareholders agreement is invaluable as it will govern the relationships of the stakeholders while sorting out the agreed rules on decision making, future fundraising exits etc.

Informal Agreements

Be careful to document informal or unwritten agreements. While third party help is invaluable in the early days, the basis upon which that help is provided should be clearly documented in writing.

Leavers

Anticipate what might happen if the company loses key employees. In particular, the implications for any shareholdings, protection of IP and confidential information should be considered. Again, this can be dealt with in the underlying employment and consulting agreements and in the company's Shareholders Agreement. Will share claw back provisions apply to bad leavers?

Intellectual Property.

The company will not be an attractive vehicle for investment if the core IP value...

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