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The Irish tech start-up scene has never been stronger. There are dozens ofincubators and accelerators active in this space and the government and state agencies are working hard to create a start-up friendly ecosystem.1 Arthur Cox has a rich heritage of working with high potential Startup Technology Companies. We set out below some basic rules of thumb that are 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 ShareholdersFor 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 AgreementA 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 AgreementsBe 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.
LeaversAnticipate what might happen if the company loses key employees. In particular, the implications for any shareholdings, protection of IP and confidential information should be
1 www.ucd.ie/nova/ www.dcu.ie/invent/ www.dcu.ie/ryanacademy/ www.ndrc.ie/ www.dogpatchlabs.com/ http://www.dbic.ie/http://www.mediacube.ie/ http://www.enterprise-ireland.com/en/Management/Learn-skills-to-start-and-develop-your-business/I-GAP.shortcut.html
JUNE 2012
Technology Group Briefing
Legal Tips for Tech Start-Ups
This document contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
Earlsfort Centre, Earlsfort Terrace, Dublin 2, Ireland | tel: +353 (0)1 618 0000 | fax: +353 (o)1 618 0618 | email: [email protected] | web: www.arthurcox.com
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Innovation
02LEGAL TIPS FOR TECH START-UPSJUNE 2012
Dublin
Earlsfort Centre, Earlsfort Terrace, Dublin 2, Irelandtel: +353 (0)1 618 0000 | fax: +353 (o)1 618 0618email: [email protected]
London
12 Gough Square, London EC4A 3DW, Englandtel: +44 (0)20 7832 0200 | fax: +44 (0)20 7832 0201 email: [email protected]
Belfast
Capital House, 3 Upper Queen Street, Belfast BT1 6PU, Northern Irelandtel: +44 (0)28 9023 0007 | fax: +44 (0)28 9023 3464email: [email protected]
New York
One Rockefeller Plaza, 15th Floor, New York NY 10020, USAtel: +1 (1)212 782 3294 | fax: +1 (1)212 782 3295email: [email protected]
www.arthurcox.com
Silicon Valley
800 West El Camino Real, Suite 180, Mountain View, California, 94040, USAtel: +1 (1)650 943 2330 | fax: +1 (1)650 962 1188email: [email protected]
considered. Again, this can be dealt with in the underlying employment and consulting agreements and in the company’s Shareholders Agreement. Will share clawback provisions apply to bad leavers?
Intellectual PropertyThe company will not be an attractive vehicle for investment if the core IP value is not clearly vested in the company or properly licenced. Usually IP will reside with the original creator and so IP assignment agreements and employment agreements need to clearly evidence the absolute ownership by the company of any core IP.
Some web-based offerings are easier to protect from an intellectual property point of view than others. If unsure, it may be better to stay in stealth mode until you have taken steps to register or protect the necessary IP.
Trade SecretsAsk your professional advisor to put together a good non-disclosure agreement for negotiations you might have with 3rd parties (including potential employees and funders).
Key Legal DocumentsScaling companies should keep one eye on future fundraisings and the terms that are likely to apply. In particular, the following documents should be carefully stored as they are likely to be required for any pre-financing due diligence:
» Any contract signed by the company.
» All employment or consultancy contracts.
» Any IP assignments or licences (in particular any licences associated with Open Source code).
» Any IP registrations (for example, a trade-mark registration certificate or a domain name registration).
» Any correspondence to or from a state body such as the Revenue Commissioners.
» Any correspondence received which threatens legal proceedings or makes claims against the company.
Raising FinanceGet advice before signing any fundraising term sheets. While many term sheets are not binding, it is very difficult for the promoters of the company to negotiate new terms when the deal advances. We will usually be happy to review and comment on draft term sheets for our clients without raising a fee.
ContactsFor further information, please contact:
John MentonPartner, Head of Technology Group
+353 (0)1 618 [email protected]
Chris BollardAssociate, Technology Group
+353 (0)1 618 [email protected]
Rob CorbetPartner, Technology Group
+353 (0)1 618 [email protected]
Iseult Ní GhallchóirAssociate, Technology Group
+353 (0)1 618 1153 [email protected]
