The key legal issues to take you from startup to scale up

Starting any new business comes with a steep learning curve, especially as a founder when you often find yourself wearing all the management hats. This is why it is important to deal with the core legal issues early, so that when the time comes to scale up, your business is ready and in good shape to expand.
‘Carrying out a review of your legal requirements is a sensible place to begin. Then, implementing, referring to and updating a legal checklist will save costs, reduce risk, and free up vital headspace for you to work on growing the business,’ explains Jonathan Padgett, a Commercial Solicitor with Bailey Smailes in Huddersfield.

Legal structure and corporate housekeeping

Sometimes there is a misconception that once your legal structure has been set up, there is nothing further to attend to. If you started as a sole trader, you may wish to consider whether this is still appropriate for your ambitions.
As a limited company, corporate housekeeping such as completing resolutions, dividend allocations, income declarations and minutes of meetings are necessary to ensure you are complying with the Companies Act 2006.
One of the items on the legal checklist which startups tend to overlook or elect to bypass at the beginning of their journey, is a shareholder or co-founder agreement. These agreements set out the responsibilities and decision-making rights and obligations of parties, as well as exit and dispute resolution clauses. Having these agreements in place allows everything pertinent to the operation of your business to be put down in a contract and also provides the framework for growth going forward.
They are valuable when you start talking to growth partners, as they provide clarity over key issues, show that you take compliance seriously and have mitigated dispute risks associated with the legal structure of your business.

Trading terms

Once the legal structure is secure, the operation of your business will inevitably require terms of business or other contracts with suppliers and customers. These requirements will vary depending on if your business provides services, products, or both:
• product based businesses will need robust terms and conditions in place which comply with consumer laws to govern the relationship with the consumers; and
• service based terms and conditions will usually mean putting contracts in place with clients.
Some startups may try to save money by creating their own and using competitor versions as a starting point, but this can be a false economy. Each business has a unique set of risks which it needs to manage, and it is advisable to have solid bespoke trading terms in place from the outset.
A key benefit to having these in place as early as possible is that the terms will also direct the day-to-day operation of your business to be consistent with your terms. For example, if your terms say that you will issue refunds within a specified period of time, then you know you will need to set up reminders on your customer relationship management software to ensure this occurs.

Data protection

Compliance with privacy and data protection regulations is another important area. Founders need to familiarise themselves with initial compliance obligations and ongoing responsibilities.
Initial items on this part of the checklist will typically include:
• appointing a data protection officer;
• setting up a privacy policy; and
• registering with the Information Commissioner’s Office.
However, you may also need to put in place data processing or data sharing agreements with partners in certain areas of your business. If you use third parties for payment processing or email marketing, relying on their privacy policies or mentioning them in your privacy policy may not be enough.
Complying with the GDPR is very much about understanding the data you collect and how it flows through processes, even through your business partners. Having this clearly mapped out and policies in place will make it easier when you add new information streams, services, or suppliers.

Scale up partners

For product-based businesses, scaling up inevitably involves increasing manufacturing capacity and expanding distribution or territories via sales agents.
Setting up relevant contracts with new partners will be crucial to ensuring your rights and risks are protected in what are intended to be long-term commercial relationships.
You will need to identify key issues, such as dispute and liability risks, which will be important to set out in both your contracts and working relationships. For example:
• should a manufacturer take on product recall liability?
• who takes on responsibility for product spoilage in a distribution center?
• how are targets monitored and remunerated with any distributors?
These contracts are as much about setting out the terms of trading as they are about considering all the potential pitfalls that may occur and how they ought to be addressed between the parties.

Other specialist areas

Each business is different and as you consider the legal issues which will prepare you for growth, alongside the core commercial issues outlined above, you might also need specialist advice on:
• trade marks and brand protection;
• patents or design rights;
• employment contracts and policies; or
• share incentives.

How we can help

The above list is, of course, not exhaustive. Our Company and Commercial team is highly experienced in working with startups and scale ups as they progress through the business lifecycle.
For an informal discussion, please contact Jonathan Padgett in the Corporate and Commercial team on 01484 435543 or email Bailey Smailes has offices in Huddersfield and Holmfirth, West Yorkshire.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

Ian Holmes and David Wells are the STEP accredited Solicitors for Bailey Smailes

David Wells and Lucy Cortis are the SFE accredited Solicitors for Bailey Smailes