Starting a company feels exciting, but that excitement dies down when we have to deal with legalities. Many founders freeze at this point and struggle with understanding legal terms.
In this glossary by Advent Communications, you can find legal terms explained simply and will help you from setting up your company to raising your seed round and signing customer contracts.
1. Incorporation
Forming a private limited company means officially registering it as a limited company at Companies House. This means creating a separate legal entity so you can protect your personal assets. Typical steps include online registration, appointing directors, adopting Articles and receiving a certificate of incorporation. For instance, you need to register your company before taking payment from your first customer.
2. Articles of Association
The Articles of Association are your company rulebook, covering director powers, voting rules and share rights. Most startups start with the model Articles, then tailor them as they grow. You can adjust the Articles during your first investment round, adding new rules about share transfers for investors.
3. Statement of Capital
This records your issued shares, classes, and rights. Investors review it to confirm ownership and economic terms. File updates with Companies House whenever you allot shares to investors or make changes to your capital.
4. Persons with Significant Control (PSC)
A PSC register is for people who own or control more than 25% of your company. Keep it accurate and file updates with Companies House. For instance, if a new investor crosses 25 percent of ownership, update the PSC register within the required timelines.
5. Directors’ Duties
As a director, you have legal duties to act in good faith, and use reasonable care, skill, and diligence for the success of the company. Board decisions need to consider long-term effects, employees, suppliers, community and the environment. For example, you record the potential long-term effects of a supplier change before making the decision.
6. IP Assignment
IP Assignment means transferring ownership of any intellectual property (like patents, trademarks, or code) from individuals (like founders or employees) to the company. These assets should belong to the company and not individuals. Use assignment agreements for founders, staff, and contractors, and include assignment clauses in employment contracts. For example, a freelance developer signs an assignment so the source code is owned by the company from day one.
7. Employment Contract and Day-One Written Statement
Employees and workers must receive a written statement of particulars on or before the first day, covering pay, hours, and other key terms. Employment contracts should also cover confidentiality and IP. For instance, you provide the employment contract and written statement to a new employee on their first day.
8. Employers’ Liability Insurance
Before you employ anyone, you are required by law to have Employers’ Liability Insurance. A minimum £5 million should cover costs if an employee gets injured or ill because of work. Use an approved insurer for best coverage.
9. Privacy Notice, UK GDPR and PECR Cookies
A Privacy Notice tells your users how you collect, store, and use their personal data. Under UK GDPR, you must get their consent before collecting certain data, especially through cookies. For Example: You should display a cookie banner on your website, and a privacy notice that explains how you handle customer data.
For more information, refer to the ICO’s guide for setting up your cyber security.
10. Consumer Pricing and the DMCC
The Digital Markets, Competition and Consumers Act (DMCC) helps protect consumers by making sure businesses are clear about prices. Online businesses should present total pricing clearly and avoid surprise charges. Follow the DMCC’s guidelines to avoid heavy fines and enforcement actions in the future.
11. VAT Registration Threshold
From 1 April 2024, companies must register for VAT once it earns over £90,000 in taxable sales over the course of 12 months. Track your earnings monthly and prepare an accounting and book keeping system early.
12. Shareholders’ Agreement
A Shareholders’ Agreement is a contract between shareholders and covers decision rights, share transfers, founder vesting, leaver terms and dispute routes. It reduces founder conflict and helps with future funding rounds. For instance, co-founders can agree to a four-year vesting with a one-year cliff and pre-emption on new issues and transfers in a shareholders’ agreement.
13. Pre-emption Rights
Pre-emption rights give existing holders the right to buy new shares pro-rata before outsiders. This protects them from dilution of their ownership. Disapplication needs a special resolution and investor buy-in. For example, you run a pre-emption offer to current shareholders before a top-up.
14. EMI Share Option Scheme
An EMI (Enterprise Management Incentive) scheme allows you to offer tax-free share options to employees as part of their pay. EMI options help attract and retain staff through equity. You can offer EMI share options to key employees, giving them the right to purchase shares in the future.
15. SEIS and EIS
SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) offer tax relief to investors in early-stage businesses. They make it easier for startups to raise money.
16. Term Sheet
A term sheet is a non-binding document of key terms of an investment deal. Typical items include valuation, board rights, liquidation preference, anti-dilution, and information rights. It’s a blueprint for the final agreement. Explore the BVCA model documents and setup your business with ease.
17. ASA and SAFE
An ASA (Advanced Subscription Agreement) or SAFE (Simple Agreement for Future Equity) allows investors to contribute funds now in exchange for equity at a later date, typically when the company raises its next round. These agreements are often used for early-stage investment. For example, you raise money using an ASA, where investors’ funds convert into shares at a discount during the next funding round.
18. Liquidation Preference
Liquidation Preference determines the order in which investors get paid in the event of a sale or liquidation of the company. Investors with liquidation preference get their investment back first, often with a multiplier. For Example, a preferred shareholder gets their original investment back before common shareholders if the company is sold for £10 million.
19. Warranties and Indemnities
Warranties are promises made by one party to another in a business deal, often about the condition or ownership of assets. Indemnities provide protection against specific future risks, such as tax liabilities. For Example, in an investment agreement, founders might warrant that the company owns all intellectual property and indemnify investors for any tax liabilities that arise later.
20. MSA or SaaS Agreement
A Master Services Agreement (MSA) is a contract that sets out the terms for providing services to customers, including deliverables, payment terms, and liability limits. It is especially important for SaaS (Software as a Service) businesses.A SaaS startup signs an MSA with a client, ensuring uptime commitments, payment terms, and data protection clauses.
Conclusion
Understanding legal terms is essential when running a startup, but it doesn’t have to be complicated. By knowing these key terms, you can confidently set up your company, hire staff, raise funds, and sign contracts. Always make sure you’re following the legal requirements for your business type, and don’t hesitate to seek professional advice when needed. By staying on top of the legal side, you can focus on growing your business and achieving success.