The 5 myths associated with building a tech startup

There are lots of issues to overcome, from raising financing and hiring staff to the marketing and selling of the product or service.

But, among the excitement, many budding entrepreneurs don’t place as much focus on the less glamorous side of operations – their legal obligations. They may be under the impression that tax, share ownership and intellectual property are all problems that can be ironed out further down the line, and there appear to be some common misconceptions about these issues.

It’s important for entrepreneurs to realise that tackling key legal issues correctly up-front isn’t just a question of compliance: doing so early builds the right foundation and can help capture and add value to the business. 

But what are these myths? And what can companies do to ensure that they don’t succumb to them?

1. We’re all friends here, share ownership can come later

Every organisation, regardless of size, needs to know who owns what. This can prove a challenging task when a business is growing quickly, but if share ownership is set out early on, it avoids plenty of potential headaches later in the process. 

Likewise, development of a business can prove stressful, and there are moments when friendships will get fraught. In these situations, it’s vital that everyone knows their rights and obligations, from profit distribution and business conduct to general decision-making processes. Some degree of formality and structure helps to avoid disputes and allows the business owners to focus their attention where it should be: on product and customers.

Make sure to set up a selection of pro-forma agreements which can easily be tailored as growth continues. Incorporating the company, sooner rather than later, is also advisable, and it will require you to consider share ownership at an early stage.

2. Interns are great, they’re a free resource

Not quite. Internships are often seen as a useful way to tap into a stream of bright, young and eager talent at little to no cost. But using the label “intern” doesn’t prevent the national minimum wage rules applying. If your intern is classed as a worker or an employee, you must pay them at least the minimum wage, currently £6.50 per hour for those aged 21 or above. 

But how do you determine the status of your intern? Ask yourself whether they do more than mere shadowing of a position, or are expected to fulfil an actual role and carry out work. If the answer to either of these questions is yes, you are not only obliged to pay them, but they may also be entitled to paid holidays, statutory sick pay and unfair dismissal protection.

Read more about legal issues for early-stage businesses:

3. We bought it, we own it

Don’t be so sure. Intellectual property law protects the legal rights of creators. If you commission someone to create something in connection with any element of your business, it doesn’t mean that you definitively own what they have produced. Make sure you are granted full ownership rights and there is evidence (e.g. a contract) to back this up.

In some cases, you will also want to register yourself as the owner of the creation at a central IP agency, (this would include registering any logo or brand name as a registered trade mark). And don’t forget domain name registrations and social media handles.

4. We don’t make a profit yet, so tax advice can wait

Tax is rarely the number one priority for a growing tech business. But confirming your tax position early can have considerable advantages. Potential investors can be provided with tax breaks through HMRC incentives, and key members of staff can be incentivised through share incentive schemes at no cost to the company. Some of these schemes are only available to start-up and small companies – it would be a shame to miss out. Also, make sure that you structure your company tax efficiently; otherwise you might get a nasty tax surprise on exit.

5. Privacy is dead

Despite what you read in the papers, data privacy laws are very much still alive, and it’s your responsibility to adhere to them. Fines and penalties for non-compliance are increasing. If you collect any personal information from your customers and employees, you must comply with data protection law and regulation. 

That means processing information fairly and taking appropriate measures to protect personal data. On a longer-term basis, being able to demonstrate that you take privacy and security seriously will reassure investors and customers alike. 

There is no right answer to growing a small business – sometimes it comes down to a range of factors beyond your control. But, by ensuring that you pay attention to a few basic legal steps, you maximise your chances of creating and preserving an efficient and valuable business.

Sue McLean is a technology lawyer and Of Counsel at Morrison & Foerster

Image: Shutterstock

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