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FAQs for startups

Below are some of the questions we are regularly asked by startups. They cover a range of topic areas, to see the answer simply click on the question.

If you have a question and cannot find the answer below, email us here and a member of our team will be in touch.

founders’ agreements

It allows an investor to convert a loan it is making into equity (shares) in that company. This arrangement is on pre-agreed terms and usually, but not always, at a discount. It's very much like any other commercial loan although, sometimes,interest can be deferred until a particular milestone is reached by the company. For example, when they are comfortably able to pay it - practice here varies. 
These are a more sophisticated type of convertible loan which enable a company to accept the same loan from multiple investors at the same time, under the same terms and under one master agreement.

Startup investments are, in the majority of cases, inherently risky and the main attraction of using convertible loans is often the flexibility and speed with which they can be put into place. This means they can often be used for bridging finance prior to a funding round.

They can also be a lower risk to investors than equity. That's because, as a loan holder, you would be a creditor in case things don't go to plan with the growth of the company. This is especially the case if the loan is secured although often in a startup, loans will be unsecured. 
 
Another of the main advantages is that you don't get into valuation issues up front when you put the money in. These can be left until the loan is converted.

funding rounds

Not in all cases, but particularly if investors are involved, it's a useful thing to have.

Because it regulates how the company is run and sets out the relationship between all of the shareholders.

In order to keep your startup costs to a minimum, the most cost effective time to put in place a shareholders’ agreement would be at the point investors become involved. This is because they are likely to demand their own protections and if you already have your own shareholders’ agreement you might find that you have to start again from scratch!
The content of your shareholders’ agreement will depend on the number of shareholders and the level of shareholding. However, key things to include are:
  • rules on issuing, transferring and selling shares, including how to prevent third parties acquiring them
  • how the company will run, including appointing, removing and paying directors, rules of business, finance arrangements etc
  • paying dividends
  • dispute resolution procedures
  • investor consents, if applicable.
These are matters that the Board cannot undertake without the consent of the investor/s and are a common inclusion in shareholders’ agreements where investors are involved.

brand and IP protection

Copyright protects your work and stops others from using it without your permission. It is a non-registered right that arises automatically on the creation of, say, your company name, logo or strapline. You get copyright protection automatically as it arises at the point of creation.
You automatically get copyright protection when you create:

  • original literary, dramatic, musical and artistic work, including illustration and photography
  • original non-literary written work, such as software, web content and databases
  • sound and music recordings
  • film and television recordings
  • broadcasts
  • the layout of published editions of written, dramatic and musical works.

If you wish, you can mark your work with the copyright symbol (©), your name and the year of creation. Whether you mark it or not won't affect the level of protection you are entitled to.
How long copyright lasts depends on the type of work being protected. The duration of copyright for different types of work is:
  • literary, dramatic, musical or artistic works - the life of the author who created it, plus 70 years 
  • sound and music recordings - 70 years from when the recording is published
  • films - 70 years from the last to die of the director, screenplay author or composer  
  • broadcasts - 50 years from the first broadcast
  • the layout of published editions of written, dramatic and musical works - 25 years from the first publication.

Copyright is generally owned by its creator/author. This can change in certain circumstances, for example, if they created the work within the course of their employment, in which case, the employer will be the owner unless there is an agreement otherwise.
A trademark is a registered intellectual property right which allows you to protect your brand - for example, the name of a product or a service.
You need to apply for the right to hold the trademark. In the UK, this is done through the Trademarks Registry. You simply follow the application process and the Registry will confirm whether or not you have a registered right to hold the trademark.
A trademark registered right lasts for 10 years, at which point it will need to be renewed.
A trademark is owned by the person who applies to register it.

taking on employees - from outside of the UK

This generally depends on nationality; what activity the individual will be doing in the UK; and how long they intend to stay for.

Some migrants from certain countries (e.g US, Australia, Canada) may not need to obtain a visa if they are doing certain permitted activities and are staying in the UK for 6 months or less in any 12 month period.

However, if a migrant will be doing any paid/unpaid work outside of these permitted activities or if they are coming to the UK for more than 6 months in any 12 month period, then they will most likely first need to apply for a visa.

See our overview of the UK immigration system for further information on the types of visas that might be applicable to you or your staff.

If the individual requires a Tier 2 visa, then the UK entity will first need to apply for a Licence to Sponsor. In summary, this will require you to make an online application and send specific supporting documents and information to UK Visas and Immigration (UKVI). They will then assess whether or not they consider you to be eligible for a Licence. The online application will probably only take around an hour to complete but you will need to send original or certified supporting documents, which can take some time to collate.

As part of the process, you must appoint personnel within the organisation to manage the process of sponsoring workers for you. The roles are:

  • authorising officer – a senior and competent person responsible for the actions of staff and representatives who manage the process
  • key contact – your main point of contact with UKVI
  • level 1 user – responsible for all day-to-day management of your licence. It is advisable to have at least two level 1 users at any one time, one of which is an employee.

You will not be granted a Licence if you or any of the above staff have:

  • unspent criminal convictions for immigration offences or certain other crimes, such as fraud or money laundering
  • any history of failing to carry out sponsorship duties.

You will need to put in place appropriate HR systems to monitor sponsored employees and report to the UKVI if there are any problems (e.g. if your employee does not turn up for work).

In order to improve the chances of being able to come to work in the UK, you may also wish to provide financial support by making appropriate legal advice available, on matters such as, whether the individual is eligible for a visa; how to complete the visa application; and what supporting documents will be required.

If you are a medium or large business (which is defined as one having an annual turnover of more than £10.2m and more than 50 employees), it costs £1,476 for a Tier 2 Licence to Sponsor. If you’re a small or charitable organisation, it costs £536.

Processing times for standard applications are currently eight weeks.

A Licence is valid for four years, after which you can apply to renew it.

 

Apply outside of UK

Extend or switch in the UK

Extend or switch in person in the UK 

Tier 2 General

£446 - £1,174

£446 - £1,354

£1,036 - £1,944

Tier 2 ICT

£463 - £1,174

£463 - £1,174

£1,053 - £1,944

*The actual fee will depend on how long the visa is for and whether the role is in a shortage occupation.

In addition to the cost of the visa, the worker may have to pay a health surcharge as part of their application and obtain a TB and criminal record certificate. The sponsor may have to pay the immigration skills charge. These charges vary depending on the particular circumstances, so please let us know if you require specifics on this.

In terms of timescales, it depends where the visa application is being made. The standard processing time is reported to be up to three weeks. However, you can pay an additional fee to speed this up. 

 

Those with a Tier 2 (General) visa can come to the UK for a maximum of 5 years and 14 days.

For those with a Tier 2 (ICT) visa, the maximum stay for each type of visa is:

  • long-term staff (if you earn more than £120,000 a year): 9 years
  • long-term staff (if you earn less than £120,000 a year): 5 years, 1 month
  • graduate trainee: 12 months.

It costs £89 for a 6 month visa; £337 for 2 years; £612 for 5 years; and £767 for 10 years.

The earliest you can apply for one is 3 months before travel to the UK. Most applications are processed within 3 weeks.

At the moment, it’s business as usual. Nationals from the EEA and Switzerland have the right of free movement to the UK. See our update on the Brexit negotiations for further details of the impact that this will have on EEA nationals.

tax efficient incentives

If a member of staff is given shares and doesn't pay the full value for them, the difference between what they pay and what they're worth will be subject to Income Tax and National Insurance contributions. Considering that Income Tax rates can be as high as 45% for some people, that can be quite a hefty tax bill.
You could consider an 'Enterprise Management Incentive' (EMI) Scheme - a non-risky share option, created by the Revenue, which has tax advantages built in. It allows you to grant options to your employees with the aim of getting all the growth in value of the shares between the date on which the options are granted, and the date on which the options are exercised into Capital Gains Tax, rather than Income Tax. Given that Capital Gains Tax could be as low as 10%, and the individual may have their annual exemption available too, it's a more sensible option.
No. There is no tax on day one, so there is no risk to employees.
EMIs are designed so that the aforementioned tax benefits are gained as long as the exercise price (when the employee acquires his shares) is at least the market value of the shares when the options are granted. So the employee could pay less than that value, but it means there will be Income Tax and NI charges when the options are exercised.
Yes. Because EMIs were created by the Revenue, there is an easy process to follow to get the certainty of knowing what the market value of the shares is at the date of grant, before you go ahead and issue the options.
EMIs are really flexible in terms of when the options can be exercised and the shares can be acquired. Some people, for example, will grant an option because they're aiming for a particular company event when the option will be exercised - maybe the sale of the company, a listing, or a voluntary liquidation. Other people use them so that the options can be exercised on particular dates or in particular periods, so you could use them in that manner. You can also tie performance conditions to them if you so wish.
To use an EMI, there are a number of statutory conditions you must satisfy. The main ones are: 
  • you must have less than 250 employees
  • the employee in question must work at least 25 hours a week in the business
  • there is a limit of £250,000 per person
  • there is also a list of disqualified activities available from the Revenue which are not eligible for EMIs. These include: banking, farming, property development, provision of legal services and ship building.
There is a scheme called a Company Share Option Plan (CSOP) which has also been created by the Revenue and works in a similar way to an EMI. However, an employee can only be granted options for shares up to £30,000 and these have to be held for three years before they can be exercised under the terms of a CSOP.
Here you are moving away from share options and actually awarding shares to your employees, for which they have to give up certain employment rights. The benefits, from a tax perspective, are that £2,000 worth of shares can be given to your employees completely free of tax. Also, as long as the shares issued are worth less than £50,000 on the date they receive them, they can be sold in the future completely free from Capital Gains Tax.
The only real disadvantage comes if the shares you are issuing are worth more than £2,000 because, any value over that will be subject to an Income Tax and NIC charge. For example, if the shares are worth £50,000, the employee will be eligible to pay a 'dry tax' on £48,000.

You could look at hurdle shares - sometimes known as growth, flowering or freezer shares. You would, however, be moving away from Revenue-approved schemes with these. These are shares that are issued with particular rights attached to them and, the idea is, to mirror the tax treatments of an EMI so you benefit from the growth in value after the date you've acquired them. All that growth in value will be liable to Capital Gains Tax.

You need to make sure that when the employee acquires the shares, they don't have the dry tax issue to deal with if the shares are worth a lot but they're not paying for them. It's essential to get the value right and, as they are not Revenue-approved, there is no easy mechanism for agreeing that valuation with them - so they can be a lot more risky.

FCA regulation

In the UK, there is a general prohibition on carrying out most of the activities which make up 'financial services' unless the company is authorised or exempt. The general prohibition is set out in section 19 of Financial Services and Markets Act 2000 (FSMA).

You will have to apply to the Financial Conduct Authority (FCA) for authorisation. The permission needed will vary according to the regulated activity being carried out.

It is likely to have a direct effect on your business plan in terms of the cost of the application fee, any potential regulatory capital required and the length of time it might take to gain the authorisation before you can start providing financial services to your customers.

It is very important because a breach section 19 of FSMA is a criminal offence. Also, contracts entered into in unauthorised business are potentially unenforceable.

If you are concerned and think you might be carrying out regulated business which needs to be authorised, you can take a look at the Perimeter Guidance manual from the FCA which gives guidance on the circumstances under which authorisation is required. You can also get in touch with them through their Innovation Hub.

focus on...

Guides

An introduction to EMI share options

Share options granted under the Enterprise Management Incentive Scheme (usually referred to as EMI options) are a popular choice for SME and start-up companies who want to reward and incentivise employees in alternative ways to simply paying them more amounts of cash.

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Guides

An introduction to EIS and SEIS tax efficient investing

Where a start-up or SME company is looking for external investment, and one or more individuals are looking for investment opportunities which can provide significant tax advantages, it is well worth considering the Enterprise Investment Scheme (“EIS”) or the Seed Enterprise Investment Scheme (“SEIS”).

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Legal updates

Changes to Tier 1- Introducing the New ‘Innovator’ and ‘Start-up' visas

The Home Office recently announced substantial changes to Tier 1 of the PBS.

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Legal updates

Round-up of our key InsurTech deals 2018

Throughout 2018 we have seen corporate transactional activity in the InsurTech sector continue to rise.

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