Most technology startups are incorporated as private limited companies. This structure offers several advantages for founders and investors, including limited liability, flexibility in issuing shares, and a well-understood governance framework. When forming a startup company, founders should consider:

 

1. the allocation of shares between founders;

 

2. the rights attached to different classes of shares;

 

3. vesting arrangements for founder equity;

 

4. the company’s articles of association; and

 

5. what the parties would like to happen when the company is dissolved, or the partners go their separate ways.

 

Early decisions about company structure can have significant consequences when the company later seeks capital investment, and if we had a penny for every founder that regrets not setting out the obligations and benefits of the parties before incorporation, it certainly would make a significant pile. One of the most common legal issues faced by early-stage startups arises from poorly documented founder relationships. Founders should, therefore, carefully consider entering into a shareholders’ agreement at a very early stage possibly before or shortly after a company is formed or incorporated. A well-drafted agreement can regulate:

 

1. ownership of founder shares;

 

2. decision-making processes;

 

3. vesting arrangements for founders leaving the business;

 

4. dispute resolution procedures; and

 

5. restrictions on share transfers.

 

Many startup disputes arise because founders did not formalise these arrangements when the company at the point of creating or forming the company.

For most companies, intellectual property is often the startup’s most valuable asset. Startups should ensure that all intellectual property created by founders, employees, or contractors is properly assigned to the company. This is particularly important where the business is based on research or software development. These issues can be especially relevant for companies emerging from research and/or technology environments in the United Kingdom or globally.

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