Steps to consider for new entrepreneurs & startups
The decision to become an entrepreneur or to venture into a startup company requires careful consideration and meticulous planning. Before embarking on a new venture, it is essential to plan ahead and prepare all necessary documents to avoid future headaches. This article will introduce the necessary steps to consider in setting up a business, be it a company, an enterprise or a partnership, and present both legal terms and agreements to consider beforehand. There is no all-inclusive starter pack for entrepreneurs and startups as every business venture will vary and comprise different needs. As a start, the following are a few necessary steps to think about when starting a business venture:
- Obtain professional advice from the beginning during the planning stages as opposed to only seeking professional advice when a problem arises. Professionals you may want to engage include, but are not limited to, lawyers, accountants, auditors, tax agents, and company secretaries.
- Determine what entity you want to incorporate or set up. There are several choices with advantages and disadvantages, ranging from a private limited company, sole-proprietorship, limited liability partnership to partnerships.
- Determine the shareholding or equity percentages that you and your partners will hold. The form of shareholding or equity percentages will depend on the type of entity you wish to form.
- Determine whether you require any specific industry licenses or any other relevant business licenses. This consideration will solely depend on the type and nature of your business.
- Ensure you have applicable employment contracts in place if you intend on hiring employees or staff.
- Ensure any and all intellectual property assets are registered and protected. In this regard, be sure to enter into relevant Non-Disclosure Agreements with third parties during negotiations or transactions to safeguard confidential information.
Apart from the necessary steps to consider as set out above, it is fundamental to be familiar with legal jargon terms, which entrepreneurs and startups should be aware of when ensuring a successful business. Please take note that some terms below do not apply to partnerships, sole-proprietorship or limited liability partnerships.
1. Articles of Association
- A document that defines a company’s purpose and specifies regulations for the operation as well as the management affairs of a company.
2. Memorandum of Association
- A document that defines the relationship between the company and its shareholders upon its formation which is required during registration.
3. Company Constitution
- The constitution of a company specifies the rules for the management to run a company. Note: Company constitution and Articles of Association are similar. Both the articles of association and memorandum of association form a company’s constitution.
4. Authorised Share Capital
- The authorised amount of share capital the company can issue.
5. Issued Share Capital
- The total issued and paid-up share capital in the company.
- The value of shares issued by a company. In a partnership, equity means the portion of equity, amount or percentage of a partners ownership.
7. Intellectual Property
- Intangible assets in the form of creativity, such as trademarks, patents or copyrights.
8. Ordinary Shares
- Shares in a company which are issued to ordinary shareholders with rights to participate in members’ meetings, vote on shareholders’ resolutions and receive profits/ dividends.
9. Preference Shares
- Shares in a company issued to preference shareholders which carry preferential rights to profits and dividends but have no voting rights on shareholders’ resolutions unless otherwise specified in a company’s constitution.
- Comprehensive checks and reasonable steps to enquire on a business, individual or company, which is usually carried out on prospective buyers and/or target companies to establish its assets, liabilities and evaluate commercial interests.
11. Pre-emption Rights / First Right of Refusal
- A shareholder’s first right of refusal over the issue of new shares in the capital of a company. It is common to find this in a company’s articles of association stipulating that shareholders have a first right of refusal over the transfer of existing shares. Pre-emption rights are usually found in clauses under an option or merger agreement giving investing shareholders a right to maintain their shareholding percentage and preserve voting power in a company by entitling them to purchase a proportionate number of shares in the issuance of new shares.
Essential Legal Agreements
It is advisable to have written agreements for all your contracts with all third parties, agents, between shareholders as well as employees. We set out below a list of basic legal agreements which entrepreneurs and startups should consider (depending on your entity or nature of business):
- Shareholders Agreement
- Partnership Agreement
- Employment Contracts
- Non-disclosure / Confidentiality Agreement
- Service Agreements
- Contract for Sale and Supply of Goods
Specifically for Startups
Startups are businesses that want to grow big with a view to sell or expand eventually. Agreements must be well-drafted to safeguard the startups’ shareholders and investors, as well as to document the agreed terms and conditions for the relevant transaction. Ultimately, some startups grow intending to eventually merge or enter into a joint venture with other companies to raise its working capital. It is pertinent for startup business owners to be aware of the following standard agreements in this regard.
Put Option Agreements
A put option agreement is used where an existing shareholder, a person or company is granted a right (but not an obligation) to sell a predetermined amount of shares for a specific price (either predetermined or determined using a pre-fixed formula) within a specified period as set out under the Agreement.
Call Option Agreement
A call option agreement is similar to a put option agreement; however, this is where a right to buy is granted.
Redeemable Convertible Preference Share Agreement
The terms “redeemable shares” and “convertible shares” refer to different types of stocks. Redeemable Convertible Preference Shares (RCPS) agreements are used to cater for shareholders or buyers to be able to either redeem their shares in a company for cash within a specified period or convert their ordinary shares to preferential or other classes of shares within a specified period under the terms of an RCPS agreement.
Employee Share Option Schemes
An Employee Share Option Scheme refers to an incentive scheme in which employees are offered an option to purchase shares in the company at a specific price either over a specified period of time or upon specified milestones.
A subscription agreement is an agreement between a company and an investor to sell a given number of shares in the company to the investor at a specific price.
Share Sale Agreement
A share sale agreement is a principal agreement in Mergers & Acquisitions transactions. It is an agreement that governs the terms and conditions for the sale and purchase of shares in a company.
Joint Venture Agreement
A joint venture agreement governs the terms and conditions for a joint venture or collaboration between two or more parties. It sets out the duties and obligations of the parties in the joint venture.
Whether you are looking to set up a company, an enterprise or a partnership, the above steps, checklist and definitions should assist you in your journey to become a successful entrepreneur or owning a successful business. It is always best to obtain independent and professional advice to ensure that all legal and financial risks are taken care of for the purpose of avoiding legal disputes in the future.