The "Do-it-Yourself" Entrepreneur and the Start-Up Business

The good old Kiwi “do it yourself” attitude breeds innovative New Zealand businesses which are critical to the country’s economy and its international influence. The advances in online development, hosting and accounting tools allow the process of starting and running a business to be less arbitrary. 

We need to do away with the age old saying ‘she’ll be right mate’, and take the first step in establishing a solid legal foundation for that start-up business.

This overview is derived from the Legal Challenges for Technology Start-ups, Technology Law Conference, the Companies Act 1993 (“CA”) and Securities Act 1978.

The legal establishment of a business

Ownership structure

An important question for start-up founders to consider is the ownership structure of the business.  A founder “pre-nuptial agreement” should be created to avoid a Zuckerberg/Winkleross Facebook litigation situation arising.

When discussing ownership structure, whether as shareholders, directors in governance positions, or independent contractors, individual contributions should be laid out on the table and not treated as a taboo subject.

Openness is the best policy in these discussions and will lessen the burden when the topic arises again in the business’ future, which will undoubtedly be a time when the conversation will be harder to have and the euphoria of the start-up has worn off and been replaced by the talk of money.

Once ownership percentages have been decided then the formal creation of the company can take place. Incorporating the company limits its founders’ liability by separating ownership from management.

Incorporation and maintaining/operating an incorporated company

Advice on what type of company structure is best suited to the business is something best discussed with legal and accounting professionals. At this stage in the process one should also seek legal advice in relation to the extensive requirements of directors under the CA. In particular, the CA requires that companies keep proper records and to ensure that the directors comply with this requirement, directors are responsible for, amongst other things:

  • the establishment of a company register;
  • the maintenance of director registers and share registers within the company register;
  • preparation of directors’ resolutions and shareholders’ resolutions;
  • preparation and filing of annual returns and accompanying resolutions;
  • holding annual director and shareholder meetings; and
  • arranging for annual financial statements to be prepared, and passing appropriate resolutions to be kept on the company register.

A lawyer is the ideal person to be responsible for the company register, and more importantly, to ensure that directors have fully complied with the raft of obligations under the CA.  Accordingly, it is strongly recommended that you engage a lawyer prior to the legal establishment of the business.

What is a constitution and what does it mean?

A start-up company may wish to adopt a constitution which allows flexibility to vary the provisions set out in CA, while providing that provisions in the constitution are not contrary to the compulsory provisions in the CA. If the constitution contains provisions which are contrary to the CA those provisions will be severed and rendered unenforceable.

A company can choose to incorporate without a constitution, the effect of which is that the company is governed by the provisions of the CA.  The constitution is a formal document that is drawn up by the founders of the business and included when registering the company. It sets out the rules for running the company, the rights, powers and obligations of all people involved and sets out clear guidelines. It will contain provisions such as:

  • pre-emptive rights for share issues and/or share transfers;
  • prerequisite requirements for adopting and removing directors;
  • permit dealings which are unauthorised unless the constitution specifically permits them;
  • allows the company to pay for directors’ and employees’ indemnity insurance, etc.

You should engage a lawyer to prepare an appropriate and legally valid constitution or, if you already have a draft constitution, legal advice should be obtained to ensure that your draft constitution is compatible with the CA and includes provisions, in addition to the rules set out above, appropriate to your ownership structure and business as they can vary considerably.

Do I need a shareholders agreement?

We strongly recommend that the shareholders enter into a shareholders agreement. It is important to note that such agreements vary from one business to the next so it is not prudent to simply rely on your friend’s agreement.

The provisions of a shareholders agreement include, but are not limited to:

  • how decisions should be made and approval sought with regard to appointment and removal of new shareholders and/or directors;
  • capital raising;
  • payments of dividends;
  • the issue of new shares; and
  • share sales.

In addition, the agreement will set out key decision-making requirements which keep the business founders in check. A shareholder’s agreement will also set out what can be done in difficult or deadlock circumstances that may arise so as to get the business back on track in relation to the objectives set out in the agreement or wind up the business.

Again, you should engage a lawyer to prepare an appropriate and legally valid shareholders agreement.

Intellectual Property

The realm of intellectual property is vast and sometimes daunting, so to make it clearer and easier to navigate one should seek legal advice when moving forward with a company name, logo, trademark, copyrights and designs, as there are very real risks associated with sitting back and not taking action with intellectual property protection or, where required, registration.  The time for attending to intellectual property matters is at the time you determine ownership structure, incorporate the company, sign a constitution and sign a shareholders agreement.

What intellectual property does the company own at start-up? This is an issue best covered in employment agreements and/or independent contractor agreements which should stipulate that anything which an employee or an individual contractor creates in relation to identified intellectual property belongs to their employer/principal. Seeking good legal advice in this regard will ensure that the identified intellectual property is owned at all times by the company and therefore protected as a valuable asset potentially driving up the value of the business or shares.

In addition, you should consider the international market.  New Zealand is a party to the Madrid Protocol which allows owners of trade mark applications and registration in New Zealand to seek registration in up to 85 countries around the world. This step is highly cost efficient because there are no additional fees (to those paid to the Intellectual Property Office of NZ) paid in the jurisdiction(s) where the intellectual property is to be used.

Investment

It is possible for a start-up business to immediately commence trading internationally but, for the dreams of global domination to come to fruition, one must begin by ensuring that all transactions that concern the business are properly documented and, if agreement can be reached, made subject to New Zealand law and the jurisdiction of New Zealand courts (either exclusively or non-exclusively).  In addition these documents must be correctly signed to make them legally valid and enforceable.

In addition, it may be that you want to enter into an agreement with an investor (foreign or local) so that you can receive that much needed cash injection.  When the time for investment in a start-up arises, a prospective investor will carry out due diligence on the company and usually provide the company with a standard set of requests for copies of financial statements and other information pertaining to its business activities. By keeping good records that are easily managed and of course required by the CA, the company allows the doors to investment and expansion to open with easy access to such documents.  It demonstrates to the potential investor that the company affairs are being conducted in an orderly and well managed way and the legal requirements are being complied with.

Alternatively, you may wish to raise capital using your shares.  Where the start-up wishes to raise capital then legal and accounting advice should be sought, in particular, in relation to seeking investment capital from the public, ensuring compliance with the complex requirements of the Securities Act 1978, Securities Regulations 2009, Securities Market Act 1988 and Financial Reporting Act 1993.  

Comments

Don’t let a start-up business run aground when it comes to establishing a solid legal foundation at the outset of its journey. Through the right legal advice and guidance, what could otherwise be a daunting process is put in perspective. Seeking legal advice will not cost an arm and a leg but instead it will allow a start-up to get the best head start and keep the founders “can do” attitude running long into its future endeavors with a minimised risk to the structure of the venture itself and its capital.

The best value investment that a start-up business can make is to seek good legal advice at the early stages of its development as the whole venture can be taking an unknown step at that stage and be easily prejudiced without that intent.

If you would like further information on any issue raised in this update please contact:

Krystle Gardner, Solicitor

DDI: 09 965 2662

Email: krystle.gardner@clendons-ns.co.nz

 

Alessandra Loi, Graduate-at-Law

DDI: 09 965 2661

Email: alessandra.loi@clendons-ns.co.nz

 

Disclaimer

Further advice should be taken before relying on the contents of this summary. Clendons North Shore Accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material in this summary.