Key conversations for owners of start-up companies

Questions that are answered by your company’s constitution whether you asked them or not.

Those setting up a business may be aware that it is important to make sure they understand and have tailored their company’s foundational documents such as Articles of Association to work for their business (a prompt to an AI assistant will give you this reply!).

However, in our experience, a big part of the value here is in the conversations between business partners to agree the rules to be documented.  For obvious reasons, these will be different for every company and depend on the business and those involved.  However, we believe the following topics of conversation are key for any start up.

Why is decision making so important?

There are always lots of decisions to be made in the first few years of a business.  As well as fundamental questions such the most appropriate legal structure for the new business there will also be:

• strategic questions to help identify competitors and the business’ unique value proposition
• financial questions such as how the business is to be funded, and
• operational questions about how best to provide products and services.

Making sure that everyone is on the same page about how these decisions are to be made should help give direction to the business, clarity as to everyone’s role and prevent misunderstandings.  All of which can be very important in what can be very busy initial years setting up the business.

Everyone’s situation is different, but owners often find it helpful to categorise decisions: some decisions might need sign off from everyone involved in the business whilst other decisions may be required to be made rather more quickly. 

The expertise of those involved in the business is also something that business owners find helpful to consider in this context.  It may be that, whilst someone is intending to be less involved in the day-to-day activity of the business their contribution to certain decisions will be invaluable.

What about third-party sale?

The question ‘what is the ultimate aim for the company?’ will matter to all those involved, and it is likely that the motivations for setting up the company will have been discussed, even if that conversation was not detailed or in depth.  

Answers to this question might involve any number of things including financial independence, a drive to offer solutions that help consumers or other businesses and provide employment opportunities, or even to have greater control over the way you work, and your lifestyle. 

It is not unusual for discussions to include a possible sale of the business in the future even if such a sale is contingent on lots of other things and that future is still quite a way off.

The key question is often ‘who will need to agree to any sale of the business?’.  The answer might simply be that everyone involved must agree.  However, where there are several individuals involved and each of them has different interests to protect, it might be more appropriate to agree that the company will be sold where key players have agreed to sell.

Should there be processes for transferring shares?

Another important question for those going into business together is what freedoms or restrictions should apply to the company’s shares.

There is a good deal of trust involved in setting up in business together and, typically, where the business is owned by several individuals, they will want the protection that those involved will not change (or at least will not change without everyone knowing what is happening and approving the new owner).

What these freedoms and restrictions should look like very much depends on those involved in the business and the complexity of these rules can vary considerably.  However, as a starting point many owners of start-ups agree that shares may not be held by anyone other than a founder without approval.  If this is the case, it is prudent to consider a mechanism that would allow a shareholder to leave the company, and it is not uncommon to set out a procedure to buy out someone’s shares if they wish to leave the business.  Again, how that procedure works should be something that is adapted to suit the company and the practical realities of everyone’s situation.

Why do company documents matter?

On incorporation, every company will have adopted rules that govern the way the company is to be owned and managed (the company’s Articles of Association) and these rules will be publicly available at Companies House.

For many start-ups these will either be the Model Articles (default rules established by the Companies Act 2006) or standard articles based on these regulations with minor amendments used as an alternative default position by some professionals when setting up new companies.

There is no obligation for companies to adopt different rules and there is certainly a speed advantage in ticking the box to adopt the model articles on incorporation.  However, businesses are far from all being the same and adopting default articles can very much be a case of one size not fitting all.  Whilst it may not register as a massive decision when the company is set up, reality is that in the event of any dispute the Articles are one of the first things that will be considered by any lawyer.  The business’ file at Companies House is also something that any prospective buyer or investor will investigate at an early stage.

Shareholders’ Agreements provide an additional layer of rules agreed between those involved as to how they are to operate the company.  As such agreements are private, this can be a more appropriate place to set out more commercially sensitive matters.  There is no obligation to have one in place, but it can be beneficial to have done so.

Why should we keep it simple?

It is natural for the owners of a start-up to be mindful of the time and costs involved in developing bespoke documents for their company. However, this does not mean that they have to accept the Model Articles as the governing rules.  It is possible to put in place relatively simple documents concentrating on key concerns to give everyone involved peace of mind. 

As the company grows, it is then best practice to review these documents and update them as needed to adapt to the growing business.

The Higgs’ approach

We understand that there is real value in the conversations that take place to determine what the company’s constitutional rules should be and we are experienced in helping facilitate those conversations and clarify the rules that emerge from them.

This helps us to understand our clients and the company rules they believe will work for them.  We believe that ultimately this means that the documents we produce more accurately capture the requirements of the business and those involved in it and are strong foundations for future growth.