Common legal missteps startups make

Tapio PekelharingPenn Pekelharing Stroes Advocaten LLP

May, 16th 2013

Fact 1: research shows that you will only remember 10-15% of a presentation you are really interested in

Fact 2: you will only remember 2-7% of this LEGAL (yawn…) presentation...

No worries: I will tell you at the end which 2-7% you should remember

About melawyer (advocaat)/entrepreneur

• Corporate law/M&A

• (European) competition law

• Andersen Legal

• CMS

• Peek Legal

• Amsterdam

• Brussels

• Started/invested in various companies

• Guest Brands & Events

• Marketing/brand activation

• Flex Republic

• Bon Chic PR (startup)

• Maastricht

Current focus:

One of our and my ambitions: helping startups to corporate maturity

Forming the company

How you legally structure the company is especially important to the management and the owners of the company

Decisive factors in your choice of legal structure:

• solo or partners

• responsibilities

• management and decision making

• financing/investors

• continuity

• tax issues

Before we touch on legal structures...

• DON’T incorporate a HOBBY

• It’s a waste of money to spend a lot of money on incorporation if it is still a hobby

• Reasons to incorporate sooner: IP, investors, large risks, employees

What are the common legal structures for startups in NL

• Sole proprietorship (eenmanszaak)

• Partnership (VOF, maatschap, CV, LLP)

• Corporation (BV)

Sole proprietorship: key elements

• Who has ownership? the owner, he/she owns the business IN PERSON

• Who runs the business? the owner

• Profit distribution? all profits for the owner

• What about debts? all debts responsibility of owner IN PERSON

• Legal liability? the owner, again IN PERSON

Sole proprietorship: advantages

• easy formation: do-it-yourself

• low/no starting costs

• direct control of all decisions

• no capital requirements

• favourable tax regime if you meet the criteria (MKB Vrijstelling, Startersaftrek)

Sole proprietorship: disadvantages

• unlimited and personal liability

• continuity is at risk

• less professional appearance

• not suitable for big risks/large investments

• fiscal: make a lot of money and you will pay high taxes via higher tax brackets

Sole proprietorship: must do

Do it yourself!

Partnership: key elements

• Who has ownership? collaboration between two or more individuals or corporations

• Who runs the business? each partner, together equally or whatever you have agreed

• Profit distribution? profit is split between partners equally or agreed variations, depending on time and money invested

• What about debts? depends on the type of partnership, but 9/10 times each partner is responsible for the WHOLE debt!

• Legal liability? depends on the type, most of the times partners together

Partnership: advantages

• no one likes to work alone...

• compensating each other weaknesses

• easy to incorporate

• taxed as personal income, same nice treatment as sole proprietorship

Partnership: disadvantages

• conflicts may arise, especially if you do not have a solid agreement in place

• no legal difference between the individuals and the business/partnership if you participate in person: PERSONALLY LIABLE

• one partner accountable for the other one’s behaviour (fraud, debts, breach of contract)

Partnership: must do’s

• make a good agreement between partners (CHECK: lawyer)

• CHECK: prior non-competes, non-solicitation and other restrictive convenants

• Agree on (1) voting rights, (ii) who’s going to be doing what & how often, (iii) who & when can exit, also INVOLUNTARY (iv) vesting for partners (v) what happens and who has to pay what when the company needs money (vi) conflict resolution.

• This list is definitely not exhaustive...

Limited Liability Partnership

• Interesting UK/US entity

• It is a hybrid: partnership WITH limited liability: this is GOOD

• YES: you can operate via a LLP in the Netherlands

• Was created for “professions”: lawyers, doctors, etc.

• Tax authorities in the Netherlands are indecisive whether it is also applicable to joint ventures

• Worth looking into!

Incorporation (BV): key elements

• Who has ownership? The shareholders. Shareholders do not need to be involved in running the business.

• Who runs the business? The director or the board of directors. They are elected by the shareholders. Really important decisions: shareholders

• Profit distribution? First you have to pay corporate taxes over the BV’s profit. Surplus is for shareholders to decide, leave it in the company or pay out as dividend

• What about debts? In principle: Shareholders are responsible up until the investment they have made. NOTE: director’s liability rules!

• Legal liability? the BV is liable. NOTE: director’s liability rules!

Incorporation (BV): advantages

• Limited liability

• I REPEAT: limited liability

• More suitable for raising money

• Professional structure, trustworthy

Incorporation (BV): disadvantages

• Relatively high costs to incorporate

• Complex structure with administrative burden

• Fiscal wise not interesting when you are not making quite some profits (appr. EUR150.000 to EUR200.00 PER shareholder...)

Incorporation (BV): must do

• Go to a civil notary and establish the BV: mandatory by law

• Create a clear and solid shareholders agreement next to the bylaws of the company. NOTE: this is a lawyer’s job, not a tax advisor, auditor or notary’s

• Discuss everything and agree on everything with the other shareholders. Make sure it is either in the bylaws/articles or in the shareholders agreement. NOTE: small shareholders/investors: different approach...

• NOTE: recently BV law changed in NL, became easier, more flexible to work with

NOTE:

If you intend to raise capital/have investors join you (even if only friends, family or fools), you must properly

structure the company

IP

What is IP?Intellectual property is the bundle of legal rights that arise from the creative genius of the human mind

name, trademark, brand, logo, codes, patent

IP:What are you doing wrong?

• you started developing before you incorporated the company

• you had a friend helping you out with programming/codes

• the domain is registered under your name

• you think that registering a tradename is sufficient to protect the brand

• you were very enthusiastic about the name Tweetdeck for your new company

Contracts

There is so much to be said about contracts. It is really important to get a good set of agreements/contracts

for your business

Basic contract principles• a contract needs an offer AND an acceptance of that offer

• accurately identify the parties (check Trade Register who you are dealing with!)

• establish if the person you are dealing with has a clear mandate to bind the company

• avoid ambiguous payment terms

• make clear definitions

• check and ask for all attachments

• always try to write the first draft of a contract. Not writing the first draft, puts you in a disadvantage

• Try to stick to ONE version of your supply or client contract: resist temptation to customize a contract for every client

• make sure you at least email a PDF of your general conditions

• get a good employee contract in place when it is that time to hire someone

Your advisors need a contract too...

• get an agreement in place before they start to work for you, YES: especially your LAWYER

• Your lawyer should not charge you for: (i) drafting an engagement letter, (ii) multiple lawyers on a conference call, (iii) introduction to an investor, (iv) meals, drinks etc.

So what about that 2-7%?

• Legal matters ARE the right problem to focus SOME of your time on

• It is all fun and games until someone slaps you with a lawsuit

• Keep it simple if it is just you, sole proprietorship

• Discuss and agree with your partners about EVERYTHING

• Always make an agreement with your clients

• Do not start writing contracts, but read and understand every article

• IP: check ownership of codes, trademarks, domains etc.

• If you aim for investors, set up the company properly

• When it seems to get serious with an investor, it is time to CALL A LAWYER

• REMEMBER: the investor’s lawyers are not there to get you a good deal!

Questions?

Penn Pekelharing Stroes AdvocatenTapio Pekelharingtapio.pekelharing@ppsa.nl

: @tpekelharing