United Kingdom

How to successfully implement legal tech into in-house legal teams


The Legal Tech industry is steadily following in the footsteps of its sibling FinTech, generating worldwide revenue of over 17.3 billion USD in 2019 alone. The pandemic has only further contributed to this trend, acting as a huge catalyst in its growth. In-house legal teams have a lot to gain from experimentation in the field, with many Legal Tech projects focussing on simplifying the core legal processes that in-house teams complete every day. 

However, this also means that in-house teams have much to lose during the implementation process. Their smaller scale relative to their company’s chosen counsel, combined with their more selective focus on the core and everyday legal issues faced by the company, means that the imposition of any new process or tool will significantly impact the team, its workload, and its efficiency. 

No in-house legal team, but still interested in the benefits of legal tech?

That’s where Zegal comes in! With tools such as contract automation, contract lifecycle management, and approval workflows, Zegal brings legal tech tools directly to over 20,000 businesses. 

Ensuring legal tech success within in-house teams

With over three-quarters of in-house legal professionals having experienced at least one failed tech adoption project, it is clear that the in-house legal industry has a lot to learn about how to best craft the user experience of the process. 

So how do you ensure success when integrating legal tech into an in-house legal team?T here are three key areas to consider:

  • Selection
  • Implementation
  • Continued support

Selecting the right legal tech

1 in 4 in-house legal professionals cited employee resistance as a barrier to the future adoption of legal tech. Given that 1 in 3 also cited it as a reason why legal tech projects fail, it is clear to see how a dangerous cycle appears. Once an employee has suffered one failed legal tech implementation, they are more likely to be resistant to trialing another, resulting in a lower chance of success for future projects. 

To help combat this resistance, getting employees of all levels involved in the selection process is critical. The most successful legal tech projects are often those that aid the most mundane of processes because these processes usually take the most time cumulatively and ultimately present little financial return for the company.

Engaging with employees to discover these processes and how they are currently conducted will mean they are more likely to advocate the legal tech. Successful adoption of legal tech tools could boost team morale, further improving productivity and employee retention. 

Implementation

While most tools will aim to be somewhat self-explanatory, and employees will be able to pick them up as they work, it is often the case that tools won’t be used to their full potential unless adequate training is given.

Training also presents a further opportunity for employee engagement, especially where custom-built tools are being implemented. 

Continued support and development

Gone are the days when a company could upgrade to the newest version of Windows before breathing a sigh of relief that they were sorted for the next several years. Technology is now patched, developed, and upgraded far more often, and legal tech is no exception. 

Asking what more the tool could do or how it could do what it is currently doing better will help shape future development goals. 

Now is a great time to turn to legal tech

While there are risks of failed legal tech integration, the potential benefits are far greater. Equally, as the field grows, adoption will become imperative.

Considering the process of how to implement legal tech, before embarking on it, will help to ensure success.

 

What should be included in a UK employment contract?


employment contract

This article does not constitute legal advice. Professional employment law advice should be sought where necessary. 

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Hiring additional and replacement employees becomes more important as businesses grow and develop. When making the decision to hire, the more important aspects in any business owner’s mind are likely to relate to the marketing and interviewing process.

But this is not where the considerations should end. Attention should be paid when creating an employment contract, as changes cannot be made unilaterally by the employer. As with any contract, both parties must agree on alterations (the employer and employee).

In some cases, this will also involve negotiations via a trade union or employee representative. Therefore, the cost and time involved in making any changes are significant, and success is not guaranteed. 

Consequently, it’s essential to make sure that the employment contract works for both parties when it is originally signed.

What does the law say?

Employers don’t have to issue employment contracts by law. The only requirement is that employees are provided with a ‘Written Statement of Employment Particulars’ within two months of the employment commencing.

This is separate from any employment contract, laying out only broad details of the employment terms, and can be changed by the employer acting alone.

However, due to their broad scope, employers may struggle to later rely on the provisions of the Statement. Therefore, it is always advisable to generate an employment contract alongside the Written Statement- ultimately, it makes things more transparent for both parties.

Zegal can help with your employment contracts

With Zegal’s Document Builder tool, you can have a legally-binding employment contract tailored to your business needs within minutes.

Employment contracts are just one of many templates available on the Zegal platform, allowing you to take care of all your contracts in one place while having access to the team of Zegal lawyers for advice when necessary.

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Key components of a contract of employment

Basic details

A lot of these can be lifted from the Written Statement of Employment Particulars, such as:

  • Names of both the employee and employer
  • Job title (including the classification of employee- this is important as employees are given different rights than contractors, for example)
  • Employment start date (and end date, if known)
  • Hours and location of work 

Job description

While you may have already included the job title, a description of possible duties can also be useful in clarifying what is required from the employee. These duties can be altered by the employer, given an employee’s duty to be adaptable. However, any alterations or directions to act outside of the job description must align with the employer’s duty to maintain mutual trust and confidence. A general ‘catch-all’ clause can be useful to make this element clear, i.e., the duties will be X, Y, Z, plus any other duties which are reasonably required of the employee by the employer. 

Compensation and benefits

This is an opportunity to demonstrate the value placed upon the employee clearly and could be the difference between them choosing to leave or stay with the company. Include all of the benefits offered alongside the core salary, such as private healthcare, bonuses, and employee share schemes. While the details of these benefits can be provided elsewhere, a clear list of the types of benefits offered will help persuade employees to join the company. 

Paid leave entitlements

Similarly to details about benefits offered, this section can market the company. Clarity on holiday, parental, and sick leave entitlements is helpful for employers to provide employees with a more concise overview of leave entitlements. For this reason, it may also be worthwhile to include basic details about how any paid leave is calculated and the process involved in booking it (if applicable). 

Pensions 

Given the advent of the automatic enrolment system for employees in the UK, this section of an employment contract can be vital. Details of pensions eligibility and the type of scheme offered may be too lengthy for inclusion in the employment contract itself, but a simple statement of whether the employee will be eligible for enrolment, the name of the scheme, and where more information can be found will act as a useful signpost for employees looking for the pension options available to them. 

This must be given as part of the Employment Particulars Statement, so it can be transposed into the employment contract if needed. While this might be repetitive if it’s listed elsewhere, employees are more likely to check their contract for information relating to their employment. 

Confidentiality provisions

Confidential information can be protected from disclosure by an employee during their employment, but it becomes more difficult post-employment. Without an added provision, only trade secrets are protectable post-termination of an employee’s employment contract. This is a high threshold to meet, and given the importance of confidential information to many businesses, this risk should be taken seriously.

Confidentiality provisions should be considered carefully in any employment contract to encompass any confidential information the employee may have access to. This can be a thorny area due to the need for carve-outs (such as when disclosure is required by law), so professional advice should be sought if this is an area of particular importance. 

Termination and disciplinary procedures

It may seem pessimistic to consider what will happen when things go wrong or when the employment relationship ends, but it is essential to be clear from the outset.

Consider the conditions either party must meet before the employment can be terminated, any restrictions on how the employee can act post-termination (e.g., anti-compete or anti-solicitation provisions), and details of where disciplinary and grievance procedures can be found. 

This can be problematic for both parties, especially since the employer/ employee relationship is presumably already fractious when issues arise., so a balance between party interests is vital.

While an employer will be keen to protect their interests for the least cost possible, the brand image should also be considered, especially when providing severance packages or restricting an employee’s future behaviour.

Tax issues of transferring shares


tax issues

If you are considering transferring shares, either as a prospective seller or buyer, you likely have plenty on your mind. From evaluating the reasons behind your decision to how to go about the transfer process, transferring shares can be a complex process. But there’s one aspect you really can’t afford to forget: Tax issues.

While tax issues of share transfers fall mainly on the seller of the shares, there are also consequences for the buyer, making the tax issue important to all parties involved.

Keep reading to find out:

  • Who has liability for what tax
  • Current tax rates
  • Potential exemptions and reliefs lessen or even negate the tax burden incurred upon a share transfer. 

This article is intended as a guide only. Professional advice regarding tax issues should be sought before transferring shares. 

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Tax implications for the seller of shares where the seller is an individual

If the seller of the shares is an individual, the sale of the shares will likely give rise to a chargeable gain subject to Capital Gains Tax (‘CGT’). The rate of tax applied to the gain will depend on the seller’s income tax band. 

Generally, basic rate taxpayers will pay CGT on any gain from the sale of shares at 10%, while higher and additional rate taxpayers will pay 20% on any chargeable gains. 

To calculate the amount of chargeable gain made on the sale of the shares, any allowable expenditure is deducted from the consideration received.

Allowable expenditure includes the costs incurred when selling the shares (for example, legal costs of executing the stock transfer forms) and any initial and subsequent expenditure associated with the shares. Initial expenditure encompasses the base cost of the asset to the seller and any incidental costs of acquiring the shares.

Subsequent expenditure is more limited, including only sums involved in establishing, preserving, or defending title to the shares and any expenditure associated with increasing the value of the shares. 

Share sales between connected persons

The sum of the consideration received by the seller will not be used to calculate the chargeable gain in two circumstances: when the sale is between ‘connected persons’ (meaning any relatives, spouses of relatives, companies under common control, or business partners) or between unconnected persons but at an undervalue (noting that this must be a genuine undervalue and not merely a bad bargain on the part of the buyer). Here, the market value of the shares at the time of their sale is used instead of the sum of the consideration received. 

Another critical aspect to note when considering the amount of any chargeable gain here is whether the seller retains the right to additional consideration upon specified eventualities (commonly called an ‘earn-out’ clause). This further amount may result in additional tax liability further down the line, so professional advice should always be sought before agreeing to such a clause.

The good news is that several CGT exemptions and reliefs are available to individuals. 

Annual exemptions

Firstly, there is the Annual Exemption which for 2021/22 stands at £12,300. The simplest of tax reliefs, this allows individuals domiciled in the UK to make chargeable gains of up to £12,300 without incurring any CGT liability.

Gifting shares

CGT liability is removed entirely when the sale of shares is between married couples, civil partners, or is a gift to a charity. The catches here are that couples have to have lived together at some point in the last year, and shares must be gifted to a charity instead of merely sold at an undervalue. For most people looking to benefit from this exemption, these are easy requirements to meet, and therefore CGT is often escaped from using this mechanism. 

If the shares are given away as a gift (rather than merely being sold at an undervalue), Gift Hold-Over Relief may apply. While this removes CGT liability on any deemed gains for the seller, it will result in a greater liability for the recipient of the gift when the shares are sold again (unless they also utilise this relief).

This is because the original base cost for the seller is held over to act as the buyer’s deemed base cost, meaning that their overall gain will be increased on any future sale. For this reason, both parties have to make the joint election for Hold-Over relief to apply. 

Death of share seller

Another example where CGT liability is removed comes when the share transfer arises as a result of the death of the seller. Just as in the couples exemption detailed above, no chargeable gain is deemed to have been made. The literal gain made on the transfer of the shares to the personal representatives/ executors of the seller’s estate is said to benefit from a ‘free uplift on death’.

Capital loss

CGT liability may be significantly lessened where an individual has also made a capital loss in any given year. As any liability is levied against total chargeable gains made in any given tax year, any corresponding capital losses will serve to reduce this overall figure. 

Business Asset Disposal Relief (BADR)

Finally, the rate at which CGT is levied on individuals may be lowered to 10% regardless of the income tax status of the seller where Business Asset Disposal Relief (‘BADR’, previously known as Entrepreneurs’ Relief) or Investors’ Relief (‘IR’) apply. These are more complex reliefs, and specialist tax advice should be sought regarding them.

Generally, BADR is applicable when the seller is both a shareholder and employee of the company, and IR is used by sellers who have held shares in unlisted trading companies for at least three years prior to the sale. Both reliefs are subject to a lifetime limit for each individual, which currently stands at £1m for BADR (noting that this was higher in previous years, meaning that some individuals have benefitted from BADR for sums greater than this) and £10m for IR. 

Tax implications for the seller of shares where the seller is a company

As a company, any financial gain made on the sale of shares will be subject to Corporation Tax, which currently stands at a rate of 19%.

‘Company’ includes limited companies, most unincorporated associations, and any foreign companies with a UK physical presence.

The amount of chargeable gain here is found by subtracting any allowable expenditure, indexation allowance, and any applicable capital/ trading losses from the sale proceeds.

Allowable expenditure bears the same definition as for individual sellers (see above). While indexation allowance was abolished in 2008 for individuals, it still applies to corporate sellers, albeit with decreasing value given the freeze on the RPI factor used in the calculation since 2018

Similarly to individual sellers, it is important to note that any ‘earn-out’ clauses may also result in additional tax liability for corporate sellers. 

While such clauses may sound like a good idea, it is never pleasant to be hit with an additional unexpected tax bill further down the line, especially given that many of the exemptions and reliefs detailed won’t apply to this additional liability. 

Substantial Shareholding Exemption (‘SSE’)

For corporate sellers, the most important exemption to corporation tax arising on share sales to know is that of the Substantial Shareholding Exemption (‘SSE’).

If the shares are in a trading company, have been held by the seller for at least 12 consecutive months in the six years prior to the sale, and represent at least 10% of the issued share capital of the company, SSE automatically applies, and all corporation tax liability arising from the share sale is completely negated. 

If SSE does not apply to the sale, it is worth considering whether there is a ‘bona fide’ commercial reason for any of the price paid for the shares to be in paper form (for example, in loan notes or in shares in a corporate buyer).

If there is such a reason and the shares being sold represent at least 25% of the issued share capital of the company, then either holdover (in the case of consideration in the form of shares) or rollover (where the consideration is in the form of loan notes) relief may apply to the sale, enabling the seller to defer any tax liability due on this part of the consideration until a later date. 

Deducting trading losses

The ability to deduct capital or trading losses from any chargeable gain arising on the transfer of shares can significantly reduce the overall corporation tax bill due. To set off a loss, include the relevant details in the Company’s Tax Return

Trading losses can be set off against chargeable gains made in both the same account year and against gains made in the previous accounting year (provided that the company has carried on the same trade across both years).

Note that there has been a temporary extension to how long trading losses can be carried back from one year to three years for losses made in the accounting periods ending between 1 April 2020 and 31 March 2022 as Covid-19 relief measures.

Losses must be offset against gains made in later years before being carried back further, and losses carried back past one year are subject to a £2 million cap. 

Offsetting trading losses

Trading losses unused to offset gains made in the previous year(s) will automatically be carried forward to offset gains of up to £5 million (the ‘Deductions Allowance’) and 50% of taxable profits above this amount (the ‘Loss Restriction’) generated during each accounting period. 

However, these limits apply to offsets by both trading losses and capital losses collectively. Equally, if the company is part of a group of companies, these limits apply to the whole group and not just to each individual company.

The good news for group companies is that trading losses can often be transferred between companies within the group, allowing the company selling the shares to offset any losses made by another company within the group and lower the tax liability arising from the share sale in this way. If the test for a company being deemed as part of a group for tax purposes is not met, consider whether Consortium Relief may be applicable instead. 

The rules concerning offsetting capital losses (such as losses made on previous share sales, for example) differ from those governing trading losses. Any capital losses made by a company can be set off against any capital gains arising in the same accounting period, but the losses cannot generally be carried back to gains made in previous years.

Capital losses can be carried forward indefinitely until the loss is fully offset; however, a claim must be made to HMRC within four years to crystallise the loss. If the capital losses are carried forward, they are subject to the Deductions Allowance and Loss Restriction detailed above. 

Finally, it is also possible to offset any terminal losses or property income losses. These are more specialised, and professional advice should be sought if these reliefs are being considered.

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Other tax implications

While CGT and Corporation tax are the two most notable taxes encountered during the share transfer process, you should also be aware of Stamp Duty/ Stamp Duty Reserve Tax and Inheritance Tax. 

If the share transfer is electronic, Stampy Duty Reserve Tax will be due; if the transfer takes place using stock transfer forms, Stamp Duty liability will arise if consideration for the shares is over £1,000. The current rate of both these taxes stands at 0.5%.

While legislation does not state which party is responsible for this liability, it is usually the buyer who pays any sums due. This is because it is the buyer who primarily suffers from a failure to pay the tax. For example, the company secretary can refuse to update the Register of Members and will not issue a share certificate unless the tax is paid and the stock transfer form is duly stamped. 

Inheritance tax is a complicated issue by itself, and its application to the transfer of shares is no exception. The most important point of application here concerns Potentially Exempt Transfers (‘PETs’).

The transfer of shares during a person’s lifetime to another individual acts as a PET, meaning that inheritance tax will be charged if the seller dies within seven years of making the transfer.

Taper relief may be applicable if the seller’s death comes between three and seven years after the transfer. However, the potential impact of inheritance tax becoming due is still an important consideration when considering a share transfer. 

How to use shares to incentivise employees at a UK startup


Allocating shares to a startup team

A key reason for joining a startup that early-stage founders and first hires often cite is the excitement of being a part of the next rocket ship. 

Working for a startup typically means personal sacrifice and losing the security of a higher-paying role with established companies.

The dilemma of the founder or early founding team is how to incentivize additional core founders and build a highly skilled team by sharing this potential growth.

For a new company with only one shareholder, the simplest way to reward successful new hires is to give them shares. It is a straightforward process and involves minimal paperwork to issue shares to the employee and update the company register to add your new shareholders.

Zegal can help you issue shares to your team. Get in touch with us.

The benefits of your team becoming shareholders in the company are often psychologically important. Shares unite the team as ‘founders’, which helps foster an owner mentality, creating goodwill that fuels the startup vision.

Awarding unrestricted shares tends to be preserved for the earliest members of the founding team, who are then locked in to see the journey through. They are ‘on the bus’.  

The drawback of this approach is that, while the team is anchored by share ownership, any team members leave do so with their shares. Nothing ties share ownership to their employment with the company, and this level of risk is naturally not appropriate for every worker.

Protect your shares using forward vesting

To countenance the risk of staff leaving with shares, it is common for early-stage companies to vest shares.

Vest means to award a specific number of shares to an employee, but over a specified period.

Example: Rather than awarding 1% of the company’s shares today all in one go, Sarah is asked to work for the company for one year, following which half her shares will be awarded. The other 50% are given over the next two years.

 

shares

 

Share vesting has the obvious benefit that if Sarah leaves within a year for any reason (from performance issues to simply not wanting to work at the startup anymore), she does so without any shares. If she leaves after 12 months, she does so with half her shares. 

Awarding shares like this are often referred to as restricted shares. Sarah does not own the 1% outright, and she will need to work for the company for at least three years to own them all.

Companies typically set out the restrictions in a share vesting agreement which may be quite detailed but typically govern how the employee earns the restricted shares, for example, by hitting certain work-related milestones, time with the company, and seniority. There are also restrictions on what happens to the employee’s shares if they leave the company earlier than planned.

The company ordinarily will not want to risk employees leaving early with shares or, worse, taking them after a bad performance. So it is common to see a “good and bad leaver” provision in share vesting agreements. These provisions handle situations in which employees are let go for poor performance or resign early, with differing economic outcomes for the employee. To learn more about share vesting agreements, please read this article.

When an employee receives shares, the shares will ordinarily be treated as income and taxed in the UK.

Contact Zegal if you need individual or company advice on restricted shares.

In addition, there is usually a tax event when the shares are actually sold, and the tax paid at that time is capital gains tax (CGT). These taxable events can surprise early-stage entrepreneurs who find that a significant portion of their expected windfall is taxed. This is especially so in startup companies that grow incredibly quickly, and the share value increases exponentially.

Reverse vesting of shares for tax purposes

After vesting, there is usually a tax event when the shares are actually sold, and the tax paid at that time is capital gains tax (CGT). These taxable events can surprise early-stage entrepreneurs who find that a significant portion of their expected windfall is taxed. This is especially so in startup companies that grow incredibly quickly, and the share value increases exponentially.

To address this situation, startups can use reverse-share vesting. Although complex sounding, this can be quite simply understood using the same example as above. 

Example: Sarah is awarded 1% of the shares in the company, and again she will receive half after 12 months, with the remainder over the next two years. However, with reverse vesting, Sarah receives the full amount of 1% of her shares on day one. The company then has a right to take back her shares (often described as a clawback) which begins with a right to take all the shares back; reduced to a right to take back only 50% of the shares after 12 months, and then to zero after the full vesting period. 

 

shares

 

In this way, the same mathematical position is achieved, insofar as Sarah receives 1% of shares in the company over three years, only this time, she receives them all at the start. 

Why use reverse vesting?

The idea behind this structure is that the startup’s shares should be at their lowest value in its earliest years. Hence, if an employee receives shares in a drip-feed over a more extensive timeframe, the potential for income tax increases dramatically as the value of the shares awarded does each year.

By making the legal transfer on day one at the company, the employee benefits from the award with a low value and could benefit from the lower tax.

Navigating the tax implications of vesting shares

To benefit from reverse vesting, you will need to arrange for your startup and the employees to enter into what’s known as a section 431 election, which is filed with HMRC.

The effect of this election is that no tax is paid by the employee on the date the shares are awarded. It can reduce the tax payable to only capital gains tax (CGT) (at the Entrepreneur Relief level of 10%, payable on the gain in value when the shares are sold). This election must occur within 14 days of the share vesting agreement being signed.

Zegal can assist you and offer individual and company advice on a section 431 election. Contact us here

It is worth noting that from a tax perspective, for pre-seed or pre-revenue startups (if not fundraising), giving shares to the team at a nominal value does not create any of the above tax implications since the shares have no value at that time.

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What is the difference between shares and share options? 

When you give your employees shares, they immediately become shareholders. They now wear two hats: As an employee and a shareholder with all the rights that come with being a company shareholder, for example, rights to a dividend, voting rights, and the growth in financial value.

A share option (generally referred to as an option) is different and is the right to buy shares in the future. Giving your employees options means they could be shareholders at some future time, but for that to happen, they would need to convert their options into shares.

Converting options into shares is known as ‘exercising’ the option. This mechanism allows an employee to acquire shares at some point in the future by ‘exercising’ the option at a price set at the award date. 

The ability to exercise the option is set out in their option agreement. It is likely contingent on the employee hitting certain employment milestones or the company achieving a landmark event such as significant fundraising, a trade sale, or an IPO. 

Share schemes can be split into those that have received HMRC approval and benefit from favorable tax treatment and unapproved schemes (which, as the name suggests, HMRC has not been notified of). The tax position (which primarily impacts the employee) when they exercise their options varies depending on which scheme is adopted. We will focus on the difference between the tax-advantaged EMI Scheme and unapproved schemes.

Enterprise Management Incentives (EMI Scheme): 

EMIs are tax-advantaged share options. Under the share option plan, employees are allowed to acquire shares in the company within a specified time period and at a fixed price, set up to minimize employee tax. There are strict criteria for setting up an EMI Scheme, but most early-stage startups can satisfy these:

Qualifying companies 

EMI is available to companies with gross assets of £30m or less. In a group, the gross assets test is applied to the group.

The company must carry on a qualifying trade, and most tech companies usually qualify. Examples of trades that do not qualify include leasing, farming, financial activities, and property development.

If you have a group setup (with a holdco), EMI share options must be granted over shares in the parent company (the holdco) and at least one of your subsidiaries must carry on the qualifying trade.

Your startup must not be under the control of another company. (However, the parent company of a qualifying group can grant EMI options to group employees.)

Qualifying options

Options must be granted to employees or directors over ordinary shares that are fully paid and not redeemable. The shares can be subject to restrictions.

  • Only EMI options on up to £250,000 worth of shares per employee qualify for EMI.
  • Options can be granted at a discount or nil price, but this usually negates the tax advantages.
  • Options must be capable of being exercised within ten years.

Eligible employees

EMI options can only be granted to employees who are required to work at least 25 hours a week, or, if less, at least 75% of their working time must be for the company.

Employees with a ‘material interest’ of more than 30% of the share capital before the options cannot be a part of the scheme.

Tax considerations

The company pays no tax on EMI options. Because options are not considered ‘readily convertible assets’, they will not ordinarily be regarded as earnings for NICs (so no charge to the company or employee).

Valuing your startup to reduce your team’s potential tax liability

Agreeing on the company’s value with HMRC (the taxman) when the EMI options are granted gives certainty that no income tax charge will arise. 

If the options are granted under an EMI scheme, and the exercise price is at least equal to the market value of the shares when the options are granted, then no income tax will be payable on either the grant of the options or on the exercise of the options.

If the options are granted at an exercise price below the current market value of the shares, there will be no income tax on the grant of the options, but employees will pay income tax on the exercise of the options.

Income tax will be charged on the lower market value of the option shares at the date of grant or the date of exercise, less the total price actually paid for the shares.

Entrepreneurs Relief at the sale of shares

The second key advantage of EMI shares is that if the employee has held the shares for 12 months or more, any capital gain made on the sale will be taxable at 10% (a reduced rate for entrepreneurs) rather than at 28%. 

As with share vesting arrangements, there is a large degree of flexibility regarding the conditions of the option award, including when the employee may exercise the option and acquire the shares, but these must be specified in the option agreement. They can vest immediately or after a certain period, perhaps after certain performance conditions are met. A common and popular condition is that options only vest immediately before a trade sale, IPO, or major fundraising event.

Example: Noah is granted 10,000 options at an exercise price of £5 per option. After two years, Noah exercises his options and pays the company £50,000 (10,000*£5). The actual market value of the shares in the company is now £20, so Noah now owns a value of £200,000 shares (10,000*£20). The £150,000 increase is not liable to tax or NICs because the options are granted through an EMI scheme. If Noah sells his shares now for £200,000, he will pay CGT at the reduced 10% on the capital gain because he qualifies for Entrepreneur Relief.

Unapproved employee share option schemes:

An unapproved option scheme involves granting share options that have not received HMRC approval. It can be used in any situation where the criteria for the EMI scheme cannot be met.

Ordinarily, in the context of a startup, this is likely because either the plan requires much more flexibility than the EMI scheme permits; the number of options is above the EMI threshold; or the individuals being issued options can’t satisfy the criteria for ‘employee’ under that scheme, either because they are not working sufficient hours or are not actually employees. So this scheme can, of course, still be of tremendous value to incentivise consultants, advisors, or individuals outside of UK tax.

There is not usually any income tax due when the option is granted under an unapproved share option scheme. However, there will always be a charge when the options are exercised. Naturally, then for UK taxpayers, this is significantly less appealing than using an EMI scheme. 

On the exercise of an unapproved option, the employee will face an income tax charge based on the market value of the shares at the time of exercise, less any amount paid for the options and on exercise (if anything).

In contrast with an approved scheme, the tax charge arises in the year of exercise of an option and not on the subsequent disposal of the shares. This means the employee may not have the funds to pay the income tax liability.  

An employee will usually be subject to capital gains tax at their applicable rate up to 28% on the disposal of the shares in the normal way. The amount of the chargeable gain is the difference between the disposal proceeds and the price paid.

Example: Noah is granted 10,000 options at an exercise price of £5 per option. After two years, Noah exercises his options and pays the company £50,000 (10,000*£5). The actual market value of the shares in the company is now £20, so Noah now owns a value of £200,000 shares (10,000*£20). The £150,000 increase is liable to tax and NICs because the options are granted through an unapproved scheme. If Noah sells his shares now for £200,000, he will pay CGT on the gain at a rate up to 28%.

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How does Share Vesting work?


If you’re here, you’re likely wondering how share vesting works. In a nutshell, share vesting is the process by which a company gives its equity to its employees or consultants as a means to keep them with the company for a period of time and incentivize them to reach certain established performance goals.

Share vesting is often used when a senior employee or an important advisor or consultant comes on board.

What exactly does share vesting mean?

Share vesting means the company gives its shares to an individual upfront and the shares are subject to the company’s right to buy them back. These shares are known as “unvested shares”. The buyback right extinguishes over time (or upon fulfillment of certain conditions).

The shares that are released from the buyback right are known as “vested shares”. This mechanism is sometimes known as “reverse vesting”, as opposed to the grant of a share option which is “forward vesting” (check out how a Share Option Plan works by clicking here).

Share vesting enables a senior employee or an important advisor to have equity immediately upon coming on board, but the company still retains control over those shares by way of a right to buy back and, in this way, the company keeps the employee or advisor on board until the end of the vesting period. This is how share vesting works.

share vesting

How Share Vesting works

Step 1: Check your company’s Articles of Association/Constitution

Check if the constitutional document of the company restricts the buyback of its own shares. If it does, you may build in some appropriate mechanisms in your Share Vesting Agreement, or you may consider another form of rewarding your team (for example a Share Option Plan).

Step 2: Create a Share Vesting Agreement

Create and sign the Share Vesting Agreement. After signing, the following will take place:

  1. The employee/consultant pays for the shares on the “Purchase Date” that you set in the agreement;

  2. On the Purchase Date, the company secretary issues share certificates in the name of the employee/consultant and he then becomes a shareholder of the company. The numbers of the share certificates and the number of shares covered by each certificate should match the vesting schedule;

  3. The employee/consultant signs a document known as a “Share Power” and delivers this document to the company secretary;

  4. The company secretary keeps the share certificates in the name of the employee/consultant and the Share Power in escrow; and

  5. When shares are vested (i.e. released from the company’s right to buy back) according to the terms of the Share Vesting Agreement, the share certificate in respect of that part of the shares will be delivered by the company secretary to the employee/consultant.

What is a Share Power?

A Share Power is a document in which the employee/consultant gives his authorization to transfer his shares to the company. It is only used if and when the company exercises the buyback right (which may or may not happen). Some information in the Share Power has to be left blank and can only be filled in by the company when it exercises the buyback right.

share vesting

Step 3: The share recipient pays for the shares and signs the Share Power Agreement

The employee/consultant pays for the shares on the “Purchase Date” that you set in the agreement.

In addition, the employee/consultant signs a document known as a “Share Power” and delivers this document to the company secretary.

Step 4: The company secretary issues and holds on to the share certificates

Also on the Purchase Date, the company secretary issues share certificates in the name of the employee/consultant who then becomes a shareholder of the company. The number of share certificates and the number of shares covered by each certificate should match the vesting schedule.

The company secretary keeps the share certificates in the name of the employee/consultant and the Share Power in escrow.

This is how share vesting works. However, there are a few more options available.

Optional: Exercise of the buyback right

If the employee/consultant leaves the company, any unvested shares will be subject to the company’s right to buyback. (Note that the vested shares are not subject to buyback but may be subject to the call option. See Step 4 below.)

The company may exercise its buyback right for three months from the date the employee/consultant leaves the company. The buyback right is deemed to be automatically exercised by the company upon the expiry of the three-month period. This is unless the company notifies the employee/consultant that it does not intend to exercise the buyback right.

If and when the company exercises the buyback right, the company needs to pay the buyback price for the shares (which is the same price that the employee/consultant paid for the shares in the first place) to the employee/consultant. Following this, the company secretary takes the necessary steps to make the transfer effective.

After the buyback, under Hong Kong and Singapore law, those shares will be regarded as canceled. Make sure the company secretary makes the necessary filing with the Companies Registry/ACRA within the applicable statutory timeframe after the share buyback.

Optional: Exercise of the call option

When creating the Share Vesting Agreement, you may opt for a “call option” to be put in place. This call option enables the company to do one of two things:

  1. Buyback all vested shares at fair value; or

  2. Convert all vested shares to non-voting shares (i.e. the employee/consultant, being the holder of the vested shares, can still receive dividends from the company but has no say in the decision-making of the company).

The company may exercise the call option for six months from the date when the employee/consultant leaves the company.

The fair value of the shares is determined by the auditors of the company or an independent firm of accountants.

Conclusion

Now you know how share vesting works. All you need to do is get yourself a share vesting agreement, some solid employees to vest shares to, and you’re good to go.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

ABOUT ZEGAL

Zegal is the end-to-end platform for the legal smaller companies need.

Our story

Zegal was founded in 2014 by lawyer friends Daniel Walker and Jake Fisch. Having been a part of the system that preserves quality legal advice only for those that can afford it, the two were determined to build a model that delivers the ‘corporate law firm’ experience to small businesses.

Today Zegal is the world’s only end-to-end platform for smaller companies to create, negotiate, and sign both the simple, and complex contracts they need to run their business, with expert legal advice, 100% online every step of the way. Since our launch, we have helped more than 20,000 companies close commercial contracts, run leaner HR teams, and enter new markets. You can use Zegal for your company in the UK, Australia, and across Asia. Make your legals simple.

READ MORE: UK Startups: Essential Legal Documents

FURTHER READING: Vest Shares to an Employee or Consultant

DOCUMENT: Share Power

Company Administration


INTRODUCTION

When a company becomes insolvent or faces financial difficulties, its business and assets will usually be controlled by an insolvency practitioner. It is often central to determine whether a company is insolvent, as consequences under insolvency law flow from that.

The Insolvency Act (IA), 1986 does not define insolvency itself but rather expresses the concept in the phrase “unable to pay its debts”. Under section 123 of the IA 1986, a company is deemed unable to pay its debts, if:

  1. It fails to comply with a demand for payment, in the prescribed form (a statutory demand) for a debt of over £750;
  2. It fails to satisfy enforcement of a judgement debt;
  3. The court is satisfied that the company is unable to pay its debts as they fall due (the cash flow test); or
  4. The court is satisfied that the liabilities of the company (including contingent and prospective liabilities) exceed the assets of the company (the balance sheet test).
Company Administration

If a company is ‘unable to pay its debts’ under any of the above tests, a creditor may petition for the company to be placed into compulsory liquidation. The same tests apply to determine whether administration proceedings can be commenced.

The IA 1986 provides four procedures for companies in financial difficulties, one of which is Administration.

What is company administration in the UK?

Administration orders were introduced for the first time by the Insolvency Act 1985. They were intended to be an alternative to immediate liquidation and to enable a company to achieve a more advantageous realization of its assets than would be obtained on liquidation. A petition for an administration would block winding-up petitions by other creditors (a moratorium). The problem was their cost and complexity, as the court had to be satisfied that the company was, or was likely to become, unable to pay its debts.

The Enterprise Act 2002 made significant changes to the administration procedure, enabling the appointment of an administrator, even without petitioning the court, thus making access to the procedure easier, faster and fairer. Those holding floating charges over some or all of the company’s property (e.g. a bank) can apply to appoint an administrator, as can the company itself or its directors.

In all cases, the administrator must provide an opinion stating that the statutory purpose of the administration, which is set out as a hierarchy of objectives in the IA 1986, is reasonably likely to be achieved. 

What is the objective when a company goes into administration?

The main purpose and primary objective of the company administration is the survival of the company as a going concern. Only if this objective is not reasonably practicable, or does not produce the best result for the creditors, does the second objective apply. 

The second objective is to achieve a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration. An example of when the second objective might apply is where the company is in a position to continue trading until the business (or part of it) is sold as a going concern. 

Only if the second objective is not reasonably practicable, and it does not unnecessarily harm the interest of the creditors as a whole, does the third objective of realizing the company’s property for the benefit of one or more secured or preferential creditors apply.

What happens when a company goes into administration?

The control of the company is passed to the administrator when the company goes into administration. The administrator must  be a licensed insolvency practitioner. The administrator will notify creditors and Companies House of his appointment by writing to them. The notice of his appointment will also be published in the Gazette.

The main purpose of the administrator is to try to stop the company from being liquidated (wound up). If this is not possible then they will try to satisfy the creditors as much as possible from the company’s assets. 

Within a period of 8 weeks of their appointment, they have to prepare and write a statement to the company’s creditors, employees and Companies House. Their statement must explain their plan they wish to undertake to repay debts, the current status of the company and their anticipated outcome. They must invite them to approve or amend the plans at a meeting.

What is the benefit of company administration?

One of the main benefits of the company administration is that the company is protected against any legal actions from creditors, including the issuing of a winding up petition by placing the moratorium around the company. This saves the company from any threats by the creditors during the administration period. 

In addition to this, no steps may be taken to enforce security over the company’s property except with the consent of the administrator or the permission of the court. No distress may be levied against the company or its property and no right of forfeiture can be exercised by the landlord in relation to premises let to the company.

Who gets paid first when a company goes into administration?

When a company goes into administration, the money realized from the company’s assets is used to pay debts owed to the creditors. The debts are paid according to the priority set out for the creditors. An insolvent company is not in a position to pay full debts, therefore, debts are paid according to the priority. In such cases, some creditors will not be able to recover their full amount. However, the assets of the company will be realized to pay at least part payment of debt and liabilities.

The way an Insolvency practitioner must act to realize a company’s assets to pay debts and meet claims of the creditors is provided by IA 1986 and the Insolvency Rules. The creditors are divided into different classes and the creditors will be paid according to their order of priority. The right of priority claimants to receive payment is prior to anyone below them in the order of ranking.

How is asset distribution priority set in an insolvency?

As mentioned above, the creditors are paid according to their order of priority when the company goes into administration. Once the top ranked creditor is fully repaid then only the claim of the next creditor in the list will be addressed to get paid. It basically means that creditors are paid in a descending order of priority. This process is referred to as a pari passu distribution

The priorities are set in the following ways:

  • Top rank claimants: Those claimants who have a proprietary interest in the company’s assets and those creditors who hold fixed charges on the firm’s assets have a top rank in the order of priority. The creditors holding fixed value over the firm’s assets are entitled to recover their value from the proceeds of the company’s assets.
  • Second rank claimants: are those who are owed expenses of the insolvent business estate. Before satisfying any other claims, these claimants are entitled to recover their expenses from the insolvent estate.
  • Third rank claimants: are preferential creditors. Once second rank claimants are fully repaid then preferential creditors will be paid from the remaining company’s assets. 

    Some unsecured debts are also given a preferential treatment like debts such as payments towards state and occupational pension plans, staff wages and salaries for any work that employees had completed in four months prior to the insolvency and up to a maximum of  £800 per staff member. Any staff whose contract has been terminated as a part of insolvency may be paid holiday pay if possible.

  • Fourth rank claimants: are those who hold floating charges. Once all of the claims against the insolvent estate and the preferential debts have been settled, the remaining assets will be used to pay those having floating charges.
  • Fifth rank claimants: are unsecured creditors. Once all other debts have been paid, if any assets are available then unsecured creditors will be paid out of it. Such creditors have no security over any of the assets of the insolvent company and hence, they have low priority. These creditors have to prove that the insolvent company owes debt to them.
  • Sixth rank creditors: Where all the above claimants are paid, if anything remains will be divided between the shareholders.

Are directors obliged to act in a certain way when a company goes into administration?

The directors have certain legal obligations to fulfil when the company goes into administration. They have a duty of care that they act in the best interest of the creditors and must try to maximize the return to creditors. To ascertain this, they have to assess the situation, set objectives, collect information and make their decisions in a way which protects the interest of creditors.

How does administration come to an end? 

The administration may come to an end in the following ways:

  • automatically after one year – where more time is required to achieve the purpose of administration, this period may be extended with the agreement of the creditors or the permission of the court,
  • by court order, where the purpose of administration can’t be achieved in the view of an administrator or where his appointment was made by the court, if he thinks the purpose of administration has been achieved; 
  • where the administrator was appointed out of court, if he thinks the purpose of administration has been achieved. 

What happens when administration comes to an end?

When administration of company comes to an end or is concluded, the following ways may be used:

  • Where CVA was agreed during the administration, it may continue according to the terms of CVA.
  • the company may be dissolved if there are no funds for distribution to unsecured creditors.
  • the company may go into liquidation
  • the control of the company may be returned to its directors and management. 

Who determines the administrator’s fee? 

If there is a creditor’s committee, the administrator’s fee is determined by it, else it can be decided by the creditors or the court. There are certain factors which will be taken into consideration while determining the administrator’s fee and such factors like 

  • time spent by the administrator and his team, 
  • the complexity of the case,
  • the effectiveness with which the administrator carries out his duties, 
  • the value and nature of the company’s assets and 
  • any other exceptional circumstances or responsibility handled by the administrator.

What’s the difference between administration and liquidation?

This question is generally asked whether Administration and Liquidation are the same. Both are entered into when the company is unable to pay its debts or the company’s liabilities are in excess of its total value of assets. These both are formal insolvency procedures, however, they are still different both in their objective and application:

When the company is entered into administration, its main objective is survival of the company whereas liquidation is used to realize the company’s assets before winding up the company.

Although both administration and liquidation are fundamentally different in their application and objectives, both are used to protect the company and limit its damage.

Check out our next blog.

The Institute of Directors (IoD) Launches Exclusive Partnership with Zegal


 

LONDON, UK, 13 January 2022 — The Institute of Directors (IoD) Launches Exclusive Partnership with Zegal, increasing legal protection for more than 20,000 UK small and medium sized businesses.

Access to legal services is one of the key pillars in the growth of the small business sector. A 2021 report by the Legal Services Board concluded that ​​ ‘across the board, SMEs are frustrated that getting legal issues resolved can be costly and time-consuming’. That’s why the UK’s Institute of Directors is working in conjunction with Zegal, to give IoD members free access to the Zegal web App which includes 1,000s of legal templates designed specifically for UK small business.

Zegal is a legal services platform for SMEs used by over 20,000 organisations globally to manage contracts digitally, to save time and money, and increase legal protection so that they grow faster.

Jonathan Geldart, Director General of the IoD, said:

“Directors equipped with the tools they need to be legally compliant can run better, more transparent organisations. We are delighted to be working with Zegal and their legaltech platform to compliment the extensive range of technology solutions built for leaders of small and medium sized businesses, already available to our members. ”

Daniel Walker, Founder of Zegal, said:

“The IoD is the leading organisation for small and medium sized businesses in the UK, and we could not be more excited that they have chosen our platform for their members. This exclusive collaboration creates a fantastic opportunity for the IoD and Zegal to satisfy the unmet needs of many 1,000s of SMEs. Whether members are looking for a quick NDA, employment contract, raising money or even selling their business, each contract template includes a step-by-step Document Builder, designed by legal experts so users can create bespoke contracts in minutes. The process is always the same. Select your template, edit, negotiate, finalise and eSign without ever leaving the App. ”

For more information and/or interview requests please contact Oliver Boote at oliver.boote@zegal.com.

Linkedin | Facebook | www.zegal.com 

ABOUT ZEGAL

Zegal is the end-to-end platform for the legals smaller companies need. 

Our story

Zegal was founded in 2014 by lawyer friends Daniel Walker and Jake Fisch. Having been a part of the system that preserves quality legal advice only for those that can afford it, the two were determined to build a model that delivers the ‘corporate law firm’ experience to small business.

Today Zegal is the world’s only end-to-end platform for smaller companies to create, negotiate, and sign both the simple, and complex contracts they need to run their business, with expert legal advice, 100% online every step of the way. Since our launch, we have helped more than 20,000 companies close commercial contracts, run leaner HR teams, and enter new markets. You can use Zegal for your company in the UK, Australia and across Asia. Make your legals simple.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

READ MORE: UK Startups: Essential Legal Documents

Seed Investors in Manchester


As the name may suggest, seed investing refers to the initial funding stage of a business venture which typically entails a small amount of money dedicated to the research and development of the company’s product. Operating similar to equity, seed investors will provide money to the early-stage company based on the valuation of the startup in exchange for a stake in the business. The city of Manchester is one of the top technology hubs for startup growth, boasting more startups than anywhere else in the North West, thus serving as an ideal location for early-stage companies. If your startup business is located in Manchester and you’re looking for a source of initial capital, here are some of the most active seed investors in Manchester to consider. 

  1. Entrepreneurs Fund 

Boasting a rich portfolio of various entrepreneurial teams, the Entrepreneurs Fund prides itself on supporting individuals and businesses who share values of fairness and transparency. As an existing venture capital member of COFRA Holding, one of the world’s largest groups of family-controlled businesses, this organisation knows exactly how to support the formation and growth of technology-driven global businesses during its seed stage and beyond. The Entrepreneurs Fund typically invests between €250k and €10m in seed-stage businesses. The fund invests from around €250k to more than €10m in individual companies. The typical initial investment is €1 to 2m and the fund normally aims to invest at least €5m over the life of a company. 

2. Deepbridge Venture Capital 

Deepridge Venture Capital is another seed investor in manchester committed to investing in growth-focused companies by fostering a community of passionate, fair-minded, and practical professionals. Alongside a team of mentors, their ambition to achieve the highest levels of corporate governance allows them to provide the best outcome for investors. Deepbridge invests anywhere from less than £150k up to £10m and, additionally, does not invest exclusively in companies that are EIS and/or SEIS-qualifying. While the fund is determined to invest across a wide range of market sectors, most of its professional experience lies in renewable energy and technology sectors.

3. Ignite 

For more than a decade, Ignite has been helping launch and scale small businesses through the assistance of experienced entrepreneurs and active investors. Their tried and true programme has been run all across Europe and offers the opportunity to collaborate and receive mentoring from industry experts. This fund’s experienced team is comprised of founders of startups who have raised investment globally and successfully exited companies; thus providing a unique opportunity for startup founders to gain valuable and bespoke advice from the industry’s own trailblazers. Ignite typically invests £17k in participants of their accelerator programme which includes workspace for up to six months, access to the fund’s incubator space, and growth support. The fund takes an 8% stake in exchange for investment, or 4% of businesses have already received funding.

4. Crowdcube 

Crowdcube encourages investors of all stages to diversify their portfolio beyond property and pension by investing in startup, growth, and venture-backed businesses with the potential to deliver significant returns. Catering to new and experienced investors, Crowdcube provides a simple, secure, regulated method of investing through their in-house team of legal professionals. Crowdcube typically works with companies raising between £250k and £1m, with a minimum of £20k. There is no maximum target amount, however, the optimum range is between £100,000 and £150,000.

5. Foresight Group 

Underpinned by a strong commitment to ESG initiatives, the Foresight Group strives to implement its investment strategies in a way that will work towards creating a sustainable legacy for future generations. This group aims to support small businesses across the UK with attractive investment opportunities and growth capital, all the while offering advantageous tax-efficient opportunities to private investors. The Foresight Group typically invests between £1m and £3m in companies with a strong sustainability focus. There is also a Foresight Solar & Technology VCT. Companies should have between £0.5m and £2m EBITDA at the time of investment.

6. LMarks 

With over 70 innovation programmes launched across the UK, Europe, Israel, Asia, and the US, LMarks has developed and implemented a ‘learn-by-doing infrastructure securing their consistent growth and a reputation for having the UK’s largest network of corporate innovation labs. By leveraging the ideas of seed-stage businesses, LMarks and their invested companies have risen as competitors in all sectors. Their fund provides growth capital and works closely with businesses to create a tailored mentoring programme to track progress and chart growth.

7. Catapult Ventures 

The team behind Catapult Ventures holds more than 10 years of professional experience across a plethora of industries from healthcare and pharmaceuticals to luxury consumer brands. Catapult Ventures is an independent Fund Manager. Committed to supporting ambitious entrepreneurs and value creation through long-term relationships with seed-stage companies, the owners of Catapult Ventures each operate a number of discrete venture capital funds on behalf of a range of public and private sector investors, with a total of £130m under management.

8. Draper Esprit 

Draper Esprit plays an active role in assisting seed-stage businesses with investment opportunities worldwide through their bespoke mentorship programme and commitment to investing in the best European technology companies. While highly selective, making 10 to 20 new investments every year, this organisation pushes for rapid scale-up and helps establish a strategic position for each of its companies. Draper Esprit typically invests between $2m and $50m in Series A and Series B rounds. Notable investments include Push Doctor and POD Point.

Finding initial investment as a seed-stage company can often be intimidating and overwhelming, but there are investors and venture capital companies available to assist you in scale-ups and the overall development of your company as it matures. Get in touch with our team of experts to find out more about how your company can receive early investment opportunities. 

These are the 8 most popular seed investors in Manchester.

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Everything you need to know about IR35


 

taxIf you are a freelancer, contractor, consultant, in any way self-employed, or are hiring those who are, you’re going to need to know everything you can about IR35. 

Here is our complete IR35 guide including exactly what it is, who it affects, whether you fall inside or outside of it, and a checklist to ensure you comply. 

What is IR35?

In a nutshell, the new off-payroll IR35 rules is a set of tax laws that form part of the Finance Act in the UK. After a year’s delay due to Covid-19, the regulations took effect on April 21st, 2021. 

So, what have they changed the rules for? Well, the new IR35 rules were created to distinguish employees “disguised” as individual contractors for tax purposes. In recent times, the gig economy has contributed to an explosion in contract employment where an individual engages with a business, often through a third party, such as a personal service company (PSC). And thus receives tax benefits they otherwise wouldn’t if they were an employee.

Previously, it was the role of the PSC to determine whether the individual falls inside, or outside the IR35 regulations to pay any increased tax. Now, the business that engages the contractor needs to make this assessment.

Inside IR35 

Specifically, when you are inside IR35, you pay the same national insurance and tax as a permanent employee. You should have the correct PAYE deductions as a regular employee taken from your salary. Also, your employer/client will match your national insurance contributions to the government. 

Quite simply, being ‘inside IR35’ means you are paying tax appropriately for your role as an employee. If your role changes, you will need to reassess your status. 

If you are found to be ‘inside IR35’ after an enquiry, HMRC will calculate the tax, national insurance contributions, and interest, for the time period. You will also be subject to a penalty if they decide your status was incorrect. 
 
 As a rule, if you are receiving the same rights as a permanent employee, you are likely to be inside IR35. This includes sick pay, holiday entitlement, sick pay, and certain benefits.

 

Outside IR35

Generally, being outside IR35 means you are a legitimate contractor receiving a salary from your limited company. 

Contrary to an employee, it’s your responsibility to pay the correct national insurance and taxes on the funds resulting from your work. Additionally, you are not subject to PAYE from your contract client. However, you may still be subject to an enquiry from HMRC.

Who does IR35 affect? 

The new rules have implications for businesses across all sectors but the government maintains that it will not affect genuinely self-employed individuals. 

Contractors that work through their own limited company don’t get benefits such as holiday leave or sick pay. Instead, they benefit from tax efficiencies. However, sometimes contractors use this tax efficiency while also receiving employee benefits. HMRC amended the off-payroll working rules to stop this from happening. Now contractors, who would have been an employee if they were providing services directly to clients, pay the same tax and National Insurance contributions as employees.

For example, a contractor working onsite for a rolling contract using a specialised computer provided by the client and being paid monthly wages would likely be inside IR35. This is especially true if they need to clear a holiday with the client. 

Another example is a contractor working from home, on their own laptop, for a four-month contract with a fixed payment for the work. That would usually fall outside IR35.

While an IT contractor working for a firm on a one-off project which is due to take three months, using their own equipment, working from home, and being paid a fixed amount for that work, would usually be seen as outside IR35.

These changes were set to take effect in 2020 but were put on hold during the initial COVID-19 pandemic. They officially came into play in April 2021. 

UK

Determining IR35

Again, the assessment obligation will sit with the business that engages the contractorShould contractors be treated as employees for tax purposes, the client will then be responsible for the tax burden.

HMRC will take a view of the whole situation and how it works in real life, rather than just how the contract appears on paper. But these are the principles:

  • Substitution: Does the contractor have to carry out the work personally, rather than being able to send a substitute?
  • Mutuality of obligation: Does the client have to provide the contractor with work, and/or does the contractor have to carry out any work that the client requests?
  • Control: Does the client have control over how, when, and where the contractor carries out the work?

If the answers are yes to these questions, this will indicate a quasi-employment relationship, which falls under IR35.

HMRC has a tool for employers called the Check Employment Status for Tax which was introduced with the reforms to IR35 in 2017. This can help to determine whether someone working falls inside IR35 or not.

How to hire contractors in compliance with IR35

Here are some strategies to make sure your contractors are legitimately outside IR35:

  1. Communication is key. It is in both parties’ interests for tax and employment status to be confirmed well ahead of major legislative change or a status enquiry from HMRC. Start by having a compliant written contract. But the true relationship between contractor and client will always supersede any written terms.
  2. For individual freelancers or contractors, you should collect evidence to show you belong outside IR35. Gather emails, supporting documents or agreements from a client reflecting that you operate as a genuine business. Should your client suddenly decide you belong inside IR35, if and when reform lands, you’ll be in a stronger position to overturn the determination. Such evidence can include your company stationery, business cards, and website as well as anything else to suggest you operate as a business.  
  3. The sheer complexity of IR35 means it’s not a bad idea to have your contract looked over by an independent party. A specialist can carry out an IR35 contract review of not only your written contract but your actual working arrangement too. 

If you engage sub-contractors regularly, you can complete a Status Determination Statement (SDS) so you are clear about the employment status for tax purposes.

freelancer
This guy’s got his IR35 status sorted.

How to be outside IR35 as a freelancer, contractor, or consultant

So, how do you make sure you are outside IR35? Here are some strategies to put in place that will ensure you set yourself up as properly self-employed.

  • No benefits 

Benefits are for employees. If you’re a contractor, (and therefore outside IR35) you shouldn’t be getting private healthcare from your client. Also, you shouldn’t get paid holidays.  

  • No perks

That includes the free barista service, the office gym, creche, and anything else that is a built-in perk for employees. If you want to clearly keep yourself outside the limits of IR35, these workplace comforts are not for you. There’s no sick pay in the world of a freelancer. And pension contributions are out of the question.

  • No internal comms

You’ll have to decline a company email or access to the Intranet where you’ve taken up a contract. This also includes frequently used comms apps like Slack, Flock, and Hangouts.

  • Use your own stuff

This means you should be using your own equipment to do the job. Whether that is a computer or desk or any specialist gear.

  • Have insurance

Professional indemnity insurance is considered essential for contractors, consultants and freelancers alike.  As indemnity insurance covers your legal costs and compensation payments if your client takes legal action against you if you make a mistake on the service you provide.  And, it’s a clear marker for HMRC that you are indeed self-employed.

  • Start and finish

For a contractor, having deadlines and endpoints to your contracts is a part of the service that makes you a contractor. Your relationship with your clients should have projects with clear definition, goals and timelines. This includes a conclusion to the contract, rather than keeping it ongoing. To be outside IR35, you need to work on multiple projects simultaneously and have multiple sources of income.

  • Flexibility 

You may need to be on-site at times for meetings and project management reasons, but you should also be able to work from wherever you need to be and not subject to regular working hours like an employee is. 

  • Proper paperwork

Clauses in your contract should include no mutuality of obligation, rights of substitution, immediate dismissal, and control clauses. Your client should never have direct control over the way you provide your services. Your client does not need to provide you with work. You also do not need to say yes to the work you offer. Keeping your paperwork in order will help if you do have to undergo an HMRC investigation.

When you’re preparing your contracts, you’ll need to include the above clauses in your consultancy agreement, freelance agreement or supply of services contract with your clients. And then importantly, live by them as well. Otherwise, you could be viewed as an employee.

To Conclude

Make sure you know everything you need to know to comply with IR35’s new regulations. You do not want to find you’re operating on the wrong side of it and undergo an HMRC investigation with potentially enormous penalities. Best to sort your status, or that of your hires, right from the start. 

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

ABOUT ZEGAL

Zegal is the end-to-end platform for the legals smaller companies need. 

Our story

Zegal was founded in 2014 by lawyer friends Daniel Walker and Jake Fisch. Having been a part of the system that preserves quality legal advice only for those that can afford it, the two were determined to build a model that delivers the ‘corporate law firm’ experience to small business.

Today Zegal is the world’s only end-to-end platform for smaller companies to create, negotiate, and sign both the simple, and complex contracts they need to run their business, with expert legal advice, 100% online every step of the way. Since our launch, we have helped more than 20,000 companies close commercial contracts, run leaner HR teams, and enter new markets. You can use Zegal for your company in the UK, Australia and across Asia. Make your legals simple.

RELATED READING: Hiring a consultant for your UK business? A consultancy agreement is a must

READ MORE: UK Startups: Essential Legal Documents

IR35 Guide for Freelancers


freelancer

If you’re a freelancer in the UK, you’ll be needing to understand whether you fall under the scope of the new IR35 regulations or not. Here is a detailed IR35 Guide for Freelancers.

What’s IR35? 

A good place to start is to check out why the government has put the new regulations in place. As of April 6, 2021, IR35 came into action to help stop ‘disguised employees’. In a nutshell, the gig economy has created plenty of workers that enjoy all the benefits and perks of an employee but are classified as self-employed, and HMRC wants it to stop.

IR35 rules now apply to ‘medium or large’ sized businesses in the private sector and all organizations in the public sector. There’s an exemption for ‘small businesses.  You can view our full post on the exact details of it here

How to determine your IR35 status as a freelancer

The government has put out a toolkit to help you determine your status. However, this is not as clear-cut as it sounds and you’ll need to examine your client contracts to ascertain if you fall inside or outside IR35 as a freelancer.

Confusingly, freelancers are no longer responsible for assessing their project’s IR35 status. It’s now the end client that is responsible for determining whether an assignment is inside or outside of IR35 rules. However, it’s in your best interests to make sure you are clearly self-employed and remaining IR35 compliant so it’s best to know your contracts inside out before you sign. 

You’ll want to point a discerning eye at the details of your contract to assess the following:

    • Your responsibilities
    • Who decides what work needs doing
    • Who decides when, where, and how the work is done
    • How you will be paid

 

Inside or Outside IR35? 

In essence, inside IR35 means the client pays Income Tax and NICs (employers and employees) to HMRC. It also means the freelancer does not receive any benefits that an employee would have access to. The client must make this decision before engaging a freelancer and then fill in a Status Determination Statement (SDS). They must then provide the SDS in writing to the freelancer before the assignment begins.

However, if a client is based overseas and doesn’t have any UK offices, the new rules do not apply.

 

If you are chosen for an IR35 inquiry

If HMRC decides to investigate you, you will first receive an opening letter to which you will need to respond with a breakdown of your income, expenses, contracts, and an explanation of why these contracts should be outside IR35. After that, if you haven’t provided sufficient proof, you may be called for a meeting with HMRC compliance to provide more information. However, you can request the inquiry continues by post rather than face-to-face.

Generally, the inquiry will focus on one specific tax year. And after HMRC has gone through all the evidence, they will make a decision. You may appeal if they determine you are insider IR35, however, there are costs involved. 

How to be outside IR35

Here are some tips to making sure you stay on the right freelancer side of IR35:

  • keep your records of work and contracts up to date and well filed
  • don’t take on a job where you are replacing an employee
  • do your tax returns on time

Freelancers providing services will always be susceptible to accidentally falling outside the new IR35 regulations. Keeping thorough records, reading through your contracts carefully before you sign on, and keeping under the radar of HMRC, as all sound ways to ensure compliance. 

Important to note

Notably, freelancers and contractors do not have to pay penalties for errors relating to off-payroll assignments for the first year.  Additionally, the new rules will only apply to services carried out from 6 April 2021.

You can also check out our IR35 checklist to make sure you have everything in order. 

 

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

ABOUT ZEGAL

Zegal is the end-to-end platform for the legals smaller companies need. 

Our story

Zegal was founded in 2014 by lawyer friends Daniel Walker and Jake Fisch. Having been a part of the system that preserves quality legal advice only for those that can afford it, the two were determined to build a model that delivers the ‘corporate law firm’ experience to small business.

Today Zegal is the world’s only end-to-end platform for smaller companies to create, negotiate, and sign both the simple, and complex contracts they need to run their business, with expert legal advice, 100% online every step of the way. Since our launch, we have helped more than 20,000 companies close commercial contracts, run leaner HR teams, and enter new markets. You can use Zegal for your company in the UK, Australia and across Asia. Make your legals simple.

READ MORE: UK Startups: Essential Legal Documents

READ MORE: New April 2020 tax rules in UK and how to comply with IR35

 

How to be outside IR35


tax

With the April tax changes in the UK, consultants, freelancers, and contractors may need to make some small adaptions to the way they work to make sure they can clearly be outside IR35 for their next tax return. 

So, how do you make sure you are outside IR35? Here are some strategies to put in place that will ensure you  set yourself up as properly self employed. 

Ignore the perks

Yup, all those lovely little bonuses that makes a workplace into a home away from home should be out of bounds for you. That includes the free barista service, the office gym, creche, and anything else that is a built-in perk for employees. If you want to clearly keep yourself outside the limits of IR35, these workplace comforts are not for you. 

No benefits either

Benefits are for employees. If you’re a contractor, (and therefore outside IR35) you shouldn’t be getting private healthcare from your client. Also, you shouldn’t get paid holidays. There’s no sick pay in the world of a freelancer. And pension contributions are out of the question. 

Stay external

It’s all too easy to accept an invite into the internal communications channels for easy access to the people you’re working with. However, this is a no no for keeping outside IR35. You’ll have to decline a company email or access to the Intranet where you’ve taken up a contract. In general, this also includes frequently used comms apps like Slack, Flock, and Hangouts. 

Get insurance

Having professional indemnity insurance is considered essential for contractors, consultants and freelancers alike.  As indemnity insurance covers your legal costs and and compensation payments if your client takes legal action against you for any element of the services you provide or mistakes that you make, you really shouldn’t be without it as a working professional. And, it’s a clear marker for HMRC that you are indeed self employed.

Clear projects with clear endings

For a contractor, having deadlines and end points to your contracts is a part of the service that makes you a contractor. Your relationship with your clients should have projects with clear definition, goals and timelines. This includes a conclusion to the contract, rather than keeping it ongoing. To be outside IR35, you need to work on multiple projects simultaneously and have multiple sources of income.

Work where you want 

Although you may need to be on-site at times for meetings and project management reasons, you should also be able to work from wherever you need to be and not subject to regular working hours like an employee is. You also use your own equipment to do the job. Flexibility is one of the perks of being a contractor. 

Get it in writing

Keeping your paperwork in order will help if you do have to undergo an HMRC investigation. Clauses in your contract should include no mutuality of obligation, rights of substitution, immediate dismissal, and control clauses. Your client should never have direct control over the way you provide your services. Your client does not need to provide you with work. You also do not need to say yes to the work you offer.

You need to include these clauses in your consultancy agreement, freelance agreement or supply of services contract with your clients. And then importantly, live by them as well. Otherwise you could be viewed as an employee.

Conclusion

Whether you’re a consultant, a contractor, or a freelancer, make sure you follow these tips to be outside IR35 and keep within the new rules that are there to protect those who are truly self-employed. 

You can also check out our IR35 checklist to make sure you have everything in order. 

 

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

ABOUT ZEGAL

Zegal is the end-to-end platform for the legals smaller companies need. 

Our story

Zegal was founded in 2014 by lawyer friends Daniel Walker and Jake Fisch. Having been a part of the system that preserves quality legal advice only for those that can afford it, the two were determined to build a model that delivers the ‘corporate law firm’ experience to small business.

Today Zegal is the world’s only end-to-end platform for smaller companies to create, negotiate, and sign both the simple, and complex contracts they need to run their business, with expert legal advice, 100% online every step of the way. Since our launch, we have helped more than 20,000 companies close commercial contracts, run leaner HR teams, and enter new markets. You can use Zegal for your company in the UK, Australia and across Asia. Make your legals simple.

READ MORE: UK Startups: Essential Legal Documents

READ MORE: New April 2020 tax rules in UK and how to comply with IR35

 

ZEGAL SEES HUGE CUSTOMER GROWTH IN THE UK


small business

Zegal, the end-to-end legal platform for small businesses, launched in Australasia, sees tremendous growth in the UK. 

LONDON, UK, 20 June, 2021 —Increasing small business demand for online end-to-end legal services in the UK has Zegal rapidly expanding its team and product range. 

Small businesses in the UK, well-versed in using cloud accounting services like Xero with their accountants, are demanding the same and more from their legal advisors.  Enter Zegal.  The Zegal platform, which is used across Australia and Asia by more than 20,000 smaller companies and their legal advisors, has seen tremendous growth in the UK as businesses adapt to work-from-home offices.

Zegal is designed to be end-to-end—enabling companies to do legal work that is more complex. Zegal’s sophisticated software is the core of the experience, providing the technology for businesses to work alone; or together with good old fashioned real-life lawyers, working virtually through the platform, whenever needed.  The result is streamlined and affordable legals.

As a global Software as a Service (SaaS) company, Zegal was built for the cloud and is an example of how technology companies are providing significant opportunities to small businesses the world over by leveraging the benefits of scale and leveling the playing field.  Zegal recently announced a collaboration with British leading virtual law firm 360 Business Law, selected by Zegal to deliver legal advice to its UK clients. Clients using Zegal’s contract management application can now access a free 30-minute consultation with a lawyer at 360 Business Law.

Daniel Walker, Zegal Founder says, ‘The transition we’ve seen from office to remote working has driven a huge demand in the UK market for virtual legal counsel and platform solutions. We are seeing the strongest demand within the mid-market space, which is a very exciting opportunity.’  

For more information and/or interview requests please contact Alicia Walker at alicia.walker@zegal.com 

 

Linkedin | Facebook | www.zegal.com 

ABOUT ZEGAL

Zegal is the end-to-end platform for the legals smaller companies need. 

Our story

Zegal was founded in 2014 by lawyer friends Daniel Walker and Jake Fisch. Having been a part of the system that preserves quality legal advice only for those that can afford it, the two were determined to build a model that delivers the ‘corporate law firm’ experience to small business.

Today Zegal is the world’s only end-to-end platform for smaller companies to create, negotiate, and sign both the simple, and complex contracts they need to run their business, with expert legal advice, 100% online every step of the way. Since our launch, we have helped more than 20,000 companies close commercial contracts, run leaner HR teams, and enter new markets. You can use Zegal for your company in the UK, Australia and across Asia. Make your legals simple.

 

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

READ MORE: UK Startups: Essential Legal Documents

READ MORE: New April 2020 tax rules in UK and how to comply with IR35

Zegal and 360 Law Group to bolster UK small business economy 


small business

Zegal, the end-to-end legal platform for small businesses, and 360 Law Group, give UK companies ability to control their own legals from home

LONDON, UK, 10 June 2021 —Increasing small business demand for online end-to-end legal services in the UK has Zegal rapidly expanding its team and product range. 

The relentless onslaught of Covid-19 has sped up the need for online legal solutions for small businesses in the UK. Zegal’s all encompassing platform brings virtual legal counsel directly to  the users and gives them the capability to complete their own legal work online.

Zegal’s UK partner 360 Business Law has been selected by Zegal to deliver legal advice to its UK clients. Clients using Zegal’s contract management application can now access a free 30-minute consultation with a lawyer at 360 Business Law.

Robert Taylor, CEO and General Counsel at 360 Business Law says, “We are delighted that Zegal has selected us to support their UK clients. Zegal has an excellent contract management application. It is ideal for SME users, giving them access to a vast range of the very latest contractual documentation which they can adapt to their specific needs. Our lawyers are on hand to advise them, answer their questions and help them complete their contracts.”

Zegal Founder, Daniel Walker, says “Smaller businesses are the backbone of the UK economy and have borne the brunt of the tough measures we have faced over the past year. I’m delighted that Zegal is part of a broad movement in professional services to help smaller businesses adopt digital technology as we move to a new business as usual.”

For more information and/or interview requests please contact Alicia Walker at alicia.walker@zegal.com 

Linkedin | Facebook | www.zegal.com 

ABOUT ZEGAL

Zegal is the end-to-end platform for the legals smaller companies need. 

Our story

Zegal was founded in 2014 by lawyer friends Daniel Walker and Jake Fisch. Having been a part of the system that preserves quality legal advice only for those that can afford it, the two were determined to build a model that delivers the ‘corporate law firm’ experience to small business.

Today Zegal is the world’s only end-to-end platform for smaller companies to create, negotiate, and sign both the simple, and complex contracts they need to run their business, with expert legal advice, 100% online every step of the way. Since our launch, we have helped more than 20,000 companies close commercial contracts, run leaner HR teams, and enter new markets. You can use Zegal for your company in the UK, Australia and across Asia. Make your legals simple.

ABOUT 360 LAW GROUP 

360 Law Group, a Times Newspaper Top 200 UK Law firm in 2020 and 2021, is constantly seeking to challenge the status quo in order to ensure the most efficient, cost-effective and high quality client service possible.

360 Law Group operates a virtual network of lawyers through a secure cloud-based IT infrastructure. The firm provides businesses and consumers with something that had not previously been available from a single group of companies – the ability to offer clients a choice in how they engage with lawyers; on a regulated basis or on a lower cost, unregulated basis.

It was the first UK provider of subscription legal services on a global basis, and the first law firm to offer its services on both a regulated and unregulated basis.

 

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

READ MORE: UK Startups: Essential Legal Documents

READ MORE: New April 2020 tax rules in UK and how to comply with IR35

What is IR35?


tax

You may have heard the term bandied around but what exactly is IR35? And why should I care? Well, if you are self-employed, or employ contractors of any sort, you are definitely going to need to invest some time investigating this term.  In recent times, the gig economy is amplifying the grey area that divides consultants from employees. Specifically, Great Britain has brought in IR35 to put a clear mark between the two.

At its core, the IR35 legislation is there for contract workers who operate as a limited company. For those working for a third party to provide specialist services to a client. It determines one as ‘outside IR35’ for these reasons, in addition to the stipulations that contractors do not receive benefits, holidays, or sick pay.

Why does the UK need IR35 legislation?

In general, the creation of the legislation was to stamp out the practice of companies having ‘disguised employees’ on their books in order to avoid tax. Contractors were often misusing the tax efficiency of a self-employment status, when in fact, their status should be as an employee. This became common as the gig economy opened these loopholes in the way we work. This is the government’s way of catching up with the changing world of work.

Why you should care about IR35

In addition to the legislation, HMRC is actively investigating individuals and companies to determine if a consultant’s status is correctly ‘outside IR35’. If not, the new rules demand that any money an employer hasn’t paid in national insurance be rectified. Also, missed tax and interest on the tax need to be paid. That’s not to mention the penalties for misclassifying yourself, which can be enormous.

For clarification, HMRC has developed an online employment status tool (CEST) for contractors unsure of their liability under IR35. If you are receiving the same rights as that of a permanent employee, for example, holiday entitlement, sick pay, or if you are receiving certain benefits, you will likely be deemed as inside IR35. We have a handy article here on determining whether you are inside or outside IR35.

Conclusion

This isn’t something you want to get wrong. Taxes are not an area you want to mess around with. Get your status properly assessed so you can get on with business.

Check out our IR35 checklist to make sure you have everything in order.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

ABOUT ZEGAL

Zegal is the end-to-end platform for the legals smaller companies need.

Our story

Zegal was founded in 2014 by lawyer friends Daniel Walker and Jake Fisch. Having been a part of the system that preserves quality legal advice only for those that can afford it, the two were determined to build a model that delivers the ‘corporate law firm’ experience to small business.

Today Zegal is the world’s only end-to-end platform for smaller companies to create, negotiate, and sign both the simple, and complex contracts they need to run their business, with expert legal advice, 100% online every step of the way. Since our launch, we have helped more than 20,000 companies close commercial contracts, run leaner HR teams, and enter new markets. You can use Zegal for your company in the UK, Australia and across Asia. Make your legals simple.

READ MORE: UK Startups: Essential Legal Documents

READ MORE: New April 2020 tax rules in UK and how to comply with IR35

Affordable UK Legal Document Drafting Service


We talk with Zegal in the UK to find out which startups and small businesses their new legal document drafting can help. And importantly, how much it costs.

laptop drafting

What is Zegal’s Document Drafting Service?

To begin, Zegal provides a document drafting service for startups and SMEs in the UK.  

Firstly, startups are assisted by our experienced Lawyers Without Ties (LWT) legal team. LWT lawyers are UK qualified and are a unique mix of part entrepreneur part lawyer. All our lawyers have experience in fast-growth companies so this area of complex law is second nature to them. 

Next, our SME clients work with the Contracts4U (C4U) team. C4U lawyers are commercial contracts specialists. They live and breathe the contracts which make businesses tick. 

Regardless of your company type, our legal drafting services are open to all Zegal subscribers and all the work is done using the unique Zegal app. This empowers businesses to work with their lawyers directly and in real-time on contracts and agreements. So not only does this make the process financially more efficient but it saves time, increases productivity, and of course means that work can be carried out from anywhere.

What kind of businesses are you able to help?

Essentially, our focus is on two main types of businesses, SMEs and startups:

  • LWT focuses solely on the startup legal issues that fast-growth companies face. This means figuring out the challenges a young business faces during and after incorporation as it moves towards product-market fit.  One of the principal concerns here is of course early-stage fundraising. Typically this means drafting founder employment contracts, term sheets, and investment documentation, as well as considering the protection of a company’s intellectual property (IP). 
  • C4U works with SMEs which can mean anything from single-person consultancies to 50+ person teams. The main work we do here is drafting commercial contracts which are essential for day-to-day business operations – think, sales contracts, non-disclosure agreements, franchising agreements, etc.

What kinds of documents can you draft?

Our lawyers draft the full range of commercial contracts. For startups, we tend to focus on early-stage documentation which means shareholder agreements, employment contracts, or founder agreements. Very often founders are concerned about protecting intellectual property (IP) and of course fundraising timesheets, which means drafting and reviewing term sheets and related investment documentation.

SME contracts are more frequently customer-facing contracts and commercial contracts. Our lawyers can help an SME consider allocating risk in contracts, whether it is for a specific liability that the customer has identified or identifying risks with the lawyer.  We are frequently engaged to draft manufacturing and franchising agreements; sales contract and term of service; service agreements and consulting agreements.

We have a particularly high concentration of clients in the consulting space who have worked for larger organizations and now need the same degree of professionalism for their own company’s contracts as well as the same degree of protection that they would expect in a blue-chip. This is especially true for consulting firms that are frequently engaged by the ‘big boys’. Zegal equals the playing field by providing an outsourced legal counsel model at a price that is affordable for a micro business. 

What’s the price for drafting documents?

Zegal is a subscription platform that gives clients access to legal contracts that they can use for their business on an unlimited basis. Customers that need a lawyer to draft specific documents can take advantage of a very simple model.

Importantly, we have a very simple model. All legal drafting work is £25 per page. We simply count the total number of pages of the relevant contract template from the Zegal platform on which the client needs assistance. This means there are no complicated quotes or ifs and buts. Just straightforward pricing the client knows in advance. 

Let’s take the example of a non-disclosure agreement (NDA).  The Zegal NDA template is eight pages long.  If a client needs a lawyer’s help in preparing a specific NDA, we will charge 8 x £25 = £200. It doesn’t matter if the NDA ends up being 16 pages long! See we told you it was simple.

Of course, there will be many situations where the client just uses the NDA as is from Zegal and we love that. More power to the customer! Then it costs absolutely nothing!

How do your lawyers work with clients?

Drafting a document for a client is always a personal experience and our lawyers don’t like doing everything online! So we always include a 30-minute video call to ensure we understand precisely what needs to be in the contract. 

After the initial call, all time is spent on Zegal. This means preparing versions of the contract together with the client, making comments and suggestions in real-time on the platform, and even sharing it with the counterparties if needed for their review too. Our lawyers will prepare up to two drafts of the contract for you and ensure you understand exactly what the provisions mean if you are unclear on anything. 

Of course, our clients always have the Zegal Customer Success Team (CST)  on hand on live chat as well from 9 a.m. until 6 p.m. every business day. The CST team knows our platform in and out and can help you find contracts and knowledge articles. They are not lawyers but think of them as the friendliest librarians you ever met. Not the kind that doesn’t want to answer questions!

Which industries do you serve?

We most frequently serve fast-growth companies and consulting businesses. We would call ourselves specialists in working with businesses that are between 1 and 50 employees. This size of company finds enormous value in the outsourced General Counsel (oGC) model.  It is this oGC model which makes Zegal unique and puts us ahead of the competition, making us uniquely positioned to serve businesses in the post COVID era.

Zegal makes it possible for lawyers to not only work with clients remotely but in real-time. In many ways, clients feel closer to their lawyers now than in the good old days of booking an appointment and watching the clock tick in expensive offices. 

  • Because we don’t have law firm overheads, you get to work with best-in-class lawyers, that ordinarily would have extremely high fee rates and locations in Central London or other city locations. 
  • Technology makes onboarding and file opening something that now happens the same day (not next week…. or later). 
  • Zegal serves clients in UK, Australia, NZ, Singapore, and Hong Kong so our clients are future-proofed with great assistance even after they expand out of the UK (or into the UK from Asia). 
  • Clients can work in real-time with a lawyer and give immediate feedback which speeds up the process of drafting and getting the documents ready for e-signing.

Do you have any use cases that you can tell us about?

LWT was recently engaged by a team of London financiers who had already set up a company in Hong Kong to build a platform business. The founding team wanted to issue additional vested shares and bring on an early-stage investor. The team needed documents that would be valid for both the UK and Hong Kong jurisdictions. 

The LWT team incorporated a holding company in Hong Kong, set up a shareholders’ agreement for the holding company, and restructured the subsidiary Hong Kong company with share vesting agreements for the founding team. All within three days, all online. This is one of many examples of the range of assistance that we give to young fast-growing companies and the international scale of our team’s knowledge.  But above all, it is technology-enabled and that makes the process fast, efficient, and cost-effective.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

BECOME A ZEGAL REFERRAL PARTNER

READ MORE: A digital strategy with practical know-how

FURTHER READING: Three tips for online brand engagement

Opening a Business Bank Account in the UK


A comprehensive guide to knowing how to open a business bank account in the UK, this article will take you through the processes needed for you to smoothly get started with your UK business! 

bank

A business bank account allows you to separate your business from personal finances – which is especially important for properly managing and keeping track of all business transactions. Regardless of whether you are a sole proprietor or have a business with employees, having a business bank account simplifies many financial transactions and streamlines your financial activities, giving you more time to focus on growing your business. 

What documents do you need to open a business bank account? 

To open a business bank account in the UK, the following are the required information to be prepared: 

  • Full names and date of birth of all company directors
  • Proof of identity (ID), this can be your passport, driving license or national ID
    *all company directors are required to show proof also
  • Proof of personal address
    *if you are residing in your current one for less than 3 years, proof of your previous housing needs to be shown 
  • Full business address
  • Contact details for the business
  • Companies house registration number (for limited companies and partnerships)
  • Estimated annual turnover 

Can anyone open a business bank account?

Of course, the straightforward answer is yes, as long as you do own a business. But there are other factors that should be considered before you are eligible and ready to open your first business bank account in the UK. 

Although a business bank account is required and necessary for limited companies, sole proprietors should also look into opening a business bank account, as mentioned earlier. 

But, before officially opening a business bank account, here is a suggested checklist to consider in order to make sure you are ready to open your business bank account.

1. Check your Credit History

Personal credit history might be an indicator to banks about your financial situation and influence the potentiality of being able to open a business bank account. However, it is more often than not that people have a personal poor credit history. 

Besides that, banks will still allow people with poor personal credit history to open a business bank account, so as long as your business has a feasible plan. Therefore, a nifty tip is to check your credit history prior to opening your business bank account to check for any outstanding amounts that might peg you down. 

2. Is your business plan feasible and credible?

Proposing a thoroughly thought out business plan with details on financial and logically projected forecasts on profits and losses will greatly impress the bank and therefore, place you in an ideal position to open a business bank account. 

This point goes hand in hand with the question of credit history, as long as you have a solid and feasible business plan, the chances of opening a business bank account is more likely despite possible bad credit history. 

3. Are you on the Electronic Register and registered with HMRC (HM Revenue & Customs) 

Being a registered member on the Electronic Register and being on the HMRC is important as it makes the application process much smoother. 

Can you open a business bank account online?

With the advent of Covid-19, smart technologies have revolutionised many processes. This includes the application process to open a business bank account. Nowadays, most of the UK’s banks allow you to open a business bank account online, having customised interfaces that make the experience smoother and interactive. 

An example is Barclays, a bank that allows you to apply with an online application form. It automatically lets you know what information is missing before you can successfully open your business bank account. 

Many banks in the UK allow you to apply for a business bank account online, like HSBC and Starling Bank, with 24/7 app on-the-go services to complement your experience of online bank activities. 

Top UK banks for business bank accounts 

Barclays

  • Simple and easy to understand online, digital interface
  • 2 simple price plans with an online calculator for you to make a better informed choice
  • Free business banking for the first 12 months upon opening your business bank account
  • 24/7 fully digitalised services and app to allow you to manage your business’ finances on the go

HSBC

  • Free business banking for the first 18 months upon opening your business bank account
  • Fixed fee payable for the subsequent 12 months 
  • Free Visa Business debit card will be issued 
  • 24/7 fully digitalised services and app to allow you to manage your business’ finances on the go
  • Available overdraft services 

Starling Bank 

  • Zero monthly fees payable 
  • 24/7 fully digitalised services and app to allow you to manage your business’ finances on the go
  • Integrated online banking services, the app is also equipped with accounting services 
  • Open banking marketplace that connects you to 3rd party applications 

To Sum Up

In summary, opening a business bank account is a step in the right direction in managing your business properly and systematically. Knowing the full process in order to open your business bank account frees up more of your time. Now you can focus on the other business functions to help boost the profits. 

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

DOCUMENT:Director’s Resolution for Bank Account Opening

Pitfalls of Setting Up a Business in the British Virgin Islands


long bay, british virgin islands

British Virgin Islands (BVI) is well known as a global tax haven. However, as with anywhere, there are some pitfalls to watch out for. 

Many international corporations look to set up an offshore corporation with BVI for the purpose of the tax haven policies. Noticeably, it is very cheap and straightforward to incorporate a BVI-registered company. Additionally, the maintenance of the BVI-registered company requires little cost and a low level of procedural effort. 

For all the benefits that come about for incorporating a business in British Virgin Islands, keen business owners need to remember to look out for the pitfalls too. And be prepared for the required costs and efforts needed to ensure you’re running your business there properly. 

Business in British Virgin Islands

BVI was recently added to the Organisation for Economic Cooperation and Development (OECD) white list. This undeniably gives it a positive reputation globally. However, this also incurs higher costs as BVI has to align its standards with OECD’s. 

The BVI Economic Substance (Companies and Limited Partnerships) Act 2018 was implemented and was in effect from 1 January 2019. This Act introduced economic substance laws that implement a requirement for eligible BVI entities to maintain an appropriate level of economic substance. This economic substance includes: 

  • Building local economic substance. Entities can build and maintain economic substance if it is commercial and feasible 
  • Revision of the entity’s operational and legal structure in order to comply to the Act’s standards 

If the entity fails to comply with the basic requirements listed above, it is very likely that the entity should be liquidated. Do take note that liquidation processes are put in place and must be followed as well. 

Stemming from the implementation of the Act, there has been an increase in the costs needed to maintain your business in BVI. The administrative work has also increased with more paperwork and documentation being required by BVI’s official authorities. This is because tax-resident, locally-incorporated and BVI-registered foreign entities are now required to have a physical office with an active director or staff working from BVI. This results in an inflation of costs incurred for incorporation and maintenance of a BVI business. New costs like office rental (or buying land), utilities and employee incomes will be incurred.

With a BVI office address for businesses, this will mean that the business has to comply with the local BVI government regulations surrounding local businesses. 

Long Application and Approval Period

With the implementation of the economic substance laws under the Act, many processes with the BVI have also been formalised and implemented. Therefore, business owners have to adhere strictly to the required permits and licenses processes. 

For businesses that fall under banking, insurance, trust management, or investment advice services, a license must be obtained from BVI’s Financial Services Commission

Businesses are also required to open a bank account based in British Virgin Islands. Business owners should prepare the needed documentation to open a bank account. This process is estimated to take around three months. Thus, to ensure smooth sailing, you should prepare your business accordingly. More information can be found on BVI FSC’s official website here.

Overall, setting up a business in British Virgin Islands does come with a list of additional procedures that leads to higher costs, effort, and time in comparison to other international business company jurisdictions. However, BVI has a reputable and well-implemented governmental system and a robust economy. BVI also ranks highly in terms of reputation internationally as the ideal country to set up an offshore company. Therefore, your business will also be able to latch on to these benefits and many more.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

READ MORE: A Guide to Singapore’s Taxation System

FURTHER READING: Pitfalls of Setting Up a Business in Australia

MORE: Company Incorporation in British Virgin Islands

Company Incorporation Step by Step: United Kingdom


Photo by Anthony Rosset on Unsplash

 

This article covers the main points on registering a company in the United Kingdom. Read on for details on the United Kingdom’s requirements, procedures, and the estimated timeline to register a company. 

Minimum Setup Requirements to Register a Company in the United Kingdom

In the UK, there are 2 common types of companies – private and public companies.

For private companies, the requirements are:
  • Director – 1, at least 1 director must be an individual director
  • Shareholder – 1 
For public companies, the requirements are:
  • Directors – 2, at least 1 director must be an individual director
  • Company Secretary – 1
  • Shareholder – 1 

The legal requirements in the UK are very strict for directors and company secretaries.

To be a director, you cannot be:
  • Disqualified from acting as a company director
  • An undischarged bankrupt
  • Under the age of 16

To be a qualified company secretary, you must be:

  • From the office of secretary of a public company for at least 3 years of the 5 years before your appointment to the new company
  • A barrister/ advocate/ solicitor called or admitted in any part of the UK
  • A member of any of the following professional bodies
    • Institute of Chartered Accountants in England and Wales
    • Institute of Chartered Accountants of Scotland
    • Institute of Chartered Accountants in Ireland
    • Institute of Chartered Secretaries and Administrators
    • Association of Chartered Certified Accountants
    • Chartered Institute of Management Accountants
    • Chartered Institute of Public Finance and Accountancy 

Registration Timeline 

In the UK, the incorporation process can be done on 3 different platforms. For each platform, the timing differs.

  • Electronic Software Filing
    Done usually be external services that have their own websites to help with incorporation. The standard fee for this platform is £10 and usually takes 24 hours.
  • Web Services
    The easiest online, one-stop platform to register your company with Companies House and HM Revenue and Customs (HMRC). The standard fee for this platform is £12 and usually takes 24 hours.
  • Paper Filing
    The only physical platform to incorporate your company. The documents must be submitted to the correct offices and therefore, will take a longer time. The standard fee for this platform is £40 and usually takes 5 working days.

Step 1: Submit relevant forms  

Unlike other countries, there is no reservation of the proposed company name for the UK’s incorporation. The proposed company name must be submitted along with all the relevant documents needed. However, you can check if the proposed name has not been registered here.

The documents that need to be submitted are: 

  • Form IN01
    This application form requires details like:
    • Proposed company name
    • Official place of business address 
    • Type of company structure (private/public/unlimited)
    • Details on the type of business activities 
    • Choice of Articles of Association 
    • Details of proposed director/s and company secretary (if needed)
    • Details of people with significant control (PSC) 
    • Residential addresses of director/s
    • Statement of capital and initial shareholdings
    • Statement of compliance/ guarantee
  • Memorandum of Association
    • The required contents of the Memorandum of Association can be found in the revised Companies Regulations 2008. Or, you can download a pro forma memorandum here. Most importantly, the wording for the memorandum is prescribed, amending it will result in the submission being invalid.
  • Articles of Association
    The internal rulebook of the company, it can be decided by the company members. It should not contain any rules that go against the law. It can be adopted/ taken wholly from the model articles here.
After all the above documents are submitted with valid information, the government will issue a Certificate of Incorporation that officially incorporates your company.

Step 2: Open the company bank account

The next step after incorporation is to set up a company bank account. Before application, it is important to have all the needed documents on standby to make the process fast and smooth. 

  • Proof of ID
  • Proof of personal address
  • Full business official address
  • Contact details of the business
  • Companies House registration number
  • Estimated annual turnover

 Step 3: Register your company for Corporation Tax

Most companies are required to register for Corporation Tax and PAYE within 3 months of the incorporation of business. You will require the following:

  • Company’s Unique Taxpayer Reference (UTR) 
  • Company’s registration number
  • The commencement date of business 
  • The date the annual accounts are made up to 

Once the following are submitted to the HMRC, a deadline to pay corporation tax will be given. Additionally, all companies must file a Company Tax Return. 

Accounting

The accounting year must not be longer than 12 months and it usually follows the financial year. For new incorporated companies, the HM Revenue and Customs (HMRC) will issue a letter with the dates for the accounting period.

In the event that the accounts cover more than 12 months, you must file for 2 returns.

Corporate Tax Requirements

Once you have registered for Corporate Tax, you must keep all accounting records and prepare a Company Tax Return. The deadline to pay the tax (or to declare nothing to pay) is 9 months and 1 day after the end of the accounting period. The average corporation tax payable is 19%.

Annual General Meeting

For public companies, the AGM must be held annually within the period of 6 months beginning with the date following its accounting reference date.

It is not compulsory for private companies to hold an AGM annually but it is recommended. 

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

Related Article: Company Incorporation London | Detailed Guide 2021

MORE IN THIS SERIES: Company Incorporation: Hong Kong, Singapore, Japan, New Zealand, Australia,Taiwan, Macau, China, Philippines, BVI, Vietnam,Thailand, Indonesia, Cayman Islands, United Kingdom

READ MORE: Documents required when incorporating your business

UK Startup Grants You Probably Don’t Even Know About


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Funding is a major challenge for even the most savvy start-ups in the UK. Besides applying for a small business loan, there are other sources of low or no-interest financing that are often overlooked, like grants.

In the UK, government grants are one of the top sources of funding for small businesses. Grants are given for a variety of reasons, and range from £500 up to £500,000.

Grants are available in a wide range of fields, and they’re a great way to put your small business ahead of its funding schedule. This article will cover everything you need to know about the most common small business grants in the UK.

 

Direct Grants

A variety of agencies offer direct grants to British start-ups, and the government’s finance and support page makes it easy to find the kind of grant you’re looking for. Grants are available for both new start-ups and established businesses working in a number of different industries.

Direct grants commonly require you to match what you receive, so you’ll need to find a source of funding for the other half. You’ll also need to use the money as outlined in the grant agreement, so it’s important to have a clear plan for the cash before you apply.

 

R&D Tax Credits

Research and development is often a major expense for technology-driven start-ups, and R&D tax credits allow you to earn a partial refund on costs related to development. The program offers businesses up to 32 percent of their money back on qualifying costs.

Applying for R&D tax credits is relatively simple, but you can still hire a professional if you want to work with an expert. They can even cover salaries and wages for both full-time employees and contractors that work on development for your business.

 

New Enterprise Allowance

The New Enterprise Allowance is dedicated to helping the unemployed start successful careers. You’ll need to receive one of the following benefits in order to be eligible:

  • Employment and Support Allowance
  • Jobseeker’s Allowance
  • Income Support

In general, the New Enterprise Allowance offers £65 per week for your first 13 weeks, then £33 per week for the remaining 13.

 

Innovation Vouchers

Innovation vouchers match small business funding with up to £2,500, more than enough to a difference for a growing company. They distribute the vouchers through a partnership with Birmingham City University. As such, funds are only available for businesses in Greater Birmingham and Solihull.

The vouchers are intended to help you access experts and research institutes in your field. This means there are some restrictions on how you can use the money. Companies that receive Innovation vouchers can also take advantage of free business innovation workshops.

It can be difficult for small businesses to find private funding, and these grants are a great opportunity for any start-up in need of money. Even a small amount of money can have a large impact on the long-term success of a small business.

 

Rae Steinbach is a graduate of Tufts University with a combined International Relations and Chinese degree. After spending time living and working abroad in China, she returned to NYC to pursue her career and continue curating quality content. Rae is passionate about travel, food, and writing.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

 

READ MORE FROM RAE STEINBACH: Angel Investors vs VCs: Pros & Cons

READ MORE: Five Clauses Every Shareholders’ Agreement Should Include. Does Yours?

How UK Startups Can Protect Their Intellectual Property


Photo by Josh Riemer on Unsplash

        

Entrepreneurs in the contemporary market focus are known to focus their attentions on mainly economics rather than the equally crucial legal aspects of their company. We will discuss and analyse the contemporary relevance of intellectual property (IP) and its impact and relevance to startup companies. 

Ordinarily, startups are small in size and initially of little economic value. However, startups provide the perfect opportunity for individuals to launch an innovative business idea in today’s contemporary market. At first, while creating a business, there is a multitude of factors to consider; from branding to targeted consumers and markets. An important factor is considering the appropriate legal documents needed and determining a suitable type of IP protection. These factors are incredibly important as a considerably well organised IP strategy determines whether a company succeeds or fails. 

Startups are composed of unique and distinct legal rules, which if followed correctly ensure the success of a company. Failing to provide mission-critical legal documents can lead to the downfall of the company. Thus, it is of the utmost importance that entrepreneurs take the necessary legal precautions (through legal documents) to legally protect their business. By doing so entrepreneurs ensure the wellbeing of their company.

These legal documents are split into seven distinct categories:

1.the article of incorporation, 

2.intellectual property (IP) assignment agreement,

3.bylaws,

4.operating agreement (founders agreement),

5. non-disclosure agreement,

6. employee contracts,

7. offer letter and shareholder agreement.

IP protection makes the difference between making or losing money. This is demonstrated by the Alexander Graham Bell case, a name most people will be familiar with from their school days. The company patented a telephone model only a few hours before a rival competitor and this ensured his victory over another. Without the IP protection granted by the WIPO, Alexander Graham’s company would be known as the company who nearly made the telephone, or more likely , not known at all. With the fast moving technology today, IP protection is more important than ever before. 

Photo by Armand Valendez from Pexels

The protection provided by intellectual property depends on the underlying subject matter. Intellectual property is, therefore, a vital tool that helps secure market shares by creating intangible property rights. These rights shield companies from competitors and ensure exclusive rights over a monopoly, for a certain amount of time. If Apple, the well known technology company, had not registered its trade mark, other companies would be granted the legal freedom to use it.

Why is this relevant?

Because an entrepreneur invests time, energy and money in the production of software (for example) and IP provides exclusionary rights over the creation of the software, thus this prevents and prohibits third parties from using and exploiting someone else’s ideas or innovations. Therefore, IP protection grants the company exclusive rights over the software. Granting companies like Apple an indefinite monopoly over the market.

According to the laws of the United Kingdom, the owner or owners of the IP are those who either created the product or who will own the product, as the creator of the product develops it as part of their duties at work. If X, an employee for Y’s company, modifies and improves a computer software as part of his job, the computer software will automatically be owned by Y’s company. However, to not arouse any doubts, it would be sensible to include a clause in the employee’s contract specifying that any creation made by them will be owned by the company. If the creator does also have a special obligation to further the “commercial interests” of a company in question then the company is still going to own the IP, not the creator. Lastly, the IP will be owned by the company if the creator signed an agreement to change the ownership of the IP.

Any business that uses a name, logo, brand or design, or a new product or process is strongly advised to use trademark, design or patent protection respectively. The UK IP Office (UKIPO) does provide free training, case studies, IP health checks and advises companies on which IP is best suited for their business. If the UKIPO is not capable of providing the right advice to the company, they will redirect the company towards a qualified attorney. 

Once the legal position is determined, and it is clear who owns the IP, and, to what governmental infrastructure a company can ask for help, it must then be put into writing as to the chain of ownership of the IP. It must be clear in an assignment document who the owner of the IP is, and what ownership other co-founders of the company have. This document must be signed by all parties and in some situations even sealed. This legal document is cheap, quick to make, and most importantly will protect the IP owner from future ownership challenges. 

DOCUMENT: Assignment of Intellectual Property Rights

If however the IP is created by an external consultant without a specific assignment, then they will be the owners of the IP.  Thus, your logo designer might, for example, prohibit the future use of a logo he/she created. Thus, it is strongly advised to make workers sign a simple assignment document, to move the ownership of the logo in this situation to the company that commissioned the work. 

When an IP owner decides to sell their IP ownership, the IP owner should make the seller sign a simple assignment that clearly states that once X amount of money is paid to Y by a determined amount of days, then the ownership will automatically be transferred to the buyer. This document provides absolute clarity and allows the owner of the IP to sell his ownership on his terms. 

DOCUMENT: Trade Mark Assignment

If you want to extend your ownership of the IP to other countries outside the UK, other countries will require proof of ownership as the T&C will not be considered valid nor acceptable. As such, it is of extreme importance that all relevant legal documents are in possession of the company, to be used for future disputes as proof.   

It is important to highlight that if you are the owner of a startup, you individually will not own the IP, but it will be owned by the company. If you decide to sell your company, once sold, and the IP with it, the owner will be giving up any rights he ever had on the IP. All rights the owner once had will disappear automatically and be transferred to the buyer of the company.

In situations where no company is set up, it is a good idea to have joint ownership. However, it’s also worth noting that joint ownership can create problems and cause future issues. As such, it is suggested to have the IP owned only by one person and then create an agreement, in the form of a written contract agreement on how the IP may be used. 

If the owner of a company cannot get the ownership of the IP transferred to the company, he/she must get a license, through a Software License Agreement and or a Trademark  License Agreement. A license is a legal written contract, signed by the owner, and authorises the licensee to use the IP in the way specified in the agreement. 

The final and most important aspect when dealing with IP is disclosure

It is fundamental that the inventor of an IP does not disclose the invention in any shape or form to the general public. If such events take place it is very unlikely that the IP owner will be granted a patent. Keep in mind that verbal disclosure can destroy your business. It’s recommended to make all those involved with the IP sign a Confidentiality agreement to prevent the disclosure of information.  As demonstrated and highlighted by the courts in the case of Synthon BV v Smithkline Beecham Plc. 

Keep in mind that this article provides a general guide to the subject matter of startup companies in the United Kingdom and the importance of protecting IP. 

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

READ MORE: The Startup Documents Your Business Cannot Live Without: A Complete Legal Toolkit

READ MORE: Tools For Expanding Your Business Into New Markets

UK Startups: Essential Legal Documents for Your Business


Ensure that your business achieves its full potential by establishing the right legal foundations to protect your intellectual property, employment and tax issues straight from start up to scale up.

Taking your business ideas into fruition is undoubtedly no easy feat. What’s more, without the valid legal infrastructure in place to outline the relationships between its founders and company, or to protect business ideas, your startup may be susceptible to greater growth-limiting risks and overall detrimental losses.

Having the correct legal documentation in place from the get-go sets up legal protection, defines roles and responsibilities, and provides a solid foundation allowing the business to grow into its own within the fast-paced commercial market. There are several common key legal issues relevant to every startup that can easily be avoided (and in an efficient and accessible way with the assistance of Zegal’s contract templates) which will maximise the chances of success within the competitive business industry.

Shareholders Agreement

As with every startup, when a group of individuals incorporate and become shareholders in a newly founded business, it is important to set in place a Shareholders Agreement in order to distinctively outline the shareholder to shareholder relationship as well as the shareholders’ relationship to the company so as to provide clarity on a myriad of potential issues regarding shareholder rights, company share transfers, the feasibility of certain decisions made by shareholders and so on. In constructing a well-founded and secure Shareholders Agreement, it is vital that each clause aligns with the company’s memorandum and articles of association, which highlights the distribution of responsibilities within the company and are both required for companies formed in the UK, according to the Companies Act 2006

The memorandum of association clearly and explicitly demonstrates that the shareholders agree to form the company in compliance with the aforementioned Companies Act 2006 and, further, agree to become the first members of the company. This prescribed form, which requires each shareholder to authenticate its clauses, is comprised of a statement of compliance. It must be delivered to the Companies House in accompaniment with an application for registration of the company and the startup’s articles of association, which outline the company’s limits and restrictions. With Zegal’s Term Sheet templates, parties can easily enter into negotiations and execute transactions using the Investment Agreement template.

The limits and restrictions imposed on a company and its exercise of powers as set out in its articles of association serves as a source of reassurance for shareholders of the startup that its directors will not pursue potentially damaging courses of action yielding grave repercussions without the acknowledgement and approval of its shareholders.

While there is no prescribed form that these articles must abide by, The Companies (Model Articles) Regulations 2008 sets forth model articles, available on the Companies House’s website, applicable to the most common types of companies: 

  • Private company limited by shares;
  • Private company limited by guarantee; and
  • Public limited company

These articles must be submitted to the Companies’ House for approval of acceptable terms before the company can be formed, however, their proposed model articles need not strictly used as the startup may choose to either amend the model articles or construct original articles for review. 

FURTHER READING: Five Clauses Every Shareholders’ Agreement Should Include. Does Yours?

RELATED READING: Investment Agreement vs Shareholders Agreement: What’s the Difference?

Founders’ Agreement 

While there is no legal obligation to do so, a founders’ agreement, especially in the early stages of a startup’s growth, provides an extremely helpful sense of security to founders of a business using a company vehicle. It also provides greater clarity with regard to the operations of the business in avoidance of disputes and miscommunications. The document takes the same form as a shareholders’ agreement, however, is restricted solely to clauses addressing the founders of the company as opposed to all shareholders, these may include:  

  • Ownership rights;
  • Operational responsibilities;
  • Division of equity i.e. value of ownership

The Founders’ Agreement helps get the conversation started and finalises the way you will move forward as a company and as business partners.

RELATED READING: Should I Use a Founders’ Agreement or a Shareholders’ Agreement?

Non-Disclosure Agreement (NDA)

As a startup company, a non-disclosure agreement may seem like an unnecessary and arbitrary big-business practice inapplicable to the minutiae of business ideas and values of a smaller brand yet to reach the apex of recognition on the business market.

The NDA is protection for a vast abundance of private information that you may not want employees or partners publicising or stealing.

Startup companies are in an especially vulnerable position, with every partnership capable of acting as a catalyst for growth, or, alternatively, an opportunity for competition in an environment where you need to ensure trust and candid discussions with potential partners.

FURTHER READING: Strictly Confidential? You need a Non-Disclosure Agreement

Employee Contracts and Offer Letters

In the early stages of establishing a company, it is important that the business strictly outlines what is expected of its employees within Employee Contracts. These legally enforceable contracts are useful as they can also enforce confidentiality obligations through assignment of intellectual property provisions and working hours which abide by the UK government’s Working Time Directive (WTD).

As part of the UK’s PAYE Scheme, if an employee earns more than £10,000, the employer must enrol employees into a pension scheme, which should also be outlined within their employee contracts.

Other details an employee contract may include:

Employees in the UK are legally entitled to a written statement including terms and conditions such as pay, holidays, and working hours, within two months of starting work. These may either be express terms which are set out in writing or agreed orally, e.g. work hours, sick pay, holiday pay, or implied terms which are incorporated into the contract through expectation, e.g. stealing or publicising confidential information.

Zegal provides Employment Contract Templates, providing startups with the essential and indispensable components of the contract such as statutory benefits, restrictions on financial interest and non-disclosure clauses.

By the same token, just as employee contracts enforce clarity regarding expectations held by the employer towards the employee and vice versa, bylaws are also used to address the specific powers capable of being exercised by shareholders and directors. More specifically, these bylaws establish the company’s internal rules, for example, dispute settlement, determining powers of shareholders, and leadership selection.

To facilitate these decisions, a Shareholders’ Resolution to Appoint Directors can be used, while a FAST (Founder Advisor Standard Template) Agreement may be especially useful to startup companies in need of a mentor-figure to advise them on development objectives in return for company shares in the future.

Having bylaws in place protects the startup’s long term organisational integrity and confidence in avoidance from conflict.

One document that should be included within a company’s bylaws to expedite the process of conflict resolution is a given Founder’s Schedule, which determines how a company will efficiently manage its time, prioritising both ‘making’ and ‘meeting’ in equilibrium so as to support the streamlined and constant workflow efficiency of the business even in its earliest days. Furthermore, a Vesting Schedule may also be addressed within your startup’s bylaws in order to protect the parties’ ownership rights over the company.

In this way, the scheme allows employees and employers to benefit from the success of the company, even in the case of a founder leaving the company. The process always involves a specific vesting schedule, which determines when the employee has full ownership of the specific asset or how much of the stock the business can acquire back in case the person leaves. Vesting schemes will include a Cliff Clause, which holds that parties leaving the company within the first year of business do not keep the equity they owned; alternatively, if a party leaves after two years, they may retain 50% of what they owned. 

Transitioning a startup into a scale up company is often seen as a laborious, time-consuming and meticulous task, however, Zegal’s customisable contract and agreement templates have made constructing contracts and ensuring that the daily functioning of the company remains effective and efficient more streamlined than ever, making way for ever-evolving, beneficial changes at an even faster rate.

 

Ching Hei Cheung is a first-year law student and aspiring solicitor studying at the University of Bristol. She is involved in a myriad of extra-curricular activities such as debating team where she has obtained first place in a national competition judged by a panel of legal professionals from Baker McKenzie, commercial awareness society and pro-bono society, in order to refine existing skills in public speaking and negotiations, as well as develop a greater understanding of the commercial market that encapsulates the everyday workings of the legal sector. She is currently interning with Zegal Content Team.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

Start managing your legal needs with Zegal today

 

READ MORE: 21 most common startup Mistakes

READ MORE: Angel Investors Vs VCs: Pros and Cons

READ MORE: 5 Reasons To Set Up Your Business In Singapore

How Do I Fund My New Business Venture in the UK?


fund new business

A new business venture has been born. You have your killer idea, you have done your research and are putting the finishing touches to your business plan, but what’s next? Every successful venture needs some financial backing to get it off the ground. How do you go about securing that much needed business funding and how do you know which is the best option for you?

There are various ways you can go about this and you may need to combine multiple approaches to enable you to launch. From business bank loans and startup grants to angel investors, here are some realistic ideas for consideration that can enable you to get you off the ground.

Self-Funding

Raiding the piggy bank might not produce the capital you require but having a look at your own personal funds is a good place to start. It’s also a good way to test whether you truly believe that your new venture has prospects. Conduct a full personal financial review to assess your position. You may have funds that you have set aside intended for other purposes but that you can re-consider as investment in the business. Do you have any shares that you could cash in for example, or can you get a better deal on your mortgage to free up some capital?

Self-funding is more beneficial than you may realise as it allows you to have full control over your business and mould it the way you want to. It also demonstrates that you have complete faith in your venture which will in turn attract any future investors. If you are willing to invest your own assets then they are more likely to invest in you.

Family and Friends

Raising capital from within your immediate network might be a sensible option. Those who know you well are more likely to trust your business vision and are also have confidence in you that you will deliver on expectations. With interest rates so low in the UK this option is mutually beneficial. You can repay the loan with an interest rate that is higher than they would receive from that cash sitting in the bank. This rate will still be lower than you would have to pay the bank borrowing the money directly from them.

In addition, you can agree on other terms and conditions that are specific to your requirements. For example how much the loan will be when it needs to be repaid and the repayment terms such as frequency of payments. It is advisable to formalize any loan agreements with a written contract. Having the agreement in writing will formalise the details and allow for clarity on both sides.

A Promissory Note is a simple contract that records the terms of a small loan in place of a complex loan agreement. It should include the amount of money to be loaned, any interest rates that are to be applied, repayment terms and the date when full repayment of the loan is to be made

Small Business or Startup Bank Loan

A bank loan obviously comes with the added cost of an interest rate. These vary considerably and can be very high so you will need to do some research. The advantage is that it allows you to keep ownership of your business without having to give any shares away to investors.

The biggest banks in the UK all have specialised services for small businesses. The process for applying for a loan can be long and tedious and you are likely to have to offer up personal assets as security. It is vital to ensure that you don’t borrow too much capital in proportion to your equity. Ensure you have a realistic and convincing business plan drawn up before you embark on securing a loan.

Startup Grant

The UK Government has pledged to help SMEs through the stages of start-up and growth and now there is a range of funding for small businesses to take advantage of. Use the government’s Business Finance Support Finder which allows you to search for funding opportunities based on the location, size and type of business you run.

One option is to apply for a government backed Startup grant. This is a loan of between £500 and £25,000 specifically intended to start or grow your business. Unlike a business loan, this is an unsecured personal loan. In addition you will get free support and guidance to help write your business plan, and successful applicants also get up to 12 months of free mentoring.

Angel Investors

An individual angel investor is usually themselves an entrepreneur who is looking to invest their spare assets into a startup. The advantage of bringing an angel investor on board is that they will not only contribute substantial funds to your business, but also be able to share their experience and access to resources that will guide you towards growth.

You can rely on an angel investor to act as your business coach as they obviously have a vested interest in the success of your venture. You can sense check new ideas and business developments. An angel investor will also usually be able to open doors for you via their large business network.

The downside is that you will have to surrender a significant percentage of control as your investor will require a share of the business in return for their investment. You may also be under significant pressure to deliver your business projections to ensure your angel receives the value they expect.

Related reading: Angel investors vs venture capitalists

When you do get the backing of an investor you will need ensure the correct and relevant legal documentation is in place in order to protect all parties involved.

You may want to issue a convertible note to your investor. This is a form of short-term debt that converts into equity. So the investor would be loaning money to your startup and instead of a return in the form of interest, the investor would receive equity in the company. A Convertible Note Certificate is a certificate that evidences the investor’s title to the convertible note. It is issued after due payment of investment amount by an investor.

A Simple Agreement for Future Equity (SAFE) is a contract by which an investor makes a cash investment into a company in return for the rights to subscribe for new shares in the future. Contrary to a convertible note, a SAFE does not carry interest, does not expire, and does not specify a minimum amount of investment that the investor will make.

A Seed Investment Agreement (Ordinary Shares) is a contract by which funds are raised by issuing new ordinary shares to new investors. Raising funds by a Seed Investment Agreement is simple and direct. The new investors have the same class of shares as the founders and therefore have equal rights.

Incubator

As the name suggests, an incubator is a company that protects and nurtures a fledgling business enabling it to develop and grow. An incubator can offer training, guidance, networks, capital and coworking spaces. Utilising an incubator will also give you credibility with respect to any future investors.

Final Thoughts

There are some alternatives to traditional ways of raising investment that are gaining in popularity. Funding Circle for example is a peer-to-peer lending marketplace that allows investors to lend money directly to small and medium-sized businesses.

Related reading: When should your startup consider crowdfunding?

Lastly, have you considered Crowdfunding? Essentially this involves encouraging people to club together to fund a new project or venture. You will need to raise many small amounts of cash from a large number of people typically via the Internet. Propose your business venture to the masses and if it’s popular enough you can raise the necessary capital to get it off the ground. You will need to offer some sort of incentive though to attract investors and remember, it’s not the done thing to attempt to crowdfund for a vacation or a new sports car!

Zegal can assist you with the necessary documentation when raising finance for a business venture:

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