A piece in this morning’s Guardian gives voice to the criticisms of businesses and commentators over the use of funds by the Technology Strategy Board. It’s slow, it’s bureaucratic, it’s unaccountable. Yada-yada-yada. Oh, where to start…
The Guardian reports “entrepreneurs are complaining that the significant amount of time it takes to apply for [a TSB grant] is an investment they can’t afford”.
There are 3 ways to raise money to finance your business, people. Three ways. Debt finance (people lend you money), equity finance (you sell some of your business in return for money) or grants. They each have benefits. They each have drawbacks. If you want to raise money through grants, yippee, it’s free money.
Well, no, it’s not free money. It’s not free at all. You have to jump through hoops to get it and when you’ve got it, you have to account for how it’s spent. Sometimes you spend days preparing the paperwork and you get knocked back by some bureaucrat who hasn’t bothered to get to grips with your business and your needs and there’s no right of appeal. What do you want? A medal? Stop your whinging and get on with finding an alternative to fulfil your plans. Jeesh…
The Guardian reports the words of Andrew Carroll (founder of Paperless Receipts, who, and we’ll take this one step at a time, it quotes as saying:
“We went to the Government for our first round of funding…”.
Er, hello? Grants should never be seen as a first round of funding. NEVER. You simply cannot build a business plan for a growth-oriented enterprise that is based on the availability of a grant. If the only way you can get your business moving is with a grant, it’s not a business. I don’t mean that it’s not worth doing. It’s just not a business. Not yet, anyway.
Grants are subject to the whims of politicians and the career ambitions of civil servants. They are used as a power play by the grey sector – that sphere of business that exists somewhere between the public and private sectors, notionally private or at least independent of government but entirely dependent on the flow of public sector capital. NONE OF THIS SHOULD BE NEWS TO YOU. If it is, go back to your lab or your studio and leave the business to the grown-ups.
Andrew Carroll continues:
“… and found the process of doing it laborious and lengthy, to the point that it’s just impossible to actually get [eek split infinitive] anywhere in any reasonable timescale.”
First, see above re. the cost of using grants to finance your business. Second, just what is a reasonable timescale? If the development of your project depends upon the availability of grant funding, you had better build the requisite timescales into your planning. Those timescales are the timescales that an organisation like the TSB works to. That could easily mean a year passing before you get the green light to proceed with a really adventurous project. You, supposedly being in business, might consider that “unreasonable”. In reality, it is neither reasonable nor is it unreasonable. It is what it is. Stop whinging and get on with it.
“I have a number of friends who have had to turn to venture capitalists because they’ve found the TSB process impossible.”
Really, venture capitalists? Surely it’s not that bad?
Are you serious? This guy needs a reality check. If a VC (or a private investor) is prepared to invest in a project, it’s because s/he sees a return. Here’s the rub. You may not yet see the project as a business, but the VC/investor does. Ergo, it is a business. And if somebody is prepared to give you money because they see a return, then that’s the appropriate source of money for you, not the Government. Grants from the likes of the TSB should only ever be for instances where no private sector finance (by which I mean equity finance, since debt finance will not be appropriate at this stage).
Why wouldn’t a VC invest in this situation? Usually because the prospect of a return is too distant or the technical risk is too great. Or maybe because the market is too small and does not justify the investment, in which case there could easily be merit in public sector finance provision. But if this doesn’t apply and you still can’t raise the money, guess what. You’re on your own. Or you would be, were it not for the curious notion that the welfare state should extend to business-building.
Now, you might think that these things are pulled out of the Guardian in isolation, given it’s particular reputation for views on these things. But the Huff Post carried a story this afternoon headlined “British Science Faces ‘Valley of Death’ say MPs”. The piece reviews the publication of a report by the House of Commons Science and Technoloy Committee. The Huff Post summarises the report as saying:
“it was “troubling” that so many British technology start-ups have to be acquired by foreign companies before they can grown into thriving businesses”.
Committee chairman Andrew Miller is reported as saying:
“British entrepreneurs are being badly let down by a lack of access to financial support and a system that often forces them to sell out to private equity investors or larger foreign companies to get ideas off the ground.”
Curse those private equity investors and larger foreign companies with their pots of money and willingness to finance our ideas.
And the TSB is criticised for having a lousy record in backing winners. Good, I say. I WANT the TSB to give money to things that only have a remote chance of success. Because that’s the best way of making sure that the person whose ideas are being financed really doesn’t have a more appropriate option for raising money. So, it’s the best way to guarantee that when there’s a success, it is something that would never have seen the light of the day were it not for the funding.
I have spent a lot of time listening to the Entrepreneurial Thought Leaders podcast series, which is part of the Stanford Technology Ventures Program. (I think that should be “Programme”. Tsk, colonials…). It is very interesting to compare the approaches taken by businesses growing out of Stanford’s enterprise programme and the contrast with our own approach. There are grants available in the USA in order to encourage beneficial research for which no equity finance is yet ready to support. But you would NEVER hear a Stanford graduate describe grant funding as their “first round of funding”. If equity finance is not available, a Stanford entrepreneur might be encouraged to seek finance from a ‘foundation’, that being an organisation set up by philanthropists to support certain ideals. But grant funding would never be the first option. Apart from anything else, life is too short. Especially life in Silicon Valley.
I am no apologist for the Technology Strategy Board. But if you think they are there to be a conventional source of finance because you don’t want to give away any ownership or you’re not prepared to bootstrap or not willing to keep schlepping the finance trail, it’s you that’s wrong, not them.
And whilst we’re on the subject of myths, here’s another one. I’ve just been told by a new games studio client that they’ve registered their copyright with the UK Copyright Registration Service. Anybody that’s been along to one of my IP presentations will have seen the rookie mistake already.
YOU CAN’T REGISTER COPYRIGHT.
Not at all. Not anywhere in Europe. “Registering” copyright proves nothing in the UK other than that the particular expression supposedly registered was actually in existence at a particular time. And even then, only if the court accepts that the copyright registration service you use is infallible in its administrative procedures. It may have an official sounding name, but the UK Copyright Registration Service is NOT part of the UK Intellectual Property Office.
If you want to protect your copyright by starting enforcement action against somebody you believe to be infringing your work, your registration will do no more than show that you purportedly created a version of the work concerned by a particular date. But it doesn’t show that you own the copyright in that work. It doesn’t show that there even IS copyright in that work.
The only time I can conceive of a copyright registration service being of real use is if you have created your work independently and ‘registered’ before the publication of somebody else’s work, and that other person is now threatening you with infringement action. Then, the copyright service may help show that you had created your work independently and independent creation is a complete defence. But of course, that still requires the court to accept that the registration is administratively accurate. The registration is not conclusive evidence of anything.
I don’t know how much it costs to register your copyright, but whatever it costs, think very carefully about whether there is any better way of spending that money. It’s not that this is a con like those grubby sods that try to trick you with their false invoicing scams when you file a trade mark application, but it’s just not what you might think it is.
And don’t even get me started on the difficulty of pursuing copyright infringement in a software scenario these days…
In Seth Godin’s ‘StartUp School’, the great man is asked about his experience of using lawyers whilst starting a business. He tells how, in his last year at Stanford, he started a business with a couple of friends and they managed to scrape together $5000 to invest in it. The university pushed them into taking legal advice – this was long before the days of Eric Ries and the ‘lean’ theory that dominates start-up culture these days.
Seth describes how the lawyer charged him $3000 of the $5000 he had in order to incorporate the company and put everything in order. Remember, this was in the mid-80s, when $3000 was a lot of money. Unsurprisingly, the business folded a year or two later and the only person really to benefit was the lawyer.
If you have been through the process of starting your own business, you’ll be aware of just how precious cash is. It is difficult to justify setting a lot of money aside for professional fees when you’re worried about paying the electricity bill and the rent. But when you can no longer resist that nagging voice you hear in the middle of the night and do pluck up the courage to make an appointment with Big Law LLP, it doesn’t help when the lawyer you see gives you a list as long as your arm of tasks you need him (or her) to carry out RIGHT NOW! You know the sort of thing:
- shareholders’ agreement
- director’s service contracts
- employment terms
- freelancer agreements
- terms and conditions of sale
- review of bank documents
- procurement terms
- trade mark registration
- data protection notification
- distribution agreements
- blah blah blah
And before you know it, all your money has been spent on the legals. In the event that the business is a sustainable success immediately with little further need of cash, you’re sorted. For everyone else though, the £1000s you’ve just spent is likely to be a significant overspend at best, or a complete waste of money at worst. But at least you’re keeping the law firm’s equity partners in cushy new Mercedes leather seats, so that’s something at least.
Because we specialise in the commercialisation process, we deal with a lot of start-ups. I mean A LOT of start-ups. That’s because most innovation is done by early stage companies, so it’s not surprising. We try to put time into those start-ups because most of them will become clients eventually, if not right away. Not having much in the way of spare cash ourselves, you could say that this time is our marketing spend. But the key with start-ups is to work out what they really definitely absolutely have to do with a lawyer right now. And the honest answer for most of them is… well, not a whole lot.
So you’re average growth-oriented start-up will already have incorporated. It won’t want a shareholders’ agreement because it will be looking for equity investment and the investment agreement will stand as the shareholders’ agreement going forward. Yes, it’ll need some help with the employment terms for directors and workers, but this probably doesn’t have to be bespoke at this stage. It’s likely to be some way off being market ready, so terms and conditions etc are not a big issue. And brand protection is something that you need to worry about in the immediate run up to your launch, but it’s probably a risk you can afford to run until then. And if you don’t want to risk it, you can do it yourself, with a bit of guidance.
The question is, how do you access that kind of advice. How do we find you? Back in the money-laden days of ONE Northeast, programmes were plentiful, allowing us to earn a modest living delivering workshops and clinics with rooms, projectors, tea and coffee all supplied. Nine times out of ten, these programmes were entirely free to attend, which meant that on average, about 20% of those who registered didn’t attend and about another 20% failed to make it through to the end.
But nobody is paying us to deliver workshops these days. In fact, one well-known local QUANGO recently asked us to pay them for the privilege of delivering further workshops for them. We politely refused.
We still need to find you. You still need to find us.
Fortunately for us all, most people who are starting a business don’t stand on ceremony. The marble halls of Dickinson Dees are one of our best marketing tools. If you want the biggest law firm in the region, use them not us. If you don’t, why pay their rates? And if you don’t want to pay their rates, you probably aren’t fussed about their conference suites and cocktails on tap. Well, they don’t have cocktails on tap. I made that bit up.
Being officeless (and paperless and secretaryless), we spend a lot of time meeting clients and colleagues in the cafés of the north of England. And we spend a lot of time engaged in social media. So I thought, why not have a crack at staging a clinic ourselves. In a café that everyone knows, marketing it via Twitter, LinkedIn, Facebook and Google+. I asked people to get in touch and make free half hour appointments, even last minute if necessary. But I knew that even if nobody did, I’d still have to go and sit in the café for the day. That’s not such a chore, really, is it?
But they did come. Six of them. All start-ups or early stage businesses. None of them existing clients and only one of them properly known to me (a certain Vicki Stone Marketing). They came. They bought cake, They talked. And we started the process of building a relationship.
I called it The #CafeClinic. And I’m going to do more of them, with the next being on Wednesday 13th March at Whites at Boho One in Middlesbrough. So if you see a tweet mentioning a future #CafeClinic or a LinkedIn status confirming where and when, could you do us and the nation’s start-up community a favour and just pass it on? We might even buy you a coffee…
I had another chance to examine the wider v deeper debate over LinkedIn usage in the last week, this time with a connection – Jeff Fitzpatrick. Jeff is a well-known entrepreneur and investor with particular expertise in ‘turnaround’. He and I connected a few years ago in connection with his Eco-Panel business.
It’s fair to say that Jeff is an advocate of ‘wider’ whereas dear reader, you will know by now that I favour ‘deeper’. I suspect it is related to the introvert/extrovert personality traits. But it got me to thinking, ought I to be making better use of LinkedIn to connect with the contacts of the dim and distant past?
Last night, I was fiddling around with my iPad whilst watching telly I noticed the ‘import contacts’ tool. I had seen it before, but thinking about it, I wondered whether I might use it to find connections from my personal gmail account. Boy, did I. I have added about 30 connections in the 12 hours that have passed, some of which are clients that I had long forgotten about but whom I’m delighted to see are still going strong. There are probably quite a few people who had connection requests from me and are thinking to themselves ‘who the hell is this guy’, but I hope they don’t regard my requests as spam. After all, we must have corresponded at some point.
I guess this is an exception to the rule. An example of where wider and deeper can be the same thing.
I am on a mission. Not a mission from God but a mission to persuade anybody starting a business that getting a lawyer involved early can prove really useful. I know that it sounds counter-intuitive. Bear with me…
If you follow the advice of Jon Bradford, you’ll blag whatever free advice you can from whichever lawyer might be prepared to spare you a few minutes. If you listen to Seth Godin, you will muddle through without lawyers at all until you have had a chance to build a convincing business model.
Who, then, am I to argue with these start-up heroes? I am a lawyer, dammit.
You see, conventionally, lawyers ARE bad for start-ups. Go and see a lawyer and you will expect to walk away with a long list of jobs you will need that lawyer to do for you and an hourly rate upon which those jobs will be done. The sufficiently risk averse amongst you will want to make sure everything is absolutely tickety-boo and you will waste thousands on unnecessary legal fees, money your business probably can’t afford and can be better spent elsewhere. The more naturally entrepreneurial will either NOT see a lawyer at all, or decide that everything that your lawyer says is surplus to requirements.
But if we can dispose of some common myths that lawyers that are NOT accustomed to dealing with start-ups will try to reinforce, you will see that there are very real benefits to speaking with somebody that knows what they are talking about because they have demonstrable experience in working with start-ups. Because what you need right now is ADVICE, not a shopping list.
In what follows, I have included some links to some of our content. Other providers are available. You may not like the cut of our jib, but please do try to seek out another service that is backed by real live lawyers (we don’t much care for the business model, but Rocket Lawyer is an alternative, for example), not a machine that churns out obscure documentation.
Myth 1 – You Need to Create a Company Right Now
Whooah, hold on there soldier. It is part of the human condition to desire a nice job title, and “Managing Director” is right up there, but remember that this is just vanity talking. Absolutely, it’s always a good idea to trade through a company. You will never hear us say anything else. But are you ready for that yet?
The first thing to bear in mind is that incorporating right away costs money. Not a lot of money, but some. Then you need to bear in mind the legal responsibilities you will have. Running a company is a lot like raising a child. Except that a company is much less likely to throw up its breakfast over your freshly-pressed shirt. Have you agreed between yourselves exactly how the company should be owned? What about where somebody is working full time with somebody else to join later? And what about if somebody leaves? These are considerations for your Shareholders’ Agreement.
Myth 2 – You Need a Shareholders’ Agreement Right Now
So you are ready to incorporate or maybe you have already. How do we regulate the relationships between those that own the company? We do it by using a shareholders’ agreement, which you might sometimes see referred to (especially by me) as an SHA. Getting that apostrophe in the right place is always a nuisance.
In any start-up involving 3 or more people, I always expect that within 2 years, no matter how successful the business, one of the founders will be wanting to leave their full-time role to go do something else. This is particularly true amongst businesses run by 20-somethings, who get offered great jobs, want to go travelling, want to move out of the region, pay a mortgage, etc. So having an SHA is a good idea if only for that purpose, and there are stacks more besides. But do you need one now?
If you have started a business that will need equity finance in order to scale effectively, your early doors SHA ain’t likely to be worth so much as a hill of beans once the investor’s lawyers get involved. It’s nice to demonstrate that you take these things seriously, but from that point forward, the investment agreement will be where the action is at.
If you are a husband and wife team or a team of siblings, then, to be honest, your expensive SHA is likely to be much less relevant should you fall out. You will probably have much bigger problems to overcome. And in the husband and wife example, the divorce settlement would override the SHA terms anyway.
If you do have to have an SHA, can you make do with something simple. If you give your conventional corporate lawyer a chance, s/he will want to throw everything in there from deadlock provisions that you may not need to the choice of furnishings for a company boardroom you will never have. Oh OK, so I exaggerate, but the point is that a basic SHA can be done for hundreds. Let your lawyer off the leash and it is going to cost you thousands. Think about when it will be that you will have something of worth going into the company (whether that is resources or revenue) that requires this most expensive of corporate safeguards. Then think about what you need to agree with your co-founders. You’ll thank me.
Myth 3 – You Need Director’s Service Contracts and Employment Contracts Right Now
Let’s address this one bit at a time. If you are employing someone who is just going to be an employee and not, for example, a co-founder, they are entitled to have some written terms of employment. But they don’t need to have a full scale 19 page employment contract. Basic employment terms are readily available on the web for just a few pennies. We have a template on www.particular.pro in fact.
Co-founders don’t have to have a written contract of employment. If you are going to have a shareholders’ agreement then it would make sense to have director’s service contracts as well since there is considerable overlap between the roles you play. Also, if you are looking for equity investment or you think you may be required to defend your IP, you should have contracts that confirm that the company is the owner of any IP generated by the directors.
Even if you do need director’s service contracts at the outset, don’t be fooled into thinking that you need something bespoke. To begin with, all the co-founders should have the same template, so that will save you a bit. Second, you need a draft that covers the core issues. You don’t need something that runs on for dozens of pages. If you want to know a bit more about this, have a look at Deb’s videos “Why You Need to Know About Employment Law” and “Guide to Employment Contracts“.
Myth 4 – You Need Commercial Terms Right Now
Are you already selling? If so, how does that selling take place? If you are running a clothes shop and all your sales are to folk coming in buying t-shirts or whatever, then you’re probably not going to need terms of sale at all.
If you are building something and working towards a launch in 3 or 4 months maybe, then that’s when you need some terms. Not now. And if you are building something new and you really don’t know whether it’s going to work at the outset or whether the business model might not be right initially – and especially if you are bootstrapping – do you really need bespoke terms straightaway? Your first customers will be the innovators and early adopters on the product acceptance curve. These guys like something new. They’re usually not so bothered about the terms of registration/sale. As long as you’ve covered the basics (which you could do by adopting something like our standard service terms as Bloo.ie did, for example) you should be fine for the time being.
When your revenue graph starts bending upwards, you do need to think about investing in some decent terms, preferably something written in plain English or at least what we call “softened legalese”. But the problem with writing your terms too early is that terms of sale or registration or whatever are heavily dependent on your business model. Every time you pivot, you need to review or even replace your terms and that will cost more money.
Oh, and one last thing. I have had a couple of occasions recently when, a client with funding has been asked by a start-up contractor to produce a supply agreement. You can usually translate such a request as “can you have some terms written for us as you’ve got funding and we don’t.” To which, of course, the answer is a firm “no”. The sub-contractor should have their own terms (it would worry me that they don’t). You review them and suggest alterations that will be drafted up by their lawyer as special conditions for your consideration. Job’s a good ‘un.
However, if you can’t find a specialist to speak to for half an hour who can give you a nudge in the right direction (for example, at our #CafeClinic) try the Information Commissioner’s Office website. They have a helpline and they’re super helpful.
Myth 6 – You Need to Protect Your Intellectual Property Portfolio Right Now
So this is probably the most controversial of the myths, but here it is. You don’t need to PROTECT your intellectual property at the start-up stage. What you DO have to do is to ESTABLISH whether what you are doing will infringe anybody else’s rights and IDENTIFY your intellectual property and what it will take to protect it. Then, you have to make a decision on whether the cost of that protection is warranted at this stage.
So, for example, you may have come up with a distinctive brand for your product that is still 6 months from launch. You think your main markets will be Europe and North America and perhaps the Pacific Rim, if things go really well. Do you need to start filing trade mark applications now? Well, even if you do it yourself, a Community Trade Mark application is going to cost you a €900 filing fee. That’s like buying a spare MacBook Air. Not many bootstrapped start-ups have that much cash lying around uncommitted.
So what are your options? Wait until closer to your launch and file your application then. After all, you may come up with an even better identity by then. And if you don’t, what’s the worst that can happen? Somebody else gets in there first and registers the same name or something similar and you have to rethink. If you are really committed to the identity in question, this might not be a risk you feel you can afford to run. If you are not, but you still feel a registration is important, then it might be.
Let’s look at the other major IP right that has start-ups jumping: patents. There are two risks to delaying the filing of your patent application. First, there may just be another team working in some part of the world on solving the same problem as you and they may have come up with the same solution. The first to file their application wins and it really is winner takes all. If you are second, you get nothing, nil, zero, zilch, diddly-squat.
The second problem is that if you run the risk that your invention becomes public knowledge (it is “anticipated”) or that something happens that means your invention is no longer sufficiently inventive (it has become “obvious”). If either of these things happen, your invention will no longer be patentable, or if you still manage to get a patent, it could be revoked.
There is not much we can do about the second limb of this second risk other than to say that you should, in any event, have checked that what you are building won’t infringe the rights of anybody else. In doing that, you should get a pretty good view as to how fast things are moving in your field. But as far as the first limb is concerned, whether your concept becomes public knowledge is very much down to you. You can keep it confidential until you are ready to file by using non-disclosure agreements with suppliers and partners. You might be able to test market by disclosing WHAT your product does without disclosing HOW it does it.
Now look at it the other way around. Is there any danger associated with filing your patent application too early? Yes there is. If you file a patent application and then find that some tweaks to your invention make it much more effective and much more valuable, you may find that you are unable to protect those improvements because once your own application is published, those tweaks have become obvious. Your eagerness to obtain protection will have been your own undoing.
Myth 7 – Speaking to a Lawyer Will Cost You a Lot of Money
And so, to conclude, the biggest myth of them all, but one that, unlike the first 6, is not perpetrated by lawyers but by those consultants and advisers that will love to share their opinion with you: Lawyers cost you money.
Well, of course, lawyers DO cost you money. But legal fees need not be a waste of your resources provided you use your lawyer effectively. If you need help from a lawyer, it is because you are doing stuff and it’s doing stuff that causes you to rub up against the sort of things you need a lawyer’s help with.
Any lawyer that is experienced in dealing with start-ups, especially start-ups in the tech sector, is likely to be able to give you a pretty clear plan of how you need to proceed within the time it takes to drink a big mug of the frothy stuff at a leisurely pace, especially if you are prepared to pay for his or her coffee yourself (always a good sign for potential clients that, I find). Make sure that the lawyer you are going to talk to DOES have that experience though. Ask around, check his or her LinkedIn profile for recommendations and examples. Don’t be suckered into thinking that for a lawyer, working with a start-up is like working with any other kind of commercial client because it isn’t. But if all you do is ask them, they’ll SAY they do, whether they do or not.
You do need guidance and, yes, a plan at this stage. But your plan should not be written in stone. Your business will evolve over the coming months and you and your plans need to adapt to account for its evolution. Ultimately what you need most of all from your lawyer is a relationship, not a shopping list.