Night 8 – Legal Issues
In 2017, I attended Phase 1 of the New Frontiers Programme which is run by Enterprise Ireland. The programme ran two nights a week over six weeks. There was no fee to attend. I would highly recommend this programme to anyone starting a new enterprise, whether your idea is just an idea or is a semi-developed product. What follows is a post which gives an outline of night 8 of the course. When fully published, there will be 11 posts documenting all nights of Phase 1. To see a list of published posts, click here.
Tonight’s talk was given by Fred Logue (Twitter, LinkedIn). Fred is a former engineer turned solicitor (with FP Logue Solicitors) and he managed to make what, to me, is an uninteresting subject relatively lively and upbeat. Fred covered many topics and answered questions from the group as well as he could. However, as we only had two hours, most of Fred’s answers had the caveat of ‘it depends!’ after them.
The Makeup Of A Company
Fred started by talking about what a company is, what shareholders, directors and nonexecutive directors are. For the record here are the notes I made on it:
Shareholders own the company. There is commonly an agreement between them known as a shareholders agreement which lays out the processes for share selling etc. There can be such things as founder shareholders which have different terms and conditions to regular shareholders in the shareholder’s agreement.
Directors are appointed by shareholders to manage the company. Directors fiduciary duties which are set out in the Companies Act 2014. A person may be a director and a shareholder at the same time but does not have to be. Legally a nonexecutive director has the same responsibilities as all other directors. However, typically a NED is not involved in operational decisions but may paid a retainer.
There are two types of companies, a limited share company (LTD) and a designated activities company (DAC). This blog explains the differences between a LTD and a DAC. Essentially a DAC is restricted as to which activities/services/products they can produce/provide. A DAC may be more attractive to investors as its activities are ringfenced and mean that company remains committed to whatever the investor initially invested in.
When a venture capitalist invests in a company, it is typical that they will look to have a director appointed and may want revisions/amendments made to the shareholder’s agreement. We were also made aware that although a 51% stake in a company is a controlling share, it only takes a 25% stake to block changes that require approval by 75% of voting rights.
Fred was asked typically what a good percentage of a company is to give to investors. what was interesting was that Fred had a different way of looking at this question that I had encountered before. The way Fred suggested we think about this question is as follows:
Instead of saying, ‘I will give you 15% of my company for €15,000.’ Think about what your projections are. So if you have projected your company to be worth €1,000,000 in three years time, your investor will now be owed €150,000 which is a huge return for three years. So perhaps a better equity portion to have given away for €15,000 may have been 1%.
I found that to be very interesting. As well as the above, Fred stressed that we should not be willing to give away more than we feel is right and not to be intimidated into doing so. Also, the point was made that before taking a NED or mentor into the company, it should be clearly laid out what that investor’s role will be. For example, are you as the company owner expecting them to be at a meeting every Monday morning while the NED/mentor thinks he/she will only be available for a ten-minute phone call once a quarter.
Investors will want to know that you have all your legal boxes ticked. For example, that you own all your logos/trademarks etc.
Other Topics Of Interest
Some other interesting things that were discussed tonight included the importance of
- Having a good accountant and not attempting to file company accounts by yourself
- Not filing a trademark without a solicitor
- Being aware that copying document templates for legal documents relating to your business is not a good idea as each business is unique and one will not cover the other
- Recognising that we cannot and should not try to do everything. Fred gave the example that Michael O’Leary runs Europe’s largest airline but does not fly the planes.
- Having a trademark. If you do not own a trademark you may not even have a right to your domain name.
Fred suggested that we look for software to help us with our bookkeeping and personally recommended Bullet HQ. While writing this post I just opened an account with them and they do seem pretty slick.
There exists a document which goes by the name of The Consumer Rights Directive.
As a software product matures, it becomes easier and cheaper to replicate. Therefore it is important to grow the brand and business and not just enhance the software product.
During the talk, I wondered why anyone would bother setting up a new company as there is so much legislation to be aware of and processes that must be followed…Overall another worthwhile and interesting class, even if the subject matter is not of great interest to me.
If you know someone that would benefit from an online booking system, please let me know about them. I will send you a two paragraph email for you to forward to your friend so it couldn’t be less hassle for you to help a couple of Irish businesses to grow!