Britain has been cementing itself as a world-class technology hub for many years and has attracted millions of pounds in investment from all over the world.
The UK was ranked as the third most promising market for innovation, disruption and technology breakthroughs in KPMG’s 2018 Global Technology Innovation Report. It is only led by the United States and China. The report states that tech businesses published robust earnings and cash flows, making 2017 a strong year for the sector generally. Venture capital investment in 2017 was almost double that of 2016, with a record of $4 billion. Apple Inc.’s recent announcement that it is acquiring the UK-based Shazam for $400 million is just one example of the UK tech sector’s growing prowess.
Deals such as this beg the question; in addition to a unique selling point, what else do start-ups need to growing from Kickstarter campaigns to being in the same league as (what can now be considered) tech giants like Netflix, Snapchat, Airbnb and Spotify?
Flexibility and foresight are key for tech start-ups; the ability to create a structure and growth strategy that works for you and future investors.
Here are our top three tips for making your tech start-up work for you.
One – Take steps to ensure you can hire talent from anywhere in the world
One of the biggest challenges tech companies face when attempting to grow is finding the right talent quickly. According to Tech Nation, over 50% of tech companies listed a shortage in highly-skilled employees as a barrier to running and growing their business, with a quarter of them stating it was a “major concern”.
Unfortunately, Brexit is not making this situation any easier, with many EEA nationals shunning the UK in favour of other European tech hubs due to the uncertainty surrounding their right to work in Britain. That said, companies that meet the qualifying criteria could apply for a Tier 2 sponsorship licence to hire employees outside the EEA, thereby broadening their talent pool. Further information on the Tier 2 work visa process can be found here.
Two – Incentivise employees with share options or a share award scheme
Share options are a great way to attract talent and incentivise employees, especially if an organisation is not in a position to pay high wages from the outset. Share options give employees a stake in the financial success of the company, without the need for the company to make the person a formal shareholder. Not only are share options flexible, but they can also be tax efficient.
Employees are usually able to exercise their share options within a certain period of time and after certain triggering events have taken place, such as reaching certain targets. This is known as a vesting period. The advantage to the employees is when they exercise their share options i.e. buy the shares, it will be based on the price that was fixed at the time the employer granted the share options. Essentially, the increase in the market price of the shares will not affect the price payable by the employee.
These type of arrangements can also be referred to as ‘phantom share option plans’ (further details can be found here).
The advantage of this type of incentive to the start-up, is simple: employees are likely to work harder and be committed to growing the business when they can reap the financial benefits as well.
Three – invest in protecting your IP
Intellectual property (IP) can be the most valuable asset of a start-up. IP is concerned with the protection of unique branding, creative works, trade secrets and inventions. There are different types of IP:
– Design right; and
– Passing off.
For example, groundbreaking software or processes can often elicit patent, copyright or database rights protection. That said, allocating resources towards IP protection often takes a back seat to more obvious business needs such as hiring the right CTO or acquiring an office space.
However, funders looking to invest want the comfort of knowing that the start-up has taken appropriate steps to protect its IP, which in turn demonstrates that the founders have good management procedures in place and that the start-up understands where its value lies. For tech start-ups especially, it is the IP that secures investment, and savvy venture capitalists want to see you have protected the object they are placing their risk on.
It is important to have an IP protection strategy in place from the outset. In addition, make sure third-party IP is dealt with using ‘clean room’ procedures to avoid time-consuming, costly disputes. For further information on IP considerations, please click here, here and here.
While it may seem like an expensive luxury for a start-up, the fact is that prudent entrepreneurs understand the long-term value of investing in early legal advice. By creating a solid foundation regarding hiring and retaining the right talent and protecting your biggest asset – your IP – chances are that you can attract quality investment and grow at a pace that ensures long-term success.
Saracens Solicitors is a multi-service law firm based opposite Marble Arch on the North side of Hyde Park in London. For information on any of the points in this article, please call our office on 020 3588 3500.