How To Set Up A Company In The Uk

Transcription

1 TW TechFocus Starting a Tech Business A Legal Guide Free online forms for start-ups Ω Representative offices

2 Introduction When starting any business there are many matters that need to be dealt with. Most important is a good idea which can be turned into a product or service which can then be sold. However, to develop a business, it is often necessary to raise finance and, if it is a technology business, it will be necessary to protect the ideas being developed and to incentivise employees. This booklet summarises the legal issues that those starting a technology business must consider. It is intended for general guidance only and does not represent legal advice. Further information can be found on the TW Tech Focus microsite at We have also now added onto the microsite a suite of free seed investment documents which are available on an open-source basis. These documents include term sheets, investment documents and explanatory notes and can be accessed via the link above or via the QR code on the front of this booklet. For further information please contact your usual Taylor Wessing adviser or one of our specialists, whose details are provided at the back of this checklist. Editor Simon Walker +44 (0) s.walker@taylorwessing.com

3 Contents Setting up a Company 03 Seed Investment 13 Intellectual Property 27 Employment 33 Immigration 41 Share Options 45 Tax 51 Contacts 57

4 Setting up a Company 03

5 Setting up a company 04 Overview A company is a legal entity with a separate identity from those who own it or run it. Businesses can also be run as a sole trader or as a partnership. Those approaches do not allow the business to be owned by a separate legal entity or provide limitation of exposure to the debts and other liabilities of the business in the way that a limited liability company does. Other possibilities include a limited liability partnership (LLP) which is similar to a limited company in providing limitation of liability and a separate legal entity. An LLP is not viewed as an entity in its own right in the same way as a company for tax purposes. Getting the legal formalities right at the outset and getting into good habits of administration can prevent difficult questions arising later on, for example on fund raising, bringing in new partners or realising value. Who forms the company? A company is registered by filing the necessary documents (including Form IN01) and paying the required fee at Companies House. The company is brought into existence when the Registrar of Companies issues a certificate of incorporation. A company can either be registered with documents that are specifically tailored to the requirements of the owners, or a company can be bought that has already been incorporated but not yet traded (a shelf company) and its constitutional documents amended to suit the owner s needs. Law firms, law stationers and company formation agents register shelf companies with standard provisions in their constitution for this purpose.

6 Setting up a company Shares and shareholders A fundamental question is who will own the company. Related to this is working out if the company should have different types of shares in addition to an initial class of ordinary shares, for example additional classes of ordinary share or preference shares. This means considering economic rights (income and capital), voting rights and other matters such as transferability and ability to convert into other classes of shares at particular times. Questions may also arise as to the issue of options and warrants to subscribe for shares. Often it will make sense to set out rights of shareholders in an investment agreement or shareholders agreement, to supplement what is in the company s articles of association see next section. Directors An early decision to make is who will be the initial director(s) of the company. The board of directors is responsible for the day to day running of the business. A private company needs to have at least one director. At least one director must be an individual and all directors must be at least 16 years old. Each director must consent to act as a director and that consent must be provided to Companies House either in written form or electronically, together with certain other details. Secretary A private company does not need to have a secretary (unless the company s articles of association require it). It can be useful to appoint a company secretary, to have one person who takes care of the legal administrative requirements, such as ensuring that 05

7 Setting up a Company the required filings are made at Companies House and dealing with shareholders. As with directors, the secretary must consent to act. Name of the company The company's name must end with "limited" or "Ltd". Before finalising a company name, checks should be run by searching at Companies House (using their WebCheck service) for names the same as an existing name on the index of company names. The Trade Marks Register of the UK Intellectual Property Office should also be checked. This is because: no two English companies can have the same name; if the name includes the registered trade mark of a third party, the use of that name will automatically breach the registered mark if the intended use is in the same class; and if there is confusion in the market place between the corporate names and both companies are in a similar trade, a "passing off" action may be brought by the first company which has built up goodwill in the name, against the second. There are further restrictions under the Companies Act 2006 in relation to: names that suggest a connection with Her Majesty s Government, a devolved government or administration or a specified public authority; names that include sensitive words and expressions included in regulations; names that include words that would constitute an offence; and 06 offensive names.

8 Setting up a Company Even after incorporation a company can be required to change its name in the first year if: the name is "too like" an existing name on the index; misleading information was provided at the time of registration; the company s activities are misleading; or the name is too similar to a name in which someone else has goodwill. In general a name is "too like" an existing name if the differences are so trivial that the public are likely to be confused by the simultaneous appearance of both names on the index; and/or the names look and sound the same. In addition to the basic searches referred to above, to start off on a sound footing other searches can be performed in relation to trading names and trade marks in the UK and abroad and on such other matters as URLs and patents. Articles of association The company must have articles of association. The articles are a contract between each shareholder and the company and govern the company's internal workings and will set out a range of procedures to deal with various matters including rights attaching to shares, directors' powers, proceedings at director and shareholder meetings and voting rights. Usually the articles are not contentious; however, in the event of an investment by an independent third party, the articles will often be one of the main focuses for negotiation see next section. The articles need to be registered at Companies House unless the company relies on the "Model Articles", which apply by 07

9 Setting up a Company default if no others are registered by the company. The Model Articles may not be suitable for every company and will generally require alteration to meet the needs of the company. Registered office A company is required at all times to have a registered office to which all communications and notices may be addressed. Service of a document on a company is effective if it is sent to the company's registered office. A company may change its registered office by giving notice to Companies House. The change takes effect when the notice is registered. There is a 14-day period after the date of registration of the notice where a person may validly serve documents at the company's previous registered office. Statements of initial shareholdings and capital The statement of initial shareholdings in the application to form a company (Form IN01) must state the total shares taken by the subscribers on formation including the number, class and the aggregate nominal value of those shares of the subscriber's shares. Whenever possible, all of the founders should subscribe for shares on incorporation and should subscribe for more than one share each. An individual subscribing for shares who is a director / employee or about to become one should sign a Section 431 election within 14 days of subscription. 08

10 Setting up a Company Documentation for incorporation To incorporate the company the following documents must be filed with Companies House: application to register a company (Form IN01) and the fee; articles of association (unless Model Articles are adopted in their entirety); and additional information if the application includes a sensitive word or expression (see Name of company). These items can be filed in paper form by sending them to Companies House in Cardiff (for companies to be incorporated in England and Wales). Hand delivery is also possible during office hours, for which the branch of Companies House in London may also be used. Registration normally takes seven days if the application for registration is made using the normal service for which the fee is 40. An expedited service of incorporation within 24 hours is available and costs 100. They can also be filed electronically if an electronic filing service account is set up. The fee is 13 ( 30 for the same day). Alternatively, the Companies House web incorporation service can be used. This allows people to set up a simple private limited company, using Model Articles, for a fee of 15. Customers access the service via the Business Link website ( 09

11 Setting up a Company Stationery, websites, s and signage Every company must display its registered name at its registered office and at any location, other than the registered office, at which it keeps company records available for inspection as required under the Companies Act. The registered name must also be displayed at any other location at which it carries on business, unless this is a location which is primarily used for living accommodation. The registered name must also be disclosed in legible characters on all websites of the company and on all (whether in hard copy, electronic form or any other form) other forms of its business correspondence and documentation. In addition to the registered name, all business letters, order forms and all of a company's websites must clearly state details of the registered number, the part of the United Kingdom in which the company is registered and the address of the registered office. Companies House filings All statutory forms are available, free of charge from Companies House. They can be obtained from their website or by telephoning Forms can be filed electronically using WebFiling or Software Filing (for which suitable software needs to be installed). They can also be filed in hard copy. A company using WebFiling can register for the PROOF (PROtected On-line Filing) Scheme. This provides additional security relating to the delivery of directors details and registered office address for documents delivered electronically. It prevents unauthenticated paper filings. 10

12 Setting up a Company Directors have a responsibility to prepare and deliver documents, on behalf of the company, to Companies House when required by the Companies Act. Common filings include: the annual return; the annual accounts; notification of any change in the company s officers or in their personal details; notification of a change to the company s registered office; allotment of shares; and registration of charges. 11

13 Seed Investment 13

14 Seed Investment Equity Equity is a term which covers all types of shareholding investments in a company. Equity has the following characteristics. It gives the equity holder ownership of a stake in the business. It is unprotected so on a liquidation or winding-up the shareholders will not recover their funds until all creditors and other costs of winding up the company have been paid in full. When a company is limited by shares the liability of those shareholders can never be more than the amount which they invested. A shareholder has rights in the company; these are set out under statute and common law and can be varied by agreement between shareholders through the articles of association and/or a shareholders' agreement. Debt Debt is a term which covers all types of borrowings by companies and has the following characteristics: Debt ranks ahead of equity on an insolvency of a company. Secured debt ranks ahead of unsecured debt. If it is secured this means that the company has charged or pledged certain of its assets to the lender in order to obtain funds. From the company's point of view a secured loan will restrict its ability to deal with the assets which have been charged. Many lenders will not risk funds in companies with little trading history and/or tangible assets without taking some form of personal security from the shareholders or directors. 14

15 Seed Investment The advantage to the shareholders and the company of borrowing money is that it allows shareholders to retain their shareholdings without dilution. Loan notes Loan notes can be a halfway house between equity and debt and be a flexible alternative. A third party will lend money to a company and the loan will be convertible into shares at a prescribed price at a future date or on certain events happening. There would usually be interest payable on the capital amount of the loan notes. That capital sum may be secured against assets of the company. Loan notes may also be repayable within a certain period or on certain events happening. Statutory restrictions to raising funds Companies seeking finance from investors are, in effect, promoting investments and must therefore ensure that in doing so, they comply with the relevant legal and regulatory requirements which have been put in place to protect the investor. Financial promotion communications in the UK are prohibited unless they are made or approved by an authorised person' or unless there is an available exemption. There are exemptions available where the target audience is restricted to institutional investors such as venture capital funds, existing shareholders or creditors and certain high net worth and sophisticated individuals such as business angels (or groups of them). Private companies are prohibited from offering shares or other types of securities to the public (including any section of the public). However, private limited companies can offer their shares by private placement in certain circumstances. 15

16 Seed Investment Key Issues and Terms of Seed Investment Key documentation At the initial stages, quite often heads of terms will be put in place between the investor and the founders to set out the key terms of the investment and reflect a non-binding indicative offer from the investor. An important element will be setting out the agreed valuation of the company which then determines the price of the shares being issued, amount of investment and percentage of the company the investor will obtain. An investor may require that it has exclusivity for a limited period to complete the investment. A detailed heads of terms will make the negotiation of the binding legal documentation an easier process. As part of this process, the investor will be carrying out due diligence on the company (and typically issue a due diligence questionnaire) and making financial and commercial investigations and the parties will enter into a confidentiality agreement. The investors will be examining the business plan and financial budget in detail. The two principal binding documents are the investment agreement (also called the subscription and shareholders agreement) which sets out the contractual terms of the investment and the articles of association which sets out the rights of the classes of shares. If the funding is a seed investment, one would not expect all of rights of an investor (set out on the following page) to be required, but the rights are explained in full so a founder can understand the typical terms that can be asked of them. 16

17 Seed Investment Key terms of the Investment Agreement Parties Existing shareholders and the company All the existing shareholders (and in particular the founders) and the company should be a party to the agreement, although it may not be practical for all minority shareholders to be a party if there are a large number of them. Investors As the investment agreement deals with the subscription for shares by the investors in return for the investment monies, the investment agreement should bind all investors participating, including any separate funds that are investing. Future shareholders It is usual to have a provision requiring any transferee or new allottee of shares to enter into a deed of adherence which has the effect of treating the new shareholder as if he were an original party to the investment agreement and therefore bound by the provisions of the agreement. Completion conditions The investor will stipulate that certain conditions must be satisfied before the investment can proceed to completion. These conditions may include the following: completion of any necessary due diligence in respect of the company; the delivery of a satisfactory business plan and management accounts; obtaining any required tax clearances, for example for VCT or EIS purposes; 17

18 Seed Investment 18 having the necessary authorities (board and shareholder) in place to issue the new shares to investors and adopt the new articles of association; the founders and key management having been issued shares or options. See the 'Share Options' section for discussion of tax issues for share and options and 'Setting up a Company' for details of the initial stages of incorporation; the necessary intellectual property rights being owned by the company; appropriate insurance such as keyman and directors and officers liability insurance being put in place. Completion mechanics These are actions that need to be taken on the completion of the investment: Approval of the investment agreement and if applicable, disclosure letter. Issue of subscription shares to the investor. Appointment of the investor director(s) to the board of directors. An obligation on the investor to pay the subscription monies to the company's bank account. Approval and execution of service agreements if the founders are to become executive directors of the company. Adoption of or commitment to adopt a share option plan. Tranche payments Many investors, particularly in the context of start-up companies, may not want to provide all the funds at the beginning of their

19 Seed Investment investment. There may be negotiation as to the timing of instalments and whether any future instalments should be subject to performance milestones. If so then care should be taken to ensure the milestones are as unambiguous as possible. Warranties Warranties are representations made by the warrantors, who are usually the founders and the company, that certain statements relating to the company are true and accurate at the completion date. If any of the warranties are untrue as at completion, any investor can sue the warrantors for breach of contract. The warrantors can qualify the warranties by way of a disclosure letter and agree limitations to the warranties (for example, time limitation, materiality threshold and financial limitation (which for the founder is usually linked to a multiple of his salary)). Investor consent regime The investor will usually have a minority interest, i.e. it will be holding less than 50% of shares in the company. Under English company law, many shareholder matters can be passed by either a majority of shareholders or by at least 75% of shareholders. The investor will want a contractual right to prevent shareholders taking key decisions without their consent. This applies to management decisions as well as shareholder decisions. The level of consent is very much dependent on how many investors are investing in the target. If there is only one investor, then it is usual to state that none of the matters listed above can be done without the prior approval of the 19

20 Seed Investment investor. However, where there is a consortium of investors it is impracticable and time consuming to require the consent of every single investor before any shareholder matter or board matter is undertaken. In these circumstances it is much more usual to require the consent of a certain percentage of those holding preferred shares. Financial information It is often a requirement that the company produces management accounts, audited accounts and financial models and budgets for the upcoming financial years. This can be burdensome for management to produce. The investor is also likely to require that they can access to the accounts of the company for inspection. Board representation In most cases where a minority stake is being taken, the investor is likely to require that it is able to have an entrenched right to appoint a director and that any such director must be present in order for there to be quorum of any meeting of the board to allow business to proceed. Founders may also have an entrenched right to appoint a director. These rights are often subject to maintaining a minimum shareholding. In some cases, the investor may look for observer rights' so that it has the right to send non-directors to sit in and observe board meetings and to receive board papers, but not to vote. Restrictive covenants The purpose of restrictive covenants or non-competes is to prevent the founders from competing with the business of the target company whilst, and when they cease to be, involved with the company. 20

21 Seed Investment Typically, restrictive covenants will be found in the service agreement as well as the investment agreement. However, restrictive covenants in the investment agreement are generally more enforceable than those in the service agreement, as the founders are giving the covenants as shareholders (not employees) in part consideration for the investment. Key terms of the Articles of association Classes of shares All companies will be incorporated with ordinary shares. If there is only one class of shares they will be ordinary. These have full voting rights, dividend rights and capital rights (to receive funds on any winding up or other return of the company's assets to its shareholders). A company can have any number of types of shares. Some investors will require to be issued with preferred shares. Once a company has more than one class of shares, separate class consent may be required if the rights of a class of share are being varied or abrogated. Liquidation and sale preference If the articles of association are silent, on a distribution of net proceeds of a company on a liquidation or sale, such proceeds are distributed to shareholders pro rata to their shareholding in the company. The investor may require a 'liquidation preference', i.e. the right to be paid a sum equal to (or in some cases though less common these days a multiple of) the subscription amount paid by it before any of the other shareholders are paid. This 21

22 Seed Investment 22 may also apply on a listing. If an investor wants EIS or Seed EIS relief he will be restricted from certain preferences. The investor can seek a non-participating or a participating preference depending on the commercial circumstances. A non-participating preference means that the investor receives its subscription amount paid in priority and the remaining proceeds are distributed to the other shareholders pro rata to their shareholding. Alternatively, after the investor receives its priority payment the remaining proceeds are distributed to all shareholders including the investors pro rata to their shareholding. Dividends The holder of preferred shares may receive a dividend ahead of the ordinary shareholders. However, dividends cannot be paid to shareholders unless the company has distributable profits so there is no guarantee that the investor will receive the dividend. The dividend may become payable on a quarterly or annual basis, at the time of an exit or conversion and can be cumulative or non-cumulative. Voting It is typical for the holders of ordinary and preferred shares to have one vote for each share held although in some circumstances a preference share will be non-voting. Conversion It is usual that the holders of preferred shares have the right to convert their preferred shares into ordinary shares at any time. However, on certain events it is usual to see a provision made for the automatic conversion of the preferred shares into ordinary shares, for example on the listing of a company. An investor may insist that an

23 Seed Investment automatic conversion on a listing of the company only happens if the shares are listed at a price which is at least the same price per share as the subscription price paid by the investor. Anti-dilution Should the business and accordingly values decline, the company may need to issue further equity at a lower price. An investor (particularly an institutional investor) may look to protect its stake by having the right to have further shares issued, at no cost, but credited as fully paid, to bring its cost per share in line with the lower issue price. Such adjustment could be based solely on the new issue price (full ratchet) or could take account of the amount of new monies being raised and shares in issue (weighted average). The articles of association can contain pay to play provisions so that if the investor does not participate in the future issue, it loses its right to such anti-dilution protection. Founder shares The investor may insist that the ordinary shares issued to the founders may be subject to a vesting schedule'. This means that, although the shares are issued to the founders from the outset, the holding of such shares is conditional on the founders continuing to be employed by the company for a certain period of time. If the principle of vesting is accepted, typically the articles of association will include provisions so that the founder shares vest on a monthly or quarterly basis over a defined period. The circumstances of departure (e.g. misconduct or poor health) may vary the vesting or whether such vesting applies and if so at what price the shares must be offered for sale. 23

24 Seed Investment In respect of unvested shares of a departing founder, it is not unusual for such shares to become converted into deferred shares with minimal rights. Alternatively, the unvested shares may be purchased by the company (but the company must have distributable profits for a buy back), offered to incoming employees, employee benefit trust or the other shareholders of the company pro rata to their shareholding (the price of such shares being determined by the circumstances under which the founder departs) or the shares become non-voting until the time of a transfer or listing. Pre-emption rights on new issue of shares When a company issues new shares, the articles of association typically stipulate (unless dis-applied by special resolution) that the company is required to offer such shares first to the existing shareholders pro-rata to their shareholdings (or a particular class of shares). The main purpose of the pre-emption rights is to give existing shareholders a right to maintain their percentage interest in the company. There are typically carve-outs including the grant of options under the share option plan and shares issued for an acquisition. Pre-emption rights on transfers of shares Unless the transfer falls within the list of permitted transfers, the transfer must comply with the pre-emption rights and the shares be offered to the other shareholders. The selling shareholder should be required to give notice to the company of its intention to sell. The priority in which sale shares are offered to the existing shareholders must then be determined. The 24

25 Seed Investment investor may insist that it has a first right of refusal over any shares proposed to be sold irrespective of class. Permitted transfers are exemptions to the pre-emption rights and may include transfers to family members and trusts as well as intra-group transfers amongst group companies or members of an investment fund. The investor may require that its prior consent is required before a founder can transfer his shares, in particular unvested shares. Compulsory transfers On the occurrence of certain circumstances a shareholder is compelled to sell his shares. These typically include bankruptcy or insolvency events, change of control of a company that is a shareholder. If a shareholder is an employee he may be compelled to sell his shares depending on whether he is a good (ill health) or bad (misconduct) leaver. The circumstances of departure will also determine whether he sells at market value or nominal value. Drag along rights Drag along is another situation where a shareholder may be compelled to sell his shares. The drag-along provision compels minority shareholders to sell if a specified percentage of shareholders decide to sell the company (for example 75%). This mechanism enables the sale of the entire company to a purchaser although a purchaser may be reluctant to rely on such provision to effect the share transfers. It is important that the drag along also applies to existing options that are exercised at the time of a sale. 25

26 Seed Investment Tag along rights Shareholders may want to negotiate tag along rights so that if an offer for shares in the company is received by a number of shareholders holding a specified number of shares (so that for example the purchaser will acquire a controlling interest in the company), and those shareholders wish to accept the offer, that offer cannot proceed unless it is made available to other (or perhaps all other) shareholders at the same price. This protects minority shareholders so that they can participate in any offer. Additionally, tag along rights or co-sale rights can be put in place to ensure that, if the founders receive an acceptable offer from a third party, they are obliged to procure that the third party also makes an offer to the investors or the other shareholders on the same terms for the requisite percentage of their shares. Additional issues The articles of association will also deal with the following issues: director appointments and conduct of board meetings, conduct of shareholder meetings, conflicts of interest of directors and insurance and indemnity of officers of the company. 26

27 Intellectual Property 27

28 Intellectual Property In the UK, intellectual property is protected by a complex, sometimes overlapping set of laws derived from both English common law and legislation and European legislation. Some of these intellectual property rights (IPRs) require registration in order for a right to arise and others arise automatically. Highlighted below are some IPRs which may be relevant to tech start ups. Copyright Copyright gives a bundle of rights to the copyright owner (often the creator) to prevent other people from copying, using or exploiting their original works without their consent. It is the most pervasive of IPRs, subsisting in anything from menial pieces of text to great works of art, literature and music. Original works can be found in categories including computer programs, music, books, photographs, drawings, logos and sculptures. Copyright comes into existence automatically when the relevant work is created. This makes it a powerful right because no formal steps are needed before it can be relied on and it lasts for years after the death of the creator. Registered trade marks A company s trading names, brand names and logos can all be protected as registered trade marks. Where not registered, they may be protected by the common law action of passing-off (similar to the law of unfair competition in other jurisdictions). Logos may also be protected by copyright. 28

29 Intellectual Property Registration of a trade mark is not compulsory but it can bring certain advantages. Registration confers a statutory monopoly in the use of that trade mark in relation to the goods or services for which it is registered and in relation to similar types of goods and services. In addition, an action for infringement of a registered trade mark is much simpler than an action in passing-off. Domain names in the UK Domain name jurisdiction, unlike other forms of intellectual property, is determined not by where the business or creator seeking protection is based, but by the top level domain. There are currently 22 top level domain names available in addition to country names such as.fr and there will soon be many more as organisations have, from the beginning of January 2012, been able to apply for a bespoke top level domain name. Domain names originate in the US where they are issued and administered under the aegis of ICANN (the Internet Corporation for Assigned Names and Numbers). However.uk domains are overseen by a company based in Oxfordshire called Nominet ( Patents A patent confers an exclusive and absolute right to exploit what is covered by the patent and can give 20 years protection provided it is renewed every five years. Open Source Software (OSS) OSS is software whose source code is publically available to be used, adapted, modified and re-licensed, usually free of charge. 29

30 Intellectual Property Most OSS is supplied under licence. The licences range from short, wide 'permissive' licences to longer complex licences. They are likely to entitle a customer to ask for OSS source code, to enable them to adapt, modify, or re-license it. Additionally any modifications made by you to the OSS source code are also likely to be governed by the terms of the licence. Compliance issues are usually: failure by companies to make the source code, together with the relevant licence terms, available to downstream users or inserting the appropriate copyright notices; infection by the OSS of the company's own proprietary code, effectively making the proprietary code open source and governed by the terms of the relevant OSS licence. Each company should mitigate the risk associated with OSS as failure to do so may result in buyers and investors requiring indemnities and warranties about the use of OSS in the proprietary software or even reduce company valuations. IPR Ownership Under UK law, in many (but not all) cases, IPRs developed by an employee will be owned by the employer. IPRs developed by a third party such as a consultant or design agency on behalf of a company are not automatically owned by that company. To ensure the company has ownership of those IPRs the company s rights should be protected by a contract which assigns the IPRs to the company. Founders who started work developing IPRs before their company was established and they became an employee will retain ownership of these IPRs unless they are formally assigned to the new company. 30

31 Intellectual Property A company should be properly advised as to how best to identify and then protect the IPRs it may have, as well as how to avoid infringing the rights of third parties. Data Protection Any data which can be used to identify an individual is 'personal data'. All businesses will process (use) personal data e.g. in customer and supplier databases and employee records and therefore may need to make a notification to the Information Commissioner about their data processing activities as a data controller. A Data Controller has responsibility for the way in which data is processed and is defined as any organisation or individual who is responsible for determining how and why personal data is processed. A Data Controller has a legal obligation to protect the data. Where a Data Controller appoints an agent to carry out processing and the agent does nothing with the data on its own initiative, the agent will be a Data Processor rather than Data Controller. A Data Processor has no direct obligations under the legislation but is likely to be contractually obliged to comply with instructions of the Data Controller. Transfer of personal data outside the EEA is, subject to certain exceptions, prohibited unless the data subject has consented and therefore Data Controllers should be mindful of where they host the personal data and how it is processed. 31

32 Intellectual Property Cookies Rules on the use of cookies have changed. The consent of a visitor to a website to the dropping of a cookie is now required except where the cookie is strictly necessary for a service requested by the user e.g. in a shopping basket. The ICO has the right to bring an action against website owners who fail to comply with the new rules. You should keep your use of cookies under review. You need to provide your website users with easily accessible, clear information about your use of cookies; obtain their consent to that use; and provide a link to an opt-out where available. 32

33 Employment Issues 33

34 Employment Issues 34 Hiring employees Hiring members of staff will be an important step in growing your business. In doing so, however, it is important to be aware of your rights as an employer but also the rights of your employees. Many questions arise, such as is a written contract needed, what will the employee s holiday entitlement be, are work permits required, will the employee be entitled to sick pay and what happens if you want to let the employee go? You will find below a brief consideration of some of the main issues when hiring staff, although these are a general guide and specific advice will always be needed. Contracts of employment Every employee must be given a written statement of certain terms and conditions of their employment within two months of their start date. They are also entitled to receive an itemised statement of pay and deductions for tax, etc. It is worth remembering that after a month of working for you an employee will be entitled to a minimum of one week s notice and this will increase by one for every year of service up to a maximum of 12 weeks with twelve or more years' service. Investors will often want the founders and important members of staff to sign up to appropriate employment contracts containing, among other things, IP and confidentiality protection for the company and post-termination restrictions to lesson the risk of competition for a period of time after the employee has left the company. Working hours and holiday Anyone working for you is entitled to work only 48 hours per working week unless they sign something explicitly revoking this protection. In addition, all full-time employees are entitled to a

35 Employment Issues minimum of 28 days paid holiday per year (which can include the eight public holidays in the UK), with a pro-rated equivalent for part-timers. The amount each employee will be paid for a holiday taken is usually based on the average pay of the 12 week period prior to the holiday starting. National Minimum Wage Any worker over the age of 21 is entitled to 6.19 per hour worked and those aged between 18 and 20 inclusive are entitled to 4.98 (these figures are reviewed each year and from 1 October 2013 the rate for year olds will rise to 5.03 and adult rate will rise to 6.31). Employers are under a duty to keep full records of payment to their employees and it is important to ensure that you have these right from the start. Income Tax and National Insurance An employer is primarily responsible for the deduction of an employee's income tax and national insurance contributions from the employee s salary and for the payment of these sums to HM Revenue & Customs on a regular basis. This system is known as Pay As You Earn, or PAYE. The employer must register with the appropriate authorities for PAYE. If the employer does not make these deductions from salaries and payments to the relevant authorities, the employer may be subject to liability for the sums which ought to have been deducted in respect of the amounts paid and for penalties and interest on the unpaid sums. The rates of income tax for the year 2013/2014 are as follows: 0-32,010 20% 32, ,000 40% Over 150,000 45% 35

36 Employment Issues In addition, an employer will be obliged to pay the employer's national insurance contributions (NICs) at a flat rate of 13.8% of the salary (above a minimum limit and from April 2014 the first 2,000 of employers' NICs costs will be exempt). There is also a liability for the employer to deduct the employee's NICs from the employee's salary. Broadly the employee's NICs are at a rate of 12% for salary between 149 to 797 per week and at a flat rate of 2% above 797 per week. Family friendly laws All female employees are entitled to 52 weeks maternity leave, regardless of how long they have been with the business, and during this period the contract of employment will continue except for those parts relating to pay. For any employees who have 26 weeks continuous service, statutory maternity pay must be provided. Much of the cost of this can be recouped from the Government and it is worth checking the specific regulations on the Government's website. All pregnant women are entitled to reasonable time off in order to attend ante-natal appointments. On a woman s return to work after maternity leave she must be reinstated in her former position. Any dismissal on the grounds of pregnancy is automatically unfair and would also amount to sex discrimination. There are similar provisions in relation to adoption leave which would cover the same period. The partners of women who have become mothers are entitled to up to two weeks paid paternity leave on the birth of the child and up to 26 weeks' unpaid paternity leave. The Government intends to introduce a new system of shared parental leave from 2015, allowing parents to share up to 50 weeks of 52 weeks' "maternity" leave between them. 36

37 Employment Issues All employees with at least 26 weeks' of continuous employment who have a child or caring responsibilities for an adult are able to make an application to the employer to work flexibly in terms of the number of hours they work a week or the times that they are required to work. They are also able to make a request to work from home. Although employers do not have to agree to such requests, they do have to take them seriously and it is important to demonstrate that as an employer you have considered whether or not it is possible to agree the request. Health and safety An employer is under a general direct duty to have regard to the safety of all employees. The employer is also liable for accidents caused by acts of employees where the employees were acting in the course of their employment. There may be civil liability and criminal liability for failure to observe health and safety responsibilities. The officers of a company in breach of the legislation may be personally liable, in addition to the company itself. An employer is obliged to maintain insurance, under one or more approved policies with an authorised insurer, against liability for bodily injury or disease sustained by employees and arising out of and in the course of their employment. 37

38 Employment Issues 38 Dismissal All employees who were employed on or after 6 April 2012 will have the right not to be unfairly dismissed once they have worked for a company for two years. Dismissals are only fair if they relate to: Capability Conduct Redundancy Illegality of continuing to employ someone (e.g. their visa has expired) Some other substantial reason A dismissal for any other reason will be unfair. In addition to only dismissing someone for a fair reason, the employer must follow a fair procedure in reaching the decision to dismiss. If employees are found to have been unfairly dismissed they may be compensated by a basic award and an additional compensatory award. The basic award is calculated on the same basis as a redundancy payment (see the following page). The current maximum compensatory award for unfair dismissal is 74,200. Redundancy In the event that an employee is redundant (i.e. where the business has closed down or else the type of work that the employee is doing is no longer being done by the business) any employee who has two years continuous service has a right to compensation in addition to their notice period. Redundancy payments are calculated on a sliding scale depending on age and the length of service with the company. The maximum award is 13,500 but most employees do not have the necessary service for this amount of money (20 years). It is nevertheless an additional cost to the business which should be factored in.

39 Immigration Pensions Employers will soon be required to provide a pension scheme for employees. When this applies depends on how many employees the business had on 1st April If the business had no employees then, the law won't apply until between May and November When it does apply, all employees who earn over a minimum amount and are aged between 22 and state pension age will need to be automatically put into a pension scheme. The employer will need to make minimum contributions of at least 1% of salary (rising to 3% in 2018) and deduct contributions from the employees as well. It is wise to prepare a few months in advance, carefully choosing the scheme and funds to be used and communicating details to employees, as well as setting up the payroll process. 39

40 Immigration

41 Immigration Overview One of the most common complaints from technology businesses is finding suitably skilled staff. With an under-supply of skilled developers and specialist tech staff in the UK, digital economy firms are increasingly looking abroad or to non-eu staff already in the UK to plug the skills gap. You will find below an overview of the UK visa options available to non-european entrepreneurs and startup tech businesses. In each case, the spouse / partner and children (under 18) of the main visa applicant may be eligible for dependant visas too, enabling those family members to work and/or be educated in the UK. Entrepreneur visas, sole representative visas and some sponsored Tier 2 visas lead to permanent residency after five years continuous stay in the UK, although there are differing rules on permitted overseas absences (the Entrepreneur visa has the greatest flexibility). Permanent residency is a mandatory stepping stone to getting a British passport. Entrepreneurs Non-European entrepreneurs looking to start-up a standalone venture in the UK should consider the Tier 1 Entrepreneur visa, designed for foreign wealth creators bringing growth to the UK. The main conditions and things to consider for this personal visa are: To get and hold the visa, the entrepreneur must invest funds into a new or existing UK business. If the seed money comes from a reputable source, the minimum investment is 50k. A qualifying source of funding will be any of: (a) VC firm regulated by the FSA, (b) UK entrepreneurial seed funding competition endorsed by UK Trade & Investment or (c) a UK government department. 42

42 Immigration In most other cases, the entrepreneur will need to invest at least 200k of their own unrestricted personal funds, but this can include money from certain third party contributors. To extend the visa after three years the entrepreneur must prove (a) the required investment was made, (b) he/she has registered as a UK director or as self-employed, and (c) created at least two full-time equivalent jobs for settled (usually EU) workers in the UK, lasting at least 12 months each. Permanent residency can be accelerated in certain circumstances. Overseas businesses Non-European tech businesses looking to set up a UK office for the first time should use a sole representative visa to send over one senior and established employee to run the UK operation on a full-time basis and to oversee a sponsor licence process to enable subsequent staff transfers to the UK from head office (see below). The employee must not be a majority shareholder in the overseas business and the new UK operation must be either a registered Establishment (branch) or wholly owned subsidiary of the parent company. The UK operation must also carry out the same type of business as the overseas business. Work visas for technology businesses By closing various personal visa routes (such as Tier 1 General and Tier 1 Post Study Work for recent UK graduates), UK employers need to use Tier 2 work permits to hire skilled non- EU staff. Tier 2 is a sponsored visa route for skilled non-eu employees with a job offer from a licensed sponsor. To get a sponsor licence, the UK office needs to be trading (with at 43

43 Immigration least one employee) and show that it can meet certain HR and compliance requirements. For a start-up trading business with a UK bank account and other registrations in place, it will take at least three months from submission to get a licence. Once a licence is in place it can be used to recruit skilled non- EU staff, either already in the UK or from overseas, although recruitment from abroad will usually result in additional process and delay because the UK's immigration cap will apply. For all Tier 2 visas, there are minimum salary and skill levels for the UK job, and unfortunately there are no concessions for start-ups. Often advertising of the role to the resident workforce is required before a visa can be issued to a non-eu hire, because the UK employer must show that there are no suitably qualified settled (typically European) applicants. If the UK office is part of an international corporate structure, intra-company transfer visas can be used to move employees from overseas offices to the UK on assignment, in which case the UK sponsor will be exempt from the cap and advertising. 44