Growing a tech business can present a very exciting, but equally challenging, experience for tech entrepreneurs and investors. Whether you are an investor in tech businesses or you are a founder, there are some key tips to consider.
Founders perform a number of roles and they don’t have the luxury of unlimited time and resources! They will need to consider an abundance of information, and it can be easy to become overwhelmed at this stage. The core driver must be the establishment and growth of a unique and investible business. The items on a “to do list” should drive towards that aim.
Entrepreneurs are often “blue sky thinkers” with a host of ideas for their nascent business. While this is perfect for problem solving, the market will be less knowledgeable than the founders. Drilling down to one core market or application will help to prevent a business spreading itself thinly and confusing potential investors or customers. This will also help to deliver a clear pitch to bring in early investors. Once the business is revenue-generating or has enough investment, then the product range can be expanded.
It is important that the business’ team, including lawyers and other advisors, understand how to work with tech businesses. Advisors should demonstrate a shared enthusiasm for innovative and disruptive businesses – this is something we look for in all of our lawyers. Tech businesses tend to break new ground – so expertise and experience are essential as they navigate new issues. Try and find advisors that listen and understand the business’ unique needs.
Investors will be interested not only in the business, but also the people behind it. Make sure co-founders are aligned and understand their responsibilities and contributions to the business. This will include formalising how shares are allocated using a shareholder agreement and potentially putting in place directors’ service agreements. A tech business which is well-run with simple and comprehensive corporate governance structures will be more attractive to potential investors.
It will be essential to establish clear and clean ownership of intellectual property assets so that the business can prevent others from stepping on its toes. This will show investors that the business already has value in those assets and increases the chances of securing investment.
Where possible, register patents, trade marks and/or designs. Ensure that proprietary “know how” and other confidential information is appropriately secured – only disclose what is absolutely necessary and ensure confidentiality agreements (non-disclosure agreements (“NDAS”)) are in place. Make sure all agreements with third parties are reduced to writing and contain appropriate intellectual property assignment provisions and confidentiality provisions.
The business name and logo should stand out and be a unique representation of the business’ identity. The business will need to grow the reputation and goodwill associated with that name and brand. Having to rebrand at a later stage will be a costly exercise and it is wise to avoid this. Instruct lawyers or trade mark agents to conduct searches to check no-one is using the chosen name or brand and then have them register trade marks.
Your customer terms and conditions are one of the important documents that businesses will need to develop as they will ensure the cash flow into your business. They can also help to manage the exposure of the business to risks and liability through caps on liability and disclaimers. It will also need to be reasonable and relevant for the target market to ensure the proposition is persuasive.
Consumer contracts should be drafted carefully to ensure they are fair and reasonable and meet the necessary legal standards.
Do not neglect supplier contracts; they secure the timely supply of key services and components for the business and should impose appropriate standards and service levels on the supply chain.
All businesses will have to comply with applicable laws and regulations to some degree. Some sectors are more onerous than others.
Those laws will also vary from country to country, so consider the geographic reach of the business and plan for this in advance.
Most tech businesses will use data in their business for example, for analytical purposes, service improvements or artificial intelligence (“AI”). Data protection compliance should not be disregarded – the rules are complex and any un-informed assumptions made at the outset will create unnecessary risk, which future investors (and their lawyers) are likely to uncover.
Engage your lawyers to look at these issues early – as with many issues, being prepared is key.
The ideal investor for a business tends to be one that already invests in the sector and markets in which the investee business operates. Founders should try to identify investors who have already had success in those sectors and markets and try and forge connections with them – they may invest as an angel investor and provide valuable support. The investor, on the other hand, should ensure that they understand the business they are investing in.
The path to success is rarely straight and can feel steep and challenging. Obstacles are likely to arise even with the best laid out plans, for example due to competition, changes in compliance requirements or changes in technology. The business may need multiple rounds of funding to progress its plans.
Do not worry, this is not unusual – the stakeholders in the business need to be adaptable and resilient to meet those challenges!
Tom Torkar is a Partner and Head of Technology and Information team at Michelmores LLP. Michelmores run award-winning programmes for tech businesses and investors, including MiVentures and the MAINstream angel investor network.
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