CORPORATE GOVERNANCE: I wouldn’t start from here
At start-up or early stage development, you may think you’re too small to worry about “corporate governance” – but it’s never too early to get into good habits, argues Enterprise Hub Director Martin Brassell.
WHEN TO START THE CLOCK
First, a basic question: when should you incorporate your business? Many entrepreneurs underestimate the amount of time and effort it can take to set up a company. Once it’s incorporated, the responsibilities to prepare accounts and file returns to Companies House begin. If you haven’t finalised your business model or drafted your plan, you might not want to rush into this.
However, as a general rule, having a company becomes very helpful once you start spending money. If getting to market includes investment in research and development, a company can use R&D tax credits to offset these costs against profits (or even get a refund in cash). Similarly, if you need to generate equity investment, you need to have some shares to sell.
Also, and very importantly, you want to be able to claim “taper relief” against capital gains tax if your business sells early – and you must issue your shares in a sensible order to avoid nasty tax surprises in the future. Ask your accountant for details.
CORPORATE GOVERNANCE
Once you have a company, it’s essential to take record-keeping seriously from the very start, particularly when it comes to finances. You never know when you may need to give the best account of your business to a banker, prospective commercial partner, investor or even purchaser, so keeping everything “clean and tidy” from the very start also keeps all your options open.
You can think of “corporate governance” as your command and control system. If you want to give stakeholders the confidence to back you, you have to ensure you have all the legal basics in place, just like any other company. While this sounds obvious, you might be surprised how many businesses that present themselves to Hubs turn out to be missing some of the essential elements.
YOUR DIRECTORSHIP
Being a Director involves both authority and responsibility. The company’s Memorandum and Articles of Association will limit what your company can do and your authority as a Director, so make sure you know what they say (like your business plan, creating “Mems and Arts” is not something you should just leave to an adviser).
In general, a Director must: exercise both skill and care; show the skill expected of a person with your knowledge and experience; act as a reasonable person would do looking after their own business; and act in good faith in the interests of the company as a whole – which includes equal treatment for shareholders, avoiding conflicts of interest, not making personal profits at the company’s expense, and (of course) acting lawfully.
SHAREHOLDER'S AGREEMENTS
Talking of shareholders, one of the most important documents to have at the outset is a shareholder’s agreement – even before you go after any external money. A local law firm recently likened this to a “pre-nuptial agreement” at one of our Hub seminars and it’s a good analogy: think of a shareholder as being for life, not just for Christmas! So if things do go wrong and shareholders fall out with each other or with you, the last thing you want is a fight with no rules.
A well written shareholder’s agreement will cover just about everything of consequence that could occur. It can set out how the company is to be run, who will comprise the Board, how voting will work (and who has what rights) what level of agreement is required for different decisions, how (and to whom) dividends are paid, how disputes are resolved, and (in particular) how shares can be issued, transferred and sold.
A reputable investor will expect an agreement to be in place – and for it not to contain too much in terms of preferential treatment for founders (the more level the playing field, the better).
COMMUNICATION
With a growth business, it is very difficult to form an accurate view on all your future investment requirements (though naturally Hubs will encourage you to try!). For this reason, once you have external shareholders on board, it is vital to establish a constructive relationship; they will be your first port of call if more money is needed.
With any luck your investors will have professional skills, experience and contacts that they will be prepared to share to help your venture succeed. Know what to delegate.
Be prepared to give regular briefings to your investors about the progress you’re making and how it compares with the plans they bought into when giving you the money in the first place. Try not to raise problems without also offering proposed solutions (after all you’re supposed to be the one in charge).
Very few entrepreneurs are truly “rounded” in terms of their skills. Nearly all of us get drawn into the areas that interest us most, be they technical, scientific, marketing, strategic or financial. But if it’s your business, you are responsible for knowing where the land mines are, regardless of which professional discipline they may fall under.
So remember: you can’t delegate responsibility for compliance to your lawyer, any more than you can look to your accountant to make your business profitable.
Author: Enterprise Hub Director - Martin Brassell
Created Date: 17-12-2007
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