Orrick's Founder Series offers monthly top tips for UK startups on key considerations at each stage of their lifecycle, from incorporating a company through to possible exit strategies. The Series is written by members of our market-leading London Technology Companies Group (TCG), with contributions from other practice members. Our Band 1 ranked London TCG team closed over 310 growth financings and tech M&A deals totalling US$26bn in 2021 and has dominated the European venture capital tech market for 25 consecutive quarters (PitchBook, Q1 2022). The first instalment in the Series guides founders through the process of setting up a private limited company.
Incorporating your startup can be a complex and stressful process. Unfortunately, errors are relatively common and can lead to future problems when they are discovered as part of due diligence on a funding round or an exit. This guide sets out some of the key issues you should consider when incorporating a private limited company, to ensure that your startup is well set up to hit the ground running.
Key Considerations when incorporating your company
1. Co-founder equity split. One of the most common reasons why business ventures fail is due to disagreements between founders regarding equity split. Incorporating your startup early can form the basis of these discussions and allow you to address these problems head on to ensure that you and your co-founder are aligned on equity split from the beginning. Many co-founders look to have these discussions in the context of putting in place a Founder Agreement, however it’s worth noting that the Founder Agreement will get superseded by the Shareholders’ Agreement on your first priced round and is therefore often not time well spent at incorporation. More on this in our next instalment.
2. Adopt your articles of association. All registered companies must adopt articles of association, unless they opt for Model Articles to apply. The articles of association will contain provisions concerning decision making, rights attaching to a share class, and how directors exercise their powers. Although Model Articles are sufficient for your early-stage company, our Company Secretarial team can help you incorporate your startup with a set of articles which deviate from Model Articles to ensure that you have a strong constitutional foundation.
3. Consider who the directors will be and if PSC rules apply. A private limited company must have at least one director who is a living individual, over the age of 16 (although additional corporate directors are permitted). Keeping your board of directors lean at the outset can retain your ability to remain agile and make decisions quickly to match the fast-paced growth and development of your startup and leave room for your board of directors to grow with you as new investors come onboard.
4. Consider any Persons with Significant Control. A ‘Person with significant control’ (PSC) is a person with either more than 25% of the issued shares, a person with 25% of the voting rights, a person that holds the power to remove the majority of the board of directors from the company, or otherwise has the right to exercise significant influence on a company’s decision making. You are legally obligated to identify any PSCs when incorporating your startup and throughout its lifecycle.
5. Allot subscriber shares. Subscriber shares are the shares issued and allotted to the initial subscribers of a newly incorporated company. If the company is to have a share capital, it must issue and allot at least one share to each of its subscribers. To ensure you retain some flexibility as your startup grows and takes on new investment (and to avoid having to sub-divide your shares in the near future), it can be helpful to incorporate your company with more shares of a smaller nominal value, e.g. 1,000 ordinary shares of £0.001 or even 100,000 ordinary shares of £0.00001. Where you are incorporating a wholly owned subsidiary of a foreign parent entity (e.g. a UK subsidiary of a US parent company), there may be additional considerations and requirements you need to consider.
6. Include scope for employee share options. When your startup is in its early stages, it may not have the financial backing to fully remunerate its employees with high salaries. By incorporating and including provisions in the articles of the company in relation to share options, you can reward employees with the promise of a greater stake in the future growth of the company. We will cover employee share schemes in further detail in a future instalment.
7. Protect your name. It is a common misconception that registering a company name at Companies House will protect that name under trademark law and stop others from using it. In fact, trademarks in the UK are administered by the Intellectual Property Office (IPO) and should be filed for separately; your company trading name and your registered company name may be different. On incorporation, it is good practice to check the Companies House name availability checker and the IPO trademark database.
Companies House Filings
8. Making your online filings at Companies House. Most Companies House filings are now made electronically, which means that you no longer have to submit paper filings. You can incorporate your company and make most filings relating to share capital (for allotments, sub-divisions and re-classification of shares), notify a PSC, and file your annual confirmation statements through your Companies House portal. You can find a full list of the forms you can file online here.
9. Uploading documents to Companies House. Companies House has also introduced a service which allows you to upload documents online which previously required paper filing, such as your articles of associations and shareholders’ written resolutions. It is a legal requirement to file any special resolutions passed by your shareholders, but it is often missed. We recommend that you therefore take the approach of filing all of your shareholders’ written resolutions unless there is a sensitive reason not to file an ordinary resolution.
Updating and Maintaining Company Registers
10. Update and maintain company registers. It is important to prepare and maintain statutory company registers. In a financing round or an exit, they are the first documents that opposing counsel will ask for. Every UK incorporated private limited company is required to maintain certain statutory company registers, either at its registered office, at a SAIL address or at Companies House. The registers, otherwise known as the statutory books, are comprised of the following:
- Register of Members
- Register of Directors
- Register of Directors’ Usual Residential Addresses
- Register of Secretaries
- Register of People with Significant Control (PSC register).