Don't promise your shares away, lawyer advises start-ups

Start-ups should not carelessly promise their shares away as payment to employees, a lawyer from Pinsent Masons has warned.

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Start-ups should not carelessly promise their shares away as payment to employees, a lawyer from Pinsent Masons has warned.

The advice follows revelations about shareholdings that came out of social network Facebook's Initial Public Offering (IPO), which included a graffiti artist, David Choe, who is now worth more than $200 million (£127 million) after he chose to be paid in stock rather than cash for decorating the company's offices.

The potentially significant value of shares is also highlighted by the fact that Apple's shares surpassed the $500 (£317) threshold for the first time today, according to the Wall Street Journal.

If start-ups do give their shares away, they should make absolutely sure that the recipient will be with the business for the long term, said Andrew Hornigold, partner and head of technology sector at law firm Pinsent Masons.

"Promising shares to people is dangerous because it is very hard to get them back. The equity is, in many ways, the most valuable [company asset]. Start-ups are too quick to do that when they're trying to get the business off the ground," he said.

Intellectual Property Rights (IPR) is a common legal pitfall for entrepreneurs, and the key is to make sure an audit trail is created, Hornigold said.

This means that if open source technology is used, for example, there should be a clear demarcation between the open source and the proprietary aspect.

"If your business is worth £20 million, along the line, somebody will want to know you have ownership of that," he said.

Meanwhile, the new business models that are created by start-ups means that employment law can also be a minefield for entrepreneurs.

It can be difficult to determine if a developer based in India is a full-time employee or a contractor, for example.

In terms of fundraising, Hornigold agreed with ARM CEO Warren East, who told the Intellect Regent Conference in London last week that start-ups should focus on getting customers, not just on chasing investment.

"Don't go too high," says Hornigold. "People will not look at pre-revenue businesses."

"If you can demonstrate people are willing to buy your products on a repeat basis, that is going to be much easier for people to get funding from somebody."

Pinsent Masons runs a free boot camp - Bootlaw - for tech startups who want to learn more about relevant legal issues at its offices in London each month.