Part 3: When to Incorporate?

This video is part three of a series of seven videos created by Anthony Rose, Founder and CEO of SeedLegals, who’d like to share his thoughts, advice, mistakes, and learnings from his extensive career in startups, so that you can avoid the same mistakes and get off to a running start when creating yours.

 

Summary:

Great news: The UK is incredibly founder friendly. It costs a huge total of £12 to register your company online with Companies House. 

However, similarly to having a child; whilst the conception of a business may be easy, the recurring maintenance cost afterward can be prohibitive. Once you’ve registered your business you will have to start tax filing, and incorporation things, and a whole load of stuff that goes with this.

So when is the right time? You will want to register at the moment you think your idea is going to be a goer. As soon as you create your company, you can get a bank account, you can start putting money into that account, and can potentially start pitching to investors and incentivising them with the possibility of EIS or SEIS tax savings, and you may tax deduct your investments and so on.

Companies House will give you a default set of articles upon registering (maybe you read these but most people probably don’t bother). The problem with the model articles is that they’re one size fits all and so there could be something that harms you later on (kind of like a bug). In particularly these articles won’t have founder vesting, so what happens if one of your cofounders has 30% equity and quits after 6 months to get a 'proper' job at Facebook whilst keeping all their equity? This could really damage your company and kill your ability to get funding at a later stage. Your model articles will also assume that all board decisions need to be unanimous which can be a real problem if you have a disagreement and you need to make a decision quickly. The model articles are great but are the sort of thing you get for free, and this is where SeedLegals can help by offering you the articles you really want.

A quick aside about share classes: It can be overwhelming learning about all the different share classes. There are broadly three types of shares relevant to a starter; ordinary share, B ordinary shares, and preference shares:

  1. Ordinary shares are the things you start out with; all the shares are equal and life is good. All shareholders can vote on things proportional to their number of shares. At some point this will become a pain as previous employees who still own shares will need to vote. It will likely cause problems for you if you give all employees shares which entitle them voting rights.
  2. B ordinary shares can alleviate this problem, they share in all things except voting. Since later stage employees will likely have around 0.1% of the company, individually, their vote isn’t a big deal anyway (which is something you may need to explain to them) so it makes sense to offer these over Ordinary shares.
  3. Preference shares are things that your investors will almost certainly ask for. If they are given these shares this means that if the company is sold for a lower amount, they will get their money back before other shareholders. This could mean you end up in a position where you yourself have a lot of stock but you may not actually own much of the value of the company. To prevent this you will need to do some quite sophisticated cap table exit scenario modeling, which is something we’ve made really easy on the SeedLegals platform.