Digital Startups – Inception through Growth

EMW

22nd January 2019

Are you embarking on a journey as a ‘digital startup’? Perhaps you’re going it alone or working with other people. Maybe this is a new venture for your existing business.  Whatever the circumstances, there’s a lot to consider.

Being a digital startup, naturally you will have developed a digital offering.  Maybe you’ve created industry-specific software to be licensed as SaaS, or developed a new website or app to enhance UX for a product or service you’re already selling.  Your ‘brand’ will be an asset. So, you’ll probably give your offering a catchy name and striking logo to distinguish it from others in the market. Obviously, you wouldn’t copy a competitor, right?

Don’t fall at the first hurdle by not doing your due diligence – brand names and logos can be registered as trade marks. You should check the Intellectual Property Office’s register for any identical or similar marks that are already registered. Otherwise, you might infringe someone’s trade mark rights. It’s worth pointing out, because this is frequently overlooked, that a competitor need not have registered its brand name and logo to stop you from using them.  Guard against this risk by conducting robust internet searches for your proposed brand name and logo, to try and identify any potential threats early on. Once settled on your name and logo, consider trade mark registration to ward off others from profiting from your hard work. 

Exercise caution when collaborating with or using other people to help create your digital offering (e.g. developers). The risk is that integral elements of your offering are either jointly owned or not owned by you at all!  Under copyright law, if a work is jointly owned then you need all the joint owners to consent before you can use it.  If the work isn’t owned by you and you use it without permission, then you run the risk of copyright infringement.  Beware: just because you paid someone for their work, it doesn’t automatically mean you’ll own it. These risks can be avoided by clearly documenting the position at the outset.

Once you’ve secured your brand and your digital offering the next step is commercialising your ideas and doing business 

As a digital startup the chances are, your goal is to deliver your products, services or digital content to the masses, and hopefully earn a wage along the way. Just how you do this depends on the nature of your offering, but you’ll probably be selling, licensing or doing a combination of the two. Whatever the means, contractual relationships lie at the heart of it and so you’ll need to get your contracts in order.

If you’re selling products or services online, who are you selling to? Is it to individuals (consumers) or other businesses? It makes a difference. The law gives consumers a higher level of protection and so your terms of sale and business practices need to reflect that. If you’re selling to other businesses, then you have more flexibility to incorporate favourable contract terms. Although, the general idea is that you strike a balance between, reducing your exposure to risk and ending up with a one-sided contract which hinders you from doing business.

Maybe your ‘product’ is a piece of software or an app, in which case you’ll look to license it. Again, it’s important to know whether you’re licensing to consumers or businesses. If it’s an app for consumers, then you’ll put in place an ‘end-user licence agreement’ (EULA), which sets out how the user may use the app and also protects the licensor. A key point about EULAs is they’re intended to be legally binding, so you need to think practically about how the users accept the terms before the contract is concluded.

When licensing software in a B2B context, you (and your client) will want the licence to set out the key commercial points (price, licence duration, number of users, installation terms). Don’t assume anything; you should make clear the permitted uses of the software as well as any restrictions and circumstances that would result in higher licence fees. Often, the importance of software to a client’s business (and the potential damage that could be caused should it fail) will far outweigh the value of the software itself. So, be sure to limit your liability under the licence.

Lastly, software needs support. If you’ll be offering clients maintenance and support, then this needs to be addressed. Clients will inevitably want to know what support comes ‘as standard’ under their licence, what additional support is available (and the cost), and what are the expected service levels.

Scaling Up

You’ve been commercialising your digital offering, you’ve built up a client base and now your focus is on growth. It’s true that not every business owner wants to grow their business, but sooner or later they’ll face the decision.

It’s no surprise that creating sustainable growth requires cash – whether it’s to hire more people, get external advice, build a presence in a new territory or for product development.

Some digital businesses are naturally scalable and might not need external investment to generate cash or increase turnover. These kinds of businesses can create new revenue streams, like wrapping up existing products and services as packages or adopting a subscription-based model. Notably, these work well for cloud-based solutions like those used for forecasting and accounts or for sales and lead generation.

If external investment is needed, there are various options available including, equity finance (bringing in investors in exchange for shares), crowdfunding and good old-fashioned debt finance (bank loans). It makes sense to check ‘your house is in order’ before seeking external investment because you are, inevitably, inviting scrutiny of your business.

Here’s a handy list of things you can do:

  • If you’re running a private limited company, check the state of the constitutional documents and existing shareholdings. Do updates need to be made? If you have a shareholders’ agreement, how would this look to investors considering becoming shareholders?
  • Check you’ve secured your IP (to the extent possible). Who owns key assets like your brand, domain names, designs, proprietary software and patents? Do they sit neatly within one entity or are they still owned by the founder?
  • Review your key contracts. Most digital businesses revolve around the licensing model. The licence terms are the essence of the business and tie it to the clients, without whom, there is no business. Review your terms for issues that were missed or simply weren’t anticipated at the outset. If you employ people or use contractors, check your employment contracts or subcontractor terms. If you rely on sales agents to market and sell your solutions, review the contractual arrangements. When were these last updated? Have there been any big changes that should be captured, like GDPR?

The above is just a snapshot of things to consider, and each deserves consideration. We can help put you in the best position to scale your digital business and get you ‘investor ready’. For more information, please call 0345 070 6000 or visit our website: www.emwllp.com

 

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