startups legal tips maastricht week of entrepreneurship 2014

Tapio Pekelharing

May 15th, 2014

IF ENTREPRENEURS ARE SUPERHEROES, WHAT ARE LAWYERS...?

THE FOLLOWING IS THE GENERAL PERCEPTION:

DURING OPENING MEWEEK YESTERDAY, ELDERMAN JOHN AARTS SAID:

“1% more lawyers, means 5% more debt”...

JOHN AARTS USED TO BE A LAWYER....

Lawyer (advocaat)

• Since 2000

• Corporate law/M&A/contracts

• Worked for top tier firms in Amsterdam and Brussels

• Focussing on SME and Startups since 2007

Entrepreneur/investor/mentor

• Since 2007

• Founder/co-owner several companies

• Off line marketing/brand activation, Public Relations

• To be the GO-TO-LAWYER for STARTUPS• HELPING STARTUPS to (legal) maturity• Create a DISRUPTIVE business model for

law firms

MY GOALS AS A LAWYER:...

CONTRACTS

Contracts

“Starting work without a contract is like putting on a condom after taking a home

pregnancy test“

Contracts

TOP 6 THINGS YOU NEED TO KNOW ABOUT CONTRACTS

Contracts

1. Contract protects both parties

Contracts

2. Don’t start work without a contract

Contracts

3. Don’t blindly accept their terms

Contracts

4. Anticipate negotiation, but don’t back down on important stuff

Contracts

5. Lawyers talk to lawyers

Contracts

6. DIY is not a good idea

• a contract needs an offer AND an acceptance of that offer

• accurately IDENTIFY the parties (check Trade Register who you are dealing with!)

• establish if the person you are dealing with has a clear MANDATE to bind the company

• avoid AMBIGUOUS payment terms

• make clear DEFINITIONS

• check and ask for all ATTACHMENTS

• Try to write the first draft of a contract. Not writing the first draft, puts you in a DISADVANTAGE

• Try to stick to ONE version of your supply or client contract

• make sure you at least EMAIL a PDF of your general conditions

• get a GOOD employee contract in place when it is that time to hire someone

Contracts

Your advisors need a contract too...

Get an agreement in place before they start to work for you

YES YOUR LAWYER TOO!

• Incorporation

Incorporation

Do not incorporate a hobby!

What are the common legal structures for startups in Netherlands?

• Sole proprietorship eenmanszaak

• Partnership VOF, maatschap, CV (LLP)

• Private or limited Besloten Vennootschap

Sole proprietorship: key elements

• Who has ownership? the owner, he/she owns the business IN PERSON

• Who RUNS the business? the owner

• PROFIT distribution? all profits for the owner

• What about debts? all debts responsibility of owner IN PERSON

• Legal liability? the owner, again IN PERSON

Sole proprietorship: advantages

• EASY incorporation

• LOW starting costs

• direct CONTROL of all decisions

• NO capital requirements

• favourable TAX regime if you meet the criteria (MKB Vrijstelling, Startersaftrek)

Sole proprietorship: disadvantages

• unlimited and personal LIABILITY

• continuity is at RISK

• less PROFESSIONAL appearance

• NOT SUITABLE for big risks/large investments

• tax: make a lot of money and you will pay high TAXES via higher tax brackets

Partnership: key elements

• Who has ownership? COLLABORATION between two or more individuals or corporations

• Who runs the business? each partner, TOGETHER equally or whatever you have agreed

• Profit distribution? profit is SPLIT between partners equally or agreed variations, depending on time and money invested

• What about debts? depends on the type of partnership, but 9/10 times each partner is responsible for the WHOLE DEBT!

• Legal liability? depends on the type, mostly partners TOGETHER

Partnership: advantages

• EASY incorporation

• FLEXIBLE structure/freedom of contract

• TAXED as personal income, same nice tax treatment as sole proprietorship

• no one likes to work ALONE...

Partnership: disadvantages

• conflicts may arise, especially if you do not have a SOLID agreement in place

• no legal difference between the individuals and the business/partnership if you participate in person: PERSONALLY LIABLE

• one partner accountable for the other one’s BEHAVIOUR (fraud, debts, breach of contract)

Partnership: must do’s

• make a good agreement between partners (CHECK: lawyer)

• CHECK: prior non-competes, non-solicitation and other restrictive COVENANTS

• Agree on (1) voting rights, (ii) who’s going to be doing what & how often, (iii) who & when can exit, also INVOLUNTARY (iv) vesting for partners (v) what happens and who has to pay what when the company needs money (vi) conflict resolution.

Limited Liability Partnership

• INTERESTING UK/US entity

• It is a hybrid: partnership WITH limited liability: this is GOOD

• YES: you can operate via a LLP in the Netherlands

• Was created for “PROFESSIONS”: lawyers, doctors, real estate agents, etc.

• Tax authorities in the Netherlands are indecisive whether it is also applicable to JOINT VENTURES

• Worth looking into! (ask EXPERT opinion)

Limited (BV): key elements

• Who has ownership? The SHAREHOLDERS Shareholders do not need to be involved in running the business.

• Who runs the business? The director or the board of directors. They are elected by the shareholders. REALLY IMPORTANT decisions: shareholders

• Profit distribution? First you have to pay corporate taxes over the BV’s profit. SURPLUS is for shareholders to decide, leave it in the company or pay out as dividend

• What about DEBTS? In principle: Shareholders are responsible up until the investment they have made. NOTE: director’s liability backdoor!

• Legal liability? the BV is liable. NOTE: director’s liability rules!

Limited (BV): advantages

• LIMITED liability

• More suitable for RAISING money, investments

• Professional structure, TRUSTWORTHY

• I REPEAT: limited liability

Limited (BV): disadvantages

• Relatively HIGH costs to incorporate

• Complex structure with administrative BURDEN

• LESS flexible, as more mandatory rules

• Tax wise not interesting when you are not making higher profits (appr. EUR150.000 to EUR200.00 PER shareholder...)

Limited (BV): must do

• Civil NOTARY is involved, mandatory by law

• Create a clear and solid shareholders agreement next to the bylaws of the company. NOTE: this is a lawyer’s job, not a tax advisor, auditor or notary’s

• Discuss everything and agree on everything with the other shareholders. Make sure it is either in the bylaws/articles or in the shareholders agreement. NOTE: small shareholders/investors: different approach...

• Recently BV law changed in NL, became easier, more FLEXIBLE to structure a company

Limited (BV):

If you intend to raise capital/have investors join you (even if only Friends, Family or Fools), you must properly structure the

company

•IP

What is IP?

“Intellectual property is the bundle of legal rights that arise from the creative genius of the human mind”

name, trademark, brand, logo,

codes, patent

IP:What are you doing wrong?

• you started developing BEFORE you incorporated the company, the company does not own the IP rights

• you had a FRIEND helping you out with programming/codes, he claims part of the IP/ownership

• the DOMAIN/URL is registered under your name and not by company

• you think that registering a TRADENAME is sufficient to protect the brand

• you were very enthusiastic about the name Tweetdeck for your new company

This is 5% of this presentation you should remember

• Legal matters ARE the right problem to focus SOME of your TIME and MONEY on

• It is all fun and games until someone slaps you with a LAWSUIT

• Keep it SIMPLE if it is just you, sole proprietorship

• Discuss and agree with your PARTNERS about EVERYTHING

• Always make an AGREEMENT with your clients, suppliers etc

• Do not start writing contracts, but read and understand every article. DIY is a bad idea

• IP: check ownership of codes, trademarks, domains etc.

• When it seems to get serious with an investor, it is time to CALL A LAWYER

• REMEMBER: the other party’s lawyers are not there to safeguard your interest!

Questions? Coffee?

Tapio Pekelharing

tapio.pekelharing@ppsa.nl 06 15 888 466 @tpekelharing