Mike Pym on Legal Mistakes that Reduce Your Valuation
Cheryl Mack
Mike Pym from Pym's Technology Lawyers spoke at the 2015 SydStart Workshops about the five common legal pitfalls most technology companies face. According to Mike, managing the back office and legal paperwork is important for the company's survival. If you get things right at the beginning of the business, you will be in a much better position when someone puts a cheque on the table.
Here are the five common pitfalls from a legal perspective:
Not Securing Ownership of Your Own Company
"We've all heard the Facebook story. [They] didn't quite secure the ownership of their company, [which resulted to] years in litigation and billions of dollars at issue."
A valuable company should have a well-written shareholders agreement and constitution, a good company secretary, regular board and shareholders meetings, an "independent" view available, and up-to-date and readily available corporate records.
If any of these becomes an issue, Mike said they are fixable. It gets more difficult to fix, however, when money is on the table. "When I say it is really difficult, from a lawyer's perspective, it means it is really expensive."
A well-written shareholders' agreement determines ownership definitively, identifies how major decisions are made, and addresses issues you don't want to think or talk about. "These are things like, what happens if one of the shareholders or founders gets ill, or worse, dies? Shares are like any other asset; they get passed to the estate. You may find that your founder or shareholder's child or partner all of a sudden becomes the 90 percent shareholder of the business that you've just invested good money — and certainly a lot of time — in. You need to understand what happens in those situations, and a good shareholders' agreement will do that for you."
A shareholders' agreement also protects rights of shareholders, ownership and control issues, sets clear obligations, and many more.
Failing to Identify and Protect Your Intellectual Property (IP)
"A valuable company has registered all of their trademarks," Mike said. Registering trademarks is easy to do, and can be done online. Mike advised that it's better to hire a lawyer if it is under multiple classes or if it is in a fairly generic space.
Patentable inventions should be proactively identified. "You don't have to be Einstein to get a patent. It is not a measure of cleverness. It is a measure of novelty. If you've got a very simple but novel idea that can be patented, then please see a patent attorney. Don't think it's just for PhDs, it's for novelty, not for cleverness," he said.
It is also important to keep records of any software, programs, or content built and created. Confidential information should never be disclosed without having a non-disclosure agreement. Domain names should be registered in its company name and not in individual employees' names.
Not Separating the Company from the Individual
"At law, a company is a completely separate legal entity. It can be sued in its own name, it can sue in its own name, and it is a completely different entity than the individual," Mike said.
Each of the following roles: director, employee, shareholder, and company, has different rights and responsibilities. Unfortunately, they all get mixed together, particularly in small companies, Mike said, citing his own experience as an example. He joined an organization in 1999 as a COO. He had been there a week when he found out that the owner was taking his salary directly from the company's bank account.
"He thought that the cash that was in his company was in fact his, because he owned the company. Unfortunately, there are a couple of people who disagree with that, the tax office being the primary one. So what was happening was, he was taking the cash out, but he wasn't recording it as salary, so he wasn't paying PAYG and superannuation," Mike said, adding that the consequences and penalties of avoiding these are so enormous, it could bankrupt a company.
Avoid mixing company money with personal money because it has tax, superannuation, and payroll implications.
Not Having Employment Agreements
"We need to know whether they are an employee or a contractor. You need to know that from a couple of perspectives. The first, is if they are an employee, you have to pay PAYG and superannuation. If you misclassify them as a contractor because you don't want to do that, and the ATO catches you, then you're in big trouble," he said.
Another big issue is the ownership of copyright material. "The rule in copyright law is, 'he who writes it, owns it', not 'he who pays for it, owns it', unless you are an employee and you create that work in the course of your employment. In which case, the default position at law is your employer owns it."
"If you don't have a contract with the contractors, you don't own the IP of what they create, which means you don't own your product," Mike further emphasized.
Not Having Standard Agreements for Products and Services
A valuable company has Standard Agreements that:
Clearly identifies the products and services
Provides for the customer to sign (enter into) the agreement prior to delivery
Clearly identifies when payment is to be made
Complies with law, especially the Australian Consumer Law
Limits your company's liability
Protects your company's IP
Grants appropriate/limited licenses to others
Reflects your insurance cover
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