HCR look at what investors look for when considering investing in scaling tech companies

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HCR article July 2022

Are your employment practices investor ready?

Many tech businesses go through multiple rounds of funding, starting out with some early stage (or ‘seed’) investment and later progressing to further funding rounds. Employment lawyer Rowena Kay at Harrison Clark Rickerbys advises investors on this process and explores what an investor will look for as they crawl through your employee paperwork.

Do you own your intellectual property?

For many tech businesses, much of the value in their business is the intellectual property.  Make sure you own it. Nothing will put off an investor faster than discovering you do not own what you sell. For employees, the law makes a general assumption that you own what they create for you (which can be strengthened by contract). If you use consultants, the law will assume the exact opposite and that you do not own their work product unless they assign it. Make sure that you can show your investor clear paperwork for everyone, particularly those involved in product or systems development.

Employment contracts

All employees are entitled to a clear written statement of their terms and conditions. An employment contract can also go further and provide important protections for areas like confidentiality, IP and preventing unlawful competition when they leave. The penalties for not issuing contracts are minor, but the impression you give the investor if you have not taken basic steps of business protection, sets wider alarm bells ringing.

Have you paid your bills?

Another thing that really puts off an investor is a company that hasn’t been keeping track of its liabilities and paying its bills. There are a few areas where this can crop up with employees. The first is pension. Even the smallest employers now need to operate a pension (you can use an insurance company or NEST). If you have not done so, there could be large back payments.

Another problem area is non-UK tax bills. If you have employees based outside the UK, you are likely to be liable for running a local payroll. You could even trigger local corporation tax liabilities by accidentally creating a place of business (especially if that employee is in sales).

Can they exit?

When investors invest, they also want to know they can exit. As part of the investment, they will want a properly drafted suite of documents that ensures individuals can be removed from the board in appropriate circumstances and minority shareholders ‘dragged along’ on a wider sale. Many of these documents can be implemented at investment if you do not have them, but if you have already fallen out with a founder the ship may have sailed. Getting these documents in place early reduces the power of one hold out to block your investment.

Immigration

There are significant fines for employing illegal workers. More worryingly for your investor is that there can even be criminal liabilities on directors. No investor director wants that risk, so make sure you can show you check everyone (even those you believe are British/Irish) and you will be removing one more headache.

Get in touch with the HCR Employment team here

www.hcrlaw.com

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