Company share option plans

From Mr Murray, CEO

About our Client

We are a tech start-up. We have created a social networking platform. Users can create their own of characters and place them with other users anywhere in the world. There is interaction between users through an online messaging platform. You can download the app from your smartphone.  This is our first venture into the world of running a technology business and app development and we were in need of a helping hand.

The Brief

We were asked to set up the corporate structure for the app to support the social network platform.  The structure had to work for fund raising purposes as money was needed to pay for the app development.  An exit was planned for 3 years time. The structure had to be attractive to potential buyers looking to acquire the brand, technology and the database.

What challenges (if any) did you face?

Some of the biggest challenges during the app development were:

• Making sure that the company complied with SEIS investment requirements.  We did not want to disappoint our investors who thought they were benefitting from the generous tax breaks for SEIS investments.
• The software coding used in the app needed protecting.  Software is safeguarded under the rules of copyright law. The starting point was to make sure all employees and contractors involved on the project assigned all rights to the company.  Without assignments of intellectual property rights (“IPR”) sitting in the file we knew the company was vulnerable and potentially unsaleable. This was essential in the app development.
• The network held personal data about its users.  The last thing we wanted was bad publicity over leaked data.  Compliance with GDPR was a big concern for us.
• Submitting claims for R&D tax credits to help cash flow.  Gannons recommended the perfect specialists for R&D claims.

Our approach

Company formation

We incorporated the new company. We then applied to HMRC for advance assurance for the SEIS share issue, which HMRC granted.

The company attracted six investor shareholders. But, before investing the investors required the directors to provide warranties on behalf of the company.

Warranties

Gannons used their experience to help us negotiate the warranties and tell us what was reasonable. This was incredibly helpful as we were novices.

The warranties included:

• That the company owned the app and all intellectual property rights in the app.
• That the directors would not issue shares to new investors without first offering the existing shareholders the right of first refusal.
• That the company would not grant licences or other rights in the app without all the investors’ consent.
• That the directors would not undertake new ventures without consent.

Limiting liability

Many users download the app, which runs on smartphones. A key risk was the app could damage the user’s phone. Our bespoke “terms and conditions of use” limited the company’s liability in the event that this happened. If the app required updates, the company could withhold access.

The terms also confirmed the company had no liability for any message received through the messaging platform. Additionally they were not liable for any damage suffered from advertisements, such as advertisements resulting in downloads which incur fees.

The app stores accepted these terms.

Outcome

The app has been a success. The company receives royalty payments from the app stores for each download.  The company has teamed up with other providers to deliver new ideas to consumers.  Improvements to speed, security and innovation are on-going.  Further rounds of finance have been raised via EIS the sister to SEIS designed for larger businesses.