Article nav
Download PDF Get a free consultation

Introduction

Are you a programmer ready to take your software ideas and expertise to the next level? Perhaps you have an amazing idea for an app or an ingenious product that the market would love? If so, we’ve created this guide for your inner entrepreneur to develop and grow your product safe in the knowledge that you understand your basic legal obligations. At the end of 2016, YouGov interviewed over 1000 UK SMEs and we had the stats analysed by the Centre of Business and Economics Research (CEBR). According to this research, the UK Tech Sector loses nearly £170 million per year through not taking care of their legal business. But fear not! In here you should find invaluable information around how to avoid many of the common pitfalls that blight today’s startup tech scene. It is worth noting that these stages vary from business to business and that there may be some overlap between guides or things that are not relevant to your business in particular. If you’re unsure whether or not something applies to you, just ask! And so, without further ado, let us begin…

Do you own your valuable technology assets?

We went into detail about your intellectual property rights in Part 1 ‘Setting Up’ of our legal tech guides but it is worth mentioning again here. In the area of technology and software, your intellectual property (IP) is one of your most valuable assets. These IP rights (IPRs) can either be developed yourself or employees of your company, produced by third party contractors or acquired by, or licensed to, you or your company. You need to think carefully about who actually owns the IP in your product because assumptions about ownership can be wrong. For example, ownership of the copyright in some new software that you appointed a contractor to develop, specially for you, will stay with him unless it is formally transferred to you or your company. You would need an agreement which states that the IP rights of any work done by them for you must be handed over. Remember to also check out Part 1 on ‘Setting Up’ your company where you can see a range of options for protecting your brand.

Selling or exploiting your product

Licensing

Different kinds of IPRs have different transfer requirements - copyright, design rights, patent rights and trademarks pose different issues upon transfer and exploitation.

Licensing is probably the most common method of exploiting IPR’s in software and technology. A software product can contain different IPRs, for example, copyright and design rights, which are often exploited by licensing.

If a licence is unclear about, say, its duration, it may result in dire commercial consequences. For example, if a licensor finds that the licence it had granted is to terminate earlier than it had anticipated, it might lose valuable royalties or a licensee may suddenly be unable to keep distributing lucrative products or, if the licence you granted lasts too long, you may be stuck with a low revenue stream. Parties to an IPR licence who believe it lasts forever can find it terminated early if, say, the owner (licensor) assigns them to someone else.

Generally speaking a licence of an IPR permits the licensee to do activities which, but for the licence, would infringe the IPRs. Certain IPRs only last for a limited time and the IPR licence will therefore expire with the expiry of the IPRs. Licensing and the underlying IPRs being licensed, need to be considered carefully.

Cloud and SaaS

Often it is difficult to disentangle the software or technology that you own from that owned by third parties. This is further confused by complicated terminology describing the hardware, operating systems, utility software and applications software as well as the integration of these things within products, not to mention constantly evolving methods of delivering software, platforms and infrastructure as a service and the expansion of cloud computing solutions.

Software as a service involves a provider remotely hosting and managing software applications and providing support services to clients. SaaS and cloud computing are different ways for a provider to exploit its IPRs and it also changes the traditional licensing model.

Software as a service involves a provider remotely hosting and managing software applications and providing support services to clients. SaaS and cloud computing are different ways for a provider to exploit its IPRs and it also changes the traditional licensing model.

Routes to market

Website

You can sell your software through your own website and have it available to download and make payment online. It is important to advertise clearly and accurately the features of your software, and you could even include features such as video tutorials and promotional material. All marketing and advertising collateral (e.g. flyers, online ads, business cards etc) must be:

  • An accurate description of the product or service. To elaborate further, to provide an ‘accurate’ description’ means that you are easily able to prove what you say. This also includes the price of the product, so if you’re charging VAT but fail to mention that in the pricing, that’s not accurate.
  • Legal
  • Decent
  • Truthful
  • Honest
  • Socially responsible (not encouraging illegal, unsafe or anti-social behaviour

External digital stores

It is common for developers to make software available through common user ‘stores’ which are designed with developers in mind. Such examples include the Apple App store, the Google Play Store and the Amazon App Store. All you need to do is sign the agreement the host has given you… But before you do, make sure you know what you’re giving away and whether you can turn enough profit. They will most likely take a cut of the income coming through sales, so make sure you’re aware of how much it is… the industry standard is around a 30%!

Physical hard copies

You might need to hire a designer or contract a freelancer/design agency to design packaging if this is a product that will be offered on a store shelf. You will also need to hire a company to manufacture the CDs, if applicable. In both these instances, you will need to have a contract in place which denotes the terms of your arrangement from price to delivery and it should cover you in the event of something going wrong. In terms of getting your products on the shelves of the retailers, more often than not, you will be given a contract to sign as the manufacturer/distributor/wholesaler/retailer would have dealt with hundreds if not thousands of businesses before you. Likely, these will have terms that are more in favour of their business needs so although you might be keen to get going and excited they are interested in your product you should have these contracts checked for onerous terms which might affect you in the long run.

Distribution

A distribution arrangement exists where one party, the distributor, buys goods on his own account, usually from the manufacturer and sells them to customers. In contrast to an agent, a distributor usually has no authority to create a contract between the manufacturer and customer. The manufacturer has no contract with the customer of the distributor.

A distributor takes more financial risk than an agent or reseller (see below) because the distributor buys, owns and holds stock which it has to sell (and this is often reflected in higher margins on resale of the products), but is free to set their own prices in relation to the end customer, whereas agents and resellers are more likely to be obliged to comply with the wishes of the manufacturer/ supplier.

Agency

Agency exists where an agent has authority from another party, usually the manufacturer, to introduce orders from customers and the agent usually receives a commission from the manufacturer. An agent does not contract with customers in his own right, and that means he generally has no liability to them. Although, using an agent is the method that allows the manufacturer / supplier to maintain the most control of over their products, they should also be mindful of the Commercial Agents Directive when appointing an agent in an EU country. This Directive states that certain rules must be followed, whether there is a written contract in place with the agent or not. The most significant of these is a termination payment to be made by the manufacturer / supplier to the agent when their contractual relationship ends.

Reseller

Resellers and reselling have exploded in popularity as a means of getting software and related products to market. There is a wide variety of reselling arrangements and they can have characteristics of both agency and distribution.

Resellers tend to find retailers and customers for your product without first buying your product or holding inventory, so in this sense they resemble agents. They act more as a middleman for your product. However reselling often shares the characteristics of a distributor such as a close relationship with the manufacturer, minimum purchase requirements, marketing responsibilities and being remunerated, though not by commission but rather by the difference between the purchase price and the resale price. When contemplating entering a EU territory, in order not to be caught by the Commercial Agents Directive, manufacturers / suppliers should be careful for the arrangements not to take on too many of the characteristics of “agency” (which could leave them liable to pay a termination payment when the relationship comes to an end). A key component in this is allowing the reseller to set their own end prices with no undue influence from the manufacturer / supplier.

Reselling can suit both large and small manufacturing companies but often is seen as better suited to more established companies and product lines.

Reselling, distributorship and agency share the advantages of being a good way to have a physical presence in territories where you, as a manufacturer, do not operate and of selling multiple products and getting into multiple territories quickly.

Reselling has proven to be very flexible and because it doesn’t usually involve the reseller holding stock or assuming significant obligations it has proven to be a flexible and popular structure for rapidly expanding software and related product sales. But remember, as with all relationships between yourself and anyone or company associated with your business, you must have solid contracts which you understand in place to make sure you’re covered for all eventualities.

Hiring Staff

At the beginning of your venture you’re going to be the director, sales exec, marketer, accountant, administrator, client handler and everything in between but at some point there’s a rather large chance you’re going to need other people occupying these roles. There are different ways in which people could be hired. The most obvious of these is as an ‘employee’ either full-time or part-time. You can also hire ‘casual or zero hours workers’ or agency staff. There is also the option of hiring consultants or contractors, who can help you with specific projects or strategic decisions. In general, if you’re hiring staff, there are several practical matters you should be aware of but in short:

  • If you have ‘employees’ then you must have employers liability insurance.
  • You will need to set up payroll and ensure that people are paid on time and taxes are deducted (though this doesn’t apply to agency staff as they will be paid by the agency, who you will pay)
  • It is recommended that they have clear contracts in place
  • You have to provide certain information to an ‘employee’ about their employment within two months of the beginning of their employment. It is recommended that all employees sign contracts of employment containing this information and other terms that protect your business.
  • You have to provide certain information to an ‘employee’ about their employment within two months of the beginning of their employment. It is recommended that all employees sign contracts of employment containing this information and other terms that protect your business.
  • A commitment to equal opportunities when hiring staff means that you will attract the widest pool of talent; there is credible evidence that this will benefit your business in the long-run
  • A commitment to equal opportunities when hiring staff means that you will attract the widest pool of talent; there is credible evidence that this will benefit your business in the long-run

'Employees'

Here are some of the issues to consider with employee

  • Have a contract in place which states the conditions of the employee’s employment e.g. rate of pay, other benefits, working hours, holiday, maternity/paternity leave, Term, notice period, location, confidentiality, any post-term restrictions etc.
  • There is a raft of legislation affecting employees which you need to be aware of, including; Legislation on the National Minimum Wage (as of April 17, £7.50 for 25 & over and specific scales for under 15), but you should check for updates.
  • The Equality Act 2010 which prevents discrimination on the basis of age, disability, gender, race, religion, sex, sexual orientation, marriage and civil partnership, pregnancy and maternity.
  • The Equality Act 2010 which prevents discrimination on the basis of age, disability, gender, race, religion, sex, sexual orientation, marriage and civil partnership, pregnancy and maternity.
  • Generally, it is more difficult to dismiss an employee after two years of employment
  • Legislation on holiday pay, flexible working, statutory sick pay
  • The Working Time Regulations
  • The Health and Safety at work Act 1974
  • The Management of Health and Safety at Work Regulations 1999 (which govern risk assessments)
  • Legislation on shared parental leave

New pension guidelines

One point to highlight here would be the recent pension legislative changes. Following on from the Pensions Act, 2008 ‘auto-enrolment’ means that you must now develop a pension scheme for your workers/employees (though employees can opt-out). You also have to contribute an amount up to 3% of their qualifying earnings to that pension. This has been a phased process since 2012 and it is now catching up with smaller businesses too. Do not underestimate how much planning is needed to successfully do this. Importantly, you will have to account for the fact you are contributing into the scheme in your budgeting.

‘Self-employed’ or ‘Contractor’

  • If you take on someone who is ‘self-employed’ or a ‘contractor’ they do not have a contract of employment with your organisation, but need their own agreement to provide a certain service. This will specify the length of time and for what fee they are working, and the nature of the task they are asked to carry out.
  • They do not have as many automatic rights as an employee, but do have some legal protection. For example, they have the right to not be discriminated against and are entitled to a safe and healthy environment to work in.

IR35 - don’t get caught out!

We hear a lot about what IR35 is and who is liable for it. In short, it targets contractors who might be avoiding paying the tax they should be paying by presenting themselves as self-employed rather than as employees. Contractors are technically self-employed and as such are not taxed in the same way as general employees; they take dividends from their company and pay less in NI contributions. HMRC sometimes sees these people instead as disguised employees who should be taxed in the same way as a general employee. The legislation looks here to stay and it is vital for contractors and businesses alike to be aware of it and stay compliant to avoid financial penalties. Contractors need to stay within the all-important definition of ‘self-employed’ to beat the IR35 rules, but this is not always as easy as it sounds. So first of all, consider whether IR35 applies to you. You can do this on the government website. In essence, the more your contract looks like a contract of employment, the less likely your service-provider will be regarded as a contractor. Here are some give-aways;

  • Is the person working exclusively for you?
  • Is the person working exclusively for you?
  • Is the person working exclusively for you?
  • Can they appoint a substitute?
  • Do they receive employee benefits like paid holidays and sick pay?
  • Are they on an indefinite or rolling term?

In general, however you choose to hire someone, make sure you have contracts in place that clearly defines this relationship. Trust us, it will save yourself and your business a lot of future headache!

Equipment

You’re probably going to need sophisticated computer equipment at minimum as well as hard drives and network equipment, nevermind the coffee making facilities to get you and your staff through the long hours staring at screens. Here are some quick thoughts as to not only accessing such equipment but also how you can keep it working in tip top condition for yourself and your clients.

Leasing/renting or ownership?

Technology is moving at such fast and impressive rates in the modern day that it can be both challenging and expensive to stay up to date with what’s best to meet your requirements. Renting your equipment can have many benefits including servicing and getting access to fast replacements in case of breakdown or fault. It also tends to be the more affordable option if funds are low at the beginning of your venture because there are little up-front costs. Bear in mind excess fees in case something breaks down, though. Any time you rent equipment, these terms should something go wrong should be clearly defined in a contract. Make sure you’re happy with what you’re signing up to. Alternatively, if you have more fund to spare you might consider owning your own equipment. This means you’ll be solely responsible for keeping it up to date and insured. As with an excess you might have to pay if something goes wrong when renting, you’ll also need to bear in mind insurance excesses should something go wrong when owning. Make sure to weigh up all your options so you can budget accordingly.

Mitigating against common risks

Liability insurance

It is important to protect your company against claims made by customers regarding bugs in your software that could be potentially damaging to their systems. Bugs are the bane of every developer, and since you are now distributing your software to others, it could very quickly become the bane of someone else’s life too! It’s not something that a developer ever wants to happen but due to the nature of the beast, it is worthy for your company to be protected.

Cash Flow

Another challenge that start-up companies face is cash flow - that is, getting customers to pay on time and in full. Issues with your cash flow can prove to be a huge hinderance to the operation of your business and unfortunately, it means that many businesses fail. If you will be selling significant software packages or tailored solutions to individuals or business at a high cost, then this is something you should be particularly wary of. There are practical ways you can protect your business that should not be overlooked. Firstly, you can credit check your customers for bad credit, or ask them for a bank reference. Remember, if you can’t afford the loss, you can’t afford the risk! Secondly, you could ask for upfront payment before supplying the software, or at least set out in a contract your terms of service including what you expect to be paid and when. If you encounter a customer who can’t or won’t pay, then LawBite offers legal advice and alternative dispute resolution options to help you get your money back quickly and firmly.

Credit Control & Cash Flow

It’s important to have an in depth view of the credit profile of any business you work with or rely on, so that you can protect your business from financial risk.  Understanding the financial status of your potential customers or business partners is absolutely key when it comes to credit control and consequently, cash flow. Services such as Experian Business Express allow you to credit check both UK and international companies to assess if they will meet their financial commitments and lending requirements.  You can also gain insight into the individuals who run the business.

The sort of information and data can you access includes:

  • Check and monitor any UK companies & directors
  • Reduce exposure to potential bad debt
  • Qualify prospects and suppliers and set realistic credit limits
  • Take action when faced with payment delays
  • Check to see if your customers and suppliers have CCJs
  • View detailed financial payment trends
  • In-depth credit history
  • In-depth credit history

Conclusion

We hope you’ve enjoyed our brief guide to running your tech company, keeping the organisation’s legals in mind. We would recommend you seek professional advice if you’re confused about any of the above- don’t get bitten. LawBite can assist with your organisation’s legal queries for around half the price of a standard law firm, with relevant documents and advice. If you’re unsure of what you need, we offer a free consultation with one of our software experts too!

Contributors:

Lizzie Knight, Head of Marketing
Andrew Smith, Software and Corporate LawBrief (LawBite lawyer)
Amna Ahmed, Software and Commercial LawBrief (LawBite lawyer)