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Structuring with Exit in Mind

Tim Bird


United Kingdom

Whatever the product or service which you plan to sell, it is essential to set up your start-up with your attention focussed clearly on your ultimate goal.

This article first appeared on news website - on 11 April, 2013

Whatever the product or service which you plan to sell, it is essential to set up your start-up with your attention focussed clearly on your ultimate goal, which in most cases will be an exit at some point in the future.  If you get your structure right from the outset, your business is more likely to be an investable proposition and you will maximise the tax breaks which you can take advantage of along the way.

The UK is currently starting to be seen as a “tax haven” when it comes to some of the key rates of tax, and as a result growth companies in particular are increasingly asking us how to set up in the UK so as to bring their product or service to market over here or so as to tap into the many specialist VCs which we have.  However, whilst money may be tight in the early stages of a company’s life cycle, spending a little more to get the structure right will pay dividends (literally!).

The top 4 dos and don’ts when setting up a new business in the UK:

1.   I have a company which has been dormant and hasn’t done anything for years, can I use it?

We quite often get asked this question by clients who are serial entrepreneurs, particularly ones who have created some intellectual property which they now wish to exploit or commercialise.  They have an old company kicking around which hasn’t done anything for a while – why not use that?  Because it costs next to nothing to incorporate a newco and it takes virtually no time!  Unless you have a very good reason, do not transfer IP into an old company, even if it hasn’t done very much.  Investors will always prefer to see a nice clean vehicle that does not have a potentially dark history in which there lurk latent liabilities.

2.   Are there any tax breaks I can use?

Quite possibly. The Enterprise Investment Scheme (EIS) if used properly relief is at 30 per cent of the cost of the shares, to be set against the individual’s Income Tax liability for the tax year in which the investment was made.  Thereafter, if you have received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for the appropriate period, any gain is free from Capital Gains Tax.

The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from their patented inventions and certain other innovations.

3.   I have some intellectual property which I want to exploit.

Do you?!  Make sure if you have a patent, trade mark, copyright (eg software) to transfer into your newco or have licensed in some technology from a third party, that you have done so correctly and that all creators have duly signed appropriate transfers of their rights.  Where you have third party IP, do your due diligence on the third party, and if they are not the patent holder/inventor/creator, make sure that person is either an employee of the transferor or is a party to the licence or technology transfer agreement.  At some stage, a potential investor or purchaser will do due diligence on your company and they will look very closely at your intellectual property.  That is not the time to find out you don’t own what you thought you owned.

4.   I would like to issue some share options.

Take care when issuing share options.  If not done properly, this can be costly for both the Company and the employee. 

Tim Bird is a Partner in the Corporate Department of Field Fisher Waterhouse LLP

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