One of the hardest things founders have to work out when doing a startup is when to do things. That’s because ultimately founders have to do everything – business plan, product development, customer validation, legal and financial setup etc. So sorting out what should come first can be tricky! In reality, we usually find that startups build their MVP first, and then split the process of doing their legals into two steps:
- incorporate, then
- formalise startup legals, e.g. shareholder agreements etc.
These two steps are the same whether a startup uses Slicing Pie dynamic equity or traditional fixed equity. However, with Slicing Pie, your equity share always reflects what you deserve. You don’t need to keep re-negotiating it if there is a change in circumstance, e.g. because someone is working less, you’ve contributed more, or someone has left. Or worse still, arguing or feeling resentful because the original shares you agreed to in principle are no longer fair…
So here are our tips on when to incorporate and do your startup legals, if you use Slicing Pie.
A. When to incorporate
Startups looking to limit their liability always have to incorporate some time before making their first sale. However, exactly when varies. We find that founders who’ve decided a company is the right legal vehicle for them typically incorporate if they:
- need to open a bank account, reclaim VAT, apply for grants, or
- want to register their preferred company name before anyone else does.
It is extremely easy to set up a company in the UK. (But once you have, you are legally obliged to look after it, ensure that you file accounts on time, and provide other administrative information. So take your time and do your research before you commit, as founders who have heaps of shell companies to their names rarely look good to investors.)
From a Slicing Pie legal perspective, we can generally retrofit Slicing Pie legally into a startup company if it is still early-stage (e.g. it is a clean newco with a minimal number of issued shares, and an ITEPA 2003 valuation that can be argued as zero or low).
If you want to set up a company so we can retrofit Slicing Pie legally, we recommend that you:
- incorporate with Model Articles for a private company limited by shares;
- appoint two or more individuals as directors; and
- issue a minimal number of shares, e.g. 1 share of £1 or £0.01 to one person only. If you decide to go with Slicing Pie, then we recommend £0.01 shares.
Companies can be incorporated online very reasonably at Companies House: https://www.gov.uk/limited-company-formation/register-your-company
B. When to do your Slicing Pie legals
Once you’ve incorporated, then as long as your business is still bootstrapping, people are not getting paid, and everyone is happy to operate on the basis of trust, you can take your time to do your Slicing Pie legals. This is because Slicing Pie is designed to give teams an efficient and fair way of working together whilst exploring whether your business concept is viable. You can therefore use Slicing Pie and make it legally binding only when you need to.
(This is different for startups using fixed splits, because in practice individuals who’ve negotiated the biggest shares often want to lock them in legally before anyone else realises that their equity split could be fairer. So these people have no incentive to wait.)1
We usually find that startups are ready to implement Slicing Pie legally once they tick all three of the following:
- they’ve been running their pie for at least a year; and
- they need to continue making grunt inputs for at least a year or more still; and
- they have one or more of the following factors:
- Launched MVP and has customer validation: The team has built and tested its MVP (e.g. via soft launch), has fully launched (or is preparing to), and has customer validation, e.g. via first actual sale etc.
- Need to build the team: Team members don’t know each other that well, have experienced equity issues before, and/or want legal agreements as a condition of joining the project (in which case if founder(s) are still building the team, either the core team can implement Slicing Pie first, and get everyone else to join formally later, or the team can finish forming their line-up first, and implement Slicing Pie with everyone at the same time).
- May soon have a valuation: Their business will soon have a valuation because e.g. it is planning to raise fixed equity investment or sign a game-changing contract soon (so issuing Slicing Pie shares to people whilst it’s easy to argue that the business has little or zero value is better, as no additional tax needs to be paid).
- Required by others: The team needs to implement Slicing Pie legally and formalise its equity and corporate arrangements, e.g. as a condition of joining an accelerator, to qualify for a grant, to establish a trading record for the team, or to prepare for investor due diligence.
Working on your startup for a full year before legalising might seem like ages. But a year soon flies by! Once teams get going, most come to us with between one and three years of pie inputs, as it usually takes them that long to get comfortable working together, their grunt lineup to settle, and to build and test their MVP. 2 Slicing Pie’s flexibility is also great for growing a business, so we generally find that teams run their pies for several years after legally implementing, before they are ready to bake.
So, if you’re using Slicing Pie, say goodbye to equity angst! Instead, set up your pie, spend your money wisely, and focus on building the business-customer side first. 3 Then once you know you’ve got a solid business case, contact us to discuss your Slicing Pie legals.
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1 Some entrepreneurs like to sort shares out early to help with tax benefits, e.g. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which has a two year qualifying period. However, we find this is not really an issue for most startups, because they expect to work on their businesses for years to make them successful. Investors also like good teams to commit and stay for the long-term. So in reality most entrepreneurs have plenty of time to start their tax clocks running as they’ll be with their businesses for years.
2 One of our first clients implemented Slicing Pie for more than eight years of pie inputs, once they looked back at expense records and calendars. And this can be even longer for some founders.
3 Yes, we know – this is not what most lawyers would say! And if you insisted on doing your Slicing Pie legals at the outset, then of course we would help. But we think this is the right thing to do if you are a bootstrapping startup 🙂