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Three Things All Startups Need To Know About Company Law

Company law is a complex thing that is often misunderstood by startups in the UK and the Channel Islands. The aim of it is not to catch businesses out, but to make sure that businesses operate fairly. In recent years, “disruptive” startups from Silicon Valley have led some to believe that if you have a brave new idea, the law should bend to your will.

The aim of “disruption” is to shake up the old order of things by doing something so different that businesses and lawmakers can’t react fast enough, and Airbnb, Uber and Deliveroo are businesses which optimise the disruption mentality.

So, running a taxi service with unlicensed taxi drivers is illegal, but running a taxi-hailing app which facilitates and profits from unlicensed freelancers picking people up and dropping them off? That’s both a legal grey area and a gap in the market. It’s also been the reason why these same “disruptive” companies have had to deal with so many lawsuits.

So what should startups on the other side of the Atlantic take away from this? How can British and Channel Islands startups succeed while keeping well within company law? As an expert in Jersey company law, here’s my take.

 

1. Know the difference between innovation and disruption

The UK has already demonstrated that it’s not a big fan of disruption. When a startup or a company doesn’t play by the rules, they can’t play at all. This is why Uber has been banned from operating in London.

The idea that businesses should be “disruptive” is popular in Silicon Valley circles, but lawyers don’t agree and they have made a point of telling startups this. As such, the emphasis should be on innovation, rather than disruption.

One such example of innovation over disruption is from the Channel Islands, where one plucky startup has created an air-taxi service for pets and their owners. It’s a business model with a lot of demand, where the gap in the market stems from a lack of supply rather than a legal loophole. What sets these guys apart from Uber is that the company has emphasised that it will “comply with the requirements based on the laws that apply to flying in and out of the continent with pets”.

Words matter, so when a startup mentions in its press release that it is eager to follow to rules — to be innovative instead of disruptive — then this is a good sign.

 

2. Know the difference between research and assumption

It’s not enough to assume that your new business venture will be a legal one. When you consider how much the law can vary from country to country, it’s worth investing time and money into a proper analysis of the legality of your business venture.

One of the attractions of starting a business in Jersey, for example, is the fact that retail companies pay no tax on the profits they make on the island. However, recent developments might change that and these developments should factor into the plans of any startup looking to set up in the Channel Islands.

The question of legality is why Amazon’s Prime Air service has yet to take off. Despite having spent time and money developing their drone technology — and millions more lobbying to make their service legal — the company’s project is still in prototype phase. It remains illegal for businesses to use drones for commercial purposes.

Amazon can afford to lose on a gamble like this, but a startup cannot. If preliminary research tells you that your business model is illegal, it’s time to consider something else.

 

3. Know the difference between persuasion and fraud

Getting a startup off the ground can be tough. You have to spend money to make money, which is why so many startups head over to investors. By pitching your big idea with enthusiasm and zeal to the right people, you can fund the starting costs of your business. In exchange, your investors will expect to be repaid or perhaps to take a stake in the business.

The main currency here is not money; it’s trust. So, the fact that startups have been caught abusing this relationship is a big problem. It’s okay for a startup to present their company and its progress in the best possible light to their investors, but it’s not okay for them to straight up lie to their investors. The latter is a worrying trend that needs to be stomped out.

Notable examples often make headlines, such as when a vegan mayonnaise company was caught buying back its own product from the shelves in order to beef up sales. However, the real issue is the scale of investor fraud. This is when a company generates income from investors through knowingly telling complete falsehoods about their business. £1.2 billion a year is lost in the UK alone due to these scams and only 10% of the crimes are ever reported.

Startups need to know that the law is not there to hold them back. It’s perfectly possible to run a successful business which stands as an example of how company law should be followed and what company law is there for. The aim should be to break into new markets, not to break the law.

 

Mason Birbeck is the Head of Company Law at Jersey-based law firm Parslows. Along with the rest of his team, Mason provides legal advice for stand-alone transactions, restructuring businesses, and shareholder agreements, as well as many other services.

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