Legally started: The basics of founding your company
This is the first article of a 4 part legal series by Lucy Luo, a tech lawyer at Simmonds Stewart, covering what founders should think about when starting a company. Part 2 will delve further into issues that arise when your company is up and running. Part 3 will discuss raising capital in New Zealand. Finally, Part 4 will answer readers’ questions, plus point you in the direction of further resources. We welcome questions from readers throughout the series – please email firstname.lastname@example.org if you have something you would like to ask.
1. Getting started
So you’ve finally come to the conclusion that you can no longer ignore that little voice at the back of your head – congratulations on deciding to start your own company! As much as you may be excited about your product and team (if you’ve managed to rope some people into this with you already) – we suggest some initial steps to make sure your company gets started on the right footing.
2. Incorporate your company
Every company in New Zealand has to be incorporated or registered with the Companies Office. Fortunately, we are one of the easiest and fastest countries in the world for company incorporation: most of it can be completed online here. Incorporation is as simple as reserving your company name online, completing an incorporation application, and returning some signed consent forms. You will need to have at least one director and one shareholder. All up it costs $160 NZD, and can be processed within a day or two.
Most start-ups in New Zealand operate as a limited liability business structure. This benefits shareholders as they will not be personally liable for debts incurred by the company.
A helpful website is ONECheck, which allows you to search online to see whether the company name, domain or trade mark that you want to use is available.
All businesses have to register with Inland Revenue to get an IRD number. This can be done through the Companies Office when you incorporate the company.
You do not have to be registered for GST until you reach (or if you expect to reach in the next 12 months) an annual turnover of more than NZD 60,000. If you are under that threshold, you may choose to register voluntarily to claim GST back on goods and services you buy for your business, whilst collecting GST for the government on goods and services you sell.
If you plan on employing staff, you also have to register as an employer with Inland Revenue.
4. Should you put some key legal docs in place?
There is no legal requirement for New Zealand companies to have formal governance documentation in place – constitutions and shareholders’ agreements are optional. If your company does not have these documents, the default provisions of the Companies Act will apply (i.e. a “one legislation fits all” approach to anything from a startup to a giant public company).
If you are planning to have more than one shareholder in your company, we suggest you put a simple constitution and shareholders’ agreement in place.
A constitution sets out the basic rules for the administration of the company, and it must be made publicly available on the Companies Office website. The constitution is a contract between the company and its shareholders, and allows the company to set rules which are more tailored to its specific needs (than what the Companies Act prescribes). Perhaps most important for startups is that a constitution allows companies to provide for pre-emptive rights relating to the issue or transfer of its shares. These rights would give existing shareholders an ability to purchase additional shares in the company before those shares are offered to the public.
A shareholders’ agreement deals with matters relating to the management of the company and the relationship between the shareholders (e.g. who can appoint directors, what decisions require the special approval of certain people etc). It is a private and confidential document between the shareholders.
For examples of a simple constitution or shareholders’ agreement, have a look at our template governance docs.
What goes into governance docs varies from company to company, and its content should reflect the objectives of the current shareholders of the company. However, predicting the future isn’t always possible, and so a constitution and shareholders’ agreement between founders and friends and family investors will usually need to be replaced with more prescriptive documents if professional investors get involved later on.
5. Clarifying expectations with your co-founder
If you’ve got two or more co-founders starting a company, we think it’s important that you have a conversation upfront to clarify your expectations of each other, and how you will deal with conflicts in the future. It’s much easier to have a rational discussion about this while everything is still going smoothly. We suggest that co-founders have an agreement around what happens if the relationship breaks down (this is sometimes included in the shareholders’ agreement). In tech startups, co-founder agreements are sometimes used – see our templates to get an idea of what it contains. In next month’s article, we will be discussing employees and equity in further detail.
6. Keep everything in writing!
We don’t want to overwhelm you with information, so this first article contains the bare essentials in getting started. However, if there is one thing we would like to stress from day 1, it is to keep everything in writing, and ideally in one place. “Everything” includes agreements that you have entered into (with suppliers, customers, contractors, and employees), share registers, ownership of IP, tax or other registrations, liabilities or assets acquired, incorporation and governance docs etc. Any promise of equity to other people should always be recorded.
Documentation in one place is not only good for general “company hygiene”, but becomes particularly important later as you start to seek funding to grow your business. Investors and lenders will almost always conduct due diligence on your company before they agree to part with their cash, and this is the sort of paperwork they want to see. It can be as easy as setting up a Dropbox folder and adding new documents to it as time goes on. Better to do this incrementally now, than later having to scramble around looking for a contract you have no memory of entering into.
Stay tuned for the next instalment, in which we cover issues that arise when your company is up and running.
BIO: Lucy is a lawyer at Simmonds Stewart – a law firm passionate about technology and growing businesses. Our clients range from start-ups raising seed funding to some of New Zealand’s largest IT companies, as well as high net worth and private equity investors. We understand technology, and we also understand how hard it is to start a company – which is why we open-sourced our legal templates to help you to get started with your legal documentation. Most recently, we have been helping with raising capital for three of the start-ups coming out of Lightning Lab 2014. Follow us on Twitter @techlawnz for updates, or get in touch anytime email@example.com.