Legal news round-up for small businesses - April 2014

by Startacus Admin

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Welcome to the second Startacus monthly legal news round-up for small businesses, courtesy of Net Lawman expert advisor Thomas Taylor.  Each month Thomas casts his eyes over some of the key legal news stories affecting small businesses.. (here's last months Legal news round-up for small business post too!) 

Extension of Apprenticeship grants

In the 2014 budget, the Government announced that the Apprenticeship Grant for Employers scheme (AGE) would be extended to 2015 to support 100,000 additional Apprenticeships for people between the ages of 16 and 24. Although youth unemployment has fallen slightly in the last 12 months,  it remains a key issue for the Government.

Apprenticeships are work based training programmes that operate under the National Apprenticeship Service. The Apprentice gains on-the-job experience, and receives formal training outside the workplace. The cost of employing an Apprentice is subsidised by the Government: there are grants for businesses to take on Apprentices; the external training is largely funded by the Service; the minimum wage an employer pays is greatly reduced; and in some cases, National Insurance is not payable.

Apprenticeships are suitable for over 170 industries from those that are typically associated with apprentices, such as engineering and manufacturing, to those that are not: IT, tourism, publishing and retail. Although typically an Apprentice is aged under 24, there is no upper age limit.

Apprentices are unlikely to be suitable as first employees because of the commitment to training a business must make, but when you are ready to hire someone at a more junior position into the team, an Apprentice might fit well: motivated staff who can develop into the role through subsidised training and wages.

Why non-equity crowdfunding is always likely to be more preferable to start-ups than equity crowdfunding

The buyout of Oculus VR by Facebook has been in the news for two reasons. The first is that it is the largest sale to date of a company that used crowdfunding for seed capital. The second is that the high price at which the company has been acquired has highlighted to backers of crowdfunded companies that they don't always have the same control or ownership rights as shareholders.

In the USA, equity-crowdfunding does not yet exist (although it is likely to do so soon). In the UK, crowdfunding has both equity and non-equity models.

The non-equity model is where the business offers backers future products or services as an incentive to invest now. In return for different levels of funding, a backer may receive a product at a discount to final sale price, or be given a product before it becomes available for public sale, or receive recognition (such as being named in the credits to a game or film).

This is the model under which Oculus VR raised money.

The equity model is closer to business angel or venture capital funding - backers receive benefits similar to those shareholders receive - a share in the profits of the company and, possibly, influence over how the company is run.

The question for start-ups is why they would use the equity model in preference to the non-equity model.

The non-equity model is legally simple. The business effectively pre-sells goods or services and has very little legal obligation to deliver the promises made. The risk lies with the backers, and the founders continue to control the company and benefit from growth in value.

The equity model is far more complicated, because equity investments are regulated heavily by law. With a few exceptions, private individuals cannot invest in private companies. The equity-crowdfunding model gets round this by making the crowdfunding business (which is regulated and may invest) a nominee (representative) shareholder on behalf of the individual backers. The backers have certain legal rights in relation to their investment through the nominee shareholder, but are not shareholders themselves and do not have shareholder rights.

Bringing in any new investor usually necessitates changing the legal documents that state how decisions are made. Original investors lose some control and gain more legal responsibilities. But unlike other types of equity investor, such as venture capital funds or business angels, a crowdfunding business does not bring advantage beyond a source of capital.

VCs and angel investors create additional value as shareholders because they bring experience and contacts (and sometimes additional debt financing). They take an active interest in how the company operates. In contrast, a crowdfunding business cannot be as active. It doesn't have the depth of understanding of the company's needs that other shareholders have (particularly important in start-ups where there are few shareholders and most of them are managing the business day to day at ground level). Nor can it react quickly if it needs to poll all backers in order to make a decision. However, it does have significant control of the company, which could reduce the effectiveness of other shareholders (such as the founders) to make important decisions quickly.

As a business owner, if you are simply searching for investment to develop a product, the non-equity model, where ownership and control is not ceded, is far the less expensive and risky model. Of course, pre-selling your product might only raise a limited amount of money unless backers are also altruistically supporting a vision as well. But it doesn't require you giving up control and ownership, and it isn't complicated by legal matters.

Cheers Thomas and we look forward to hearing back from you next month with your next monthly legal news roundup! 

 

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Published on: 11th April 2014