Why is it important?
It is important to identify that the nature of these companies is very different to manufacturers and high street retailers. Therefore equally the way they protect their assets and value must also be dealt with in a different way.
Value of intellectual property
The first important step is to identify where the value of your intellectual property is and how to preserve this. Tech startups will not generally have a large number of machines, but very simple setups, perhaps not even in an office. The real value comes from the following:
- Website and URL
- Contact details
- Google rankings
- Software development
With the amount of work that is involved in setting up this type of company, taking additional steps to protect the value of this can often take a back seat. Some basic steps you can take include:
- Ensure that new developments are properly protected with trademarks and patents.
- Ensure personal data is encrypted – this will be a legal requirement from 25 May 2018.
- Arrange insurance cover against cyber crime – being that your business cannot function if you suffer a significant attack.
- Set up “clean room” protocols for any third party hardware, software or otherwise to be tested before it is introduced to existing systems.
Tech startups are widely recognised as something from the younger generation. Whilst you may be very proficient in programming and full of ideas, we have seen numerous companies with no real business experience or knowledge of the tax system. It is important to identify your skills gaps at the outset.
It is well worth the investment to ensure that you employ people to fill these gaps:
- Accountant – All businesses should have an accountant, but you should ensure yours is aware of your industry and can assist with R&D tax relief and lower tax rates through patent box.
- Intellectual Property Solicitors – To ensure that both your own property is protected and you are not in breach of copyright or otherwise of other documents prepared.
- Sales & Customer Service – Your product may be great, but you need the right people to sell if for you and deal with customer enquiries.
All of these things can add value to your product and ensure this value is optimised and protected moving forward.
How to value your business?
Based on the nature of tech companies having few tangible assets this is not as straightforward as having a surveyor visit your premises. There are however several ways to do this, however they are largely based on share value and what someone would be willing to pay for the business.
- Based on the level of dividends paid per share.
- Based on the average surplus monthly cash flow.
- Based on the level of net or gross profit per share.
If the company is loss making this can be a bit more difficult however there are a few steps you can take to give a better idea and typical market standards.
- Gather details of turnover and gross profit margins.
- Prepare cash flow and profit & loss projections.
- Establish whether any running costs are unnecessary.
- Apply a discount of 15 – 20% to the figures you are left with.
Again these figures will only give starting figures with an estimate for the value. At the end of the day, the business is worth what someone is willing to pay for it.
What can go wrong?
Even if you take these steps to preserve the value of your IP there are still a number of issues that can arise that you should be aware of and ready to deal with.
- Being forced out – you may have had the idea, but required third party investors to fund the project. Always ensure they will stand by your decisions and leadership otherwise they are in a strong position to push you out of the final product.
- Being premature – Before going to market ensure your intellectual property is protected. If testing is required for an innovative product do as much as possible through closed alpha testing and ensure your patents are filed.
- Overpromising – Do not promise your customers or investors more than you can reasonably deliver. Do not commit to a large project in the hope you can deliver on it further down the line.
- Cashflow – make sure that you have enough cash to develop your product before it goes live and can start making a profit. This is often known as the burn rate and you should ensure you are not reckless with costs at first and keep your own pay commensurate.
One or all of these issues are common reasons for the failure of tech start-ups and need to be managed carefully to ensure the product finds its market fit before burning out.
What to do if it all goes wrong?
If you do run out of cash, but your idea remains viable even if it is still in development or only in the early stages of the market all is not lost. There are still options to rescue your tech company, resurrect your idea or recover some of your investment. Even Apple was facing insolvency in around 1997.
Sell your idea on
Whilst you may no longer be in a position to move the project forward, this does not necessarily mean someone else will not. Seeking outside investment may be daunting, but the better you protect the value of your intellectual property, the higher a third party may value it.
Around 6 months ago we met with a tech company who was seeking terminal insolvency advice. Following this, through getting the right advice, they have succeeded in finding a buyer for their business in Asia for a 6 figure sum. Not only did they recover their own initial investment, but they also are due to receive a return on their investment.
There are proper applications for a pre-pack sale ahead of insolvency and tech companies are a prime example of this. The main reasons for this are:
- A great deal of value is within the employee contracts and a pre-pack will ensure continuity from their perspective.
- Continuity of service is generally expected based on the products provided and a pre-pack will ensure this service.
- Based on the above two points this will achieve a much higher return to creditors which is something you would be scrutinised upon.
It should be noted that you will need to pay for the development and intellectual property prepared to date. An insolvency practitioner will also need to conduct marketing of the business and if you wish to retain this you will need to be prepared to put in a higher offer, potentially under sealed bidding, than any other interested party.
Back to the drawing board
If all else fails it may be necessary to completely go back to the drawing board. Due to the previous costs this may result in a liquidation for your previous company. This does not prevent you from acting as a director and revisiting your ideas from the start.
You should consider what is good and bad about your product and start a fresh from there.