B P Collins on taking your business to the next level with funding and intellectual property

Written by David Smellie, B P Collins partner - corporate and commercial.

Funding your business

When you wish to expand your business, you’ll need funds to do this. Two common ways of raising this money are by borrowing money or by issuing shares in your company to investors.

Many businesses use a combination of the two.

Borrowing money

If you are taking out a loan, there will be a variety of documents on which you might need legal advice, such as the effect of the facility letter – which sets out the terms and conditions on which the lender is prepared to make a loan facility available to a borrower - and the terms of any debentures and charges (although these agreements may not be negotiable).

You may also be asked to guarantee the loan in your personal capacity so that the lender can recover the debt from you if your company cannot pay.

It is essential that you take advice on a personal guarantee as there could be severe financial consequences for you if the guarantee is ever enforced against you.

Issuing shares to company investors

If you are issuing shares to investors, you must make sure you follow the proper process. For example, your company’s articles – its rulebook - might require that you give existing shareholders a right of first refusal over any new shares being issued.

You might also want to create a new class of share for your investors (this will probably be dictated by the investor) and in that case your company would need new articles, which would set out what the voting and dividend rights of those shares are.

An expert lawyer will be able to help you make sure you follow the right process and that your investors get what they paid for.

There is also likely to be a complex investment agreement and your investors are likely to want you to give warranties in relation to your company, which you should make sure are as specific as possible.

Some common warranties found in investment agreements include that: that accounts have been properly prepared, and any projections have been made on a reasonable basis; the management accounts are materially accurate; the company owns all of its IP; and no one has any claims against the company and the company is not involved in a dispute.

Because of the complexity of investment agreements, it is sensible to have a lawyer to review the documentation and assist with negotiations.

The commercial reality is that sometimes there may be little room for negotiating the terms of any funding because a lender or investor may make their offer on a “take it or leave it” basis.

Even so, it is best to have a lawyer by your side to make sure you understand the potential consequences for you and your business and to help you achieve the best possible outcome.

Exploiting Intellectual Property (IP) rights

Your business might make use of different IP rights, such as copyright, patents, trademarks, moral rights and rights in designs.

Exploiting your IP - and the IP of others - allows you to maximise your own business and that of others who have been given your permission to use your IP.

Before you proceed, it is important to consider how you can best exploit the IP rights and what the consequences of each of the various different options may be.

For example, will such exploitation be through assignment, licensing, distribution, sponsorship, franchising, or co-marketing and co-promotion arrangements?

Acquiring IP

You may wish to acquire IP to move your business in a new direction, such as to start manufacturing a product, which previously your business has only sold.

If you are acquiring IP from someone else, be it through licence or assignment, you will want to make sure that the IP is accurately defined so that you can be certain of what you are and aren’t acquiring and what you can and can’t do with it.

A lawyer will be able to ensure that the relevant agreement accurately defines the intellectual property that is being licensed or assigned to give you the certainty you need.

An assignment transfers the IP from one person to another. If you are taking an assignment of IP, typically you will pay a one-off lump sum to the assigning party, who will then no longer have any involvement in the exploitation of the IP.

Typically you will want the person from whom you are acquiring the IP you to make certain warranties – that is, legally binding promises – about the IP. For example, you may ask them to warrant that they are the sole legal owner of the IP and that they are not aware of any infringement.

If they breach those warranties then they could be liable to pay out damages. An assignment should always be recorded in a formal agreement drafted by an experienced lawyer who can advise you of what risks should be covered by the warranties.

Licencing your IP

If you licence your IP, you remain the ultimate owner of the IP, but you give someone else a right to use it.

You may want to do this because others may be better placed to exploit the IP, or because you wish to raise the IP’s profile.

The licence can be adapted to suit your needs, such as limiting it by time or to a particular territory, by making it exclusive or non-exclusive, or something more fluid. So, for example, you might grant one company with a strong customer base in England the right to use your IP in England, but a second company the right to use it in Scotland, where the first company’s business is not so well developed.

This could allow you to maximise the benefit you receive from the licence. A lot of negotiation is usually involved to reach an agreement, which is why a lawyer with expertise in this area is essential.

What are your thoughts on intellectual property for scaling up? Let us know at @Bdaily with #ScaleupFocusWeek.