Working with start-ups and young entrepreneurs
21 September 2020
Private client practice usually focuses on individuals and families who already have considerable wealth – those that have been successful in business, those who have made wise investments and those who have inherited substantial wealth and property. As private client practitioners, we set up structures to hold and manage the wealth of people who are already wealthy, and we aim to ensure that it is protected as much as possible for present and future generations. The type of clients we usually mean when we refer to ‘private clients’ are high net worth individuals and their families and family offices.
A new type of private client
One aspect of private client practice that is often overlooked is working with and advising individuals that are at an earlier stage of their wealth creation and generation – start-ups and young entrepreneurs. Start-ups are new businesses which are set up by one or more individuals to develop a new and innovative product or service. The founders are generally young, hungry and ambitious entrepreneurs who have a great idea (or several ideas) that have the potential to generate significant profits or capital growth but they have yet to make their millions (or billions).
While start-ups are risky and many fail, some go on to be hugely valuable and generate substantial wealth for their founders (think Uber and Airbnb) and some of the world’s most well-known and wealthy entrepreneurs founded start-ups (Microsoft was once a start-up which a young Bill Gates founded to develop and sell computer programs).
Different priorities but similar needs
Setting up a trust or foundation is probably not on the start-up founder’s radar – certainly the costs could be disproportionate at a time when they are likely to be investing heavily in the business - and they may have no need for one, either now or further down the line. Even if they have started planning for the future, they may have little interest in, or knowledge of, the more traditional wealth-holding structures and any conversation about them may be an unwelcome distraction from their goals of developing and launching their product or service, seeing that succeed and making money.
However, these business owners have the same needs as the high net worth individuals we are used to dealing with – asset protection, succession planning and good governance. Whilst they may not be ready for a trust or a foundation, or anything more complicated than a simple limited company to hold their intellectual property and through which to trade, these needs can still be met by private client practitioners in the early stages of the wealth generation.
What can we do for start-ups and young entrepreneurs?
Find out about the business and consider sharing any relevant expertise on the industry sector and business management generally. Many successful start-ups appoint one or more business advisers or set up an advisory board and it might be appropriate for them to engage one or more private client practitioners to provide advisory services.
Understand what assets are integral to the business and generate, or have the potential to generate, value (e.g. intellectual property, real property or plant and equipment) and ensure that they are owned by the founder or under their control. Encourage them to take expert legal advice in the place where each asset is situated.
Ensure that each founder has a will in place, and that it is up to date and takes into account their interest in the business. The will should leave the business, including any business assets, to the person(s) they would want to benefit from it if they were to die. Refer them to a lawyer in their place of domicile and/or the location of the assets if they do not have a will or if there are any concerns about whether it adequately covers their business and assets.
Encourage each founder to take tax advice on how to structure the business, including any investment they or others make in the business and how they will be paid (e.g. a salary, consultancy fees or dividends). The arrangements should be appropriately documented in the constitutional documents of the business, employment agreements, consultancy agreements and/or shareholder agreements (as applicable).
Most start-up businesses are put into a corporate structure to limit liability. The founders are likely to be unfamiliar with keeping corporate books and records or making statutory filings so may want to appoint a corporate service provider as administrator.
Business succession plan
Work with the founders to put in place a business succession plan which identifies who will take over the business if a founder is no longer able to run it (due to incapacity or illness), or if they want to sell it or transition it to the next generation. This should have some input from their tax adviser and a lawyer with experience of business succession planning.
Encourage each founder to enter into suitable legal arrangements with any coowners dealing with matters such as business succession and decision-making powers (usually in the form of a shareholders agreement).
If the founders are raising further funds (whether from lenders or investors) ensure that their interests and the business are adequately protected and that the proper documentation is put in place. If there are loans, whether from a bank, an alternative lender such as a debt fund or a government scheme (such as the UK’s proposed Future Fund) or even a friend or family member, ensure a suitably qualified lawyer reviews the loan documents and any security agreements on their behalf. If they receive external investment, ensure that they have taken advice on any legal or regulatory issues in respect of the fund-raising. It may be appropriate to have a prospectus or term sheet for investors, which include disclaimers and warnings, and an investment or subscription agreement which covers matters such as confidentiality.
Talk to the founders about their goals and future plans and give them a flavour of their structuring options if they do find themselves generating significant wealth. Tell them about the services you offer and the types of clients you work with and want to work with (they might be inspired by
hearing that you already work with successful entrepreneurs who started out like them).
Looking to the future
Getting these foundations right in the early stages of the business will help ensure that the founders’ interests are protected, that their new wealth is preserved and that their intentions in respect of future generations are taken into account. As the business grows and there is more wealth at stake, or as individual needs change, a more complex structure may be appropriate. If the business is managed appropriately in the early stages, it will be more straightforward to restructure it at a later date and by working with the founders now, there is an opportunity to become a trusted adviser and to be their ‘go to’ provider of private client services throughout their wealth generation journey.
Author - Kerrie Le Tissier, Partner
This article was first published in ThoughtLeaders4 Private Client magazine - issue 2, September 2020.