Start-ups “signing up” with bigger companies
David Anderson at Sykes Anderson Perry
Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Taxation and law are complex subjects and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.
Start-ups and small “disrupter” companies may be approached by a bigger more established company to work with them in developing new products and new methods. It often is what the start-up founders want as it gives them access to a bigger market and also the possibility of being bought out by the bigger player. It can also have a very unhappy ending. Here are some key points to consider.
Have a clear strategy and write it down
Do not go ahead on any basis just because a bigger player flatteringly shows an interest in your business. You need clearly to understand what is in it for you and what is in it for them. Bigger established companies have strategists advising them on the threats and opportunities from disrupters and that the best strategy is to engage with these disrupters very early on and not let them develop into a major threat. It may be best not to engage with a bigger company if all they want is information about what you are doing.
Do some due diligence on the bigger company
Make sure you know who you are dealing with. Get their latest set of accounts and see if they are solvent. Are their accounts overdue? Check at Companies House whether the directors have recently changed. Are they in the right business to fit with you?
Do not waste your time
You can spend a lot of time on these talks. If they are going nowhere walk away. It can also undermine staff morale. Weigh up the risks before you get started. Ask them whether they are talking to other smaller companies. It is best to have some form of exclusivity when negotiating.
Do not upset your investors
If you have outside investors it is probably best to talk to them before doing anything. They may not like the bigger company or may not want the early sale you want.
Protect your intellectual property
If you decide to start talks make sure you have a watertight confidentiality agreement in place. This should cover all information not in the public domain. It will have to work both ways so you keep any of their information confidential. It is best to be specific about what is covered.
Have an agreement that they will not approach any of your staff. This is always very difficult to control as approaches may be made later on via recruitment agencies.
Know the key people
Insist on meeting the key policy makers at the bigger company. It is essential you know who in a bigger entity is calling the shots. It is pointless engaging with people lower down who do not have the main board’s authority. Think whether you could work with them if you were taken over. If their business culture does not fit with yours stop it straight away.
Solicitor-Advocate and Chartered Tax Adviser