If you are thinking about leaving your 9 to 5 for a startup, here are some handy tips from a lawyer to consider before you make the move.
While it is important to be prepared, thinking about every step and planning for a year or more at once before you leave your 9 to 5 can be daunting.
This article helps you consider the bigger picture, what you need to know about restraints when leaving your job or taking on a side hustle, business structure and stakeholders.
So let’s take things one step at a time and discuss some important considerations.
Your employment contract may have a post employment restraint that says you cannot work for a competitor or set up a competing business.
Alternatively, it may have a non-compete which stops you from working for or being involved with a competitor.
Here's an example of a non-compete:
The Employee agrees that, during the period they are an Employee and for a period of:
(a) 12 months; or if that period is held to be invalid
(b) 6 months; or if that period is held to be invalid
(c) 3 months,
(the “Restricted Period”), the Employee will not either directly or indirectly render services or give advice to, or affiliate with, directly or indirectly through one or more of any of their respective affiliates, own, manage, operate, control or participate in the ownership, management, operation or control of, any competitor or any division or business segment of any competitor in:
(a) Australia; or if that area is held to be invalid
(b) New South Wales; or if that area is held to be invalid
(c) Strawberry Hills.
The court’s don’t like restraint periods that are too long because they should only exist to protect the employer’s legitimate business interests.
That is, a restraint cannot go beyond protecting business interests and stopping a worker from earning a living.
Similarly, a restraint that bars you from working in the country may also be considered too wide and onerous.
Employer’s like to keep their trade secrets, client lists and business strategy confidential and safe from competitors.
And this means that during and after you finish working for an employer, you have an obligation to keep this information confidential.
If you breach a post employment restraint, usually the employer will send you a ‘cease and desist’ letter.
The letter will remind you of your contractual obligations, asks you to hand up or destroy any confidential information that you hold and stop working for a competitor.
A well drafted response letter could stop any further action against you by the employer.
If the employer is not satisfied with your response, they may take further legal action such as seeking an injunction.
An injunction is simply a court order to stop you from working for a competitor or setting up your own business.
Also, if the employer claims you are profiting from using their confidential information, they may also seek an account of profits (that is, the profits you earned from breaching the post employment restraints).
There may be an option to negotiate a reduced post employment restraint, you may want to consider getting some legal advice about this option.
Now, once you have completed a check of your employment contract and considered your options, you can then look at your business structure options.
While you can always change your business structure later, you may want to avoid the hassle by setting up with the most suitable structure from the outset.
A sole trader structure is simple and cost effective.
Legally, it means that as an individual, you are personally accountable for the business including any losses.
Setting up as a company provides you with the benefit of limited liability.
Generally, this means that as a director, you are not liable for company debts.
The company is a seperate legal entity that can incur debts, sue and be sued. The exception to this is when you enter a company contract as a a personal guarantor.
As a guarantor, you will be personally liable for company debts if there is a default.
If you receive a document such as a lease or franchise agreement asking you to sign off as a personal guarantor, it's a good idea to get advice about this before you sign.
A trust is another option and is an attractive option for tax planning purposes.
The trustee of the trust holds assets, in this case, business assets on behalf of others (the beneficiary).
A lawyer can prepare a trust deed that sets out the powers of the trustee. It's also a good idea to get advice about tax implications of a trust from an accountant.
A partnership is a group of people carrying on a business with a common view to profit.
Different partnership laws apply depending on which Australian state you are setting up the partnership.
Also, there are different partnership types: (1) a partnership "normal" (2) limited partnership, and (3) incorporated limited partnership. Both limited and incorporated limited partnerships need to be registered with Fair Trading in New South Wales.
So how can a lawyer help you with a partnership ? A lawyer can draft up a partnership agreement to set clear expectations for your business and help you minimise disputes.
Even if you have set up as a sole trader, sole director and secretary of a company, chances are, you won't always work as a lone ranger, you will need to interact with a range of stakeholders, here are some important ones:
Regardless of your structure type, you have taxation obligations including monthly, quarterly or yearly reporting on items such as GST, PAYG.
If you have set up a company, you are accountable to the regulator ASIC.
You must notify ASIC of certain company changes such as appointing a new director, changing your business address, issuing shares and the resignation of a director or secretary.
The FWC is Australia's national workplace relations tribunal.
FWC sets the minimum national employment standards (NES) and minimum wages in awards. If you have a dispute with an employee that involves a dismissal, that worker may be entitled to seek a remedy from FWC amongst other places.
SafeWork is New South Wales' health and safety regulator.
SafeWork provides advice on improving work health and safety, licences and registrations for dangerous work and they also investigate workplace incidents and enforce work health and safety laws.
You may need to contact insurers to comply with your lease or any other legal contract. Insurance may include public liability, professional indemnity, glass, contents and plant and equipment.
Also, you may need to list your financier or your landlord as an interested party on your insurance premium.
Suppliers include anyone that supplies any product or service to your startup - IT, advisors, manufacturers, contractors and sub contractors.
Larger organisations that you deal with may supply you with a contract or terms and conditions. You can review these and have them revised or request additional terms. A lawyer can help you do this.
Here's a list of some useful contracts to have drafted early on:
Do you know someone that's leaving their 9 to 5 to launch a startup ? Feel free to share this article.