Category: Insights

SEIS/EIS Investment Schemes

Posted on by Jay

The UK government established the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) to provide tax incentives for investors in start-up and higher-risk companies seeking to raise equity finance. So far, these schemes seem to have worked well for start-ups and SMEs during the critical early years, raising over £23 billion for forty thousand businesses since 1993.

Both schemes offer investors generous levels of income tax and capital gains tax relief. Reflecting the higher perceived risk of investing in start-ups, the schemes also mitigate any potential downside for investors. But for the business owner/founder it is essential to bear in mind that the SEIS and EIS schemes are only incentives (albeit attractive incentives) and not a source of direct cash income. There are differences between the two regimes, based upon the expectation that companies which have raised seed funding through SEIS will then go on and raise further investment under EIS. So how do the EIS and SEIS schemes work and how can you use them to get funding for your business?

The SEIS and EIS Schemes

Both schemes are designed to attract funding to high-growth UK-based businesses that need financial support as they scale up. The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) encourage investors to invest in small businesses by giving them a capital gains tax exemption as well as potentially generous income tax reductions. Investors are also given a relief loss if the small business fails, thus offering a safety net for their money. However, several key differences in how they work could affect your eligibility for either.

Differences in the Schemes

SEIS exclusively targets start-ups and early-stage businesses with less than 25 employees and less than three years of trading history. The EIS scheme is suitable for larger businesses with a maximum of 250 employees and up to seven years of trading history.

Under SEIS, a business can accept a maximum of £250,000 in total funding from individual investors only and these funds have to be spent within three years. Under EIS, a business can accept up to £12 million in total funding (up to £5 million in any tax year) from both individual and corporate investors and these funds must be spent within two years.

Eligibility for EIS/SEIS

If you want to attract funding from EIS and SEIS schemes, you must be a qualifying trade or business established in the UK. HMRC has a checklist of trades that are not eligible for either scheme which includes property development, hire-purchase financing, coal/steel production, and managing or operating hotels.

To qualify for SEIS early-stage start-ups must not be a partnership, not be controlled by another company, cannot have received EIS funding and have less than three years trading history. Headcount must not exceed twenty-five full time employees and maximum gross assets should not exceed £350,000 when shares are issued.

EIS qualifying criteria for slightly more mature, but still early-stage companies, are similar. In this case the business must have fewer than 250 full-time employees, less than seven years of trading history and maximum gross assets of £15 million when shares are issued. The business must not be controlling another company (unless it is a qualifying subsidiary), cannot be controlled by another company since incorporation, or does not have more than 50% of its shares controlled by another company.

A business can raise money by attracting investment under both schemes, but the initial fundraising round must come from the SEIS scheme (up to £250,000) moving on to EIS for more. While you can apply for both simultaneously, EIS investments can only be raised at least one day after any SEIS investments. In addition, no shares under SEIS or EIS can be issued unless fully paid up.

Advance Assurance for EIS and SEIS Schemes

Applying for an Advance Assurance (AA) from HMRC will deliver a certificate stating that any investment will likely qualify for EIS/SEIS funding. This certificate can then be shared with potential investors to assure them that you meet the SEIS/EIS criteria upfront and dramatically improve the likelihood of investment in your business. Any application must be filed via a company secretary, director or agent appointed to act on your behalf. Bear in mind that obtaining the AA certificate from HMRC can take up to eight weeks.

The information you will need to supply includes your business plan and financial forecasts, latest accounts, memorandum and articles of association as well as details of how much funding you hope to raise and what you plan to spend it on. Documents to certify that you qualify for SEIS/EIS schemes as well as details of any schemes under which you have previously raised funding and any information or literature that you have been using to explain your business to potential investors should also be attached.

Once the SEIS/EIS funding round is complete, you share a compliance certificate with HMRC so your investors can get their tax relief, HMRC will issue a unique investment reference number to each of your investors, which they must use to claim their relief amount.

Long-Term Growth Requirements in Both Schemes

It should be noted that both schemes increasingly require a company to provide evidence that the main objective of fundraising is to ensure long-term growth of a sustainable business (not a short-term project). Some companies have struggled to demonstrate their intended long-term viability beyond an initial short-term product or idea, especially if marketing and fundraising documents focus on short-term success. Companies must also demonstrate that they will use any money raised for the business’s long-term growth. A comprehensive business plan and projections to evidence intentions to trade beyond three years is essential in order to obtain the AA certificate.

The Motion Paradox team of start-up business and legal consultants, based in London and Los Angeles, can help you navigate the process of seeking investment through these schemes, providing informed feedback on your plans, and preparing bespoke documentation so you can convince HMRC and future investors to back your vision of a sustainable future for your business.

Disclosure is Key in Due Diligence

Posted on by Jay

For most start-ups and small businesses, due diligence is something to be endured when a potential investor undertakes an audit process before committing to investing in your company. The intensity of that audit often depends on the amount of investment involved. That much should be obvious to any viewer of the business reality TV shows ‘Dragon’s Den’ in the UK or ‘Shark Tank’ in the USA.

Accuracy and Transparency is Essential

Sometimes, due diligence can be as simple as a face-to-face conversation, especially if you are a start-up looking for pre-seed funding. More usually the process can involve business lawyers, accountants, and a lot of paperwork. Honesty and integrity as well as accuracy and transparency are paramount because the aim of due diligence is risk mitigation. Everything you say must match up with the data you provide because the truth will always come out in the end. Err on the side of disclosure.

Preparing for due diligence is a great opportunity to do an internal audit as well as verifying the growth plan that will be a major part of your pitch. Proper preparation also allows you to defocus on the day-to-day stuff and get an updated overview of your business which can reveal areas worth optimising even before the investor gets involved.

What Investors Will Ask

Typically, investors will have a standardised checklist to go through, although it’s likely that each investor will ask different questions. Seeking the help of business and legal consultants like Motion Paradox can make due diligence easier by preparing in advance all the most common documents that investors will usually require. Given the sensitive nature of the data you will disclose, common practice is to enter into a confidentiality agreement with the potential investor, although the efficacy of these agreements is open to question.

Your business plan and financial records are the most common data points investors ask for. The aim of reviewing this information is to make sure that your pitch matches up with the concrete numbers and you are not saddled with debt. Start-ups often have multiple co-founders so make sure any documents detailing your ownership structure are up to date and ideally include a credible contingency plan for disagreements where there is 50/50 equity between founders. Angel investors and venture capitalist (VC) investors will also likely insist on seeing properly produced minutes of stakeholder or leadership meetings as well as complete openness about any legal issues, pending or threatened, that you may face.

Customer Data, Sales Revenue and Market Knowledge

Investors will want to know about your customer base and supply chain as well as gaining an understanding of your revenue streams, cost per customer acquisition and pipeline projections. As part of the due diligence process, investors will likely undertake an intense review of your competitors and the overall state of the market, so ensure you can answer any questions a potential backer may have to demonstrate your understanding of the space you are in and how you fit into it.

Ensure Contracts are Watertight

Your existing employment contracts, client contracts and vendor contracts are all likely to be a critical part of any due diligence exercise. Many start-ups and SMEs draft contracts without expert guidance, basing those documents on internet templates or what they perceive to be “common practice.” A serious potential investor will soon discover whether those off the shelf contracts actually protect your company, and hence their investment, and are sustainable in the long run. They will look far more favourably on your business if you have put in place bespoke contracts and services since, from their perspective, that will mitigate any risk and assist you in scaling properly.

Intellectual Property Rights

Potential investors will want to take a look at your Intellectual Property (IP) rights, so if you have not already done so, file for any patents and trade marks before meeting them. Your IP rights are a key economic differentiator for investors, particularly for technology start-ups. Even if you have a really great app or product, without IP protection (patent information, copyrights, design rights, trade marks) they will argue that a tech giant could offer the same thing at scale for free, so why should they bother investing in you?

Personal Interviews

Ask anyone in business and they will likely say that people tend to do business with other people, so even if all the numbers add up, the success of your company depends on you and your team. As part of due diligence, both your business and you personally are probably going to be put under the microscope. Potential investors may wish to speak with you and your team individually to get an idea of the personalities, values, and skills.

Establish a Data Room

You can get a head start on bringing in investment by building a data room to streamline the due diligence process, housing all the information most investors are likely to want to see in one convenient location – short pitch, team background, business and marketing plan, details of contracts and software licences, financial statements and IP assets. Virtual data rooms are now the norm, but whichever cloud sharing/hosting platforms you choose, you should ensure they offer both ease of access and high levels of encryption and security, since much of the information you place there will be business sensitive and confidential.

Investors in start-up businesses in particular will also likely initially propose a term sheet. Term sheets are agreements that outline the key components of the investment deal and although not legally binding, it’s still important to have access to sound legal and business advice at this stage of any negotiation After an investor has proposed a term sheet, they will need to verify all of your information to be sure that what you are selling them is real. A well-constructed data room will conveniently give them all the detail and confidence they need.

The Motion Paradox team of start-up business and legal consultants, based in London and Los Angeles, can help you through the process of due diligence, providing informed feedback on your completed plans, preparing bespoke contracts and securing your IP assets so you can convince VC or angel investors to back your vision.

Flexible Working in 2024

Posted on by Jay

Amongst the new employment laws expected to come into effect in 2024 is the Employment Relations (Flexible Working) Bill, which received Royal Assent and passed into law on 20 July 2023. Although a formal introduction date is yet to be announced, the new law is expected to come into force in April 2024, at which point employees across the UK will have greater access to flexibility over where, when and how they work. Employees will:

  • gain the right to make two flexible-working requests within any 12-month period, whereas they previously could only make one such request; and
  • no longer have to set out how the effects of their flexible working request might be dealt with by their employer.

Likewise, employers will:

  • now be required to consult with their employees before rejecting a flexible working request; and
  • be required to respond to a flexible working request within two months, a month shorter than the existing requirement.

From 6 April 2024, as a result of the Flexible Working (Amendment) Regulations 2023, which were laid before Parliament on 11 December 2023, employees will also have a new right to request flexible working from day one of a new job, removing the 26-week qualifying period before a request can be made. The measures will be supported by a statutory Code of Practice, which is currently being developed after consultation by Acas, the body that provides free, impartial advice to employers and employees on workplace rights, rules and best practice. This article considers the potential opportunities and ramifications of the new flexible working rules for employers.

What Can Be Requested?

Employees meeting the requirements to make a flexible working request from their employer may submit requests to:

  • reduce their working hours to work part-time;
  • change their start and finish time;
  • have flexibility with their start and finish time (sometimes known as ‘flexitime’);
  • do their work over fewer hours (‘compressed hours’);
  • work from home or elsewhere (‘remote working’), all or part of the time; and/or
  • share their job with someone else.

Such changes can be requested for all working days; specific days or shifts only; specific weeks only (for example, during school term time); or for a limited time only.

Access a Wider Talent Pool

Using the tagline “Happy to Talk Flexible Working” in job advertisements will certainly open your recruitment to a wider talent pool and help create a more inclusive workplace. The Chartered Institute for Personnel Development (CIPD), which has long campaigned for flexible working, suggests that employees who have greater flexibility report higher levels of job satisfaction, well-being and performance in their roles.

There’s no doubt that for many SMEs the key to being resilient right now is maintaining that sense of employee satisfaction, becoming an ‘employer of choice’ by recruiting and holding on to the best people. This can be achieved through a benefits strategy, and flexible working is certainly a part of that offer. Jobseekers are increasingly searching for vacancies offering flexible working, which according to recruitment agency Reed is proving to be more popular than four-day-week working arrangements.

Do the New Measures Go Far Enough?

Some commentators have noted that the new flexible working measures may not make a substantial difference to either employees or employers since some of the legislative reforms many organisations have championed have not materialised. The statutory grounds for refusing a flexible working request, for example, will not change. Employers can still reject a flexible working application for any of the following reasons:

  • the burden of additional costs;
  • detrimental effect on ability to meet customer demand;
  • inability to reorganise work among existing staff;
  • inability to recruit additional staff;
  • detrimental impact on quality;
  • detrimental impact on performance;
  • insufficiency of work during the periods the employee proposes to work; and/or
  • planned structural changes.

Consultation Need Not Be Substantive

After an employee has made a flexible working request, there is no minimum time frame for the required consultation with their employer and the new law does not stipulate that it needs to be a ‘substantive process’ (nor any other detail about what such consultation has to include). It therefore appears to be entirely open for employers to determine the nature, length and content of the consultation. However, while it is not a legal requirement for employers to properly consult employees on any outcome, taking the time to speak with them about how you arrived at that decision and the thought processes involved in considering their request, is a small step that can help minimise the risk of claims and maintain good relations with employees.

Sex Discrimination Claims

The right to request flexible working from day one is still to be dealt with in secondary legislation, so for now employees will still only be able to make requests once they have completed 26 weeks’ continuous service. While it may not be too difficult for employers to fit any refusal into one of the permitted reasons, the potential issue of indirect sex discrimination claims does remain.

These could arise where, for example, the requirement to work full-time hours is applied equally to men and women, but because more women have childcare responsibilities, fewer women than men are likely to be able to comply with the requested working pattern or hours.

So, if the reason for the flexible working request is childcare responsibilities, and the employer refuses, the employee may be faced with no choice but to resign. She may then look at bringing a claim for constructive unfair dismissal on the basis of indirect sex discrimination (and because the constructive dismissal is discriminatory, she does not need two years’ continuous service).

The burden of proof is then on the employer to demonstrate that their decision was proportionate within the law and that the consultation was, if not substantive, then certainly serious. Any decision to refuse a flexible-working request must be supported by a strong rationale.

Preparing for the New Flexible Working Measures

In light of the above, employers should take steps to prepare for the new flexible working measures, such as:

  • updating flexible working policies to remove the requirement for 26 weeks’ continuous service before making a flexible working request;
  • ensuring that flexible working policies and procedures are reviewed in light of the most up-to-date Acas Code of Practice and guidance;
  • developing clear guidelines for management for the process of assessing requests for flexible work arrangements; and
  • ensuring that managers are given training in order for them to be able to adapt to the new legislation.

The team of Motion Paradox start-up lawyers based in London and Los Angeles can give you legal advice and guidance in all aspects of employment law to ensure your firm hires and retains the right people to make your business more resilient, scalable, and profitable.

GDPR Compliance is Essential for Tech Start-Ups

Posted on by Jay

Several business surveys suggest that the most problematic issues facing any small business or SME include cash flow management, hiring and retaining talent, and regulatory compliance. This last issue is especially relevant to tech start-ups in particular and one of the regulations with the greatest potential for causing problems through non-compliance is the UK/EU GDPR (General Data Protection Regulation) rules.

GDPR is immediately relevant to countries in the European Union, however following Brexit, UK companies still have to follow UK GDPR rules which are essentially the same regulations simply copied and pasted into UK law. If businesses breach GDPR rules, they face a substantial fine that could prove terminal for any nascent firm.

GDPR Applies to Start-Ups and Small Businesses

Companies with 250 employees or more are required to comply with GDPR rules, however, GDPR is still relevant for small businesses with fewer employees. For very small companies, separate data processing rules still apply (see the Information Commissioner’s Office ICO website for more details) but essentially, if you or any of your sub-contractors take, process, or store any personal data or identifying information in the course of your business, whether as part of product development, marketing campaigns, or dealing with staff and customers, you must comply with GDPR rules.

Compliance Risks in Using Foreign Developers

There is however an additional potential danger for SMEs in the tech space who, for reasons of cost or accessing the necessary expertise, use developers abroad. Depending on where these third-party vendors are based, they may operate in jurisdictions which lack data protection safeguards (perhaps in some cases none at all) concerning personal identifying information and personal data that meet the standard required by the UK/EU GDPR.

If these third-party vendor companies are not GDPR compliant they are also highly unlikely to have the appropriate insurance policies in place in case a breach on their part occurs. If their input and contribution are part of your product or service offer, you will be the one facing the fine for non-compliance.

Essential Contractual Protections

Smaller tech start-ups may not have the legal knowledge or staff to spare. Entrepreneurs understandably are focussed on developing their product above all else may not be aware of the commercial data and cyber security contractual protections and obligations that need to be put in place with such third-party vendors to avoid just such a potentially damaging risk.

That’s where the Motion Paradox team of start-up lawyers, based in London and Los Angeles, can advise you on the current regulations and put in place the legal and contractual provisions that can help protect your business from any risk that non-compliance with GDPR could pose to your business.

SME Gender Pay Gap Reporting

Posted on by Jay

Although under the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 only employers with 250 or more employees are required to report their gender pay gaps, many smaller businesses are deciding to do it anyway. It is certainly true that trying to reduce a gender pay gap becomes more difficult as a business’s size increases.

By making it an early priority, employers can get the right processes in place to prevent the growth of larger gaps as the business grows. However, gender pay gap reporting can be time-consuming and difficult, so why should a small business want to voluntarily report its gender pay gap when it doesn’t have to?

Attracting Candidates

Research by the Equality and Human Rights Commission (EHRC) suggests that almost two-thirds of women look at a prospective employer’s gender pay gap before applying for a job with that employer. With fierce competition for talent, it’s important to attract the best candidates, irrespective of gender or ethnicity.

Historically, women have likely had a lower salary range in their previous roles and there is evidence that women are less likely than men to ask for higher salaries and raises. There can therefore be a temptation to simply offer female candidates and employees in your firm what they ask for or slightly above what they already earn. This is still likely to be lower than what men at the company in a similar or identical role receive and will not be helpful in attracting the best candidates.

Being open and transparent about pay gaps will demonstrate a commitment to gender diversity and can help give you a competitive edge in not only recruiting, but more importantly, retaining the right people for your business.

Issues Facing Small Businesses

There are a few practical issues that a small business should consider when thinking about gender pay gap reporting. The gender pay regulations require comparison of the average woman to the average man. If a company hires no or very few women in either the lowest-paid jobs or the highest-paid board roles, and only a few women in mid-level roles, it could end up with a seemingly very good-looking gap. But that doesn’t necessarily tell you a great deal about what that workplace is like for women.

Pay gaps are calculated from averages, so when the number of people in a group is small, the average could be changed dramatically by the addition or removal of just a few individuals. The smaller the business, the bigger the impact. For example, if an employer has just 12 staff, the inclusion or exclusion of just a single person will have a huge effect on the average female hourly rate, and therefore the apparent pay gap. There’s not much that can be done statistically to resolve this small group dilemma, which is why the associated narrative in your gender pay gap report is so important.

Crafting the Narrative

The narrative in the report allows for any gender pay gaps to be properly explained and given some context. There is a fine balance to be struck in writing the narrative between giving enough information so that the statistics have relevance, but not so much that the fundamental message gets lost.
Anonymity is also important, and you need to be wary of publishing anything that might reveal personal data. For example, a gap in a business of 13 men and 1 woman could reveal that woman’s pay, relative to the average man.

It is also important for employers to be sensitive to how an employee identifies in terms of gender and, if employees have not already provided gender identity information, then employers should establish a method which enables all employees to confirm or update their gender.

Reducing the Reporting Threshold

The Fawcett Society, a UK charity established in 1886 and active in pursuing women’s rights, recently suggested that the threshold for pay gap reporting be dropped to 100 or more employees. In Ireland new gender pay gap reporting legislation will apply to employers with just 50 staff while employers in France and Spain with 50 employees or more must currently report gender pay gap information.

The trend is undoubtedly towards more transparency and more reporting of data and although small businesses are exempt from gender pay gap reporting at the moment, that may not be the case for much longer. Those businesses investing in transparency now may find themselves reaping benefits in the short and long term.

The team of Motion Paradox start-up lawyers based in London and Los Angeles is female-founded and female-led, so we have the personal experience that makes our legal advice and guidance here more insightful, practical and useful for your business.

Why Every Start-Up Needs a Board of Directors

Posted on by Jay

Most people would associate a board of directors with bigger companies where the influence and guidance of an independent board is crucial to good corporate governance and the success of the business. However, although a start-up or small business can also reap substantial benefits from them, many owner/founders still question why they need (and shy away from) accessing the advice and guidance an in-person board can give. Instead, they turn to sometimes dubious online accelerator programs.

Take Your Foot Off the Accelerator

Ask a start-up founder what they look for in an accelerator program and many will say they want:

Advice from entrepreneurs who’ve “been there and done that”; or
introductions to potential investors including prominent venture capitalists.

Both of the above are something you can also get from a carefully selected board of directors.

Those who signed up with Texas-based Newchip, a virtual accelerator provider, didn’t get what they bargained for when it entered into Chapter 7 bankruptcy in May 2023 leaving creditors owed $4.8 million. Ironically, Newchip was itself something that may have benefited from a strong and independent board. Newchip’s founder, Andrew Ryan, admitted it grew much too fast and that he’d never been a CEO of a company that big.

A Board Adds Value

Part of the appeal of running your own company is independence, the freedom from process, and the ability to pursue your own unique vision. That said, there is no doubt that start-ups with professional boards tend to be more resilient, as well as more attractive to investors and talent. Diverse and independent board members can add value to a start-up company by bringing skills and experience that the founder may lack as well as giving access to business contacts and networking opportunities which are so crucial for an early-stage business.

Nor is there any need for the founder to relinquish control of their company. For many entrepreneurs and smaller businesses, an advisory board might be better than a fully mandated board. An advisory board does not have any legal responsibility but is solely there to advise and give feedback. Fully mandated board members also steer and guide strategy, enabling you to do the best job you can, not act as your ‘boss’.

In particular, the role of non-executive directors (who have the same legal responsibilities as executive directors) is to ensure good corporate governance, provide oversight, expertise, knowledge, and if needs be, constructively challenge management. They are not involved in the day-to-day running of the business and are not employees of the company but can still give clarity around strategy and help to differentiate between long-term and short-term goals.

Attracting Investment

The independent advice of a board can also be important in attracting investment by giving investors greater confidence that important decisions are being made solely in the interests of the company, free from any conflicting interests. If that investment in your firm is from venture capitalists (VCs) it’s probably even more important to have a board that provides strong oversight. After supplying capital, instead of monitoring their portfolio of start-ups to reduce hazards, some VCs are unfortunately using their role in corporate governance to persuade founders to pursue high-risk, rapid growth strategies to maximize returns, with all the dangers that poses to young firms. An independent board can balance the need for ongoing innovation with sustainable, accelerated growth.

Attracting and Retaining Talent

Having a board can also help when it comes to attracting and retaining talent. Getting independent board members to interview candidates not only takes the load off the owner/founder but is also very appealing for potential recruits as it can give them a wider picture of the company vision. Post-recruitment a board can also provide the oversight to ensure that you have the right HR systems and policies in place, helping to retain that talent by looking at remuneration and incentive structures as well as training.

Pick the Right Board for You

As a start-up, you should look to recruit board members with different professional experience and a range of perspectives to embed diversity of thinking which increases creativity and innovation. Many larger companies have entrenched cultures which do not harness diversity. In 2021, a report (The Hidden Truth: Diversity & Inclusion in the FTSE All-Share) revealed that less than half of companies met the target for 33% women on boards and only 3% of board members in the FTSE All-Share ex350 were ‘directors of colour’ (male or female). Start-ups can take advantage of recruiting board members with a range of perspectives to embed diversity of thinking from the outset and gain a competitive advantage.

The team of start-up lawyers at Motion Paradox can give you legal advice and guidance in corporate governance, as well as assistance in structuring a board that suits your needs to ensure your firm is more resilient, scalable, and profitable.

AI and Intellectual Property

Posted on by Jay

Do You Really Own Your App?

Depending on who you listen to, Artificial Intelligence (AI) is either a boon for mankind or, according to Elon Musk, the greatest existential threat we face as a species. It’s the “dangers” of AI that have fulled most regulation currently being discussed, with news reports focusing mainly on the perceived risks for citizens’ fundamental rights and freedoms. However, there are also legal liability concerns for both developers and users of AI inspired applications and tools.

AI and Intellectual Property Issues

In particular, the development and increasing use of generative AI systems – the technology that enables the creation of content on demand – does have significant potential, but also raises significant legal issues. Upcoming regulation has relatively little to say so far about the complex – but highly commercially relevant for many tech start-ups – intellectual property (IP) implications of AI systems. A situation made even more complex by the cross-jurisdictional nature of online data scraping and use, and territorially different intellectual property laws.

AI Ownership and Copyright Issues

A start-up tech firm or an individual who has developed an app using AI may choose to monetise it by placing it on a major player’s platform and it’s important that the developer can say they own the IP in the app. Establishing this if AI has been involved in the development is not as clear cut as you may imagine.

The UK’s position on copyright ownership for AI generated works remains ambiguous, while other jurisdictions such as the USA, Spain, and Germany have clarified theirs, stating that copyright can only exist and be owned by a human being.

Is Your AI System Protected?

Some aspects of Al systems can be protected by patents and copyright, but machine learning systems don’t fit neatly into conventional IP categories. This is in part due to the fact that the real investment and value in developing a generative Al solution goes into the training process, which makes the system inherently much more valuable. However, generative AI relies on the input of large amounts of training data, which may or may not be subject to IP restrictions. Photos and text underlying some of the popular generative AI applications are likely to be copyright protected, but whether the training set as a whole is protected varies depending on the jurisdiction (the European Union for example has a specific database protection right).

Will The Output Infringe Copyright?

The output of a generative AI system will inevitably contain traces of the training input, and these can sometimes be readily identifiable. For example, visual media giant Getty Images filed a case earlier this year in the High Court of Justice in London against Stability AI, alleging that the company copied 12 million images to train its AI model without permission or compensation.

Stability AI and another AI art start-up – Midjourney are also being sued in the US by artists Sarah Andersen, Kelly McKernan, and Karla Ortiz who claim that these organisations infringed their rights by training their AI tools on images scraped from the web without the consent of the original artists.

In the US, “fair use” can be a defence against claims of copyright infringement. The digitisation of copyrighted books for an online library project has been interpreted as “fair use” by US courts but it is not yet clear whether this exception will apply in the context of AI. Most European copyright laws do not recognise “fair use”, so it’s more difficult to justify the use of a third party’s copyrighted works in the input or output of an AI system. If third-party copyright is infringed, it’s the user and the AI developer who would be liable.

Avoiding Costly litigation

To avoid the possibility of costly and potentially business-breaking legal problems, AI developers should ensure they comply with the law when acquiring training data. This could be done through licensing agreements or by sharing revenue generated by the AI tool with the individuals who own the IP of that training data.

Equally, customers of AI tools and apps are increasingly likely to ask providers and developers whether their models were trained with any copyright protected content. To avoid risk to themselves, they will shun generative AI tools that cannot confirm training data was properly licensed from content creators or subject to open-source licenses with which the AI company complied.

Our team of start-up lawyers at Motion Paradox can give AI developers and corporate users of this emerging technology guidance in navigating a largely unregulated landscape. We can ensure your business is protected from legal issues that may damage your company.

How Hiring a Start-up Lawyer in London Can Help Build a Solid Foundation for Your New Business

Posted on by Jay

A start-up lawyer can provide legal assistance and guidance that can help build a solid foundation for your new company and help avoid problems that can arise.

Starting a new business can be an exciting and rewarding journey, but it can also be quite challenging. Many entrepreneurs who start a new business overlook the importance of hiring a start-up lawyer, often due to the perceived expense of so doing. Some start-up owners will explore ways to reduce cost by attempting to create their own contracts using templates available online.  The following are just a few ways that a start-up lawyer in London can help your new company succeed and grow.

Avoid Do-It-Yourself Contracts

Creating your own contract using online or off-the shelf formats may at first seem to be cost-effective but is fraught with risks. Online templates are often overly broad or vague and using these DIY contracts may leave out key provisions, that protect your interests. The DIY contract could prove to be unenforceable while the inclusion or exclusion of terms commonly found in boilerplate templates could unintentionally create potentially damaging legal obligations or liabilities. The limited savings of a DIY contract are quickly outweighed by the time and money you would have to spend if any of these risks become a reality for your fledgling business.

Companies require bespoke contracts and services put in place in order to avoid risk and scale properly. A start-up lawyer can help you draft, revise, and review legally watertight contracts and agreements, to help ensure that your interests are protected. This can include shareholder agreements, employment contracts, vendor agreements and sales contracts.

A Start-up Lawyer Can Help Protect Your Intellectual Property

One of the key areas where a start-up lawyer can provide valuable assistance is in protecting your intellectual property. When starting a new business, it is critical to ensure that your intellectual property is protected. Whether in the form of patents, trademarks or copyrights, a lawyer can help protect your intellectual property and prevent infringement.

Help Your Start-up Comply with Regulations

Building a start-up company also means complying with a wide range of regulations. Navigating all of the regulatory requirements can be quite complex, especially in the technology sector. Advice is helpful to understand the regulations and ensure that you are in compliance. This can help prevent legal issues down the line, such as potential lawsuits, fines, and penalties.

Start-up Lawyers can Provide Solutions to Business Disputes

Unfortunately, disputes among start-up business partners or with other entities can arise. When these disputes occur, it is important to resolve them quickly to ensure that they do not derail the progress of your business. A start-up lawyer can provide valuable assistance in helping to resolve these disputes in a timely and effective manner, while also protecting your interests.

Due Diligence

At some point you may want to raise capital for your start-up. Any potential investor will have many questions about your business prior to investing. A start-up business attorney can help you prepare the requisite corroborating documentation to support each of your responses. Through the due diligence process, they can thoroughly review your company records, identify gaps, and help you understand which warranties and representations can be made, with a view to being transparent without jeopardising the transaction.

Offer General Business Guidance

Finally, a start-up lawyer can offer general business guidance. This can include advice on choosing the right business structure to support on fundraising and investments, and a wide range of other business-related matters in-between. Hiring a start-up lawyer can help you navigate the complex world of business, ensuring that you make informed decisions from the outset that benefit your start-up in the long-term.

The team of London start-up lawyers at Motion Paradox can help build a solid foundation for your new company. We provide all of the above services and more, helping to ensure that your business is protected from legal issues that can arise and also has the solid foundation needed for sustained growth. If you are starting a new business, consider hiring the legal experts at Motion Paradox to help ensure that your business is set up for success from the very start.

Doing Business in the USA

Posted on by Jay

In a previous Insights article we examined the issues faced by American companies wishing to set up business in the United Kingdom. The practicalities of doing that are complicated for US firms, and equally UK companies looking to expand into the USA face a similarly complex (but ultimately potentially very rewarding) journey.

Establishing a US Entity

Establishing a US entity is probably the most essential step for any UK company wishing to do business in the USA. That’s certainly the case if you are thinking of hiring USA-based employees, especially if you are also considering offering them equity incentives. If you intend to operate in a space where US product liability, patent infringement, or other litigation claims are frequent, having that US entity makes it more difficult for claimants to access the UK parent company’s deeper pockets.

Some heavily-regulated US industries may require certain types of operation to be run through a US entity and although it’s not a legal imperative, many US companies simply prefer to transact with other US companies. American Venture Capital investors generally require a UK company to establish a US parent company before investing (the so-called “Delaware Flip”). Whether your UK company should “flip” into a US parent company to access US VC investment is a question that requires careful consideration of the commercial, legal, and tax implications.

Establishing an American Bank Account

Establishing an American corporate bank account through a US entity is the next most important step because it’s far more efficient than trying to run things through a UK entity. However, it’s here that the complexities of doing business the United States have been highlighted by the recent turmoil and instability in the American banking sector. Before becoming the second-largest bank to fail in US history, Silicon Valley Bank (SVB) had been the go-to lender for high-tech start-ups.

SVB also spent close to a million dollars lobbying for the deregulatory policies in President Trump’s Economic Growth, Regulatory Relief, and Consumer Protection Act 2018, that undermined the Dodd-Frank Act which had curbed the extremely risky financial industry activities that led to the financial crisis of 2007–2008. This dilution of regulatory strength ultimately created the conditions for SVB’s downfall.

SVB’s management also appear to have neglected the basics of actual banking – the bank had no chief risk officer for most of last year – and the bank’s investment strategy wasn’t well-considered. Like many smaller, regional banks in the USA, the majority of SVB’s deposits were not insured by the Federal Deposit Insurance Corporation (FDIC). This is equally true of some larger US banks, but they can withstand fearful market jitters much better than the regional operations. There are a number of proposals for banking reform being discussed in Congress, including Senator Elizabeth Warren’s legislation to repeal Trump-era financial deregulation completely. Which, if any, will ultimately prevail remains to be seen.

The Importance of Due Diligence

Although the FDIC eventually guaranteed all SVB (and other troubled banks Signature and Silvergate) deposits, whether insured or not, that wasn’t a foregone conclusion. There was no legal obligation on the FDIC to do so and it cannot be assumed that such an intervention would be repeated if a bank failure happened again. This is vital for UK companies entering the US market to bear in mind. The importance of performing rigorous due diligence before selecting a US bank (not simply rushing to choose whichever institution will give you an account the fastest) is now even greater than ever.

Everything Takes Longer Than You Think

It should be clear in light of this turmoil that expansion into America requires careful planning, forethought, and execution of corporate compliance. However, UK firms should be under no illusion about how speedy this process will be. It generally takes much longer than most assume to form a subsidiary and get a federal Employer Identification Number (EIN) before finally opening a US bank account, which is required for payroll services and registering for employer and tax identification numbers in individual states where the company wants to operate.

Getting a federal Employer Identification Number from the US Internal Revenue Service (IRS) is a lengthy and very bureaucratic process, especially at present when such applications are subject to severe delay.

Equally, if your company isn’t willing to entrust a senior executive who is a US citizen to be legally responsible for the company in the US, it is much easier and faster if your designated UK executive obtains an Individual Taxpayer Identification Number (ITIN) prior to applying for an EIN number. Obtaining the ITIN alone can take up to 16 weeks.

Navigating the US marketplace requires patience but also demands experienced and knowledgeable guidance from a trusted partner like Motion Paradox, familiar with the legal and business environment on both sides of the Atlantic because that’s exactly where we ourselves operate.

Equality, Discrimination, and Your Liability

Posted on by Jay

Recent press reports suggest that a potential legal battle between the Scottish and UK Parliament is looming because the UK government is blocking a piece of devolved legislation aimed at making it easier for transgender people to change their legally recognised sex. The reason given for this move by Westminster is that the proposed change in Scottish law could impact on equality laws that apply across Great Britain as set out in the Equality Act 2010.

The Equality Act

The Equality Act came into force in October 2010. Some believe it could be the basis for triggering a constitutional crisis, but in any event it’s worth remembering it continues to have significant implications for all employers. The Equality Act covers almost every aspect of employing someone, either directly as an employee or as a sub-contractor.

Disabled Workers and Reasonable Adjustments

Under the Equality Act, employers have a responsibility to make sure that disabled people can access jobs and services as easily as non-disabled people. The duty extends to making “reasonable adjustments”. Defining exactly what is “reasonable” may sound pretty vague, but in terms of the Equality Act a “reasonable adjustment” is a change deliberately designed to remove or reduce any barriers that a disabled individual, or indeed any job applicant, may be faced with in applying for or performing a job.

These barriers can include:

  • a physical feature of the workplace (including the layout of the premises, the lack of a lift or toilets with wheelchair access);
  • the need for extra equipment or support e.g. for a blind person; and
  • other working arrangements, such as the hours an employee is required to work, the duties they are required to undertake, and the targets they are asked to meet.

The onus is on you, the employer, to show that any adjustments made are reasonable. Clearly a small business may not be able to afford the same level of adjustments as a large company, so the law does not require you to make adjustments that are unreasonable. For example, there may be cases where the cost of any such adjustment disproportionately outweighs the likely benefit, or where it may cause significant disruption to your business. In these circumstances, you should still try to find other ways to remove any disadvantage a disabled worker or applicant might suffer, because the consequences of failure to make those reasonable adjustments can be severe.

Failure to Make Reasonable Adjustments

A failure to make reasonable adjustments for a worker or applicant with a disability will constitute discrimination under the Equality Act. In most cases, an informal complaint or a formal grievance about the employer may be the outcome. However, in some cases, you could find yourself and your business facing a claim for unlawful discrimination before an Employment Tribunal.

Where the Tribunal makes a finding of a failure to make reasonable adjustments, the employer can be liable for an unlimited sum in damages – there is no cap. It is important therefore that you put in place appropriate measures to ensure any disadvantage suffered by a disabled worker or applicant is alleviated. Failure to do so could potentially have very costly consequences. However, it is not just disabled individuals who could make a claim for discrimination (in recruitment or employment) through the Employment Tribunal.

Discrimination and Protected Characteristics

The Equality Act 2010 protects individuals from discrimination by a variety of organisations. These include transport services, schools, and colleges and healthcare providers, as well as employers. The Act sets out nine “protected characteristics”, which are age, disability, gender reassignment, marriage or civil partnership (in employment only), pregnancy and maternity, race, religion or belief, sex and sexual orientation.

Under the Equality Act, discrimination involving one or more of these characteristics, in any context, is unlawful. Employers must therefore pay particular attention to recruitment policies, the content of job advertisements, and workplace practices.

Vicarious Liability

The Equality Act 2010 also has the effect of widening the definition of “employment” for the purposes of discrimination claims. Through the legal principle known as vicarious liability, the employer can be liable for the legal wrongs committed by an employee in the course of their employment even where the employer themselves has done nothing wrong.

In other words, you as the employer may be liable for an action that contravenes the 2010 Act taken not only by your employees, but also by your authorised agents or sub-contractors, whether you knew about those discriminatory actions or not. Vicarious liability applies not just to full time employees but also where there is temporary employment, provided the employer has some control over how the “employee” carries out the work or where they are integrated into the business. The employer can also be vicariously liable for the actions of temporary workers supplied by an employment or recruitment agency.

Defence Against Vicarious Liability

You may have a defence against vicarious liability under the Equality Act 2010. For example, if you can show that you took all reasonable (that word again!) steps to prevent the employee from doing the alleged act of discrimination. The bar is set extremely high for this defence so you will need to speak to an expert.

Talk to the experts here at Motion Paradox about protecting yourself and your business from Equality Act claims. We can give you advice about developing, implementing, and monitoring policies and practices that will ensure your business is inclusive and insulated from potential harm.

London Office

17 Red Lion Square
London WC1R 4QH
+44 (0) 20 3950 0765

Los Angeles Office

1627 Electric Avenue
Los Angeles, California 90291
+1 (310) 758-2585

Copyright Motion Paradox Consulting Limited 2024. Motion Paradox Consulting Limited is a limited company registered in England and Wales. The company number at Company’s House is 10645866. The registered office address is: 17 Red Lion Square, London, WC1R 4QH, United Kingdom. Motion Paradox Consulting Limited is a company providing only unreserved legal services and is not regulated by the Solicitors Regulation Authority (SRA).

  • Motion Paradox Instagram
  • Motion Paradox LinkedIn