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Legal Talk 29: Personal Service Company v Employee: Taking on Staff
You're still waiting for Big Corporate to come back to you on your main contract, but in the mean time you are thinking of taking on staff to service new contracts. You call me, "Hi Legal Coach, I'm thinking of taking on staff, but should I hire freelancers or employees? What's the difference legally?" Okay, it's pretty straight forward. If you take on employees then of course you pay them a salary and provide employment benefits such as sick pay and holiday pay. Also, the employee has employment rights. You’ll also have to pay more tax (via employer’s national insurance contributions) if you hire an employee compared to if you were hiring a freelancer. If you take on a freelancer you are not responsible for giving them any employee benefits and just pay the freelancer as an external third party, so sometimes you just might pay the freelancer a day rate. However, the freelancer might have a higher day rate than if you were to hire a full-time employee. This is because the freelancer prices on the fact that they do not have employment benefits and do not have any job security into their day rate, particularly because you might only want the freelancer for a few days' work. Normally the freelancer will trade through a personal service company. So, for example, if you are hiring Mandy Smith as a freelancer, she might have a personal service company called Mandy Smith Limited and legally it might be Mandy Smith Limited that you hire (the company) rather than Mandy Smith (the individual). So, in summary, the benefits for you of hiring a freelancer are that you owe no employment duties to the freelancer and pay less tax. The benefits to the freelancer are that they pay less tax (if they trade through their personal service company) and have flexibility to work on different projects for different organisations (and they might get quite a high day rate compared to if they were a full-time employee). So, at the start of your venture I would suggest that you hire freelancers rather than full time employees because it is more flexible for you to upscale your workforce and downscale your workforce quite quickly (even if the freelancer’s day rate is more expensive than the full-time employee day rate). “Got it”, you say. “I’ll start off using freelancers and then see how things work out from there.” As always, I'm thinking of how I can help your grow your company fast! Best wishes Jimmy Desai Your Legal Coach P.S. Don't forget to subscribe and get even more exclusive content and legal insight. As always, this legal talk and all the legal talks are subject to our disclaimer, which you can find here. © 2019. Coaching Law Limited. All rights reserved.
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Legal Talk 28: How to convert the Letter of Intent into a Legally Binding Contract
Things are really busy with you now and it’s getting more difficult to meet face to face at. You message me and say, “UCL, we’ve got the letter of intent signed by the big corporate! Thank you, we really appreciate your help!” I’m really pleased. I sit back and gaze out of the window over the City of London. Your start up could be really big, I think. My mind begins to think about IPOs and press coverage and publicity and all the deals you could do and co-branding and partnerships and sponsorship deals and fame and invitations to big tech shows and TV and parties. I catch myself daydreaming and think I must get back to business. I email you. Okay, I say, what was the feedback on the Letter of Intent. Your email back saying, “the decision maker at the big corporate was really impressed that we were solutions people, in that we suggested the Letter of Intent and then sent it over within a couple of hours and it accurately reflected what we had talked about. That made a really good impression. I think our contact at the big corporate likes our style. Problem is that we have now set the bar high and so they will probably expect this all of the time. Our contact has now asked for the contract to be sent to her which is based on the Letter of Intent. Can you get this to us within the hour?” Okay, before we make our next move, let’s think and talk strategy here. You have the Letter of Intent signed which is very good. So, there are some things to bear in mind now to close this deal: A. No Surprises: Decision maker at the big corporate won’t want to see anything that doesn’t look familiar. She might pass the main contract to legal anyway but you increase the risk of this happening is she sees any departures from the Letter of Intent. So, stick to the principles in the Letter of Intent. B. Keep it Short: The thing is that you probably don’t want to add much legal wording to the Letter of Intent anyway as a supplier. The reason for this is that as a supplier you are the one doing the work and so 80% of the obligations in the contract are on you. Normally, all the customer has to do is pay. The net effect of this is that if you as a supplier have a long contract then you will find that most of the obligations will be on you. So, the strategy here is just to add minimal wording to the Letter of Intent and try to get this signed by the big corporate in order to: (a) keep it simple; and (b) avoid getting lumbered with additional obligations which were not mentioned in the Letter of Intent but which the big corporate thinks about later on. Does this make sense? I say. “Yes, crystal clear,” you say. “Aside from this however, where do I actually find these tactical tips in text books and legal journals if I need them from time to time?” Unfortunately, you probably won’t find this stuff, even if you search around for it. It’s called experience. “So, Legal Coach, can you update the Letter of Intent and turn it into a contract within the hour?” You ask. Yes, I will do it now and email it to you. You can then forward it on to the big corporate. C. Set a Deadline: Just to say that another tip when emailing the contract to the big corporate is to create some kind of deadline for a response. Otherwise, the contract can sit in someone’s in tray for weeks without being looked at. You could say that you would appreciate it if the big corporate could get back to you with comments in the next day or two so that you can run this by your lawyer, to try and get this deal done this week. I’ll start work on the contract now. With best wishes Jimmy Desai Your Legal Coach P.S. Don't forget to subscribe and get even more exclusive content and legal insight. As always, this legal talk and all the legal talks are subject to our disclaimer, which you can find here. © 2019. Coaching Law Limited. All rights reserved. Legal Talk 27: What figure should I cap my liability at in the Letter of Intent?
“Hi, Legal Coach! You mentioned that I should cap my liability in the Letter of Intent. What is this cap on liability all about?” You ask. Okay, it's pretty straight forward. What it means is that if things go wrong (and it's your fault) then what is the maximum amount that the customer can claim from you? For a more general reading on liability caps, I’d recommend looking here: https://www.accountancydaily.co/liability-caps. Obviously if you are only selling the customer £10,000 worth of software and services you don't want to face a claim for £10,000,000 because your software and services messed up the customer's systems. So, what normally happens is that if you sell in software and services, you try to cap your liability at a specified amount, so if a claim does arrive against you from the customer then it won't totally bankrupt you. Normally, you would get some insurance in place. Typically, you might have over £1,000,000 of cover just in case a customer claims against you; then you would limit your liability to that level of insurance so it matches up. Sometimes you cap your liability at less than the insurance you have in place because you don't want to put all of your insurance up for grabs on just one contract. If the Customer asks that you increase your cap on liability (i.e. from £1,000,000 to say, £10,000,000) then the normal response you go back with is that the customer gets your current prices for your standard £1,000,000 liability cap. However, if customer wants you to increase your liability cap (i.e. increase the amount that you are responsible for if the customer claims against you) then you might have to negotiate putting your prices up (as you will need to pay for additional insurance). Does this make sense? “Yes”, you say. You've got the basics. You say that you have insurance cover for £1,000,000 in place, but you will offer the customer £200,000 as a cap. This leaves a bit of bargaining room so that if the customer presses you for a higher cap on your liability then at least you can move up on this towards your £1,000,000 of insurance cover. However, you say that you take my point that you don't want to put up all of your insurance on just one contract if you can avoid this. You say that you will keep working on the Letter of Intent. But at least you understand what this cap on liability is all about. I can't wait to hear more! Best wishes Jimmy Desai Your Legal Coach P.S. Don't forget to subscribe and get even more exclusive content and legal insight. As always, this legal talk and all the legal talks are subject to our disclaimer, which you can find here. © 2019. Coaching Law Limited. All rights reserved. Legal Talk 26: How detailed should I make the Letter of Intent?
You call again as soon as I send you the template for the Letter of Intent. The question you have is how detailed should it be? You could just make it a few lines and on the other hand you could make it about 10 pages long. How long should it actually be? Well, here is another dilemma. On the one hand you could make it really nice and non-confrontational by just putting down 2 or 3 points of principle and hope to get these signed off because there is nothing contentious mentioned. This could get signed off but then things could become more contentious when the main contract based on the Letter of Intent is drafted. This is because a lot of the gaps that the Letter of Intent did not cover have to be filled in the main contract and so negotiations can stall because the Letter of Intent was not detailed enough. This could mean that deal breakers come to light, mid-way through the negotiation of the main contract that is based on the Letter of Intent. On the other hand, you could make the Letter of Intent really detailed but then negotiations may stall on this because it is so detailed it is not much different from what the follow up formal contract will look like. In other words, it is no longer a letter of intent but looks like the formal contract itself. “So, what should I do?” You ask. Okay, there is a question of judgement here but key things that you might mention in the letter of intent include: 1. Description of services to be provided; 2. Price and payment terms; 3. Timetable for delivery; 4. Any special terms that are specific to this deal (e.g. any exclusivity or any specific territories where the services can and cannot be used by the customer etc.); 5. Caps on your liability in the contract (normally you would try to cap your liability to simply returning the contract price to the customer); and 6. Binding terms such as confidentiality, choice of jurisdiction and lock in periods, i.e. you both agree not to talk to anyone else about this deal for a certain period of time to allow you to do a deal, etc. If you can get these points agreed then at least you know that you are on the way to getting a full contract agreed based on the points of principle above because the points above are normally the stumbling blocks. “Fantastic”, you say. “I think I get it.” You say you will work hard on getting these points of principle agreed in a Letter of Intent with the big corporate. If you want some further info, here's a good guide on how to write Letters of Intent, I found it very informative: https://www.wikihow.com/Write-a-Letter-of-Intent. Hope things go well with the big corporate. I await good news. As always, thinking about how I can help you on your start-up journey from zero to IPO. Best wishes Jimmy Desai Your Legal Coach P.S. Don't forget to subscribe and get even more exclusive content and legal insight. As always, this legal talk and all the legal talks are subject to our disclaimer, which you can find here. © 2019. Coaching Law Limited. All rights reserved. Legal Talk 25: How do I deal with my first big contract? The Letter of Intent.
You call again and I pick up. What's up, I say. You're very excited about developments. The big corporate that you’re dealing with is looking to put some really big business your way. You are a bit lost about how to take this forward now. You talked about general principles with a decision maker at the big corporate and all went well but what now? I understand. It is always a bit of a dilemma: On the one hand you would like to present some kind of full-blown contract and try to get it signed by the big corporate asap but this seems a bit pushy. On the other hand, you could keep having these polite discussions with the big corporate and you just keep going around in circles with nothing concrete coming out of these talks. There’s always the danger that as time goes by, things might change and so the original excitement that the big corporate had about your project might just fizzle away. I understand the dilemma. No need to panic! First have a cup of tea and relax. You've done really well to get things to this stage. Let's talk about next steps. One way around this dilemma is to have a Letter of Intent (which sometimes called a memorandum of understanding or heads of terms). They are all pretty much the same thing really: just a list of terms that you and the big corporate can sign off as points of principle (on a NON-legally binding basis) just to capture the key terms of the deal. For more research here's another link explaining what a Letter of Intent is: https://www.investopedia.com/terms/l/letterofintent.asp. “But if it’s non-legally binding then what's the point?” You ask. Good question. It might help if I recap the key reasons for a letter of intent. These include: 1. Clarity: It spells out the key points of principle in a couple of pages. If there are any deal breakers (i.e. no agreement on price or service specification or anything else) then at least these will be flushed out early on rather than you negotiating a long contract over days or weeks only to find out much later on that there was never any actual agreement over the key terms at the very start. 2. Emotion: Although the Letter of Intent is non-legally binding the people who sign off on it tend to treat it as if it is legally binding. This means that once they have made that commitment to signing the letter of intent the parties to the deal normally follow through on the deal by entering into a subsequent formal contract based on the letter of intent. 3. Special Clauses: There may be some terms in the Letter of Intent that are legally binding: typically these might include confidentiality, exclusivity (so each party confirms they are not talking to other people about the same things for the duration of the Letter of Intent) and choice of law (e.g. any dispute to be subject to English law & English courts). 4. Follow Up: If the Letter of Intent is signed off then it is normally agreed that the points of principle will be expanded into legal wording in a longer contract. However, the normal rule is that the points in the Letter of Intent are followed closely and not contradicted in the longer contract that is based on the Letter of Intent. “So what should I do now?” You say. Okay, what I would suggest is that you ask the decision maker at the big corporate if it would be okay if you put together some points of principle in a Letter of Intent (no more than 2 pages) and send them over to her for comments. If she says yes then she can add any points that she thinks are relevant. Once this is done, I can cast my eye over it and we can try to get the Letter of Intent signed off. Once that happens, we can try to follow up swiftly with a more formal contract based on the Letter of Intent. This should help you to get that big deal agreed asap. “Fantastic,” you say. You ask me if I have a template for this kind of letter of intent and yes, I do. I will send you the template and you can populate it and then send it back to me just to check it over, after which you can send it to the decision maker at the big corporate. Sounds like a plan, you say. You say that you have to go and will await my template so you can start working on this now. I'm excited about the progress you are making! Do call me to say how things go with the decision maker at the big corporate! Best wishes Jimmy Desai Your Legal Coach P.S. Don't forget to subscribe and get even more exclusive content and legal insight. As always, this legal talk and all the legal talks are subject to our disclaimer, which you can find here. © 2019. Coaching Law Limited. All rights reserved. |
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