Lets Get Risky: How to Manage the Risks of Starting a Business

By Michael Buckworth

Life involves risk, now more so than ever. If I go to this party, will I end up catching COVID; if I get on a plane, will I get ill? Most people balance risk, reward and necessity subconsciously. We go to see a friend who is having a hard time, but perhaps don’t go to a rave as we realise that we are more likely to catch the latest variant when in close proximity with thousands of drunken people.

Lets Get Risky

Setting up a business involves risk. Many entrepreneurs think very carefully before embarking on a new venture – they may weigh up the financial security of having a regular salary as an employee of someone else’s business against the potentially greater rewards (but far greater risks) of running their own. Once the decision to found a start-up has been made, founders throw everything into making that business successful.

Ironically one of the things that many entrepreneurs then forget to focus on is the risks inherent in their business. That is where lawyers come in. Now, let’s be honest, lawyers are genuinely awesome people: charming, eloquent, amusing, well-dressed – what more could you ask for? But the reason you instruct a lawyer is to identify and manage risk. When looking at the risks inherent in a new business, you should ask yourself the following questions:

Is my business legal?

I’m an optimist and reckon that most people can figure this one out by themselves. Selling CBD products (things like creams made with cannabis derivatives) is not illegal in many countries; planting fields of cannabis is. If you are doing something that feels potentially problematic, make sure that you are not breaking the law.

Do I need to be regulated?

Some sectors are subject to regulation. These include financial services, elements of biotech and medtech, gambling, and the professions (law, accountancy, and architecture). If your business will operate in one of these sectors, and you will be carrying out regulated activities, you will have to secure the appropriate clearances before you can start trading.

However, don’t assume that just because your business operates in, say, financial services, that you need to be authorised. Many fin-tech businesses – for example providing technology solutions to other financial services businesses are not carrying out regulated activities and so don’t need to be authorised.

Failure to get this right is often a criminal offence, so always get professional advice on any regulatory obligations you may have before you start trading.

What are my financial risks?

In my view, there are a couple of key points here. The first is whether your business is one that needs to become profitable fast (like a law firm or restaurant), or whether you plan to focus on growth and traction rather than profitability in the early stages.

Many tech start-ups focus on traction before revenue, and even when they move their attention to revenue, they are often more interested in growth in users than in profitability. For these businesses, how they pay their costs on an ongoing basis is crucial – they tend to raise multiple investment rounds to fund their financial obligations.

What compliance rules do I need to comply with?

In business there are many rules that you need to follow. If you haven’t done your research, or are not compliant, you expose yourself to the risk of fines and – even worse – of having your brand name dragged through the mud.

Data protection compliance is vitally important and it is far easier to get it right if you understand your obligations and the data you will process before you launch your product or service and build compliance into your business model.

How do I protect myself if something goes wrong?

Before you launch your product or service, you must have a customer contract in place – if you are an online service, probably in the form of terms of service that users click to agree to.

This document is the most important document you will ever put in place as it excludes liability for many trading risks and limits your liability for others. If you don’t have a customer contract in place, you have unlimited liability if something goes wrong!

Before you launch you should get insurance in place to cover you – most likely you will want employers’ liability and public liability insurance and professional indemnity insurance as a bare minimum.

What should I do next?

Understanding the risk inherent in your business is vital if you are to avoid making costly mistakes. You must put in place a well-drafted customer contract and insurance before you launch. It does make sense to speak with a solicitor at the very least to draft your customer contract so that you know that you are well protected.

To find out more about managing risk and a range of other topics relevant to setting up a start-up, you can buy “Built on Rock, the busy entrepreneur’s legal guide to start-up risk” by the author of this article, Michael Buckworth which is available on Amazon and in all good bookstores.

Written by Michael Buckworth

Michael Buckworth is a solicitor of the Supreme Court of England and Wales and founder of Buckworths, the only law firm in the UK working exclusively with start-ups and high growth businesses. He is “entrepreneur in residence” at London South Bank University and University College, London and speaks regularly at industry events.