The Top 3 Legal Ops Challenges for Early-Stage UK Businesses in 2021

From Seven Legal’s Research Department

“While it’s not the most exciting part of running a startup, getting it set up correctly is a nontrivial problem” - Y Combinator

LONDON — In the high-growth, early-stage business world of London — and the UK more broadly — regulation and legal structure often take the back seat as business growth drivers take priority, and this can lead to significant and expensive consequences down the road. 

Whether you are raising funds, attracting talent, or faced with the challenge of scaling without burning through your cash runway, an inadequate legal and operational structure can easily throttle your company’s aspirations. 

In this article, we will highlight three of your biggest legal ops challenges in 2021 and offer solutions on how you can resolve them. 

Seven Legal relies on the first-hand experience across a wide variety of industries with fast growth clients like Gophr, Patchwork and EnvoPap.

The Top 3 Legal Ops Challenges and Solutions for Early-Stage Businesses in the UK in 2021

Research from the University of California supports Seven Legal’s first-hand experience of early-stage businesses facing the following common problems:

1. The battle for talent in an increasingly remote-based and global working environment

The best workers not only produce the best work but also more of it. In their book “Leading Organizations”, McKinsey senior partners Scott Keller and Mary Meaney reveal that superior talent is up to eight times more productive in highly complex roles. 

For startup businesses, which often have small teams where everyone holds a crucial role, this means that it is exponentially more important to attract and retain the right talent, and finding that talent can be challenging. 

A McKinsey Global Institute study predicted that, by 2020, employers in Europe and North America would need 16-18 million more college-educated workers than were available. According to the same report, companies will be unable to fill one in ten roles in this period — and that is before you even take into consideration whether a candidate would be the right fit for the role at hand. In our experience, U.K. startups regularly experience challenges in recruiting suitably qualified talent for key roles.

While the COVID pandemic disrupted real data to confirm Mckinsey’s prediction, it also accelerated the trend of remote working for high-earning, highly educated employees who would have traditionally worked in office-based jobs — meaning talent is now not only scarce but the competition for it is increasing and evolving.

According to Upwork’s “Future of Workforce Pulse Report”, 1 in 4 Americans will be working remotely in 2021, and this trend is already rolling out beyond America. Now that employers are more comfortable with remote work, they are more likely to tap into the freelancer market to fill talent gaps. 

While this opens a broader and more accessible candidate pool, it also means competing with some of the top companies in the world to attract talent.

Without the right hiring and incentive structure, companies will not attract the talent pool needed for growth. Companies risk hiring the wrong people or implementing the wrong incentive package at the wrong stage, and this in turn burns management time, cash and equity. 

The solution to the battle for talent

It is imperative to (1) build an employment strategy, (2) contract with talent correctly, and (3) implement equity incentive schemes that help you attract and keep the right talent. To do this requires a combination of employment law and senior HR advice.

2. Funding and negotiating rounds during the global pandemic and Brexit

The profile of investors in UK companies is increasingly international with diverse sources of capital now available, ranging from US VCs, UK and European VCs, Angels, government schemes and crowdfunding.

In 2020, UK tech businesses received more investment than France and Germany combined. UK tech startups received $14bn in VC investment compared to a total of $14.2bn invested by VCs in the rest of Europe. 

However, that investment is not distributed evenly. Despite a larger pipeline of startups seeking investment, seed investors are becoming far more selective, investing larger sums in fewer businesses in a winner-take-all game. 

The UK is under increased economic pressure entering a post-Brexit world still grappling with the impact of COVID-19. Investors are more conservative and selective, placing bets on early-stage companies with more scrutiny on how teams deploy capital. 

At the beginning of the pandemic, valuations and deal volumes initially fell with an increased focus by investors on the prospects of their portfolio companies.

According to a report by the UK Business Angels Association, only 46% of business angels plan to expand their portfolio in 2021.

While investors are still open for business, with capital to deploy to the right teams addressing big opportunities, they have many sector-specific concerns. Healthcare, biotech, life sciences, pharmaceuticals and software-as-a-service remain the most favoured sectors.

Despite a drastic drop-off in VC funding in the first two quarters of 2020, funding to European startups last year totalled $40 billion, down just 4 per cent in total from 2019.

In short, while funding avenues remain open, investors are more demanding. The focus is on revenue-generating businesses that can demonstrate control over their burn rates and efficient capital management.

A natural consequence of investor concentration into fewer companies is that it leaves many early-stage founders fighting for what remains with a weakened negotiating position.

The solution to operating under these unprecedented times

Ensure you are prepared when entering into any negotiation on (1) what the key terms are that investors seek (2) what terms are on/off the market and (3) what terms you should be pushing for (for this round, your next round, and exit). 

As specialists in early-stage businesses, the Seven Legal team has advised hundreds of clients who have found value in having a senior legal presence at the negotiating table working in their favour and have benefited from relying on our extensive network for market knowledge across sectors.

3. Preventing professional service fees from draining your runway

Outside of building tech and hiring talent, early-stage businesses are likely to experience professional services fees as the biggest drain on their runway in 2021.

This comes at a time when the economic strain of Covid and Brexit brings added uncertainty to growth projections. 

According to Deloitte’s Covid-19 Economics Monitor, the UK can expect negative growth in Q1 2021 of -3.5%. Deloitte’s downside forecast for the year is -4% for the UK, while their base forecast predicts 2.8% growth. This represents a best-case scenario of modest growth in line with inflation — particularly low given the 11.1% contraction suffered in 2020.

As a result, all businesses will be expected to do more with less.

Typically, the choice of legal services that early-stage businesses face has been either to go to large firms with high fees or generalist local firms without specialist knowledge. The right advice vs the right price. If you’ve ever felt like your lawyer speaks a different language to you, you know exactly what this means.

A lot of legal advice given to early-stage startups is provided by junior lawyers who are often learning the trade or by lawyers who do not have in-house counsel experience — despite the fact you’re paying top-tier law firms fees.

Most law firm training is aimed at large, established, slow-moving businesses with deep pockets. That means you could be burning your scarce cash on advice that not only is not tailored to your growth stage but is also not given from an entrepreneurial mindset.

The solution to preventing your runway to be drained

Ensure that your lawyer (or any service provider): (1) works regularly with companies at your stage (2) understands your business and priorities and (3) can connect you with other like-minded service providers.

An early-stage business needs access to the best thinking coupled with the experience of working in and advising early-stage companies: this principle is as applicable to legal as it is to any advice you receive about your business.

Founder-led startups that fail to get affordable stage-specific legal advice will:

1. Burn capital at an accelerated rate;
2. Struggle to attract and keep talent; 
3. Overpay for non-stage-specific legal advice without perspective.

Seven Legal’s Stage-Specific Legal Advice Can Help You Solve These Challenges

Early-stage businesses are waking up to the reality that they no longer need to pay top-tier fees for unsuitable advice.

Instead, they are enjoying access to senior lawyers who help them solve their most complex legal challenges at an affordable rate operating from a lean cost-base and a tech-focused structure.

Seven Legal, built on a lean operating methodology and a tech-first approach, is an efficient legal partner specialising in delivering top-tier, stage-specific legal advice at an affordable cost.

We know what it means to be lean and nimble while delivering a top-quality product. Like us, you need strategic problem solving and practical solutions that enable growth — not roadblocks that slow you down or hold you back. Whether you’re funding, scaling or looking for an exit, we know the challenges you face and can help you solve them — fast.

Visit our website to arrange a free consultation to see how Seven Legal can help you get stage-specific legal advice in managing fundraising, attracting and keeping talent, and much more.