The origins of no-liability date back 150 years. The British Company Act of 1862 limited liability of shareholders to that of unpaid amount, carried forward up to 1 year after the partly paid shares were sold (cf insolvency recovery). No liability came about as a way to evade the cost-accounting regulations applied to utilities and escape solvency requirements for banks. Limited liability only matured for mining companies late 19th century and from memory, no liability rules were never intended for investor protection.
I'm still stuck on why share agreements for public blue sky mining companies should be applied in general for any startup. Mining creates incredible downstream byproduct wastes and regulators have usually wanted the owners to put up bonds, environmental performances, and cleanup deposits. Now the usual rule is if there's partly paidup shares and you miss the callup, the share is usually "lost" (most articles of association have share is controlled or restricted by company until fully paid/vested). I'm a little concerned about investors treating shares as options ... let black be black and white be white ... which points to the continued undercapitalisation of startups and more onus shifting onto the founders (sweat equity) without giving up the upside to outsiders. As I keep on telling my clients, the termsheet is the new employment contract. so anything that shifts the balance against the naive or inexperienced, I start to smell something fishy. There is need to attract patient capital, I've seen proposals for Buy&Hold Equity which is intended for 15 year+ infrastructure which is hybrid restricted equity but with preferential treatment on dividends. I've seen no voting but participating in economic benefit shares. All these are mechanisms to optimise the capital structure but I question the need at such an early stage. Caution against premature optimisation applies to money as well as code. whilst there are problems with australia (lack of experienced product development skillsets and distance from supply chains), IMHO tweaking the early capital structure is not going to change the fundamentals as the value of angels is their time and connections, not the fact they can now have a bigger liquidity preference multiplier. Lawrence http://www.linkedin.com/in/drllau On Thursday, 5 March 2015 14:14:51 UTC+8, Geoff Langdale wrote: > > So I've seen more than one article go by where folks are calling for it to > be made easier to start a startup by adopting the practice of "No liability > companies" currently available only for mining companies. > > > http://www.theage.com.au/it-pro/business-it/allow-us-to-fail-tech-startups-should-have-minings-no-liability-status-says-investor-tony-surtees-20150224-13nl17.html > > http://www.theage.com.au/it-pro/it-opinion/intergenerational-report-shows-why-we-need-to-give-tech-startups-a-chance-20150305-13vrjs.html > > The thing that confuses me is that according to Wikipedia ( > http://en.wikipedia.org/wiki/No_liability) what this means is: > > No-liability companies are differentiated from other companies as their >> shareholders are not liable to pay calls on unpaid shares. This differs >> from traditional company structure where the purchase of shares is a >> binding contract. > > > Wikipedia also states: > > No-liability companies should not be confused with the concept of limited >> liability <http://en.wikipedia.org/wiki/Limited_liability>. > > > When Alan Noble writes something like: > > >> The liability that is currently placed on board members of Australian >> start-ups is extremely onerous and out of proportion to the size of the >> businesses that they oversee. Not only does it force start-ups to buy >> additional liability insurance, it usually compels directors to adopt asset >> protection schemes. It no doubt also discourages many experienced and >> highly skilled professionals to get involved with tech start-ups. This >> shouldn't be the case. > > > ... and claims that a "No liability company" a la the mining sector is the > answer, is this correct? Am I - or Wikipedia - missing something here? I > honestly don't understand whether "calls on unpaid shares" are even a thing > for most startups and that seems to be the key difference. Someone is > confused here, at least - possibly me. > > > As a side note, I would be pretty leery of a startup that was too crazy > about evading the notion of 'liability' (in a more relevant fashion) if I > were a low-numbered employee, given that the really major liabilities for > most startups are employee pay. From the earlier article: > > Instead Mr Leonard suggested a better approach would be to take a leaf >> from Britain, where "directors are permitted to continue to trade even if >> the company is insolvent provided that they believe that the company's >> financial position could be turned around, at least up to the point where >> they should have realised that the position of creditors would be likely to >> deteriorate and was no reasonable prospect of the company avoiding >> liquidation". > > > Well, I'm all for giving the finger to the landlord and the 6 months left > to run on the plant watering service contract (joking). However, the idea > that startups should get special permission to trade insolvent seems like > it's going into a very dark place. I would hope that people understand that > making low-numbered employee status *even riskier *is not the path to > Glorious Startup Success in Australia. I think Kia Silverbrook is still > getting chased through the courts by a passel of disgruntled employees for > not paying wages and benefits. I'm sure a few "startup fails and screws all > its employees" news stories would definitely help promote the > already-dominant idea that young tech folks should go work for Google or > one of the financials or some similarly well-established company and avoid > startups like the plague. > > All that being said, generally reducing the risks associated with being a > startup founder or director seems like a Good Thing as long as we're not > throwing the "treating those you do business with ethically" baby out with > the bathwater.Otherwise I imagine startups will become tarnished as a new > place to do shonky business in the same way the Big End of Town buggered up > Employee Share Schemes by turning them into tax avoidance vehicles. > > Are there any serious proposals out there in this space, or is this just a > series of (in my opinion and to my limited understanding) ill-considered > thought bubbles? > > Geoff. > > -- -- You received this message because you are subscribed to the Silicon Beach Australia mailing list. 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