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Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
Day 5 Afternoon - Smith
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Day 5 Afternoon - Smith

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  • 1. Lead to Win Key Legal Issues for Technology Start-ups June 24, 2009 Eric J. Smith Fraser Milner Casgrain LLP © Fraser Milner Casgrain LLP, 2009. See last slide for licensing information.
  • 2. Key Legal Issues for Technology Start-ups
    • My background
    • Technology lawyer, Co-Chair of National Technology Transactions Practice Group, FMC (2001 – Present)
    • Vice-President, General Counsel, and Corporate Secretary – Corel Corporation (1996-2000)
    • Vice-President of a business advisory services company focused on early stage tech sector (2000-2001)
    Slide
  • 3. Agenda
    • Key Legal Issues for Technology Start-ups
    • Threshold Issues
    • Company Formation
    • Co-Founder Issues
    • Shareholder Agreements
    • Financing the Business
    • Employees and Contractors
    Slide
  • 4. Threshold Issues
    • Ownership of Intellectual Property
    • Duties to Previous Employers/Third Parties:
      • Confidentiality
      • Non-solicitation
      • Non-competition
      • Assignment of IP rights
    Slide
  • 5. Choice of Business Organization
    • Corporation
    • Most popular form of business organization
    • Separate legal entity from those who own it (shareholders) and those that operate it (directors, officers and employees)
    • Income taxed in the hands of corporation
    • Shareholders taxed on dividends and capital gains (when selling shares)
    Slide
  • 6. Reasons to use a Corporation
    • Limited liability (although shareholders many have to guarantee obligations)
    • Can exist in perpetuity (individuals can come and go)
    • Flexible investment vehicle – can create different classes of shares
    • Can offer shares or options to buy shares to attract and retain personnel
    Slide
  • 7. How Do I Incorporate?
    • Conduct name search
    • File Articles of Incorporation
    • Pay registration fee
    • Organize company
    Slide
  • 8. Where Do I Incorporate? Canada vs. Ontario
    • Legislation is very similar
    • Federal permits head office in any province
    • Getting desired name more difficult federally
    Slide
  • 9. Where Do I Incorporate? Canada vs. United States
    • Many Canadian tech companies seek financing in U.S.
    • Interests of U.S. Investors often conflict with Canadian founders and employees
    • Can have impact on decision of where to incorporate (or migrate)
    Slide
  • 10. Canadian–Controlled Private Corporation
    • Canadian incorporated; private; not controlled by non-residents or public corporations
    • Advantages:
      • Favourable capital gains treatment
      • Refundable investment tax credits (ITCS)
      • Tax deferred or exercise of stock option
      • Tax deduction on gain from optioned shares
      • Lower tax rate and small business deduction
      • Deduction of allowable business investment loss (for lenders to CCPC)
    Slide
  • 11. Problems For U.S. Investors
    • S.116 Income Tax Act
    • LLC treatment
    • May require complex exchangeable share structure
    • *See handouts for detailed discussion of issues in this and preceding slide
    Slide
  • 12. Weighing the Options
    • Canadian incorporation, if:
      • Company will qualify as a CCPC
      • Company can fund operations without significant foreign investment
      • BDC or labour sponsored fund may be early investor
      • Cannot afford extra expense of U.S. incorporation
    Slide
  • 13. Weighing the Options - cont’d
    • U.S. incorporation, if:
      • Company will not qualify as CCPC
      • Lead investor is U.S. investor
      • Anticipated exit is acquisition by a U.S. entity
      • Company anticipates shifting bulk of operations to U.S.
    Slide
  • 14. Co-Founder Issues
    • Remember threshold issues
    • Beware of automatically treating everyone as equals
    Slide
  • 15. Issuing Shares to Founders
    • No operating history and usually very few assets
    • Founders’ shares usually issued at nominal price (e.g. $0.001 per share)
    • If assets being transferred to corporation – s.85 rollover
    • Consider tax planning (e.g. income splitting through family trust)
    Slide
  • 16. Issuing Shares to Others
    • Contractors/employees/others
    • Must comply with securities laws
    • Must be paid for (money, property, past services)
    Slide
  • 17. Capital Structure
    • Keep structure simple in order to accommodate future financings
    • Generally, founders should purchase all shares they desire at time of founding
    • As investors acquire shares, founders may lose control over future issuances and stock splits
    Slide
  • 18. Cap Table Example
    • After Series “A” Financing
    Slide 21.2% $0.20 1,750,000 Employees 42.5% $2.00 3,500,000 Series “A” 12.1% $0.50 1,000,000 Seed 24.2% $0.001 2,000,000 Founders Ownership Price # of Shares Shareholder
  • 19. Cap Table Example
    • After 3 VC Rounds
    Slide 100% 24,333,333 Total 14% $12.00 3,333,333 Public 25% $4.00 6,000,000 Series “C” 7% $0.20 1,750,000 Employees 20% $2.00 5,000,000 Series “B” 7.2% $0.20 1,750,000 Employees 14.4% $2.00 3,500,000 Series “A” 4.1% $0.50 1,000,000 Seed 8.2% $0.001 2,000,000 Founders Ownership Price # of Shares Shareholder
  • 20. Vesting and Buy-back Rights
    • Should Founders have to “earn” shares?
    • Repurchase option if founder ceases to be participant in business
    • Vesting of 3 to 5 years
    Slide
  • 21. Shareholders’ Agreement
    • Management of Corporation
    • Rights and obligations of shareholders
    • Is agreement needed at start-up stage?
    Slide
  • 22. Key Provisions of Shareholders’ Agreement
    • No “one size fits all” agreement
    • Restrictions on transfer of shares
    • Right to repurchase
    • Pre-emptive rights
    • Right of first refusal
    • Drag-along
    • Piggy-back
    • Composition of Board
    • Super-majority approvals
    Slide
  • 23. Financing the Business
    • Is money the primary issue?
    • Types of financing:
      • Debt
      • Equity
      • Hybrid
      • Government loans/grants
    Slide
  • 24. Debt Financing
    • Shareholder loans (secured or unsecured)
    • Other Individuals
    • Banks/Financial Institutions
    • Credit cards
    Slide
  • 25. Equity Financing
    • Selling of shares from treasury
    • Existing or new class of shares
    • Investors may demand preferential rights
    • Must comply with securities laws
    Slide
  • 26. Convertible Debt
    • Debt which is converted upon occurrence of event
    • e.g. next equity financing
    • Usually has a discount on financing pricing
    • With or without security over assets
    Slide
  • 27. Sources of Financing
    • Founders
    • Friends and family
    • Angel investors
    • Venture Capital
    • Strategic Investor
    • Government (Loans, Grants, ITCs)
    Slide
  • 28. Approaching Investors
    • Very time consuming
    • Research before approaching
    • Seek referrals
    • Understand your market and competition
    • Know how much you need
    • Beware of offering memorandum/securities laws
    Slide
  • 29. Employees
    • Common Pitfalls
    • Lack of proper written agreements
    • Using inappropriate precedents
    • Failure to limit entitlements on termination
    • Improper implementation
    • Faulty IP and confidentiality provisions
    • Over-reaching restrictive covenants
    • “ Deferring” salary
    • Improper termination
    Slide
  • 30. Contractors
    • Regarded as a solution to “employment” liabilities
    • But contractor may still be an employee
    • If employee:
      • EI and CPP liability
      • Fines for not withholding income tax
      • WSIB premiums and/or fines
      • ESA liabilities and fines
      • Termination liabilities
      • IP ownership/waiver of moral rights
    Slide
  • 31.
    • Thank you
  • 32. Licensing Information
    • This work is licensed under Creative Commons Attribution – Non-Commercial – Share Alike License. To view a copy of this license, visit creativecommons.org .

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