15 Legal Concepts Every Start-up Should Know About - BHF presentation for FounderFuel

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15 Legal Concepts Every Start-up
Should Know About
February 25, 2014

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Our team
▫ Corporate Lawyers

 Fred Dionne (Stikeman, Osler, blue HF)
 Julien Saulgrain (Clifford Chance, Willkie Farr, McCarthy, blue HF)
 Karen Park (LaBarge Weinstein, blue HF)

▫ Paralegals

 Annette Laroche (McCarthy, De Grandpré Chait, blue HF)
 Emilie Cyr-Lemieux (blue HF)

▫ Strong Of-Counsel Network

 We have surrounded ourselves with a strong network of
professionals (tax, IP, R&D, accounting, labor, litigation)

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

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15 legal concepts for your StartupCo
▫ Corporate “stuff"

 The basics: shareholders, directors, officers, minute books, filings
 Others: share terms and dilution, shareholders agreement, stock
restriction, stock option plans

▫ Raising capital:

 Equity
 Debt
 Crowdfunding, S.A.F.E., Grunt Fund

▫ Protecting your IP and IP-related contracts
▫ Other important commercial contracts


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You are in charge!


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1- Be organized and manage your legal fees
▫ Unfortunately… you need legal “stuff” to run your business
▫ You are responsible for your legal contracts and other documents
and related budget
▫ Organization is key… and will save you $$$





Minute books
Corporate resolutions
Keep your counsel informed
Scan your contracts and other legal documents


2.

Corporation, shareholders, directors,
officers and creditors

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▫ Corporation

 Provincial vs. federal incorporation

▫ Shareholders

 Elect the board of directors
 Limited liability

▫ Board of directors
 Fiduciary duties
 Personal liability

▫ Officers

 Run the day to day operations

▫ Creditors

 Secured or unsecured

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3. Annual maintenance
▫ Corporate obligations

 Annual approvals: financial statements, directors, officers, auditors
 Resolutions in writing vs. general or special meetings

▫ Filings

 Corporate filings (company registrars): federal and provincial
 Tax, R&D filings
 Other filings: Patents, trademarks, etc.


4.

Share terms (1): common vs.
preferred shares

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▫ Common shares
 Issued to:

 founders, employees/consultants
 friends & family and seed round investors

 Typically voting rights and rights to dividends
 Any $$$/assets to be distributed among shareholders on a sale or
winding up of the company = shared among the common shareholders

▫ Preferred shares

 Issued to investors
 Voting rights and rights to dividends
 Priority over the common shares to receive $$$/assets to be distributed
among shareholders on a sale or winding up of the company
 Convertible into common shares : optional vs. automatically
 Often redeemable after a set number of years


5.

Share terms (2): conversion price
and anti-dilution

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▫ General

 No anti-dilution: preferred shares convert (1:1) into common shares
 Anti-dilution rights are standard for preferred shares
 When does anti-dilution kick in?

▫ Weighted average anti-dilution

 Most common approach
 Adjustment to the conversion price, taking into account:

 Price and amount of $$$ previously raised
 Price and amount of $$$ raised in the subsequent down-round

▫ Full ratchet anti-dilution





More dilution of founder shares
Investors maintain the same level of ownership as on initial investment
May deter new investors
Conversion Price is equal to the issue price of the dilutive financing

6.

Raising capital (1):
equity and qualified investors

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▫ The issuance of securities is subject to securities legislation:

 of the province where the subscriber resides
 of the province where the issuer of securities conducts its business

▫ Prospectus ($$$) vs. no prospectus ()
▫ Rely on private issuer exemptions
▫ What is a « qualified investor » ?
▫ A violation of securities laws is your biggest nightmare


7.

Raising capital (2): convertible
debentures, SAFE and grunt funds

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▫ Convertible debenture





What is it?
Optional vs. automatic conversion
Time of repayment: maturity and default
May be secured or unsecured

▫ SAFE (Simple Agreement for Future Equity)





What is it?
Automatic conversion
Time of repayment: no maturity date
Unsecured

▫ Grunt fund

 What is it?


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8. Raising capital (3): crowdfunding
▫ Forms of Crowdfunding
 Donation and Rewards (OK)
 Equity Crowdfunding (not OK yet but probably soon)

▫ In the US

 JOBS ACT (Jumpstart Our Business Startups)

▫ In Canada

 OSC and the AMF are working on it


9.

Shareholders agreement (1):
governance and issuance of shares

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▫ What is a Shareholders Agreement
▫ Board of directors: board member vs. observer
▫ Information right (financial and other relevant information)
▫ Special majority approval: certain matters requiring approval of
special majority (e.g., 2/3) of shareholders
▫ Pre-emptive right: right for shareholders to participate in new
issuances of shares, so as to limit the dilution of the shareholders’
ownership
▫ Non-Compete and Non-Solicitation


10. Shareholders agreement (2):
exit and transfer of shares

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▫ General: general prohibition vs. permitted transfers
▫ Right of first refusal upon a sale of shares
▫ Tag-along upon the sale of StartupCo
▫ Drag-along upon the sale of StartupCo
▫ Buy-back of shares in certain events affecting a shareholder (death,
disability, termination of employment)


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11. Stock option plan (ESOP) and vesting
▫ Granting stock options is a popular performance incentive
▫ The ESOP governs the issuance of stock options:

 Standard vesting terms of the options
 Requirements to exercise options
 Treatment of options on termination of employment

▫ Vesting:

 The schedule of when issued options can be exercised for shares by
the optionholder
 A percentage of the granted options may vest monthly or annually over
a period of years (often 3-4 years)

▫ To exercise options, the optionholder must pay the exercise price
and become a party to the shareholders agreement


12. Stock restriction agreements
and reverse vesting

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▫ What are restricted shares?
▫ A stock restriction agreement sets out the terms of the
repurchase/forfeiture:
 Events that trigger the right of repurchase/forfeiture
 Purchase price per share upon a triggering event
 Time when shares cease to be restricted shares

▫ Reverse vesting
 Schedule of when restricted shares cease to be restricted


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13. Protecting your IP
▫ You are always (a bit) protected
▫ Know your IP: Open source elements how proprietary is your code /
software?
▫ Source code:

 Do not disclose/transfer/license your source code… ever (if possible)
 The source code escrow alternative

▫ IP Assignment clauses: a must… everywhere (in employment,
service and other commercial agreements)
▫ Confidentiality: you, employees, suppliers
▫ Registration: patent, trademark, copyright. Yes but … $$$

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14. IP-related contracts
▫ Development services agreements
 StartupCo as service provider
 StartupCo as client

▫ License agreements

 Inbound vs. outbound
 Licenses
 EULAs, SDKs

▫ Testing your products: beta test/evaluation agreements


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15. Other commercial contracts
▫ NDAs: beware… they may be nastier than you think
▫ Website agreements

 Terms of Use / Terms and Conditions
 Privacy Policy

▫ Agreements with suppliers (ISPs, data centers, rack spaces…)
▫ Others

 Cloud services
 Distribution: reseller, referral

▫ Always maintain flexibility for change of control / assignment


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Q&A


Contact
Frédéric Dionne
fdionne@blue-hf.com | 514-907-9318
Julien Saulgrain
jsaulgrain@blue-hf.com | 514-544-1044
Karen Park
kpark@blue-hf.com | 514-907-1889
www.blue-hf.com

big firm quality, small firm fees

Talk to you
soon!

15 Legal Concepts Every Start-up Should Know About - BHF presentation for FounderFuel

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