Published on February 25, 2014
Your start-up friendly lawyers ;-) lunch ‘n learn 15 Legal Concepts Every Start-up Should Know About February 25, 2014
2 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
3 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 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
4 You are in charge! 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
5 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 $$$ Minute books Corporate resolutions Keep your counsel informed Scan your contracts and other legal documents 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
2. Corporation, shareholders, directors, officers and creditors 6 ▫ Corporation Provincial vs. federal incorporation ▫ Shareholders Elect the board of directors Limited liability ▫ Board of directors Fiduciary duties Personal liability ▫ Officers Run the day to day operations ▫ Creditors Secured or unsecured 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
7 3. Annual maintenance ▫ Corporate obligations Annual approvals: financial statements, directors, officers, auditors Resolutions in writing vs. general or special meetings ▫ Filings Corporate filings (company registrars): federal and provincial Tax, R&D filings Other filings: Patents, trademarks, etc. 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
4. Share terms (1): common vs. preferred shares 8 ▫ Common shares Issued to: founders, employees/consultants friends & family and seed round investors Typically voting rights and rights to dividends Any $$$/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 $$$/assets to be distributed among shareholders on a sale or winding up of the company Convertible into common shares : optional vs. automatically Often redeemable after a set number of years 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
5. Share terms (2): conversion price and anti-dilution 9 ▫ General No anti-dilution: preferred shares convert (1:1) into common shares Anti-dilution rights are standard for preferred shares When does anti-dilution kick in? ▫ Weighted average anti-dilution Most common approach Adjustment to the conversion price, taking into account: Price and amount of $$$ previously raised Price and amount of $$$ raised in the subsequent down-round ▫ Full ratchet anti-dilution More dilution of founder shares Investors maintain the same level of ownership as on initial investment May deter new investors Conversion Price is equal to the issue price of the dilutive financing 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
6. Raising capital (1): equity and qualified investors 10 ▫ The issuance of securities is subject to securities legislation: of the province where the subscriber resides of the province where the issuer of securities conducts its business ▫ Prospectus ($$$) vs. no prospectus () ▫ Rely on private issuer exemptions ▫ What is a « qualified investor » ? ▫ A violation of securities laws is your biggest nightmare 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
7. Raising capital (2): convertible debentures, SAFE and grunt funds 11 ▫ 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? 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
12 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 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
9. Shareholders agreement (1): governance and issuance of shares 13 ▫ 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 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
10. Shareholders agreement (2): exit and transfer of shares 14 ▫ 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) 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
15 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 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
12. Stock restriction agreements and reverse vesting 16 ▫ 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 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
17 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 … $$$ 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
18 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 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
20 Q&A 15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014
Contact Frédéric Dionne firstname.lastname@example.org | 514-907-9318 Julien Saulgrain email@example.com | 514-544-1044 Karen Park firstname.lastname@example.org | 514-907-1889 www.blue-hf.com big firm quality, small firm fees Talk to you soon!
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