start-up law

START-UP LAW

Ted Maduri

416.941.5412

tmaduri@davis.ca

AGENDA

1. Methods of Carrying on Business

2. Incorporation

3. Directors

4. Structuring

5. Financing

6. Shareholders/Partnership Agreements

7. Employment/Consulting Agreements

8. Intellectual Property

9. Third-Party Agreements: NDAs and Client Contracts

10. Additional Tips

1. METHODS OF CARRYING ON BUSINESS

i. sole proprietorship

ii. partnership

iii. non-share capital corporation

iv. share capital corporation

Sole Proprietor-ships

Partnerships Non-Share Capital Corporations

Share Capital Corporations

What is it?

Owned and operated by one individual.

Two or more persons carry on business in common with a view to profit.

No share capital, have “members” acting together for a “common purpose”.

Carries on business under its own name / has perpetual existence.

Liability Responsible for tortious acts, debts, contractual obligations of business.

Partners own business assets, responsible for liabilities of partnership, have authority to run business.

With a few exceptions, members are not liable for any liability of the corporation.

Rights and liabilities of corporation are not rights and liabilities of shareholders.

Sole Proprietor-Ships

Partnerships Non-Share Capital Corporations

Share Capital Corporations

Taxes All income or losses must be included with income or losses from all other sources in one year.

Do not pay income tax; individual partners pay tax on income earned.

Generally exempt from federal income tax as a “non-profit organization”.

Income determined and taxed separately from that of its shareholders.

Good to know

Personal liability can be limited by contract or insurance.

Exist in two main forms - general partnership and a limited partnership.

Differences between not-for-profit organizations and charities.

Most frequently used method of carrying on business in Canada.

2. INCORPORATION

• Need to file Articles of Incorporation (by right)

• Jurisdiction: federal or provincial

• Classes of shares

• As a trade-off, need to “maintain” your corporation

3. DIRECTORS

A. Directors have a common law, fiduciary duty to:• Act honestly, in good faith and in the best interests of the

corporation• Exercise care, diligence and skill

B. Common mistakes:• accept gifts, spend money foolishly, be a passenger, simply

accept what’s told to you (by management or experts), sign cheques without adequate due diligence, miss or don’t prepare for meetings, don’t disclose conflicts of interest

If fail to meet standard, directors can be sued by company/shareholders for breach of duty and can be personally liable for fines/damages:

a) Unpaid employee wages – 6 monthsb) Remittances to government agencies for HST & EE wagesc) Harassment and discrimination under the Human Rights Code –

can name personal defendantsd) Tort claims (e.g., inducing breach of contract, defamation) – ditto;

e) Health and safety violations – dittof) Failure to comply with legislation, including the Corporations Act

(Ontario) and the Canada Corporations Act

AND OTHERS… 200+

4. STRUCTURING

5. FINANCING

• Options track a company's stage of growth: • owner-funded• friends + family• crowdfunding (!)• angel investors (e.g., Dragons' Den)• VC• private equity

• Typical documents: • term sheet• subscription agreement• shareholder agreement • maybe agency agreement if agent

• Types of securities: • common• preferred• convertible• loan warrants (aka kickers) • options

• Valuation – your guess is as good as mine... (...just kidding...sort of...)

6. SHAREHOLDER (OR PARTNERSHIP) AGREEMENTS

• Top 5 issues:

1. Management and control

2. Transferability of shares

3. Forced sale events

4. Financing

5. Dispute resolution

Employee• Duty of loyalty• Duty of confidentiality• Employer owns work product• Reasonable notice to terminate

Independent Contractor• Works for competitors• No implied confidentiality• Owns work product• Notice to terminate

Four-fold test (Montreal Locomotive, 1946)• Who controls the work?• Who owns the tools?• Worker has a chance of profit?• Worker has a risk of loss?

7. EMPLOYMENT (OR CONSULTING) AGREEMENTS

8. i) INTELLECTUAL PROPERTY - COPYRIGHT

• protects literary, artistic, musical and dramatic expression (not ideas)• exclusive rights:

• produce or reproduce• publish• translate• telecommunicate• authorize

• Examples: this presentation, music, software

• Ownership - creator/employer; contractor• Registration - not required but can help enforce• Moral rights - no assignment, only waiver

8. ii) INTELLECTUAL PROPERTY - PATENTS

• statutory monopoly to make, use and sell “inventions”

• 3 key tests:

1. new

2. useful

3. non-obvious

• registration required• prior art searches• keep secret until you file• full disclosure; limited term

8. iii) INTELLECTUAL PROPERTY - TRADEMARKS

• brand names, logos, slogans• protection in association with specific products/services• registration not required, but:

• unregistered mark • registered mark

• Picking a good mark: distinctiveness, confusion• Protecting a mark:

• registration• maintain distinctiveness

9. i) THIRD-PARTY AGREEMENTS - NDAs

• Doing business = sharing valuable secrets and confidential information (“CI”)

• When is an NDA appropriate?

• Timing

• Scope

• Protective Measures

9. ii) Client Contracts - Getting Paid

4. Salvaging Phase: “A bird in the hand…”

3. Post-Sale Stage:“Keep your eye

on the ball”

2. Sale Stage: “There’s no timelike the present”

1. Pre-Sale Stage:“Early and Often”

4. Salvaging Phase: “A bird in the hand…”

3. Post-Sale Stage:“Keep your eye

on the ball”

2. Sale Stage: “There’s no timelike the present”

1. Pre-Sale Stage:“Early and Often”

10. ADDITIONAL TIPS

1.Act like you are selling from Day 1

2.Investigate government programs and incentives

3.Get insurance: commercial and directors and officers

4.Develop policies/procedures/codes and stay current:

5.Practice good governance

When to call a lawyer?

• Expertise• Not just an expense• Witty eye candy

Ted Maduri, Davis LLP

Tel: (416) 941-5412

E-mail: tmaduri@davis.ca