Get a Good Legal

Head Start(up)

October 27, 2012 Presentation to SFU Venture Connection By: Mark Longo, Partner, LaBarge Weinstein LLP .

Open Doors.

Close Deals.

Today’s Agenda 1. Before You Start

2. Forms of Businesses & Incorporation Decisions

3. Tax Planning

4. Founder Agreements

5. Reverse Vesting

6. HR Agreements

7. Intellectual Property

8. Commercial Contracts

9. Financing Your Business

10. Selling Your Business

About LaBarge Weinstein LLP • A business law firm established in 1997

• Recognized as the leading national firm for technology

and knowledge-based companies

• 40+ professionals serving clients across Canada and

abroad from offices in Ottawa, Toronto, Waterloo and

Vancouver

• Full service business law practice, including:

Corporate/Commercial

Securities, Corporate Finance & Debt Financing

Mergers & Acquisitions

Intellectual Property and Licensing

Taxation & Estate Planning

Human Resources

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Some Recent LW Deals

Closed over $6.5 billion in M&A transactions and $5.5B in VC

and venture debt transactions since founding in 1997

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• Your corporate and legal foundation must facilitate future rounds of financing

• Your foundation must be ‘exit friendly’

Begin with the End in Mind …

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Case Study # 1:

Before You Start

Before You Start • If employed, review your current employment

situation

What do your current employment terms say?

Are you subject to a non-compete or non-solicit? Are your new partners?

Will you or your partners be

perceived as having taken

confidential information from

your employers?

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Before you Start (Continued)

• Review the legal and business landscape of your proposed business

Are there special legal impediments to starting your business? Existing license or franchise restrictions? Regulatory barriers?

What licenses or consents are required? From regulators or franchisors?

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Case Study # 2:

Forms of Businesses and

Incorporation Decisions

Forms of Businesses

• Means of Conducting Business Sole proprietorship

Partnership/Limited Liability Partnership

Corporation

• Considerations Type of business

End goal

Tax considerations

Liability

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Incorporation Decisions

• Jurisdiction – Federal vs. Provincial vs. Delaware

• Types of Shares Common

Non-voting

Preferred

• Audit or No Audit

• Directors

• Officers

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• Allocating Shares Tax considerations

Incentive considerations

Shareholders agreement

• Board of Directors

Composition and role

In the “closely-held” company

With the arrival of investors

Incorporation Decisions (Continued)

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• Canadian Controlled Private Corporation (“CCPC”)

status is key:

750K Lifetime capital gains exemption for founders

Refundable SR&ED claims

• Family trust = Potentially millions in tax savings

Founder is a trustee and a beneficiary…you call the shots

(including paying only yourself if you like)

Timing is key:

Early establishment of trust is optimal but not essential

Tax “freeze” can be used later if needed

Inexpensive to establish - use it for 21 years

Tax Planning

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Case Study # 3:

Founder Agreements

• Assumes “traditional” high tech startup model

Largely “technical” founders come together to design

and build product

Financial, sales, marketing, executive roles

may be added at outset or later

Financing likely required

Main sources of compensation going

forward: equity and salary

Founder Agreements

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• How to value relative contributions to business?

• What if a founder departs early for any reason?

• How is the company run? Legally? Practically?

• How are new hires to be compensated?

• Laying a groundwork for future investors

• Tax considerations

• Can a founder sell his or her shares?

Founder Agreements (Continued)

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• IP and Confidentiality Agreements

Assigning pre-incorporation IP to company

Confirming company ownership of after-created IP

Ensuring confidentiality

• Founders Agreement can provide for:

Board membership

Holding board meetings

Special approval requirements

Founder Agreements (Continued)

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• Typically, everyone is restricted from selling

shares except:

To family, trust or corporations for tax planning

If they offer shares first to other founders (“ROFR”)

Other founders can also sell their

shares to the buyer

Dealing in Shares

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• What is reverse vesting?

Some or all of shares issued to a founder can be repurchased by the company

Conditions can include remaining with the company over time or achieving milestones

As conditions are met, specified number of shares are no longer subject to repurchase right

Good for tax purposes, as founder is deemed to hold all shares on the first day they are issued

Reverse Vesting

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• Tax considerations dictate that the earlier that shares are issued, the better

• Intra-Founder considerations dictate that shares should reward contribution to business and longevity with business

• Accomplished through a contract

Either a shareholders agreement or a

“reverse vesting” agreement

Reverse Vesting (Continued)

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• Often some shares are vested on the day they are issued, to recognize past contribution to business

• If founder leaves the company:

Unvested shares repurchased at cost

Vested shares can be placed under a “voting trust”, where remaining founders have right to vote the shares

• Departure from the company might be defined as resigning or being terminated

Reverse Vesting (Continued)

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Case Study # 4:

HR Agreements

Employment Agreement

• Job Description

• Compensation & Benefits Package

• Confidentiality/Ownership of IP

• Non-Compete

• Non-Solicitation

• Termination Provisions

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Independent Contractor

Agreement

• Deliverables

• Compensation

• Confidentiality/Ownership of IP

• Term and Termination Provisions

• Ensure individual is truly an

independent contractor

Stock Option Plan

• Provides for the grant of an “option” to acquire shares in the Company

• Purpose: To attract and retain key employees, directors,

advisors, etc.

To align goals of option holder with those of the shareholders

• Control exercise of options using a vesting schedule

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Case Study # 5:

Intellectual Property

Intellectual Property • Did you get advice on your IP strategy?

• Did you transfer your pre-incorporation IP?

• Signed IP agreements for everyone: Founders

Employees

Consultants

Advisers

• The dangers of a faulty

IP trail…

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Intellectual Property (Continued)

• Trademarks

• Patent Applications

• Copyright Registrations

• Trade Secrets

• Website Terms of Use

• Privacy Policy

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Intellectual Property (Continued)

• Establish procedures for the protection of trade

secrets and other confidential information

• Use Non-Disclosure Agreements

• Consider registering

intellectual property

• Open source software

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Non-Disclosure Agreement

• Used in discussions with third parties to protect confidential information

• Can be mutual (two-way) If both parties are disclosing

sensitive information

• Can be one-way If Company is the only party

disclosing information

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Case Study # 6:

Commercial Contracts

Commercial Contracts • Sales Contracts – consumer protection

• SaaS agreements

• Licensing License revenue approaches

Royalty (per unit, percentages)

Up front

Service and maintenance fees

The perils of exclusive licensing

• Channel Sales Agreements

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Case Study # 7:

Financing Your Business

Financing Your Business

• Sources of Financing Accelerator programs

Friends and family

Government grants

SR&ED tax credits

Seed/Angel Investors

Venture Capital

Bank financing

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Securities Law Considerations

• Comply with applicable securities laws: NI 45-106: exempt distributions from Prospectus/ registration

Need comparable US federal/state exemptions for US investors

• Private placement Prospectus Exemptions: Private issuer exemption

Friends & Family

Accredited investor (Canada and US)

Employees, officers, directors, consultants

• Resale restrictions apply to exempt share purchases

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Seed Financing Documents

• Subscription Agreement (equity or debt)

• Convertible Promissory Note

• Shareholder Agreement

• Investor Rights Agreement

• Cap Table

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Venture Capital Financing

• Form of Investment Convertible debentures

Preferred shares Priority of payment (liquidation preference)

Guaranteed return on investment

Redemption rights

• Other Considerations Due diligence

Loss of control

Valuation

Loss of liquidity

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Financing Due Diligence

• Due diligence can make or break a deal

• Proactively create virtual data room

• Deals have a finite time to close

• Don’t give investor reason to walk

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Term Sheet Crib Notes Drag-Along: right of subset of shareholders to force exit .

Right of First Refusal: right to buy portion of shares to be sold by

shareholder .

Co-sale Rights: right to sell shares on same terms as shares to be

sold by shareholder .

Pre-emptive Rights: right to buy portion of shares offered for sale

by company .

Protective Provisions: shareholder approvals over certain

corporate matters .

Information Rights: right to regular financial and other reporting \

Observer Rights: right to attend board meetings in non-voting

capacity

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Case Study # 7:

Selling Your Company

$$$elling Your Company

• Selling for cash or shares or combo

• Acquisition structures: Asset purchase

Share purchase

Merger/amalgamation

• Deferred consideration: “earn outs”

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$$$elling Your Company (Continued)

• Representations and warranties

• Liability issues: Indemnities can last for years

Escrow/holdbacks

• Be prepared for insanely rigorous due diligence

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Non-Legal To Do List

• Network in the Valley (e.g. C100) and

locally

• Take advantage of government programs

(e.g., SR&ED, IRAP, etc.)

• Surround yourself with great mentors

• Become “EBC” eligible

Information Sources • Canadian Venture Capital Association: www.cvca.ca

• National Venture Capital Association: www.nvca.org

• BCSC: http://www.bcsc.bc.ca/privateplacements.asp

• Basil Peters’ blog: www.angelblog.net

• www.startupcan.ca

• www.startupcompanylawyer.com

• www.seriesseed.com

• http://www.marsdd.com/articles/co-founder-

agreements/

• www.sprouter.com

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Mark Longo, LL.B., MBA

Partner, LaBarge Weinstein LLP

(604) 630-0448; mlongo@lwlaw.com @markjlongo .

Open Doors.

Close Deals.