TOFI August 10, 2015 Legal: WeirFoulds

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Founder Institute

Legal Panel

1

August 10, 2015



Introduction - Topics

• About WeirFoulds

•

Methods of Carrying on a Business• Raising Capital

• Tax

• Protecting IP

• Employment Law

2



About WeirFoulds

• Provided strategic business and legal solutionsfor public and private sector clients for more than

150 years

• Ranked among Canada’s leading law firms in itschosen practice areas

• Our lawyers are consistently recognized asleaders in their chosen areas of practice and theprofession at large

• Rated as a top firm in both the City of Torontoand the Province of Ontario by Best Lawyers inCanada. 3



WeirFoulds’ Experience

• We are recognized as a “go-to” law firm forour strength in mid-market, corporate and

private equity/venture capital

• As a mid-sized regional firm, we workfrequently with entrepreneurs and owner-operators to support their business

objectives

• our core structure is for us to be in line withthe needs and requirements of our clients

4



Organization and Internal Control

• Unfortunately... you need legal "stuff" to run yourbusiness

•

You are responsible for your legal contracts andother documents and related budget

• Organization is key and will save you $

– Need to “maintain” your corporation (i.e.

corporate and tax filings, minute books) – Scanned copies of contracts



Find the Right Lawyer

• Ask about fee structure up front

•

Can they grow with you?

• Find a trusted advisor

6



Founder Institute Package

7



Methods of Carrying on a Business

and

Raising Capital

Presented by: Raj Dewan and Fraser Bush



Methods of Carrying on a Business

i. Sole proprietorship

ii.

Partnershipiii. Non-share capital corporation

iv. Share capital corporation

9



Business Set-up

So, you’re incorporated – now what?

• Main features of Incorporation –

Separate legal entity for all purposes including tax,financing, employment, contracts, liabilities, etc.

–

Corporation is made up of three distinct groups:

• Shareholders

• Directors

•

Officers

– Ownership and Classes of Shares

•

Understanding the cap table

•

Freeze initial share ownership

•

Shareholders Agreements

•

ESOP 10



Business Set-Up (cont’d)

Business assets should be owned by thecorporation, not the founders (common DD issue

on institutional funding round) – Pay attention to previous employers including

universities who may have rights in IPdeveloped by founders which will be used in

the business – very important to address thisat the outset so that it does not become acloud over any future contract, financing, exit,etc.

11



Business Set-up (cont’d)

Stakeholders• Shareholders:

–

The owners of the company – Shareholder approval required for fundamental changes

• Directors:

– Responsible for overall management and direction andelected by shareholders

–

Legal duties and liabilities• Officers :

– Appointed by Directors and day to day management

– Often employees of the company

12




Director Duties and Liabilities

–

Directors have a common law, fiduciary duty to:

•

Act honestly and in good faith in the best interests of thecompany

• Exercise the diligence and skill that a reasonably prudentperson would exercise in comparable circumstances

–

Common Mistakes: spend money foolishly, don’t disclosureconflicts of interest, exercise proper due diligence

–

Fail to meet the standard:

• Unpaid employee wages (6 months)

• Remittances to government agencies

• Tort claims (e.g. defamation, inducing breach of contractetc.)

13




Governance and Ownership

• Shareholders Agreements

–

A contract that regulates the relationshipbetween shareholders and how certainfundamental decisions will be made

– Top Five Issues

•

Management and Control•

Transferability of Shares

•

Forced Sale Events

•

Financing

•

Dispute Resolution

14



Advice for Commercial Agreements

• Get a lawyer involved early to prevent problemsdown the road

•

Have your lawyer draft a good employee/contractor Agreement, IP Agreement andConfidentiality Agreement and use it with allemployees and contractors involved in yourbusiness and the development of yourintellectual property

• Review dispute resolution clauses

15



Raising Financing

Sources Track a company’s stage of

growth

• Typical Documents

- Term Sheet

- Subscription Agreement

-

Shareholder Agreement

- Agency Agreement ( if third party is raisingfinancing)

16



Raising Financing

Sources Track a company’s stage of

growth

• Founders and Employees

- Usually early stage when cost of investment is low

- Usually common shares

- Be mindful of dilution – if you need to raise more capital

through equity, early ownership interests will be reduced- Do not promise that ownership interests will be protected

(i.e., statements that for X$, you will own x% of thebusiness are dangerous)

17



Raising Financing (cont’d)

• Angels

-

Usually high net worth individuals or groups of same- Sweet spot is just after early stage financing but some

angels come in right at startup

- Angels usually purchase common or preferred shares

-

May or may not want Board representation

-

Generally limited capacity to participate in future rounds- Know your angel(s) - most angels will want some

protection against future dilution and/or approval rightsover fundamental changes – be wary of this

18




• Venture Capital/Private Equity Funds

-

VC investors typically invest at the mid to later stage orwhen there is at least proof of concept

- Investment decision also includes assessment ofmanagement team

- VC investors are in the business of generating a returnfor their own investors

- VC investors often invest in groups to spread risk

- Invest through convertible securities and will want boardrepresentation

- Typical will negotiate for certain veto and informationrights in deal documentation

19




• Crowdfunding

- Securities commissions in Ontario, BC,

Quebec, Manitoba, New Brunswick and NovaScotia have proposed rules to regulateraising capital and selling shares throughcrowdfunding websites

-

Ontario- The proposed Crowdfunding Exemption would allow

companies to use crowdfunding to raise a maximum of$1.5-million in equity in any 12-month period andindividuals are limited to investing no more than $2,500in a single project

20




• Crowdfunding-

Both reporting issuers and non-reporting issuers would

be permitted to make use of the exemption, with someexceptions

- The Crowdfunding Exemption raises fraudconcerns thought there are some safeguardsin place

-

BC proposed more restrictive regulations- The Saskatchewan Equity Crowdfunding

Exemption was adopted in December 2013

21




Sources (cont’d)

• Donations: Charities reach out to thecrowd (through portals, social media, ortheir own websites) to receive donations.

- Example: Wikipedia’s yearly donationcampaigns

•

Peer-to-peer lending: Individuals lend fundsto other individuals or companies.

- Example: kiva.org

22




Sources (cont’d)

•

Equity: Investors receive shares inexchange for an investment in thecompany. Currently not available inCanada for non-accredited investors.

-

Example: MaRS VX

23




Securities Law

•

Unless you meet applicable exemptions fromsecurities law in Canada, your fund raising willhave to comply with prospectus requirements

•

Most common exemptions for early stage are“private issuer” and “accredited investor”although there are others

•

A violation of securities law is your biggestnightmare!

24



Tax for the Start-up Company

Presented by: Ryan Morris



• Taxation of employee benefit

deferred until the shares areexercised (non-CCPC) or sold (CCPC)

• Deduction may be available such that

benefit is effectively taxed as acapital gain(as opposed to a full income inclusion)

26

Employee Stock Options



•

Currently $813,600

•

Qualifying small business corporationshares

–

90% of FMV of assets used principally inCanadian active business at time of

disposition

•

50% at all times in previous 24 months

–

Owned by shareholder or related person

throughout previous 24 months 27

Lifetime Capital Gains Exemption



•

Techniques to minimize or defer tax

– Dividends paid to family members in a lower

tax bracket

– Allow for family members to use capitalgains exemption on exit

–

Provide growth shares to family members

•

Often utilizes a family trust

•

Many restrictions / traps

–

Attribution rules 28

Income Splitting & Estate Planning



•

Fed/Ont corporate income tax rate = 26.5%

– 15.5% for CCPCs on first $500K of ABI

•

Highest marginal individual tax rate =49.53%

29

Deferral of Income Tax



• Shareholder benefit rules

• Director liability for source deductions,GST/HST and non-resident withholdingtax

• Section 160 assessments againstshareholders for amount of dividends(to satisfy corporation’s tax liability)

30

Common Trips & Traps



• Mischaracterizing independent

contractors

• Transfer pricing

•

Onus on taxpayer in tax disputes

31

Common Trips & Traps



Protecting Intellectual Property

Presented by: Ralph Kroman



Protecting IP for the Start-up Company

•

In Canada, ownership by a company of intellectualproperty (IP) created by an employee or independentcontractor is not guaranteed unless the parties haveentered into a written agreement that clearly vestsownership in the company.

33



Protecting IP for the Start-up Company (cont’d)

•

A purchaser of a company's business will usuallyrequire the company, as a condition of sale, to producewritten agreements from key employees and

independent contractors regarding ownership by thecompany of IP. If such agreements do not exist, thecompany may be in an awkward position especiallywith former employees and independent contractors.They may insist upon a "pay off" of some sort in order

to sign an agreement in the form required by thepurchaser.

• Agreements with employees and independentcontractors with well-drafted IP provisions can certainlypay dividends to the company and its shareholders.

34



WHAT IS INTELLECTUAL PROPERTY?

•

Intellectual Property (IP) is a legal term that refers tocreations of the mind. IP laws provide the owner of theIP with the exclusive right to use it. The owner may

enforce IP rights against third parties regardless ofwhether a contract or relationship exists with the thirdparty.

•

The creator of the IP is not necessarily the ultimateowner of the IP. The creator may assign ownership of

the IP to another person by way of written assignment.Ownership may also pass "by operation of law".

35



WHAT IS INTELLECTUAL PROPERTY? (cont’d)

•

Because intellectual property protection is on acountry-by-country basis, it is possible for ownership ofIP to differ from country to country.

•

Registration of IP is valid only in the jurisdiction inwhich the registration is made – complete protection ofIP may require registrations in several jurisdictions.International IP treaties may assist registration inmultiple countries.

36



WHAT ARE THE TYPES OF IP?

•

A patent is a right that is granted by a government toan inventor that gives the inventor the sole right toexclude others from making, using or selling an

invention. The authority that is granted to the inventoris for a set period (up to 20 years in Canada). Patentrights are granted through a registration of the patent.

37



WHAT ARE THE TYPES OF IP? (cont’d)

•

The invention may be:

– a product (e.g., door lock);

– a composition (e.g., chemical composition used inlubricants for door locks);

– a machine (e.g., for making door locks);

–

a process (e.g., method for making door locks); or

– an improvement on any of these.

38




•

Copyright is the exclusive legal right given to an authorto copy, print, publish, perform, film or record literary,artistic or musical works of the author.

•

Under Canadian copyright laws, the author of a workthat is subject to copyright also has moral rights in thework including:

– the right to the integrity of the work;

– the right to be associated with the work as the author byname or under synonym; and

– the right to remain anonymous.

•

Registration of copyright is not necessary to enjoycopyright protection, but registration grants advantagesto the owner in the event of infringement of copyright.

39




•

A trade-mark is a word, slogan, symbol, sound, design,shape of a container or similar item that identifies aparticular business as the source of the goods or

services associated with the mark. For example,"Coke" is a trade-mark for a cola beverage.

•

Trade mark rights arise through use of the mark, andregistration of the mark broadens this scope ofprotection.

•

Registration of the mark in Canada gives the owner theexclusive right to use the mark in Canada; theregistration is valid for 15 years and it may be renewedevery 15 years.

40




•

Industrial designs are product features that appeal tothe eye. They may be the shape for a chair, the hoodor fenders of a car, the original pattern in a woven

sweater or all of the visual features of a computermonitor. A product's visual appeal gives it a competitiveedge, setting it apart from others and making it the onepeople will buy.

•

Industrial design registration gives the owner exclusive

right to an original design for up to 10 years in Canada.Others cannot make or sell the design without theowner's permission.

41



WHAT SORT OF BUSINESS ASSETS AREPROTECTED BY IP RIGHTS?

•

All businesses have assets that are protected bycopyright. Typical assets that are protected bycopyright include software, website content (text and

images), content in marketing materials, and productpackaging and instructions.

•

Almost all companies have a brand and the brand isprotected under trade-mark law. Other items which maybe protected include slogans or taglines associated

with specific goods or services.

42



WHAT SORT OF BUSINESS ASSETS AREPROTECTED BY IP RIGHTS? (cont’d)

•

Many companies have inventions that are patented andconstitute key business assets. Some companies relyheavily on an extensive patent portfolio such as

pharmaceutical companies.

•

If a company is in a business of creating items that aresubject to industrial design, industrial designregistrations are important to enjoy exclusivity in themarketplace.

43



DOES THE EMPLOYER OWN THE IP GENERATED BYEMPLOYEES AND INDEPENDENT CONTRACTORS?

•

Inventions that are subject to patent protection aretypically created by employees as opposed toindependent contractors.

•

As a general rule, the employer owns the employee’sinvention if the employee was "hired to invent". Thefactors that are applied to determine whether anemployee was "hired to invent" can be difficult to applyin a given case, and a properly drafted employment

agreement will remove any uncertainty in this regard sothat the employer is clearly the owner of any invention.

44



DOES THE EMPLOYER OWN THE IP GENERATED BYEMPLOYEES AND INDEPENDENT CONTRACTORS (cont’d)

•

Section 13 of the Copyright Act (Canada) provides thegeneral rule that the author is the first owner of thecopyright in his or her work; however, Section 13(3)

provides for an important exception: if the work iscreated in the course of employment under a contractof service, and absent any agreement to the contrary,the employer is the first owner of the copyright.

45



•

If the employees sign an employment agreement thatconfers ownership upon the employer, it will beperfectly clear that an "agreement to the contrary" does

not exist.

•

Often companies retain outside consultants and otherindependent contractors, and the general rule is that,unless there is an agreement to the contrary, thecopyright in work is owned by the contractor, and not

the company.

•

A “standard form” independent contractor agreementthat is supplied by the contractor often provides that thecontractor owns copyright in the deliverables

46




•

When a dispute occurs with a contractor, the contractoroften takes the position that the contractor retains allcopyright.

•

Moral rights under Canadian laws are grantedexclusively to the author of the work - they may bewaived by the author, but they cannot be assigned. Theauthor enjoys moral rights even if the author is not theowner of the copyright in the work.

47




•

The Trade-Marks Act (Canada) does not contain anyprovisions regarding ownership of marks. Trade-markownership rights arise through the sale of goods and

services under a mark, and therefore it is highlyunlikely that an employee or independent contractorcould claim any ownership interest in an employer'strade-mark.

•

If a trade-mark contains original design elements that

are subject to copyright protection (such as a logo),then an employee or independent contractor mighthave a basis for a claim to ownership of the designelements depending upon the circumstances.

48




•

Section 12(1) of the Industrial Design Act (Canada)provides that the author of the design is the first owner,unless it was executed for another in exchange for

good and valuable consideration, in which case thatperson becomes the first owner.

49




•

The Act is not litigated very much in Canada, but the jurisprudence suggests that an employee's salary will infact qualify as good and valuable consideration so that

industrial designs developed by an employee areowned by the employer. It is not clear whether thesalary needs to be linked to the creation of the designin order for good and valuable consideration to exist. Aproperly drafted employment agreement will remove all

doubt in this regard.

50




WHY DO COMPANIES CARE ABOUT IPOWNERSHIP?

•

Obviously, it is in the interest of each company toensure that it has broad and indisputable ownershiprights in all IP that is created by employees and

independent contractors — by doing so, a disgruntledformer employee or independent contractor will not beable to use his or her potential ownership of IP as"leverage" against the company.

51



WHY DO COMPANIES CARE ABOUT IPOWNERSHIP? (cont’d)

•

Companies often need to seek financing (which mayinclude venture capital), or opt to sell the business orenter into a merger with a third party. It is standard

procedure that in agreements for such transactions,companies must represent and warrant that (i) thecompany owns all of the IP that is material to thebusiness and (ii) the company has entered intoagreements with all employees, consultants and

independent contractors who have created IP thatprovide the company is the sole owner of the IP(including that the author waives all moral rights in anycopyright).

52



Conclusion

•

It does not require a great deal of effort to ensure thatemployees and independent contractors do not get "theupper hand" over the company with respect to IP

created by them. A well drafted employment agreementor independent contractor agreement will do the trick.

•

Registration of IP rights in appropriate jurisdictions willmake certain that the company maintains exclusivity,and will make the company more valuable to potential

investors/purchasers.

53



Employment Law

Presented by: Hayley Peglar



Employees

The Basics

•

Employee or independent contractor?

•

Can have serious implications regarding benefits or other requirementsunder the employment standards legislation, insurance obligations oran employee’s obligations to their employer

• How a court would determine your relationship

• Intent

•

Control

55



Employees

The Basics (cont’d)

•

Employees must at least be paid minimum wage (whether

they are founders or interns). Be wary of classifying junioremployees as interns – the test under the ESA forestablishing unpaid internship, is onerous. If founders cannotafford to pay themselves minimum wage, they should beclassified as contractors until the company is generatingrevenue

56



Employees


•

Start with a good agreement template – your friendly

WeirFoulds employment lawyer can provide – everyoneshould sign an employment agreement or an independentcontractor agreement

• Employment contract

1. Set the terms

2.

Compliance3. Confidentiality

•

Probation periods can be your friends

57



Employees (cont’d)


•

Employment agreements which are signed after the

employee’s start date will not be enforceable unless theemployee has received some sort of consideration forsigning (e.g., a signing bonus)

• Use the occasion of signing up employees/independentcontractors to address confidentiality and assignment ofintellectual property rights

58





•

Employment can be terminated at any time, without cause,

as long as the individual is provided with reasonable notice• If employment is terminated without cause, you must give at

least the statutory minimum

•

If the contract contains no clear termination provision, thecommon law will apply. This is more than the statutorynotice.

• If an employee is terminated for cause, there is norequirement to give notice or pay in lieu of notice. It isrecommended to obtain legal advice before terminating anindividual’s employment for cause

59





•

It is possible to restrict termination entitlements to ESA

minimums, but only if the employee has signed anemployment agreement which is properly drafted andentered into. If no employment agreement, then common lawapplies which is very subjective and always more than ESAminimums

• Directors and officers are personally liable for unpaid

employee wages (which term includes accrued vacation andovertime). However directors and officers are not personallyliable for notice of termination or severance

60





•

Be wary of treating individuals as contractors if they really

look like employees, as CRA can assess penalties andcompanies can find themselves responsible for common lawwrongful dismissal packages which they were not expecting.Contractors have a significant degree of control over whatthey do and how they do it; employees do not

61



Today’s Team

Raj DewanPartnerCorporate(416) [email protected]

Fraser Bush AssociateCorporate(416) [email protected]

Ryan MorrisPartnerCorporate(416) [email protected]

Ralph KromanPartnerCorporate(416) [email protected]

Hayley Peglar Associate

Litigation(416) [email protected]