Written by Sergio Plazas
JD Candidate 2024 | UCalgary Law Entrepreneurial ventures often seek funding to fuel their growth and innovations, leading them to consider various forms of financing. Two main types are equity financing and debt financing, each with unique pros and cons. Understanding the distinctions and implications of each type is crucial for entrepreneurs aiming to make informed decisions that align with their venture's growth strategy and financial health. Equity financing involves selling a portion of a company's equity to investors in exchange for capital. This route is useful for startups and high-growth companies with insufficient assets or cash flow to secure traditional loans[1]. The primary advantage of equity financing is the lack of a repayment obligation, which can ease cash flow pressure on the business. However, it comes at the cost of diluting the founders' ownership and potentially ceding some control over the company[2]. Equity investors, such as venture capitalists or angel investors, often seek to influence strategic decisions and may expect significant returns on their investments. Debt financing, on the other hand, involves borrowing funds that must be repaid over time with interest. Debt includes traditional bank loans, bonds, and lines of credit. One of the key benefits of debt financing is the preservation of ownership and control; since lenders typically do not receive equity in the company, the original owners retain complete control of the business operations and decision-making[3]. Moreover, interest payments on debt are tax-deductible, which can provide a financial advantage. However, debt financing requires the company to have a reliable cash flow to meet repayment schedules, which can be a significant burden for startups and businesses in volatile industries. Failure to meet these obligations can lead to financial distress and even bankruptcy[4]. Debt might seem cheaper initially because it doesn't require giving up company shares. Still, its actual cost can be more complex and potentially higher, especially when factoring in the entrepreneurial incentives it shapes. Joseph Stiglitz's work on information asymmetry introduces the concepts of moral hazard and adverse selection, highlighting how debt contracts can sometimes lead to misaligned incentives between the entrepreneur and investors[5]. This misalignment can indirectly affect company performance, underscoring the importance of considering financing options' direct and indirect costs. Debt financing, while preserving equity, introduces fixed obligations that must be met regardless of the company's financial health. This can significantly burden startups, which typically face unpredictable cash flows and high operational risks. Equity financing, on the other hand, offers more flexibility since investors do not expect immediate returns and are generally prepared to bear the risk of uncertainty inherent in startups. Moreover, equity investors often bring valuable resources, including industry expertise, network connections, and credibility, which can be crucial for a startup's success.[6] The choice between equity and debt financing is influenced by several factors, including the company's stage of development, cash flow stability, growth prospects, and the founders' willingness to share control. While equity financing is often more accessible for early-stage companies with high growth potential but limited assets, debt financing can be a more suitable option for established businesses with stable earnings and the ability to service debt. Types of Debt Funding for Ventures The pathway to securing funding for entrepreneurs is filled with diverse options, each tailored to the specific needs and risk profiles of startups versus established businesses. Traditional bank loans, commonly pursued by established small businesses, often remain elusive for startups due to their high-risk nature and lack of tangible collateral[7]. This dichotomy pushes entrepreneurs towards alternative financing methods such as venture lending, leasing, and trade credit. Venture lending offers a tailored solution for startups with promising growth potential, providing them with the capital necessary to scale operations[8]. This option is attractive for its relatively low dilution of equity. Still, it comes with higher interest rates and often requires warrants, giving lenders the right to purchase equity later. This can benefit ventures that need substantial capital without wanting to give up control too early. Leasing is another viable option, especially for ventures needing expensive equipment without the upfront capital. It allows startups to use the equipment by paying a monthly fee, with the option to purchase it eventually. The benefits are twofold: conserving cash flow and avoiding technology obsolescence[9]. However, the total cost over time can exceed the price of purchasing the equipment outright. Small business and personal loans serve as a traditional route, offering lower interest rates than venture lending but requiring solid credit histories and sometimes personal guarantees[10]. This can be risky for entrepreneurs as it blends personal and business financial risks. Credit cards, easily accessible but costly, can bridge short-term financial gaps. The ease of use and immediate access to funds make them appealing for emergency needs. Yet, the high interest rates and potential for personal credit damage if the business fails to make this option a double-edged sword. Trade credit, an often-overlooked method, allows businesses to purchase goods or services on account, paying the supplier later[11]. This can improve cash flow management but requires a good relationship with suppliers and can come with high costs if payments are delayed. Despite the prevalent view of banks as primary funding sources for small businesses, entrepreneurial ventures face hurdles in securing such financing due to unpredictable cash flows and the high-risk nature of their operations. Banks' reluctance stems from the high probability of default and the challenges in collateral liquidation, given startups' tendency to possess intangible assets[12]. Moreover, regulatory and market mechanisms complicate the relationship between banks and high-risk ventures, such as usury laws and the adverse effects of high-interest rates on lender-borrower dynamics. Personal loans and corporate loans with personal guarantees sometimes serve as exceptions within the banking realm, providing a lifeline to entrepreneurs under specific conditions[13]—lastly, government guarantee programs and non-banking debt options present alternative financing pathways. Understanding the nuances of financing options, from venture debt and leasing to credit cards and trade credit, is crucial for entrepreneurs navigating the complex landscape of startup funding. Each option carries its own benefits, risks, and requirements, underscoring the importance of a strategic approach to financial planning and the pursuit of growth. [1] Marco Da Rin & Thomas Hellmann, Fundamentals of Entrepreneurial Finance, Oxford: Oxford University Press (2020). [2] Ibid. [3] Ibid. [4] Ibid. [5] Ibid. [6] Ibid. [7] Marco Da Rin & Thomas Hellmann, Fundamentals of Entrepreneurial Finance, Oxford: Oxford University Press (2020). [8] Ibid. [9] Ibid. [10] Ibid. [11] Ibid. [12] Ibid. [13] Ibid.
0 Comments
Written by Brody Gray
JD Candidate 2024 | UCalgary Law Intro: The modern world of entrepreneurial spirit includes more and more individuals searching for their own “side hustle” in addition to their working commitments. The term side hustle can encapsulate anything from picking up a few extra shifts at a second job to starting your own company. Many entrepreneurs may even be tied up in multiple side hustles turned early-stage companies as they go about their business careers. The formation of these companies is a key component to a healthy and growing economy. Still, entrepreneurs taking on a director or officer role in multiple companies may find themselves in a conflict of interest, which can lead to significant legal issues. Conflict of Interest Under both the Business Corporations Act (Alberta) (“ABCA”) and the Canada Business Corporations Act (“CBCA”), directors and officers owe a fiduciary duty to each corporation that they serve on the board of or are employed by, respectively. Section 122(1)(a) of the ABCA[1] and section 122(1)(a) of the CBCA[2] both impose an obligation on directors and officers to act honestly and in good faith with a view to the best interests of the corporation. The duty to act honestly and in good faith is understood at common law to include a duty to act without conflict or without a conflicting personal interest, on behalf of the corporation. A director or officer who is also working for or with another competing company could be in violation of 122(1)(a) under the applicable statute. Directors are occasionally hired specifically for their industry expertise, so it will always be a fact-specific inquiry about the details of the situation. The case of Pardy v Dobbin is centred around a possible breach of the fiduciary duty when a director acts for multiple boards.[3] In this case, it was not enough to find that Dobbin had simply worked as a director for two separate companies or that the two companies had both been golf courses. The court held that there would need to be evidence that the corporations were competing for the same opportunities, in the same market, or in some other way directly in competition with each other for a breach of the fiduciary duty to be found. A further fact-specific inquiry would be raised if a director or officer had a personal relationship with a director or officer of another corporation to determine if a self-dealing contract or conflict of interest arises.[4] A breach of a fiduciary duty may arise even when an individual isn’t personally acting for multiple boards if they act or structure deals in a manner that is self-dealing through personal connections with multiple companies. How Does this Apply? For the modern entrepreneur, any new position should be approached cautiously to ensure their new venture does not compete with any current business they are involved with. Any entrepreneur must be cautious to ensure they avoid breaching their fiduciary duty to both companies. The application of the fiduciary duty has consequences for the modern entrepreneur outside of their own obligations as well. Entrepreneurs may find themselves in contact with venture capitalists and other investment bodies in the early stages of their companies, and many of these groups will seek shares or board seats as part of investment deals. Entrepreneurs should be mindful that these parties, though they may act for the interests of a certain subset of shareholders, still hold a fiduciary duty to the corporation as a whole. What if you are in a conflict of interest? If a director or officer finds themselves in a conflict of interest, certain business deals or contracts made while in this conflict may be struck down or voidable. The applicable corporate statute provides a “safe harbour rule” in section 120 that allows disclosure by directors and officers in relation to contracts to cure a self-interested contract. Several legislative factors must be considered to determine if the safe harbour rule can save a specific contract. First, the impacted director or officer must be a party to a material transaction with the corporation and disclose this relationship in writing into the meeting minutes.[5] The disclosure must reflect the full nature and extent of the impacted director or officer’s influence. The amount of disclosure is contextualized, but fundamentally, it must make the rest of the board “fully informed of the real state of things.”[6] Second, the disclosure must be made at the first instance the contract is considered, or at the first instance in which the director became an interested party.[7] Finally, when the contract is voted on the impacted director or officer must remove themselves from the vote.[8] These requirements can be extremely difficult for smaller boards at start-up companies to meet, where directors are not entirely independent of each other, and removing one director from a particular vote may mean the removal of a significant percentage of those entitled to vote. Conclusion: Directors and officers should always be wary of their greater fiduciary duty to the corporations they work for. They should be mindful of avoiding placing themselves in a conflict-of-interest situation. When individuals accept a high role in a corporation, they take on a significant responsibility to their fellow directors, officers, and the shareholders they work for. This is a responsibility they should remain mindful of by always maintaining their focus and efforts in the best interest of the corporation [1] Alberta Business Corporations Act, RSA 2000, c B-9, 122(1)(a). [2] Canada Business Corporations Act, RSC 1985, c C-44, 122(1)(a). [3] Pardy v Dobbin, 2000 NFCA 11 (CanLII), <https://canlii.ca/t/1n1pq>, retrieved on 2024-04-05. [4] Exide Canada Inc v Hilts, 2005 CanLII 40363 (ON SC), <https://canlii.ca/t/1lx69>, retrieved on 2024-04-05. [5] ABCA/CBCA, supra note 1, s 120(1). [6] Gray v New Augarita Porcupine Mines Ltd, 1952 CanLii 322 (UK JCPC), <https://canlii.ca/t/gwcjs>, retrieved on 2024-04-05. [7] ABCA/CBCA, supra note 1, s 120(2). [8] ABCA/CBCA, ibid s 120(8). Written by Christian Rossi
JD Candidate 2024 | UCalgary Law When incorporating a business, filing the requisite documentation with the appropriate government authority and paying the associated fees is necessary. One critical document is the Articles of Incorporation (the “Articles”). Detailed requirements for the contents of the Articles have been outlined in a previous BVC blog post.[1] Share Classes Among the crucial considerations within the Articles is the corporation’s share structure. The Articles allow for one or more classes of shares. The Articles must set out the rights, privileges, restrictions and conditions for each class.[2] For start-ups, it is advisable to avoid complex share structures with too many classes. Typically, start-ups opt for two classes of shares: common and preferred. Amongst these classes, corporations grant shareholders three fundamental rights: the right to vote, the right to dividends when declared, and the right to property on wind-up or liquidation.[3] These rights do not necessarily have to be consolidated within a single class of shares; they can be spread out amongst classes, but it is a requirement that the corporation grants them. Furthermore, all shares of a particular class must have the same rights and obligations attached to them unless they were issued in different series.[4] Common shares typically come with voting rights and are essential for maintaining control over the corporation. Preferred shares, on the other hand, offer an alternative financing avenue for companies to attract investors with differing objectives. External investors may prioritize fixed dividend rates and preferential treatment in the event of liquidation over voting rights. When considering preferred shares in the Articles, consider allowing for the issuance of preferred shares in series. This enables directors to establish multiple series of preferred shares with specific terms desired by shareholders without necessitating shareholder approval to amend the articles. Equity Splits A start-up must consider the equity distribution among its founders, as improper allocation can lead to long-term complications. One approach is to assign different equity amounts to reflect different roles and contributions. While a 50/50 ownership split might seem fair for a business incorporating with two founders, it may not be the most advantageous arrangement. An even split can pose hold-up risks for the corporation in the future. For instance, where founders disagree on significant decisions, barring any provisions in the bylaws to resolve ties, the indecision may stall the business's growth and potentially strain the business relationship between the founders. By issuing equity based on different roles and contributions, the corporation mitigates hold-up risks and ensures equitable compensation for each founder’s involvement in the company. Conclusion As a corporation grows, amending and repealing governing documents like the Articles becomes more difficult. Establishing appropriate share structures at the outset can help avoid these future complications. When drafting the Articles, start-ups should carefully consider the share classes they adopt, balancing simplicity with flexibility. Common shares often provide voting rights crucial for maintaining control, while preferred shares offer attractive financing options for investors. An equitable distribution of equity among founders can also be essential to prevent future conflicts and facilitate smooth decision-making processes. By thoughtfully designing share structures and equity splits, start-ups can establish a solid framework for success and pave the way for sustainable growth. [1] Ali Abdulla , “Articles of Incorporation in Alberta – Beyond the Basics” (8 March 2024), online (blog): < http://www.businessventureclinic.ca/blog/articles-of-incorporation-in-alberta-beyond-the-basics>. [2] Government of Canada, “Share structure and shareholders” (10 May 2023), online: <https://ised-isde.canada.ca/site/corporations-canada/en/business-corporations/share-structure-and-shareholders>. [3] Ibid. [4] Ibid. Written by Bailey Quartz
and Michael Cheung JD Candidate 2024 | UCalgary Law In the world of small business, fostering a collaborative culture is a key ingredient for success. Collaboration encourages teamwork, creativity, and innovation, leading to improved productivity and growth. As women entrepreneurs, you have a unique opportunity to build a cohesive and inclusive work environment that thrives on collaboration. Today, the BLG Business Venture Clinic will explore some tips to help cultivate a collaborative culture in your small business, empowering your team to achieve their full potential. Be Smart About Setting Goals and Expectations The foundation of any collaborative culture lies in establishing clear goals and expectations. As a leader, it's crucial to articulate the objectives of collaboration and ensure that every team member understands their role in achieving them. Transparency fosters a sense of purpose and unity, aligning efforts towards common goals. Regularly communicate progress and celebrate milestones to reinforce the value of collaboration within your small business. Foster Knowledge Sharing Encourage an open and supportive environment where team members feel comfortable sharing their knowledge and expertise. Recognize and reward individuals who actively contribute to the growth and development of their colleagues. This knowledge-sharing culture enhances skills and promotes continuous learning within your organization. Implement mentorship or peer learning programs to facilitate the exchange of valuable insights and experiences. Embrace Cross-Functional Projects Break down departmental barriers and offer opportunities for team members to collaborate on cross-functional projects. Allowing employees to step outside their usual roles not only promotes personal and professional growth but also facilitates a deeper understanding of various aspects of your business. This fresh perspective can lead to more creative problem-solving and the development of innovative solutions. Prioritize Communication and Conflict Resolution Effective communication is the backbone of any successful collaboration. Provide regular training on communication techniques and conflict resolution strategies to empower your team to express their ideas and concerns constructively. Create an atmosphere where everyone feels heard and valued. By addressing conflicts promptly and constructively, you can build stronger relationships and foster a more cohesive work environment. Build Team Spirit Team-building activities play a significant role in fostering collaboration and strengthening relationships among your employees. Organize events and exercises that encourage trust, understanding, and camaraderie. Activities such as team-building workshops, off-site retreats, or fun challenges not only promote collaboration but also create a positive and enthusiastic work atmosphere. Boost Collaboration with Walking Meetings Ditch the traditional meeting room and opt for walking meetings to invigorate creativity and encourage brainstorming. A change of scenery and physical movement can stimulate fresh perspectives and active participation from team members. These walking meetings not only improve productivity but also promote a sense of equality and openness within your small business. So, if your office is in an area or a neighborhood with a good walk score (70 is considered very good), pick a nearby destination and head out for the meeting. Digitize and Store Important Documents In a collaborative work environment, quick and easy access to information is essential. Keep crucial documents digitized and stored in the cloud to ensure they are readily available to your employees. Converting files into PDF format enhances compatibility and secures valuable information for efficient teamwork. Cloud storage solutions facilitate seamless collaboration, even in remote or hybrid work settings. Cultivating a collaborative culture in your small business is an ongoing process that requires dedication and a strong commitment to teamwork. By setting clear goals, encouraging knowledge-sharing, embracing cross-functional projects, prioritizing communication, organizing team-building activities, adopting walking meetings, and utilizing digital tools, women entrepreneurs can create a thriving work environment where collaboration thrives. A collaborative culture not only enhances productivity and creativity but also empowers your team to overcome challenges and achieve remarkable success in your small business journey. The BLG Business Venture Clinic has the legal assistance you’ve been looking for. Let us know if you have any questions! Written by Ryan Morstad
JD Candidate 2024 | UCalgary Law As news cycles debate whether Canada is or remains in a labour shortage, employers and employees alike should spend the time to learn about the rights and obligations involved in their employment relationships. Canadians may not be aware that whether or not they have a formal written employment contract with their employer, the nature of their working relationship is nonetheless contractual. A lack of written agreement may create some ambiguity in the terms of this agreement. Still, boiled down to the bare minimum, all employment agreements generally include (1) that the employee will conduct work for the employer, and (2) that the employer will pay them for this work. Other terms, such as termination provisions, will be implied into the contract if the parties do not explicitly address them. As discussed in a recent BVC Blog post[1], one such implied term of an unwritten employment agreement is that employers cannot terminate employees without cause unless they provide adequate notice of termination to the Employee. Other implied terms include that the employer will not unilaterally change the employees’ job duties, hours, or location of work and that they will not make the workplace intolerable. These implied terms are generally found to be fundamental provisions of the employment agreement. If these terms are changed, employees may claim that their work has changed so much that, even though they haven’t been formally fired, they have been fired in effect. This is called “Constructive Dismissal”. Although not a formal termination of employment, Constructive Dismissal arises when an employee claims that the nature of their employment has changed to such an extent that they should be deemed legally to have been dismissed[2]. In legal language, this might be called a fundamental or substantial breach of the employment agreement. If the employee is successful in their claim that they have been constructively dismissed, the employer will be required to provide them notice or payment in lieu of notice for termination, which, depending on various factors, can be a substantial. The test for constructive dismissal is contextual and involves two steps, which are that:
To avoid costly or stressful legal claims, employers should ensure they have complete written agreements with their employees! Employment contracts are critical to ensure that employers and employees understand the terms of their working relationship. [1] Alec Colwell, “Common Law Reasonable Notice for Termination” (March 11, 2024), online (blog):BVC < http://www.businessventureclinic.ca/blog/think-twice-before-youre-taxed-twice5050080> [2] Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 [3] Ibid at para 32 [4] Ibid [5] Tymrick v. Viking Helicopters Ltd., 1985 CarswellOnt 867 at para 11 [6] Merilees v. Sears Canada Inc., 1988 CarswellBC 93 [7] Pulak v. Algoma Publishers Ltd., 1995 CarswellOnt 277 [8] ; Chan v. Dencan Restaurants Inc., 2011 CarswellBC 2874 at para 34 [9] See Alberta Employment Standards Code, RSA 2000, c E-9 section 62. Written by Ali Abdulla
JD Candidate 2024 | UCalgary Law Background - What are “Articles of Incorporation”? To incorporate a corporation under Alberta’s Business Corporations Act (the “ABCA”), the incorporator must send an application package to the Registrar of Corporations.[1] The most significant document in this application package is the “articles of incorporation”, which is a so-called “constating document” that establishes the corporation. Certain information must be set out in the articles of incorporation, including:
With this background in mind, we shall now discuss some of the more advanced considerations for articles of incorporation in Alberta. 1. Ensuring that the Corporation Meets the Private Issuer Exemption Essentially, in order to comply with securities laws in the province, a corporation must either file a prospectus, or fall under a “prospectus exemption”, before it issues shares.[4] One common prospectus exemption is the Private Issuer Exemption, which requires, among other things, that:
Note that the above discussion glosses over several nuances of the relevant securities laws, and is meant purely to flag issues related to the articles of incorporation. 2. Allowing Directors to Appoint Additional Directors between Annual General Meetings The articles of incorporation can grant the board of directors the power to appoint additional directors between annual general meetings, up to 1/3 of the current board.[6] This may help avoid a prolonged vacancy on the board of directors, or mitigate the stress of trying to quickly communicate with a large number of shareholders, if a director unexpectedly resigns or dies. 3. Miscellaneous Considerations The articles of incorporation can also include provisions allowing:
Conclusion Articles of incorporation can include much more than just the basic information required under section 6 of the ABCA. In order to set up the corporation for success, and avoid the headache of needing to amend the articles of incorporation, great care should be taken when drafting the constating documents. [1] Business Corporations Act, RSA 2000, c B-9 [“ABCA”], s 5 and 7(1); see also Government of Alberta, "Incorporate an Alberta corporation" (2023), online: <https://www.alberta.ca/incorporate-alberta-corporation>. [2] ABCA, s 6. [3] Ibid. [4] Securities Act, RSA 2000, c S-4, s 110(1). [5] This is an over-simplification, see National Instrument 45-106: Prospectus Exemptions, 2.4. [6] ABCA, s 106(4). [7] ABCA, s 30(1). [8] ABCA, s 107. [9] ABCA, s 48(14). Written by Alec Colwell
JD Candidate 2025 | UCalgary Law Termination is a common occurrence in start-up businesses. Employees don’t always work out as anticipated at the time of hire – this is even more true in a start-up where roles are typically less defined, highly dynamic, and lacking in established procedures.[1] The government and the courts have recognized that it would significantly disrupt employees' lives if they could be suddenly terminated with no time to seek replacement employment. To mitigate this problem, the mandatory minimums for reasonable notice were established. The Employment Standards Code[2] [the “Code”] outlines the mandatory minimum notice periods. The Code provides for a range of minimum notice periods depending on the employee’s length of service. In Alberta, this range begins at one week of notice for an employee who has been employed between three months to two years and increases to eight weeks of notice for an employee who has been employed for ten years or more.[3] Alternatively, an employer may opt to pay the employee a lump sum equal to their regular salary during the termination notice period without allowing them to continue working during that period.[4] This is known as severance pay. Common law factors, outlined in Bardal v Globe & Mail Ltd., [5] can entitle employees to more substantial severance compensation that is known as reasonable notice. The Bardal factors account for the likelihood that an employee can acquire similar work and include 1) the character of the employment, 2) the length of service, 3) the age of the employee, and 4) the availability of similar employment.[6] This common law determination of reasonable notice is the default position unless the employee is terminated with cause or the employment agreement contains a termination clause to limit the notice period.[7] If you can contract for the mandatory minimum notice period in a termination clause of an employment contract, then why concern yourself with the common law factors for determining reasonable notice? One reason is that a termination clause will not always stand up in court. In Machtinger v HOJ,[8] the employer’s contracted below the statutory minimum. As a result, the court held that the entire termination provision was void and the common law factors for determining reasonable notice would apply.[9] In McKercher v Stantec,[10] the court severed the termination provision of the employment contract when they found that the terms of the contract no longer reflected the objective reality of the plaintiff’s employment. The plaintiff had worked his way up in seniority over several years with no alterations made to his original contract.[11] The court again defaulted to the common law to determine reasonable notice.[12] To limit the amount of severance that an employer will have to pay, the best course of action is to seek legal help in drafting an unambiguous employment contract with a legal termination clause. Additionally, having employees sign updated employment contracts when significant terms of their contract change will alleviate issues regarding the enforceability of a termination clause. If an employment contract does not contain a termination provision, being aware of how the Bardal factors affect the determination of reasonable notice will assist an employer in negotiating fair severance. [1] Bryce Tingle, Start-Up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (LexisNexis Canada Inc, 2018) at pp 127-130. [2] Alberta Employment Standards Code, RSA 2000, c E-9 [Code]. [3] Ibid at s 56. [4] Ibid at s 57. [5] [1960] OJ No 149 (ONSC). [6] Ibid at para 21. [7] Ibid. [8] [1992] SCJ No. 41, [1992] 1 SCR 986, at 508 (SCC). [9] Ibid. [10][2019] SCJ No. 159, 2019 SKQB 100. [11] Ibid. [12] Ibid. Written by Krystian Sekowski
JD Candidate 2025 | UCalgary Law In the realm where risk intertwines with innovation, Tyler Cowen illuminates the American venture capital (VC) system in his book "Big Business: A Love Letter to an American Anti-Hero." In his chapter on VC, Cowen explains how the American VC system emerges as a global beacon, a lifeline for visionary minds whose ground-breaking ideas are not yet primed for the public market. Cowen emphasizes that VC, often synonymous with Silicon Valley's tech juggernauts, symbolizes America's exceptional ability to nurture fledgling firms with exponential growth potential. What distinguishes venture capital is its daring embrace of risky ventures—those that traditional banks, risk-averse and bound by convention, would typically shy away from. Cowen paints a vivid picture of an ingenious entrepreneur with a concept carrying a mere 2 percent chance of success but possessing the potential to revolutionize industries. While conventional bankers might dismiss such odds, venture capitalists, according to Cowen's insights, have the acumen to see beyond mere numbers. They comprehend the long odds, strategically funding numerous start-ups, understanding that, although many may falter, the select few that succeed could redefine entire industries. As Cowen delves into, venture capital transcends the mere infusion of capital; it is a meticulously crafted tapestry of systematic networks, honed expertise, and an innate ability to recognize and foster talent. In the corridors of Silicon Valley, it transcends monetary contributions, evolving into a fusion of financial backing intertwined with invaluable advice, guidance, and mentorship. Cowen argues that venture capital's influence extends far beyond the bounds of Silicon Valley and the tech-centric domains. His exploration reveals that approximately 20 percent of VC firms specialize in information technology, with the majority diversifying their investments across various industries. Whether in healthcare, medicine, or green energy, venture capital, guided by calculated risk-taking, emerges as a catalyst capable of reshaping entire societies. Cowen's exploration unveils the colossal impact of venture capital, asserting that companies backed by VC contribute a staggering 21 percent to the U.S. GDP and play a pivotal role in fostering 11 percent of private-sector jobs, as per the National Venture Capital Association. Beyond financial contributions, Cowen underscores VC's transformative effect on economies and job markets. The success stories of tech giants—Microsoft, Apple, Google, Uber—find common ground in venture capital. Cowen illustrates how these narratives underscore VC's pivotal role in nurturing businesses that ascend to market leadership, effectively shaping the tangible fabric of the American dream. As Cowen elucidates, venture capital is not confined to Silicon Valley's glamorous precincts; it is a transformative force shaping economic landscapes in diverse regions like Boston, Brooklyn, and Austin. Cowen's exploration underscores how VC becomes a driving force in economic evolution, gentrification, and fostering vibrant communities. On a global scale, Cowen acknowledges the formidable challenge of replicating the success of American venture capital. The American model, he contends, thrives on a distinctive blend of finance and trust, forming a delicate yet potent ecosystem that proves challenging to recreate elsewhere. Contrary to assertions of being "good finance," venture capital, Cowen asserts, operates as an integral component of the broader American financial symphony. VC becomes a harmonious force propelling innovation in the intricate interplay with bank backstops, letters of credit, and the orchestrated chaos of initial public offerings. Cowen's exploration also tackles the inevitability of failure in the venture capital landscape. He positions it as an integral part of the entrepreneurial journey, a driving force behind creative destruction that paves the way for replacing outdated economic sectors with new, vibrant ones. As Cowen underscores, the result is a dynamic American economy with the resilience to adjust, adapt, and thrive. In Tyler Cowen's exploration of venture capital, readers uncover the hidden magic propelling America's innovation landscape. It transcends mere monetary transactions; it's about transforming dreams into reality, fostering diverse ventures, and shaping the dynamic heartbeat of the American economy. In Cowen's narrative, venture capital becomes more than an investment—it becomes a journey, an experience, and a driving force behind the nation's entrepreneurial spirit. Citation: Cowen, Tyler. Big Business: A Love Letter to an American Anti-Hero. St. Martin's Press, 2019. Pg. 138-142. Written by Justin Chia
JD Candidate 2025 | UCalgary Law Non-compete provisions are key mechanisms that start-ups and companies use to safeguard trade secrets and other sensitive information that employees may obtain during employment.[1] The primary concern with non-compete clauses is their potential to unfairly restrict an individual’s ability to find employment in their preferred trade or occupation.[2] Clauses with narrow geographic and temporal terms are more likely to be upheld by the courts in Canada. Additionally, courts are more likely to uphold restrictions on activities in which the employee is prohibited from engaging are not overly broad.[3] Non-compete clauses and various other restrictive covenants, including non-solicit provisions and Non-disclosure agreements (NDAs), can protect a start-up’s trade secrets from its competitors. The U.S. Federal Trade Commission recently proposed a nationwide ban on non-compete clauses.[4] The ban would prohibit employers from imposing non-competes on employees, regardless of how narrowly framed. The FTC’s main concern is that non-competes unfairly restrict an individual’s employment opportunities and undermine economic competition and innovation.[5] Any agreement that purports to limit an employee’s opportunities to seek future employment will fall under the ban, even if not explicitly labelled as a non-compete. Ontario is currently the only province in Canada that has imposed a ban on non-compete clauses.[6] The prohibition on non-competes reflects the common law presumption that they are contrary to public policy. Whether the rest of the provinces or the federal government will follow suit regarding outlawing non-competes remains to be seen. The implications of a ban on non-competes for start-ups are not precisely clear. Still, it would likely considerably impact how start-ups seek to protect trade secrets and intellectual property more broadly. Should a ban on non-competes be imposed, start-ups still have a variety of other restrictive covenants at their disposal to safeguard IP, including NDAs and non-solicits. Ontario, however, is discussing a potential ban on NDAs in the context of workplace misconduct, which, if implemented, could also be extended to IP.[7] Potential bans on non-competes and other restrictive covenants emphasize an increasingly clear reality. Corporate and employment legal regimes require start-ups to balance commercial interests with the rights of employees, which is by no means an easy task. [1] Bryce C Tingle, Start-up and Growth Companies in Canada: A guide to Legal and Business Practice, 3rd ed (Toronto: LexisNexis, 2018) at 131. [2] Shafron v KRG Insurance Brokers (Western) Inc, 2009 SCC 6 at para 16. [3] Payette v Guay Inc, 2013 SCC 45 at para 61. [4] “FTC. Proposes Rule to Ban Noncompete clauses, Which Hurt Workers and Harm Competition (5 January 2023), online: Federal Trade Commission <https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.> [5] Ibid. [6] “Ontario Bans Employee Non-Competition Agreements: What Does This Mean for Trade Secret Protection?” (9 December 2021), online: Fasken <https://www.fasken.com/en/knowledge/2021/12/ontario-bans-employee-non-competition-agreements-what-does-this-mean-for-trade-secret-protection.> [7] “Ontario to consult on banning NDAs in cases of workplace harassment, misconduct” (6 November 2023), online: CTV News <https://toronto.ctvnews.ca/ontario-to-consult-on-banning-ndas-in-cases-of-workplace-harassment-misconduct-1.6632398.> Written by Brody Gray
JD Candidate 2024 | UCalgary Law The OpenAI Story The recent news story of OpenAI brings the question of corporate governance and control into the spotlight. The story began on Friday, November 17th, when OpenAI announced they would be parting ways with CEO Sam Altman. The board ousted Altman after losing confidence in his ability due to an apparent lack of communication.[1] This news kicked off a weekend of high-tech corporate drama the likes of which Hollywood can only dream of. By Monday morning, Altman had secured employment at Microsoft. Quickly after this announcement, an OpenAI employee letter began circulating in which employees flipped the script.[2] Employees claimed they had lost faith in their board and demanded their resignation,[3] going as far as threatening their resignation if their demands were not met.[4] To further the drama, a board member of OpenAI publicly posted about their regret towards the board's actions and alluded to efforts to bring Altman back.[5] This dramatic plot seems to have concluded, with Altman returning to OpenAI as CEO, as announced in an OpenAI blog post by Altman.[6] Included in the blog post was a comment from the new Chair of the Board, Bret Taylor, stating how much he wants to express gratitude to OpenAI, and specifically OpenAI employees, "who came together to help find a path forward for the company over the past week."[7] What began as a board of directors ousting a CEO ends in the CEO's return and the board's dismissal. So, Who is Actually in Charge? This whole saga seems to run counter to our ideas of the corporate hierarchy and begs the question of who is actually in charge. To answer that question, I will begin by echoing the ever-applicable legal answer of 'It depends.' What the Law Says Corporate legislation is rather clear on who is in charge. All ultimate authority rests with shareholders, who are the company's owners. Yet shareholders are not expected to give their opinion on every single issue. For efficiency, expertise, and practical reasons, shareholders elect directors. Corporate legislation states that with more than 50% of the voting shares, directors can be elected to act in the interest of the shareholders.[8] Once directors are elected, they form a board of directors, which is given very broad authority to manage or supervise the business.[9] This authority to run the business includes the power to manage the corporation's affairs, yet directors typically will not concern themselves with the day-to-day management. Corporate legislation grants directors the authority to appoint officers and then delegate powers to these officers.[10] There are a few specific categories of authority that directors are forbidden from granting to officers. In the Alberta Business Corporations Act, those are laid out in section 115(3). Directors then have the power to appoint officers. They will appoint the CEO, CFO, CTO, COO, and various other positions depending on the context of the company and the business they operate. Officers are typically granted broad management powers, and the officers oversee the corporation's day-to-day management. The above structure is laid out in corporate legislation, but it is also subject to unanimous shareholder agreements, articles of incorporation, and bylaws. The exact share percentage required to elect a director or the powers directors can delegate to officers may change from corporation to corporation, but this describes a general structuring and chain of authority found in most corporations. It would, therefore, appear that the law paints a clear picture. Shareholders elect directors to manage on their behalf. Directors take this authority and oversee the company's strategy and long-term planning, elect officers, and further delegate the day-to-day management. Officers then manage the company on a day-to-day basis, reporting back to the board of directors. The chain places directors higher than officers, and it would seem clear that it is the directors in charge. So, What's the Catch? The reality is that corporate governance is not necessarily this clear-cut, as shown by the OpenAI story. For starters, CEOs often sit on the boards of corporations they manage to increase communication and efficiency. Some CEOs may be highly prominent figures or exceptionally well liked and respected within the company. The reality of social context and working relationships should always be considered when assessing the power dynamic. There is also the reality, as shown by OpenAI, that corporations require the efforts of multiple parties, including their employees, to function correctly. A board of directors may have the legal authority to fire a CEO, but if employees refuse to work for anyone else, this authority is of little use in practice. The board of directors should be wary that they cannot afford to alienate large portions of the corporation, even if they have the legal authority to act in such a way. This discussion is particularly relevant to entrepreneurs and those working in start-up companies. This nuanced power dynamic is even more prominent, as start-up companies are often close-knit groups with intricate social relationships. Founders who sit on the board of their companies may have the legal authority to dismiss officers, but they should not conflate legal authority with practical ability. Directors dismiss CEOs frequently and can exercise their authority to do so without complaint. Still, these decisions should be made with an understanding of the contextual dynamic within any specific corporation. [1] “OpenAI employees threaten to quit en masse after former CEO Sam Altman joins Microsoft”, NBC News, (20 November 2023), online: https://www.cbc.ca/news/business/microsoft-sam-altman-openai-chatgpt-1.7033588. [2] “Majority of OpenAI employees threaten to quit as backlash against ouster CEO continues”, CBC News, (20 November 2023), online: https://www.nbcnews.com/business/business-news/sam-altman-joins-microsoft-openai-ouster-rcna125940. [3] “Majority of OpenAI employees threaten to quit”, ibid. [4] “OpenAI employees threaten to quit en masse”, supra note 1. [5] “Majority of OpenAI employees threaten to quit”, supra note 2. [6] “Sam Altman returns as CEO, OpenAI has new initial board”, OpenAI Blog, (29 November 2023), online: https://openai.com/blog/sam-altman-returns-as-ceo-openai-has-a-new-initial-board. [7] “Sam Altman returns as CEO, OpenAI has new initial board”, ibid. [8] Alberta Business Corporations Act, RSA 2000, c B-9, 2(2)(a). [9] ABCA, ibid s. 101(1). [10] ABCA, ibid s. 121(a). |
BVC BlogsBlog posts are by students at the Business Venture Clinic. Student bios appear under each post. Categories
All
Archives
November 2023
|