Employment Contracts: Put it in Writing
It is well recognized that employment contracts govern employee-employer relationships, under Canadian law. These agreements establish the parties' duties and obligations to each other in their employment relationship. Despite the benefits gained by establishing clear understanding of the parties' responsibilities at the outset—by way of a well-thought formal written agreement—many early-stage companies opt for a more passive approach, opting for verbal or implied contracts (i.e., handshake agreements).
The motive for electing a less formal approach may be haste, cost, lack of knowledge or awareness, or simply trust between parties. Regardless, the risk is too great to forgo this critical formality at the outset of the employment relationship. Both parties have everything to gain by establishing their relationship before commencing work. If terms cannot be agreed upon at this stage—when both parties are excited to tie to one another—then when? Delaying or failing to enter into a comprehensive and professionally written employment contract is likely to result in significant headaches, or worse, down the road.
These troubles tend to surface when conflict arises between the parties with respect to terms of their employment agreement (e.g. hours, wages, overtime, raises, scope of work, holidays, benefits, etc.) and at the point of contract termination (i.e., when the employment relationship ends). These can be contentious times. Absent a written agreement between the parties, these situations are likely to escalate into a word against word conflict in front of a judge. In addition to the significant monetary expense, litigation can consume an early stage company by devoting time, resources, and energy to a peripheral matter that could have been contained at the outset. Therefore entering into a written contract that clearly establishes the essential terms of the employment agreement between the parties is certain to go a long way to reduce possibility and impact of dispute or disagreement that later develop.
Ryan Logan is a caseworker at the BLG Business Venture Clinic and a 2018 JD Candidate at both the University of Calgary and the University of Houston.
You’ve Created a Corporation… Now What?
You’ve just finished filing your forms and articles of incorporation, you’ve received your certificate of incorporation; congrats! You created a corporation. You are well on your way to a (hopefully) successful business venture. However, before you are in the clear, there are formal requirements that must be met early in the life of the corporation. The first of these steps is the organization meeting, which as it indicates, is designed to internally structure the corporation. The second is the first annual shareholders meeting.
The Organization Meeting
Corporations incorporated in Alberta are governed by the Business Corporations Act RSA 2000 c B-9 (the “Act”). The Act requires that the board of directors meet after the certificate of incorporation is issued. At this first meeting, the directors institute certain foundational elements of the corporation. At the organization meeting the directors may:
The Annual Shareholder Meeting
The next milestone for the corporation will be the first annual shareholders meeting. The Act requires that this meeting be called by the directors within 18 months of the date of incorporation. At this meeting the shareholders will:
Shareholders meeting are required to be held annually. Each meeting must take place within 15 months of the last shareholders meeting.
Following the Act and properly documenting the directors’ and shareholders’ meetings will go a long way to ensuring that your corporation stays onside the law. A few simple steps early in the corporation’s life will allow you to focus on the business and keep the lawyers’ fees to a minimum.
Kevin Major-Hansford is a 2018 JD/MBA Candidate at the University of Calgary and a caseworker at the BLG Business Venture Clinic.
ICOs provide more funding than VCs: Implications for Albertan Ventures
With the recent rise of bitcoin’s market value, and the introduction of bitcoin futures trading by the Chicago Mercantile Exchange, cryptocurrency has been in the forefront of financial news. However, you may not be aware to that cryptocurrency-based initial coin offerings (ICOs) have surpassed angel and early stage venture capital funding globally, providing significant access to cash for startup businesses. The explosion of ICOs has cumulatively provided over $3.8 billion of funding to date, with almost all of that taking place in 2017. FAlbertan-based ventures looking to get in on this, it is important to consider how cryptocurrencies are regulated. Failure to do so could result in a mistake that could be fatal to the business.
Blockchain, the technology behind cryptocurrencies, allows for a secure decentralized platform that could have applications for a number of ventures that requires the keeping of unalterable records or transactions. In order to raise money for a startup using a cryptocurrency, the company must engage in an initial coin offering (ICO) or token generation event (TGE). This is the generation and selling of a cryptocurrency that represents something in your business.
Tokens and coins can be tied to a diversity of “things”, such as free merchandise or access to software. However, serious securities law considerations will arise where that “thing” is equity. TechCrunch provides a great break down of how to arrange a token sale to fund your business here, but has limited application to Albertan startups hoping to take advantage of this system, as it only discusses American laws. So how are ICOs treated in Alberta?
Aware of the need to provide some clarification on ICOs in Canada, the Canadian Securities Administrators published, CSA Staff Notice 46-307 on August 24, 2017. This document discusses some of the laws and implications if you want to fund through an ICO.
It first be considered whether the coin/token is a security. Businesses marketing their coins as merely software products may properly be considered securities. For example, for coins that allow access to a video game, it is possible that securities may not be involved and the coins aren’t subject to securities laws. However, if the coin is in any way tied to the future profits or success of a business, it is likely a security. “Many instances” of coins have been found to constitute securities in Canada. You can find some guidance in deciding whether you’re ICO is subject to securities laws by considering the four pronged test. Does the ICO involve:
An answer of “yes” to these four questions will mean that your coin or token is likely a security. If a coin is considered a “security”, a company hoping to engage in an ICO must first file a prospectus, a comprehensive disclosure document that will require significant up front and maintenance costs that should be avoided by startups businesses. Accordingly, a startup looking to fund through an ICO will need to comply with an exemption from the need to file a prospectus.
Prospectus exemptions are contained within NI-406. For instance, the coin could be sold to “accredited investors”. These are people who have met certain financial thresholds such as making $200,000 net income before tax for the last two years, or has over $1,000,000 in financial assets. Because of the nature of an ICO, this may difficult to enforce, but sale to retail investors could possibly be made through an Offering Memorandum, which has specific disclosure requirements and ongoing obligations. Also, coins sold pursuant to one of these exemptions cannot be resold freely, and is subject to significant restrictions on sale.
If a coin is a security, and is sold without compliance to these requirements, investors may have a number of civil remedies against the company issuing the coin, such as right to withdraw from the transaction and damages. If you’re hoping to participate in an ICO, or think it it may be a way for you to raise capital for your business, give some consideration to these requirements, and obtain legal advice to ensure that you can find a way to comply with or get around securities regulations, and ensure that your funding is legitimate.
Alex Grigg is a JD/MBA 2018 Candidate and a caseworker at the BLG Business Venture Clinic.
The answer is, in a typical lawyer fashion, “maybe”. These policies can set out rules for using your website, protect intellectual property within the website, limit liability, and more. Terms are often of particular importance for companies that provide services or sell products through their websites. Of course, as law students we are unable to give your business advice as to whether it has a specific need for any of the abovementioned policies. We can, however, provide information that may help you to come to your own conclusion.
What are Terms and Conditions?
Terms and Conditions explain the rules that visitors to your website have to comply with. A court would look to the terms and conditions if a claim was ever filed against your company. Terms might include clauses that address: a description of the services offered, intellectual property rights, termination of the agreement, governing law, e-commerce terms, restrictions on use, and liability.
What is a Privacy Notice?
If you are collecting data from visitors to your website, there are legal requirements as to how that information must be handled. A privacy notice explains: what information is collected from what sources; how that information is used; how that information is stored; if and how that information is disclosed. A notice will also set out the choices available to the visitor with respect to their personal information.
Online Contracts in General
For a contract with a visitor to your website to be binding, the visitor must consent to the terms of that contract. Depending on the type of website, relying on a link to a “legal terms and conditions” page might not be sufficient. The visitor might have to scroll through the contract and click an “I accept” button (browse-wrap agreements vs. click-wrap agreements).
Students at the Business Venture Clinic can provide memos that detail the relevant laws and the specific differences between click-wrap and browse-wrap agreements. We can also provide draft terms and conditions, draft privacy notices, and draft cookie policies.
Britta Graversen is a third year student at the University of Calgary and is a caseworker for the BLG Business Venture Clinic.
The Legalization of Marijuana: Opportunities for Entrepreneurs
In April 2017, the federal government introduced the Cannabis Act (Bill C-45) to legalize and regulate the production, distribution, sale and possession of Cannabis. The legislation has not yet been enacted, but legalization will open up significant new markets for startups. This is a unique opportunity, as the Canadian economy does not often spawn an entirely new industry very often.
Most case studies on marijuana startups come from businesses that operate in the United States, where medical marijuana is available in 20 states, while recreational marijuana is legal in Colorado and Washington. Although there are significant differences in the opportunities for finance between companies which operate in the United States in comparison to their Canadian counterparts, there are still important lessons for Canadian entrepreneurs seeking to enter this industry based on the countless marijuana startups in the USA that have attracted interest from investors.
There are many reasons why investors who have never backed a cannabis company before are now looking at investment in this field as increasingly viable. First, compared to other startups, the marijuana business will be able to leverage one important advantage. While most startups often face the need to create a demand or educate their potential customer base, marijuana startups face no lack of demand. Accounting firm Deloitte posits that 22% of the Canadian adult population consumes recreational marijuana on at least an occasional basis, with a further 17% showing some willingness to try it if it were legal. A total marketplace of 40% of the adult population is an enticing proposition for entrepreneurs. In light of such demand, it will not be surprising to see significant investment funnelling into the cannabis industry.
The sheer variety of business and industry opportunities is another attraction for investors to cannabis startups. For example, take a look at Eaze, an early stage company that offers medical marijuana delivery, helping their 800,000 customers order cannabis on demand. It has been described as the “Uber of Weed,” and currently operates in more than 100 cities within California. At this time, Eaze has raised $51.5 million over 5 funding rounds. Eaze gets a cut of each sale but does not actually sell cannabis itself, instead acting as an intermediary between the customer and the dispensary. A business doesn't even need to touch the plant to have success, as there are ancillary opportunities including firms that provide security for marijuana dispensaries.
Another attraction to cannabis startups for investors are the rapid valuation shifts that take place in a very compressed time period. There is often liquidity in these markets, whether through the public market or private market, and this gives a diligent investor the opportunity for good returns, especially when considering the businesses involved and the opportunities that could arise if they succeed.
The cannabis industry also has the potential of bringing capital and expertise from a wide variety of previous businesses. Cannabis touches on a range of business enterprises, from marketing to retail, science, agriculture, food, health and pharmaceuticals. This gives investors who have experience in other industries an advantage, as they can use and share their knowledge from other areas and serve as both investors and advisors. As the profit potential for marijuana-related businesses increases, it will not be surprising to see diverse sources of capital enter this market.
Despite the questions surrounding the legal and regulatory framework that will govern the cannabis industry in Canada, the bottom line is that legalization will represent a significant revenue opportunity for Canadian businesses and entrepreneurs that do things right and work within the confines of the legislation.
Hussein Ghandour is a 3rd year law student at the University of Calgary and is working with the BLG Business Venture Clinic for the 2017/2018 year.
Intellectual Property Protection in Canada
When starting a new business, one of the first things any entrepreneur should do is protect their business idea. Intellectual Property forms the basis of many new businesses, and many entrepreneurs fail to protect what makes their business unique. From the earliest stages of a business idea, even before incorporation or financing comes in, an entrepreneur is well advised to take the necessary steps to protect what will become the basis of their business, their Intellectual Property.
So, what is Intellectual Property? It is the legal right to ideas, innovations, and creations. There are many ways to implement these legal protections. Patents, Trademarks, Copyright, and Trade Secrets are the main ways in which Intellectual Property rights are protected. Each is applicable to certain situations and no one form of protection will be necessary for all businesses.
In order to receive approval for a patent in Canada, the invention must be novel, useful, and non-obvious to someone skilled in the art. Patents are granted to the first to file, not the first to invent, so timing is very important. Public disclosure of the idea also starts the 12-month clock on the window that you have to file the patent, so early application is key when patent protection is available. Patent approvals can take years, and cost thousands of dollars, but if approved a patent gives you the exclusive right to make, sell, and profit from your invention for 20 years. A worthwhile investment if you have a marketable product that meets the patent requirements.
Trademarks are used to protect a word, symbol, or design that distinguishes the goods or services of an individual or firm from others available to customers. Trademarks protect your brand and any identifying marks associated with it. The value of product recognition cannot be overstated, so protecting what makes your brand unique is very important, especially for consumer goods and services. A registered trademark protects the mark throughout Canada, while an unregistered trademark only protects the mark in areas that the product is being marketed.
A copyright protects the expression of ideas contained in original literary, artistic dramatic and musical works, including computer programs. There is no filing requirement to create the copyright and it protects the work for the life of the creator plus 50 years. The copyright protection gives the creator exclusive right to reproduce the work and any infringement on that is actionable.
4. Trade Secrets
A trade secret is something of value to your firm that is protected through a contractual regime between those who know about the information. Restrictive covenants are used to prevent those who know about the trade secret from disclosing or using the information outside what is contractually permitted. Trade secret protection is a flexible way to protect your Intellectual Property because the contracts used can be drafted in various ways that meet the specific requirements of the situation at hand.
For more information regarding Intellectual Property protections or for issues regarding who owns the Intellectual Property as the ideas arise, please contact the Business Venture Clinic so that we may assist you.
Emerson Frostad is a 3rd year student working for the BLG Business Venture Clinic for the 2017/2018 season.
Thinking of Incorporating?
Starting a new business can be both an exciting and frustrating time. It often seems difficult to get answers to what seem like simple questions. In many instances, you may not even know what questions you should be asking. For many companies, one of the first steps they take is a blind leap into incorporation. A corporation is one of the most prevalent business models but it is not well suited to every type of company at any given stage of growth. Like any business decision, deciding to incorporate should involve a careful consideration of whether it is the right decision for your company and whether it will occur at the right time.
Here are few issues you may want to consider:
Potential Tax Advantages
Starting a new business can be an expensive proposition for founders. Founders will often be the ones providing the initial capital to get their business of the ground. Flow through taxation can be advantageous to sole proprietors and partnerships in the early stages of a company’s development. Losses can be flowed directly to the proprietor or partners and used to offset income from other sources, creating a potential to reduce the amount of personal income tax payable. While these losses from start-up expenses are also deductible using the corporate form, there is usually no immediate tax advantage because there are no gains to offset. Founders who have income from other sources, especially those who are funding their enterprise with their own money, may want to take advantage of immediate tax savings.
The corporate structure can be an effective way to limit personal liability. The important question is whether your company is at a stage where there is a real potential for incurring liability in the first place. Unless you have a product or service that has been developed to the point of being marketable, you may not be in a position where reducing personal liability has a definite advantage.
Start-ups with multiple founders may want to consider incorporation. If they haven’t already, they should certainly consider the implications of the default structure, Partners under the Partnership Act (Alberta) RSA 2000, c. P-3.
Business structure becomes an important issue once a start-up reaches the stage where they need outside investment. Incorporation provides a vehicle for raising investment, issuing shares. Incorporation is also an effective structure for the typical exit transactions, IPOs and acquisitions, that many start-up hope to one day achieve.
For more information on the possible advantage or disadvantages of incorporation, please contact the BLG Business Venture Clinic.
Breton Gaunt is a 3rd year student at the BLG Business Venture Clinic for the 2017/2018 year.
Why is Securities Law Relevant to Start-up Companies?
Securities law is relevant anytime a company finances itself. All start-up companies will need to raise money continuously in order to grow and that means that securities law must be an ongoing consideration. There are significant consequences for a company if securities law is contravened and it is paramount that the rules are understood and that legal counsel is obtained if necessary. The governing statute in Alberta is the Securities Act, RSA 2000, c S-4, but the instruments (both national and multilateral) and companion policies that accompany the statute are the most important resource for rules and procedure.
What is a security?
A security is a financial instrument. More specifically, it is any asset that is purchased where the performance of that asset is entirely in the hands of a third party. Control is a very important consideration in determining whether a financial instrument is a security. Some common examples include shares, derivatives, bonds, debentures, and notes, but certain types of investment property may also be securities.
The aim of securities law
The aim of securities law is to promote investor protection, public confidence, and an effective capital market. This is achieved through disclosure, amongst other processes, in both primary and secondary markets. The primary market relates to brand new issuances of shares from a company’s treasury and adequate disclosure is achieved through a prospectus filing (unless an exemption applies). The secondary market relates to trading in previously issued securities and adequate disclosure is achieved through continuous disclosure and other reporting requirements that companies must adhere to.
Advantages and Disadvantages to Going Public
There are many reasons why a company may choose to go public and other reasons that militate against it. Some of the pros of going public include the ability to raise money, to provide liquidity to the initial shareholders, and to improve the exposure and prestige of the company. On the flip side, some of the cons include the time and expensive of an initial public offering (commonly known as an “IPO”), the subsequent continuous disclosure and other reporting requirements, the addition of more stakeholders, and pressure to achieve short-term results.
Filing a Prospectus or Using an Exemption
When a company goes public, it must file a prospectus which is a document that provides all relevant information for assessing the value of the securities being offered for sale. A prospectus must provide full, true, and plain disclosure of all material facts, which are defined as any facts that would reasonably be expected to have a significant effect on the value of the securities. The prospectus must be filed with the appropriate securities commission(s) and provided to potential investors through an online filing.
All distributions of securities must meet the prospectus requirements unless an exemption applies. Any securities that are issued through an exemption have restrictions on resale. Securities can be traded within the closed system using another exemption or publicly if a prospectus is filed. Some of the most commonly used exemptions will be discussed below. The rationale behind the exemptions is that there are specific circumstances which limit the amount of risk posed to investors and removes the need for prospectus disclosure.
Firstly, the private issuer exemption can be used if a company has never been a reporting issuer or merged with one. There must be restrictions on the transfer of shares (which are typically found in the company’s articles of incorporation), no more than 50 shareholders, and no distribution to the public previously. Securities can be issued under this exemption to a wide variety of individuals, so long as the distribution is not made to the public at large.
Secondly, the accredited investor exemption encompasses a broad class of individuals. The most commonly used categories are an individual with at least $1 million in financial assets, an individual earning $200,000/year for the last two years or $300,000/year with a spouse for the last year, or an individual with $5 million in assets. The idea here is that an accredited investor is sophisticated and can absorb a loss.
Thirdly, the friends, family, and business associates exemption can be used by reporting issuers even after 50 shareholders have been reached or a distribution to the public has been made. This exemption is similar to the private issuer exemption except that this exemption captures a broader subset of people who can become security-holders. The idea with this exemption is that these individuals have common bonds with the issuer – either through a direct connection or a close relationship with a person who has a direct connection- that minimizes risk to them.
Finally, the employee, director, and consultant exemption is available, but participation must be voluntary. The idea with this exemption is that these individuals have knowledge of, or access to, information regarding the company which minimizes the risk they are exposed to.
This blog post should alert you to the fact that securities law is highly relevant to any start-up company. Once a start-up needs to raise money through a financing (which it will), securities law will be a primary consideration whether or not the company decides to go public at that time.
Natalie Holtby is a 3rd year student at the University of Calgary's Faculty of Law. She works for the BLG Business Venture Clinic for the 2017/2018 season.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.