Business Venture Blog
This is where we post about business, ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
Business Venture Blog
Is Your Business Protected?
Despite your best efforts as a business operator, accidents happen. There may be statutory requirements for your business to have insurance, but insurance has limitations and exclusions. Depending on the nature of your business, it may be appropriate to have clients sign a waiver or release of liability. This is generally accepted as a suitable defence to harms that arise from foreseeable risks, and may prevent the client from successfully recovering against you in negligence as well.
But what happens when your clients are minors? There are additional considerations involved when minors are asked to waive their right to recover in tort.
A waiver is based in the doctrine of volenti non fit injuria, which means “to a willing person, injury is not done”. At its heart, a waiver is a contract that asks participants to voluntarily assume specific legal risks and waive, or give up, certain legal rights.
In order for a waiver to be enforceable, it is generally accepted that three questions must be answered in the affirmative, they are: did the plaintiff (participant) know what they were signing? Is the scope of the waiver broad enough to cover the conduct of the defendant (business operator)? And third, should the waiver be enforced?
Waivers given by or on behalf of a minor
It is understood in the common law that a contract that is detrimental to the interest of a minor is voidable by the minor. A waiver of liability, or any document preventing an individual from recovery in tort, is certainly detrimental to that interests, and therefore if it is signed by a minor, it would be unenforceable. A waiver signed by a minor is contrary to that minor’s interests and therefore not binding. The perceived solution to this, would be to have the minor’s parent or legal guardian sign on their behalf. It is accepted that a guardian has the “plenitude of parental power”. Which gives the parent or guardian the power to contract and bind their child. Further, It was implicit in the judgment of Toews v Weisner that consent to a vaccination must be obtained from the legal guardian and specifically not the child (although in this particular case, the parent did not consent rendering the question moot). However, this interpretation has been challenged recently. In Wong v Lok’s Martial Arts Centre Inc the court was asked to determine the validity of a waiver signed by a minor’s parent. The teenage plaintiff was injured during a sparring match at the defendant’s studio. The defendant was relying on the waiver as an absolute bar to recovery. The court held that the waiver was unenforceable, but ultimately relied on British Columbia’s Infants Act.
The issue of whether or not a parent has the ability to waive a child’s right to sue in tort and recover has not been definitively adjudicated across Canada. However, it appears that the Courts are leaning towards not accepting these documents as binding.
 Crocker v. Sundance Northwest Resorts Ltd. (1988), 1988 CarswellOnt 962 (SCC)
 Thornton v. Shoe Lane Parking Ltd. (1970),  1 All E.R. 686
 Principal investments Ltd. v Thiele Estate (1987), 12 BCLR (2d) 258
 Swanson v Henkel Enterprise 1973 CarswellMan 53 (Man. CA)
 Anson v Anson; Young v Young
 Toews (Guardian ad litem of) v. Weisner 2001 BCSC 15
 Wong (Litigation Guardian of) v. Lok's Martial Arts Centre Inc. 2009 BCSC 1385
 Infants Act RSCB 1996 c 223
Kevin Major-Hansford is a 3L at the University of Calgary's Faculty of Law and will be completing his articles at Borden Ladner Gervais LLP.
Employment Contracts Part II: What to Include
This is the second part of a two-part introduction to employment contracts for start-up companies. Part I (Employment Contract: Put it in Writing) detailed the general function of employment contracts and emphasized the importance of early adoption of written employment contracts in order to establish the essential terms of the employment agreement between the employer and employee in order to reduce the possibility and impact of future dispute. This Part II explores in greater detail some practical considerations of what should be included in these written employment contracts for early-stage growth or start-up companies.
Employment agreements used by start-up companies should be kept relatively simple. This is because of the anticipated change in nature and character of the work required from early-hire employees as well as the need for the company to maintain a flexible structure that will allow it to grow most effectively and efficiently. As a start-up company grows, new experienced executives will be hired to advance the company’s goals, which may result in diminished or changed responsibilities of initial employees. For this reason, the description of job duties in employment contracts should be kept as general as possible. The contract should also state that because of the company’s anticipated growth, the responsibilities, job title, and position of the employee may change from time to time. Clearly stating this will help a company avoid a constructive dismissal action because the contract provides the company the power to make these changes from time to time.
Furthermore, employment contracts should avoid specifying vacation policies or benefit plans as these are likely to change over time. The contract should also explicitly incorporate by reference the separate agreements that form part of the contract for employment, including the stock option agreement, share subscription agreement, non-disclosure and non-competition agreements and any assignment of technology (as applicable).
Unless terminated for cause, when an employee is terminated, the company must pay the employee a certain sum, called notice. In Canada, the length of the notice period and therefore the amount of severance owed to that employee is established by two legal regimes. First, the various provincial Employment Standards Code legislation provide for a minimum amount of notice, which is dependent on the duration of employment. Second, and usually more important, are notice amounts established by common law (i.e., judge made law), which are regularly much higher than the minimum notice periods established by legislation—the basis of which are the judge’s estimation of what is provided for under the employment contract. Since this basis is contractual, an explicit provision in the employment contract that sets out the proper notice period and severance amounts will remove this discretion from the courts and give the company greater certainty, thus reducing risk.
Non-competition provisions serve to prevent employees from working for competitors and passing on intellectual property and know-how to competitors. These provisions are theoretically enforceable in Canada but are subject to restrictions that make them of limit use. This is because courts place a high value on ensuring individuals are not denied the opportunity to work for a living. That said, non-competition provisions can be useful if their scope is limited geographically, temporally, and with respect to job descriptions and specific competitors. By narrowing the scope of the non-compete, courts are more likely to find that the covenant allows the former employee ample alternative employment in their specialization without offending the covenant.
Often, a more effective contractual method of preventing employees from using company intellectual property and know-how to compete with the company is through the use of non-solicitation provisions. These provisions have the effect of barring former employees from contacting and soliciting the company’s current employees, investors, customers, business partners, and suppliers in connection with a competing business. While non-solicitation provisions are more likely to be enforceable than non-competition provisions, they may also be struck down if a court finds them too broad—this usually happens when the provision has the effect of significantly restricting an employee’s ability to find employment in his or her specialized field. Again, limiting the scope of the covenant will increase the probability that it will be found acceptable. First, this can be done by limiting the duration to one year or less. Second, a company should consider who the restrictive covenant applies to. By limiting the application of the provision to only contacts that the employee had contact with during his or her employment at the company, the courts are more likely to find that this is an appropriate application of non-solicitation to protect the companies interests and not used instead to prevent the employee from obtaining future employment. Finally, the non-solicitation provision should be clearly differentiated from the non-competition agreement because in the event that the latter is struck down, the former may fall with it if it is not distinct and separable. Additionally, a severability clause should be included in the contract so that in the event one clause is found void, the remainder of the contract will survive and remain in force.
Intellectual Property Ownership
There is a general expectation that employees will create valuable products and ideas at all times when employed by a start-up. Of particular relevance in the context of employment contracts are patents, copyright, and trade secrets.
First, any invention, whether or not potentially subject to patent protection, is presumed by law to be the property of the inventor employee; however, this presumption can be rebutted if the company can show that: (1) a contract exists between the parties that stipulates otherwise; (2) the employee is a senior officer or fiduciary of the company and the invention directly relates to the business engaged in by the company; or (3) the employee was engaged specifically for the purpose of inventing or innovating. Companies be proactive and take measures to avoid these future disputes. This is best done by contractually characterizing invention ownership and including contractual obligations for employees’ assignment of rights and administrative duties related to patents and patent applications.
Second, unlike inventions subject to patent protection, products that are subject to copyright protection are presumed to be the property of the company employer, not the employee, provided the product was created during the course of employment. There is, however, risk that an employee will claim that work was performed outside of employment on personal time or that the product was developed, or partially developed, prior to the commencement of employment. To avoid this sort of dispute, a company should consider obtaining broad rights to all inventions and works developed by employees and related to the employer’s business. A company may also wish to include a requirement for the employee to disclose any innovations created to allow for timely determination of ownership and to chart the course for desired intellectual property protection.
Finally, though trade secrets are not technically recognized as a form of intellectual property in Canada, this information is often the most important type of information for stat-ups that requires protection. This is the information that an employee obtains only as a direct result of employment with the company, which can include both business and technical data. The common law will generally allow a company to prevent an employee from disclosing or using a trade secret if it can show that the information is a trade secret and the employee owes a duty of confidence to the employer. This duty of confidence arises automatically if the employee is a fiduciary (director or officer), but may also be found to exist if a lower level employee had information that would make the company vulnerable to disclosure. Rather than relying on the courts to make such determination, a company should include in its employment agreement or non-disclosure agreement (signed contemporaneously with the employment agreement) a duty of confidence on its employees. These restrictions should be limited in scope to only information that is special or peculiar to the company’s business because overly broad restrictions on disclosure may be struck down by a court and held unenforceable as restraint on trade.
For more information on particulars related to employment contracts and protecting your company’s interests and property, please contact the BLG Business Venture Clinic. One of the Clinic’s student will gladly detail the above and further considerations for drafting employment contracts and the ancillary agreements that form the contract for employment.
Ryan Logan is a 2018 JD Candidate at the University of Calgary and the University of Houston.
Registering trademarks in Canada
What is a trademark?
A trademark is a form of intellectual property. A trademark may be one or more words, sounds, or designs. It includes both logos and slogans. It is used to distinguish the goods and services of one person or organization from those of another. It is distinct from other forms of intellectual property, such as a patent, copyright, or industrial design.
There are three types of trademarks:
What is a trade name?
A trade name and a trademark are different concepts. A trade name is the name of the business and it can only be registered if it is also used as a trademark. This means that the name of the business must be used to identify goods or services. You should note that trade names are commonly used as trademarks even when they have not been registered as trademarks.
Difference between a registered and an unregistered trademark
The owner of a registered trademark acquires the sole right to use the trademark across Canada for a term of 15 years, and for additional 15-year terms, if the registration is renewed. This means that a registered trademark could be valid indefinitely, so long as the required renewal process is followed. A registered trademark is entered by the Registrar into the Register of Trademarks. The act of registration is direct evidence that the owner owns the trademark. This means that if a dispute arises, the burden to prove ownership falls on the individual challenging ownership. The registered owner does not have to prove they own the trademark.
Ownership over a trademark can also arise automatically at common law. This means that registration is not essential to protecting ownership over a trademark. At common law, the use of a trademark as a distinguishing mark for goods or services for a specific amount of time can provide a basis for ownership. However, if a dispute arises, both parties would be responsible for proving ownership (unless one of the parties was the registered owner). This may lead to a protracted and expensive legal battle. As a result, legal protection is strengthened with registration.
Enforcing a trademark
It is the responsibility of the trademark owner to enforce a trademark. Registration does not impact this responsibility. In order for a court to find that a trademark has been infringed, the trademark owner must demonstrate that confusion may be caused for the average consumer.
What cannot be registered as a trademark
The following cannot be registered as a trademark:
Clearly descriptive marks
Deceptively misdescriptive marks
Words representing a geographical location commonly known to be the place of origin of goods/services
Words in other languages
Words/designs that could be confused with a registered or pending trademark
Words/designs that look very similar to a prohibited mark
Duration and cost of registration
The duration of a registered trademark is 15 years from the date of registration. A registered trademark can be renewed every 15 years for an additional term of 15 years. There is no limit on the number of permitted renewals.
At a minimum, the cost of registering a trademark will include a filing fee of $250 and a registration fee of $200. There may be additional fees associated with registering a trademark depending on the circumstances, in addition to any fees associated with using a professional trademark agent, if applicable.
Steps to take before preparing a trademark application
You may wish to search the database of existing trademarks in Canada. This will help you determine if a similar trademark already exists. You may also wish to search trade names, but there is no central database of trade names in Canada. To do so, you may wish to engage a professional trademark agent. The trademark database does not include trade names (unless it is also a registered trademark).
Process for filing a trademark application
You will need to prepare a trademark application package, which includes the application for registration form, a formal drawing (if necessary), and the filing fee. A separate application is required for each trademark.
A formal drawing is required if the trademark encompasses anything other than a word or a combination of words. The formal drawing must be black and white and include a description of any colour or colours that are featured in the trademark. You should note that, in order to retain your registered trademark, you cannot change the colour or colours you have described as being featured in the trademark in your application. Finally, if the design is detailed, the drawing should be as large as possible, but within the limits of 22cm x 35cm or 8.5 inches x 14 inches.
Your application can be filed online or by mail. Once received, the application will be given a filing date, if it is complete. The filing date matters because it is the date used to assess entitlement to registration in the event that there are co-pending trademarks. The Registrar will then complete an examination, which entails: a search of the trademark records for any conflicts with pending or existing trademarks; an examination of the application to determine that it obeys the relevant laws and regulations; publishing of the application in the Trade-marks Journal to determine if there are any challenges to the application; and, if there are either no challenges or a challenge has been decided in the applicant’s favour, registration of the trademark. The processing time for an application ranges from several months to a few years.
For more information, please visit the following websites:
Natalie Holtby is a 3rd year student at the University of Calgary's Faculty of Law.
Early Round Financing Lessons Provided by Netflix
Most would declare that streaming countless hours of CBC’s Dragon’s Den or its American cousin Shark Tank is an utter waste of time. To the contrary, I would call it research. While show’s such as Dragon’s Den or Shark Tank will not make you an expert in early-round financing, they do provide many of the preliminary questions and concerns that any educated investor will expect you, the entrepreneur, to answer and establish.
Here are just some of the lessons gleamed from the constant stream of Sharks and Dragons that may help you before seeking any early-round financing...
1. Establish a Market
Ever notice that the first question after the entrepreneur gives a great pitch about their amazing new business is always...“so what do you have for sales?”...This is not a coincidence.
Educated investors want to know that there is a market for the product, that demand strong and that it will continue to grow. Nothing will scare away an educated investor faster than a big dreaming entrepreneur with no sales to show for all of their hard work.
Lesson: Have sales. Before looking for anyone else’s money prove that there is measureable demand for your product or service.
2. Know Your Numbers
Not sure what your profit margin is? Your gross and net income? What’s your financial projections next year? How about five years out?
The fact is, that you or someone from your team will need to have a strong grasp on the books to be taken seriously. At the end of the day an educated investor only cares about gaining a return on their investment. If the investor see’s that you don’t take great care in dealing with your money, there is no way that you’ll ever get any of theirs.
Lesson: People lie, numbers don’t. Educated investors will want you or someone on your management team to walk them through your company from a financial standpoint.
3. Know Your Industry
Before ever stepping foot inside an investors office you should have a deep understanding and grasp of the industry that you’re competing in. Who are the major players? What makes you unique? Or, as Mr. Wonderful would say, “what’s stopping those guys from crushing you like a bug?”
Lesson: Research. Research. Research. You should be reading blog posts, industry journals, magazines, books! Whatever you can get your hands on regarding your industry. Know the industry the back of your hand.
While we aren’t Sharks or Dragons, we at the Business Venture Clinic we can provide you with the information needed to ensure that you’re on the right path before making any early financings. Please contact us today, we look forward to hearing from you!
James Hamilton is a 3rd year exchange student at the University of Calgary's Faculty of Law.
Consumer Protection Changes in Alberta
Late in 2017, the Alberta government passed the Consumer Protection Act, which amended the former Fair Trading Act. These pieces of legislation provide the framework for consumer protection law in Canada, and contain restrictions and rights relevant to many small businesses and consumers that they may not be aware of.
The Bill, passed in December 2017, contains an updated preamble reading “all consumers have the right to be safe from unfair business practices, the right to be properly informed about products and transactions, and the right to reasonable access to redress when they have been harmed”, which is meant to reflect the additional protections to consumers throughout the document.
The Act establishes the right of a consumer to post negative reviews online. According to the new Act, “[a] business shall not include in a consumer transaction a provision that prohibits a consumer from publishing a review of the business or transaction.” The Section (183.1), also ensures that no action can be taken in respect of the publishing of a negative review unless it is “malicious, vexatious or harassing or otherwise made in bad faith.”
The bill is also relevant to those who’ve noticed mandatory arbitration clauses in the terms of any agreement they’ve entered into, such as with an internet service provider. According to the new Act, suppliers cannot enforce mandatory arbitration except in some circumstances. Those circumstances include where the consumer and supplier have agreed to arbitration after the dispute arose, or where the consumer can elect to use arbitration. So if you threaten court action on your next argument with your cell phone provider, your threat just got more credible.
Pet owners should also pay attention to the changes. Vets are required to disclose “all fees for the prescribed type of veterinary medicine services proposed” before the services are performed.
Another change to the Act, is the promise to establish a Consumer Bill of Rights, which will be the first of its kind in Canada. The new Part 8.1 of the Act creates a new series of rules targeting ticket resale bots. Under section 57.2, and secondary seller, or operator of a platform that sells tickets second hand will have to provide refunds where a ticket turns out to be counterfeit or does not work in granting admission to the event. Anyone operating a digital platform, such as Stubhub or Gametime, would therefore be subject to these rules if scammers attempt to use their platforms. This Part also outlaws any use of automated ticket purchasing software.
There is also a new set of rules for car dealers and repairs. This applies to consumers that are individuals or small businesses with a car fleet of five vehicles or less. Section 108.2 of the Act requires the business to provide provide a warranty in accordance with the regulations, provide an estimate of the cost of proposed work in accordance with the regulations, and prohibits vehicle repairs that are not authorized as required in the regulations. This Section is not yet inforce, but will have significant impacts on the sale and repair of vehicles once the regulations are introduced.
Alex Grigg is a 3rd year JD/MBA candidate at the University of Calgary.
Amendments to Regulatory Regime for Distributions of Securities Outside of Canada
The Canadian Securities Administrators has recently adopted amendments to National Instrument 45-102 Resale of Securities and changes to Companion Policy 45-102CP to National Instrument 45-102 Resale of Securities.
Provided all necessary regulatory and ministerial approvals are obtained, it is anticipated that the Amendments will come into force on June 12, 2018. As such, the following is subject to any further changes which may be implemented prior to such approval.
The amendments introduce a new prospectus exemption for the resale of securities (and underlying securities) of a foreign issuer if the issuer is not a reporting issuer in any jurisdiction of Canada, and the resale is on an exchange or a market outside of Canada or to a person or company outside of Canada.
A foreign issuer is an issuer that is not incorporated or organized under the laws in Canada unless certain circumstances suggest that the issuer has more than a minimal connection to Canada (i.e., the issuer has a head office in Canada or the majority of it directors or executive officers ordinarily reside in Canada).
In Alberta, the new exemption in section 2.15 and the existing exemption in section 2.14 will be located in the Alberta Securities Commission Blanket Order 45-519 Prospectus Exemptions for Resale Outside Canada (ASC Blanket Order 45-519). This is a step towards providing overall consistency in the approach to cross-border trading for both primary distributions outside Canada and the resale of securities outside Canada.
Reason for Change
This change represents a modernization of the regulatory regime for the distributions of securities outside of Canada so that it permits Canadian issuers and investors to participate competitively in the global capital markets.
The policy rationale for the changes to section 2.14 and 2.15 is to provide an exemption for resales outside of Canada for the securities of an issuer with a minimal exemption to Canada.
The guiding principle for section 2.14 is that it is not necessary to restrict the resale of securities over a foreign market or to a person or company outside Canada if the issuer has a minimal connection to Canada and there is little or no likelihood of a market for the securities to develop in Canada. The purpose of the ownership conditions is to measure whether the issuer has a minimal connection to Canada.
Since NI 45-102 has come into effect, securities regulation and information accessibility has changed worldwide. Canadian investors are increasingly acquiring securities of foreign issuers to participate in global market growth by investing in a more diversified global portfolio. Foreign securities are acquired either through private placements or on foreign exchanges. Many foreign issuers, without connection to Canada, are finding they have exceeded the ownership conditions, including through Canadians purchasing their securities on foreign markets. Due to this, Canadian security holders of these foreign issuers would hold the securities for an indefinite period. As such, the section 2.15 was adopted to provided an alternative to the ownership condition assessing whether an issuer has a minimal connection to Canada. Section 2.15 provides that a security holder is exempted from the prospectus requirement for the resale of securities acquired under a prospectus exemption if the resale is on an exchange, or a market, outside of Canada or to a person or company outside of Canada and if the issuer of the securities is a foreign issuer. A foreign issuer is an issuer that is not incorporated or organized under the laws of Canada.
Hussein Ghandour is a 3rd year student at the University of Calgary's Faculty of Law.
Do Unicorns Exist?
A “unicorn” is a private company with a valuation of over $1Billion. As the moniker suggests, the chance that a company will ever achieve this type of valuation is mythical (almost). Some unicorns that you may have heard of include, UBER, Airbnb and Pinterest. Only a handful of Canadian companies have achieved unicorn status. However, a recent study may have called the status of some of these companies into question.
A study from National Bureau of Economic Research (NBER) suggests that many unicorn companies may, in fact, be greatly overvalued. It is difficult to accurately valuate growth companies and the problems are compounded as the complexity of their capital structure increases. Companies relying on venture capital often have many different types of shares because of the frequency in which they raise capital.
Post-money valuation is a metric that is often employed when referring to VC backed companies. Post-money is calculated after the injection of new capital by multiplying the per-share price of the most recent financing by the total number of common shares (including options and convertible shares). The problem with using post-money valuation in in VC backed companies is that not all share classes are created equal, and therefore should not be assigned the same value. The NBER study estimates that the average unicorn is overvalued by 50%.
Valuation issues aside, there are private companies that are undoubtedly worth more than $1Billion and should rightfully be called unicorns. My current favourite is Magic Leap, which had yet to release a product but has earned itself a $6Billion dollar valuation and has raised over $1.4billion in equity.
Canadian Business Update: Energy Infrastructure
Recent news in Canada’s energy infrastructure sector has given cause for concern for many. From the overhaul of the National Energy Board, the many delays facing the Trans Mountain Pipeline expansion, to the lack of a Northern Gateway or Energy East pipeline, the future of Canadian energy transport seems bleak. Add on to that the moratorium on tanker traffic in Norther B.C., and the cancellation of several massive Liquefied Natural Gas Terminal projects in B.C., and we see an even worse outlook. With Canada’s massive reserves of hydrocarbons selling at a huge discount, largely due to transportation problems, it is time for action. There are a few key areas listed below where Canada can start to take action.
The federal government approval of the Trans Mountain Expansion happened over a year ago, and continuing legal challenges mean that the project still faces an uphill battle. Opposition from the municipal and provincial level in B.C. continues to put obstacles in the way of the expansion. Municipal by-laws and provincial freezes on bitumen importation have meant that the legal system has gotten heavily involved in the project, even after it received federal government approval. Outages on the Keystone pipeline showed how vulnerable the Canadian energy transportation system is. Producers were forced to rely on rail transportation during that outage, and expanding the Trans Mountain pipe will only help to alleviate the reliance on railway’s marginal ability to transport crude.
While a few major LNG projects in B.C. were cancelled, one still remains on the table. A joint venture between Royal Dutch Shell, PetroChina, KOGAS, and Mitsubishi, is nearing a final investment decision. The near $40 Billion project would help to get Canada’s massive natural gas reserves to the lucrative Asian markets. The proposed project in Kitimat, B.C. would mean many constructions jobs, not only for the facility, but for expanded pipeline capacity to feed it as well.
Tanker Ban Challenge
Canada’s Bill C-48, the Oil Tanker Moratorium Act proposed to impose a crude tanker moratorium on B.C.’s norther coast. The Bill was introduced in 2017, and aims to improve Canada’s marine safety. On March 22, 2018, the Lax Kw’alaams Indian Band launched a legal challenge to the moratorium. The Law Kw’alaams are launching the claim based on Aboriginal Rights and a Title Infringement Claim. If successful, it could mean that the tanker ban would not apply to traditional Lax Kw’alaams territory creating a potential gap in the legislation and allowing tanker traffic to in fact travel through some of B.C.’s norther coast. It is an important development to keep an eye on as Canada is in need for energy transportation solutions.
While Canada is becoming a leader in carbon output reduction, it has also begun to suffocate one of its most valuable resources. The task of finding solutions to Canada’s energy transportation problems that are not only efficient, but that are in line with Canada’s carbon goals will be challenging. It is important to note that the time for transportation solutions is now. As foreign investment continues to flee Canada, we are fighting against the clock to keep Canada competitive and attractive to the global markets.
Emerson Frostad is a 3rd year student at the University of Calgary's Faculty of Law.
What is a Memorandum Of Understanding (MOU)?
A Memorandum Of Understanding is a written document that outlines the relationship between two or more parties. The parties concerned will often define the terms of that relationship, including the parties’ responsibilities and requirements. A MOU drafted for start-up co-founders will often include the objective and purpose of the founders’ project, their managerial roles, their initial monetary contributions, and so forth.
When should start-up co-founders ask for a MOU?
An MOU should generally be entered into by co-founders during the initial steps of their venture. Founders considering a MOU should have a general objective for their project. At that stage, a MOU is preferable over a standard shareholder agreement, for two main reasons. First, drafting a MoU is almost always cheaper and faster than drafting a shareholder agreement. Also, a MOU is generally non-binding.
MOU: Binding vs Non-Binding
Memoranda of Understanding are generally non-binding. Why? First, when a MOU is considered, the founders may not know much about one another. As the start-up grows, new matters, which weren’t considered in the MOU, will inevitably arise such as the addition of an employee, an investment by a sophisticated investor, or a material change in the business operations. A MOU, if drafted before those events, might not be flexible enough to accommodate the new situation. Hence, MOU are generally non-binding and will often include a non-binding clause, like the following:
“This Memorandum of Understanding is not intended to create any legally binding obligations on either Founder but, rather, is intended to facilitate the Project.”
MOUs: Binding In Some Circumstances
If the founders of a start-up are in desperate need of a binding agreement (under the pressure of investors, to legitimize the company, to conclude a deal, etc.), they should consider a binding MoU. That memorandum of understanding should be binding, but subject to a sunset clause. That sunset clause could be the execution of a deal, the addition of an investor, etc. Once that landmark is reached, the parties should be under the obligation to negotiate and execute a final agreement, such as a shareholders’ agreement.
Boris Degas is a 3rd year student at the University of Calgary's Faculty of Law. He is working with the BLG Business Venture Clinic for the 2017/2018 academic year.
Who owns the designs? The Engineering Firm or the Client?
Intellectual property law in Alberta can get complicated when it comes to the designs of a project completed by an engineering firm for a client. When it comes to ownership of the intellectual property, ownership will be assigned from the agreement.
The ownership of drawings and related documents refers to the ownership of the drawings themselves, and is governed by the contract between the architect or engineer and the client. The ownership of copyright, on the other hand, refers to the ownership of the expression of the idea embodied in the drawings and the right to reproduce that expression. Architects or engineers who create the copyright work retain copyright in the work unless they expressly assign it to another. It is important to look at the language of the contract, which can be an employee agreement or a master service agreement.
Typical language in a master service agreement between an engineering firm and the client:
“…will exclusively own any and all information generated from the performance of services under this Agreement including, but not limited to, confidential information, notes, documentation, reports, programs, software, systems, methods, products, analyses, professional opinions and conclusions, inventions or improvements.”
“…assigns all rights, title and interest it may have or may acquire in the proprietary Information, unconditionally, perpetually and throughout the world, to (the Client) and will not challenge (the Client)’s claims to ownership of the proprietary information.”
Both of these clauses assign the ownership of the copyright of the designs of the project to the client. If the original contract assigns ownership of the information or all rights and interest to the Client, then the Client has the right to use the information or sell it to a third party.
In an employee and employer situation, the ownership of the designs would depend on the employment agreement. Here is an example of a typical clause in an employment agreement:
“Employee agrees and hereby acknowledges that all rights in any work are assigned and belong to Company. The Employee specifically acknowledges and agrees that all right, title and interest in and to the product of all work, including copyright of computer software and related work, is assigned to Company.”
“All drawings, flow diagrams, sketches, specifications, computer programs and printouts, native computer data and other records, regardless of form, prepared by Employee under the provisions of this Agreement, shall be the property of Company and may be used by Company for any purpose.”
In both of these clauses ownership of the intellectual property belongs to the Company. If a person wants to retain ownership of their intellectual property it is important to negotiate with the employer and specifically state that ownership remains with the employee and not the company.
If you are uncertain on whether you own the rights to the intellectual property even after reviewing the original contract, it is recommended to speak with a lawyer to know your rights.
Marty Birky is 2018 joint JD/MBA candidate at the University of Calgary. Marty is working at the BLG Business Venture Clinic for the 2017/2018 year.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.