Share Escrow Agreements
What is an Escrow Agreement?
Often, the founders of a start-up will be issued stock at the same time notwithstanding one of the founder’s main contribution occurring in the future. However, if the founder has already received the shares, he or she might not be incentivized to satisfy his or her obligations. This blog will describe how an escrow agreement may ameliorate some of the problems resulting from these arrangements.
(2) What is an Escrow Agreement
An escrow agreement is a legal document defining the arrangement by which one party deposits shares with a third-party, an escrow agent. The Escrow Agent will release the shares to the beneficiary upon the beneficiary satisfying specific terms and conditions outlined in the escrow agreement.1
By depositing the shares with an escrow agent, all the founders can rest assured the beneficiary will not receive the shares unless he or she has satisfied the obligations under the escrow agreement.
A founder receiving shares without having contributed to the business raises several issues. Firstly, it may cause resentment amongst the founders. This resentment might impede founder productivity or result in the founders sabotaging the business. Secondly, outside investors are often hesitant to invest in businesses if they perceive a shareholder is not contributing to the company. In this regard, it is important to distinguish growth companies from publicly traded companies which have many inactive shareholders. Thirdly, this may result in a hold-out risk. If the founder possesses enough shares, he or she may impede the other founders from making important decisions on how to grow the company.
Examples of Situations Where an Escrow Agreement Would Have Been Useful
The following are some examples of where an escrow agreement could be useful.
Firstly, changes in business plans may render the founder’s contributions superfluous.2 The risk of a business having to change its business model should not be underestimated. For example, Blockbuster started out with a compelling business model. Its value proposition was clear – enabling consumers to watch hit movies in the comfort of their homes.3 However, ultimately Blockbuster failed because they failed to adequately adopt their business model to compete with Netflix.4
Secondly, the founder may quit the company, or choose to dedicate his or her time to other ventures, upon receiving shares within the growth company. This is not unheard of. For example, Facebook founder Eduardo Saverin opted to commit his time to develop Joboozle rather than Facebook.5 In turn, Mark Zuckerberg chose to dilute his shares, and costly litigation ensued.6
Thirdly, the founder may be ineffective. Although the founder may look impressive on paper, his or her skills may be ineffective in that industry. For example, Apple chose John Sculley to replace Steve Jobs as the CEO of their company. Mr. Sculley had developed an impressive marketing resume during his time with Pepsi Co. However, Mr. Sculley knew little about marketing computers.7 When Steve Jobs returned to Apple, the company was on the brink of failure.8
In conclusion, an escrow agreement can be a useful legal tool for those wishing to start a growth company. It is particularly useful if one of the founder’s main contribution to the growth company does not come till after the business is formed.
Sunny Uppal is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
2 Bryce C Tingle, Start-Up and Growth Companies in Canada, LexisNexis Canada Inc. 2018 at p 110.
3 Saul Kaplan, Business Model Innovation: How to Stay Relevant When the World is Changing (John Wiley & Sons, 2012) at p 5.
4 Ibid at p 9.
Website Domain Names
Registering Your .ca Domain Name
Millions of people, organizations, and businesses trust the .ca domain name to brand themselves as Canadian online. The .ca domain represents an important tool for companies operating in the Canadian marketplace, and therefore it is advisable to proactively secure brands as .ca domain names at the earliest opportunity.
Benefits of a .ca domain name
The .ca domain name is ideal for Canadian websites for many reasons, including:
There is a Canadian presence requirement (CPR) for individuals, organizations and businesses to register a .ca domain. This requirement is meant to reserve .ca domain names for Canadians. All .ca domain name registrants must meet at least one of the 18 CPRs, i.e., the individual, organization or business must be, for example, a Canadian citizen, permanent resident, corporation, trademark registered in Canada, partnership, etc.
Register your .ca
2. Choosing a Registrar
While CIRA manages the .ca domain name registry, the domain names are actually registered through online retailers called Registrars. Registrars are evaluated and certified by CIRA every year and there are over 150 of them. When you search for a .ca domain name on CIRA’s website their certified Registrars are displayed. The Registrar you choose is important as they will be the main point of contact for the registration and management of your .ca domain name.
3. Registering a domain name
Once you’ve chosen a Registrar, a fee of $9.50 per year is payable by the Registrar on the approval of an application by CIRA. Tips for registering and protecting your domain include: to always register the domain name yourself so that you will always have access to the account; choose a strong password; provide the Registrant with the correct administrative contact information for renewal purposes; choose a registration term length that works for you (auto-renewal can be set up).
Protecting/Recovering domain names registered in bad faith
The .ca domain name operates on a first-come first-served basis. However, if there was a delay in registering a .ca domain name, there is the potential that cybersquatters (a bad faith Registrant) would have had the opportunity to register the domain name corresponding to brands that have recently entered in the Canadian market and, for non-Canadian companies, brands that are expected to enter Canada. If you suspect that there was a bad faith registration, there is a specific .ca domain name dispute resolution process called the CIRA Domain Name Dispute Resolution Policy (the “Policy”). Before a complaint can be made, the Complainant under the Policy must meet the CPR for registering a .ca domain before it can initiate a dispute. In order to succeed in a dispute, a Complainant must prove that:
Amber Blair is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary.
 https://cira.ca/cira-domain-name-dispute-resolution-policy; http://www.smart-biggar.ca/en/articles_detail.cfm?news_id=166.
 https://cira.ca/cira-domain-name-dispute-resolution-policy; http://www.smart-biggar.ca/en/articles_detail.cfm?news_id=166.
Women Entrepreneurship in Canada
The Emergence of Women Entrepreneurship in Canada
Historically, women faced greater barriers than men in entrepreneurship. To name three:
1. Access to education – generally, entrepreneurs require knowledge or understanding of the field they attempt to innovate within, and much of this knowledge is usually obtained through education – due to gender-based barriers, many women lacked this needed foundation to start their own businesses,
2. Social stigma – For much of history, women were expected to be caretakers and homemakers, not income earners, and
3. Greater difficulty raising capital – due to the gender pay gap, women historically earned less than men. It logically follows that if women earn less income, there would be fewer women with sufficient capital to start new ventures.
The first 2 barriers have been equalized or are slowly equalizing. Women are surpassing men in higher education and notions of “gender appropriate” careers is but a relic in the Western world.
The declining effect of the education and stigma barriers have contributed to a recent surge of women entrepreneurs, especially in Canada.
However, a major concern remains that Canadian women appear to be trailing far behind men in financing new ventures. The reason for this might stem from the gender pay gap which still remains an unsolved issue (although it is improving). Regardless of the reason, it’s important to realize that improved education for women and changing social norms won’t help women entrepreneurs be successful if they still lack capital to finance their ventures – a key component in building any business.
The Alberta Women Entrepreneurs – an organization that specializes in assisting women entrepreneurs find financing -- seems to be helping to improve the financing gap for women. Organizations like these may prove central to the future growth of the Canadian economy, especially if women are to take a more central part in that growth. (links below)
David Kim is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary.
A Guide to SR&ED
SR&ED (pronounced “shred”) stands for Scientific Research and Experimental Development. It is a federal tax incentive program used to encourage businesses to conduct research and development in Canada. The program is administered by the Canadian Revenue Agency (the “CRA”). Research by the Canadian Advanced Technology Alliance shows that the CRA provides around $3 billion in tax credits every year.
What are the tax benefits?
There are two main tax benefits of the SR&ED tax program.
Businesses, individuals, partnerships, and trusts operating in Canada can all gain tax benefits through the program. However Canadian-controlled private corporations (“CCPC’s”) get enhanced benefits through the program. Click HERE to see the requirements for what qualifies as a CCPC.
What kinds of research is covered
The Income Tax Act defines SR&ED in subsection 248(1). Broadly speaking, SR&ED means “systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis”. This covers: basic research (scientific work without a specific practical application in view); applied research (scientific work with a specific practical application in view); and, experimental development (work aimed at achieving technological advancement for the purpose of creating improving or creating new products, devices, materials, etc.).
The definition also coves work done by, or on behalf of the tax payer, with respect to “engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research” where the work is commensurate with the needs and directly supports the above three (basic research, applied research, or experimental development).
What kinds of research is not covered
The government has made it clear what kinds of things they do not want to be covered with this tax incentive program. The following are not covered by the program:
To make a claim under the program, you have to file Form T661 along with your income tax return. Additionally, you must file either Form T2SCH31 if you are applying for a corporation, or form T2038(IND) if you are filing as an individual.
Along with the forms, you must provide additional documents to support your SR&ED claim. Depending on what you were researching/developing, this can include things like experimentation plans, data records, prototypes, projecting planning documents, records of trial runs.
The ability to apply for SR&ED will not last forever. Corporations have 18 months after the tax year for which the expenditures were incurred. Individuals have 17.5 months from this date.
What is on the horizon for SR&ED?
The SR&ED has seen its fair share of criticism. Some have said that program disproportionately helps big corporations and foreign subsidiaries. Media reports of SR&ED abuse in 2012 spurred the government at the time to provide the CRA with more resources to curb this abuse. In 2017, the Federal Budget stated SR&ED would be reviewed. As of today, we have not heard from the government if this review has occurred.
Rick Josan is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary
 Supra, note 1.
 Income Tax Act, section 248(1).
 Supra Note 1.
Non-Disclosure Agreements (NDA)
So you are an entrepreneur with a great business idea and you want to share it with potential partners/employees or contractors to scale your business. But you also don’t want those potential partners to steal your ideas, or those trade secrets that allow your company to work in a unique way. You need an NDA: Non-Disclosure Agreement.
WHAT IS AN NDA?
A Non-Disclosure Agreement is generally given to an employee or other person working with the company to protect the company’s intellectual property – particularly trade secrets. Trade secrets include information surrounding a corporation’s finances, profit margins, customer lists, technology know-how, current and future strategy, and R&D initiatives.
An NDA can:
The enforceability of an NDA is unpredictable and relies heavily on the judge that looks at it. Despite the uncertainty of enforceability, there are measures you can take to improve the chances of an NDA being successfully enforced.
1. Make sure you have Consideration
The difference between an NDA included with an employment agreement and a stand-alone NDA is “consideration”. Consideration is anything of value. In order for a promise to be enforceable, it must be made in return for something of value.
If an NDA is included in the employment/contractor agreement, the required consideration is the promise of a job. However, if an NDA is executed at a different time than the employment agreement, the employee/contractor must be given something else of value in exchange for their promise not to disclose information.
2. Be Specific
An NDA may be found unenforceable if it acts as an overly broad restraint on trade. The courts go to great lengths to ensure that employees are protected, thus the more limited the NDA is in scope, time, and geography the more likely they will be held up by a judge or a court.
3. Contractual Counterparties or Independent Contractors
A court will consider an employee or dependent contractor as dependent on the company. If the contractor however is a true independent contractor, it means that they operate like a business. They declare profits and losses, use their own tools and control their own schedule. Most importantly, they are free to subcontract work to other parties and are not financially dependent on a single employer. In these circumstances, the courts are more likely to uphold an NDA.
Overall, these agreements do not guarantee the protection of information that is deemed to be within the general skills and knowledge of that employee/contractor. The level of protection they provide largely depend on the nature of the company’s information, the scope of the position, and how the NDA is drafted to address these specifics.
Christina Hassan is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.