Employees and Start-up Companies
Employees and Start-up Companies
Finding the best employees is fundamental to start-up companies. Bryce Tingle has noted in his book Start-up and Growth Companies in Canada - A Guide to Business and Legal Practice that "a new company's success is primarily a function of future managerial decisions, unlike more established companies where most income is derived from existing businesses."  Employees in a start-up company will see significant change in the nature and character of their work as the company progresses.  For example, a small food-preparation start-up might begin with two founders. They may have limited tech knowledge and may bring on an individual with coding knowledge. That individual may later be required for more of a business development practice as they become more familiar with the running of the business. A constant movement of various people in the firm as responsibilities change will have an effect on how an employment agreement is written.
Some general considerations of employment with start-up companies:
1. Keeping the description of job duties of an employee in a contract of employment as general as possible can help avoid issues down the road with respect to changes in job duties as hinted above. It can be mentioned that due to the corporation's expected growth, responsibilities of an employee will change from time to time.  Unanticipated changes in employment responsibilities can constitute constructive dismissal, and because changes are reasonably foreseeable in a growth company, a contract clearly providing for an employer's power to change an employee's position from time to time is important. 
2. The goal for a start-up should always be "no surprises".  To avoid issues down the road including an "integration clause" stating that the documents represent the entire agreement regarding the employment relationship, and terms cannot be modified except in writing executed by both parties is important. 
3. As in any contract, consideration is required. Canadian courts have viewed arrangements where an employee signs their formal employment agreement on their first day of work as unenforceable. This can happen where that person was first sent an informal "offer letter", or general job description, and later formally signed at work.  Rather, an employment agreement entered into as a condition of a prospective employee being offered employment is enforceable. The consideration is the employment. 
4. On a general level, Canadian courts are strongly sided towards employees rather than companies. This might be more intuitive in the sense of big multi-national corporations "taking advantage of the little guy". However, for a start-up, being sued by an employee can be heavily detrimental, if not crippling to, a company's survival. It is vital to ensure that employee agreements are well-written and thought out. The BLG Business Venture Clinic can be a useful service for early start-ups considering and contemplating the drafting of employee agreements, and various clauses within such as rights of first refusal, piggyback rights, shotgun provisions and others.
Nielsen Beatty is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, Third Edition, LexisNexis Canada Inc. (2018) at 126.
 Ibid at 127.
 Ferdinandusz v. Global Driver Services Inc.  O.J. No. 4225, 5 C.C.E.L. (3d) 248 (Ont. Gen. Div.).
 Tingle, Start-up and Growth Companies in Canada at 127.
 Ibid at 128.
 Buaron v. Acuityads Inc.,  O.J. No. 5045 (Ont. S.C.J.).
Is a Unanimous Shareholder Agreement Right for My Business
There is no “one size fits all” solution available when a new venture requires a shareholder agreement. The question of whether a Unanimous Shareholder Agreement (“USA”) should be used over a conventional shareholder agreement is one that entrepreneurs should consider when the time comes to put a shareholder agreement in place. This question is also likely to spark a debate (although, not a particularly exciting one) among lawyers. This blog post sets out to explain the main differences between USAs and conventional shareholder agreements.
What is a USA?
USAs are a creature of statute. It is imperative that entrepreneurs turn their minds to which statute their business is incorporated under, as this will determine whether their agreement amounts to a USA. The corporate statutes in all provinces except British Columbia and Nova Scotia contemplate the existence of USAs. The Canada Business Corporations Act (“CBCA”) defines a USA as being:
An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation....[i]
In contrast, the Alberta Business Corporations Act (“ABCA”) defines a USA as being:
These matters include the rights and liabilities of the parties, election of directors, management of the corporation’s business and affairs, or restriction of director powers.[iii] It is worth noting that it is possible to inadvertently enter into a USA by satisfying one of the statutory definitions above. If, for any of the reasons that follow, an entrepreneur does not want to create a USA, the shareholder agreement should explicitly state that it is not meant to be a USA.
How are USAs Different than Conventional Shareholder Agreements?
USAs are unique in that a person can become a party to the USA without signing it. If a USA is in effect when a person acquires a share of the corporation, that person is deemed to be a party to the agreement and will be bound by it.[iv] This means that those who invest in future equity financings carried out by a corporation will be bound by a USA (if one exists).
Another important distinction is the fact that, when the shareholders are exercising powers that have been transferred from the directors, they are subject to the same fiduciary duty attracted by directors in the ordinary course of their business. A consequence of this is that shareholders making decisions in place of the directors will lose their ability to pursue their own interests.[v] Shareholders acting in place of directors pursuant to a USA must act in the best interests of the corporation.[vi] In contrast, shareholders that are a party to a conventional shareholder agreement are free to act in self-interested ways.
Finally, it is often much more difficult to amend or terminate a USA in comparison to a conventional shareholder agreement. For CBCA corporations, it is uncertain as to whether a court would uphold the termination of a USA executed by any fewer than all the shareholders.[vii] The amendment or termination of a USA in the context of ABCA corporations certainly requires the consent of all shareholders.[viii] Termination provisions in conventional shareholder agreements can have a much more relaxed structure.
When Should a USA be Used?
Generally speaking, start-up growth companies should steer clear of USAs; however, there are certain situations in which a USA may be advantageous.
Firstly, a corporation may anticipate a turn of events that will result in a significant amount of its shares being widely held by individual investors – in this situation, a USA would provide an effective means to bind each one of these new shareholders to the terms of the corporation’s shareholder agreement.[ix]
Another situation in which the creation of a USA may be advisable is when a corporation whose shares are held primarily by non-Canadians wishes to be classified as a Canadian Controlled Private Corporation (“CCPC”) for tax purposes. If Canadian resident shareholders possess the right to appoint a majority of the board of directors by virtue of a USA, the corporation will qualify as a CCPC despite the fact its shares may be owned primarily by non-residents.[x]
Again, USAs are often not advisable for use in start-up growth companies mainly due to the fact that both current and future shareholders are bound by them. Conventional shareholder agreements provide a higher degree of flexibility and allow shareholders to consider only their personal interests.
Thomas Machell is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
[i] Canada Business Corporations Act, RSC 1985 c C-44 at s 146(1) [CBCA].
[ii] Business Corporations Act, RSA 2000, c B-9 at s 1(jj) [ABCA].
[iii] Ibid at s 146(1).
[iv] CBCA at s 146(3); ABCA at s 146(2) and 146(3); Note that recourse is available for persons who acquire a share of a corporation that is subject to a USA if they did not receive proper notice of the agreement’s existence.
[v] Bryce C Tingle, Start-up and Growth Companies in Canada, 3rd ed (LexisNexis, 2018) at 103 and 104 [Tingle].
[vi] BCE Inc v 1976 Debentureholders, 2008 SCC 69 at para 37.
[vii] Tingle at 106.
[viii] ABCA at s 146(8).
[ix] Tingle at 107.
[x] Canada v Bioartificial Gel Technologies (Bagtech) Inc, 2013 FCA 164 at para 58.
Startup Pitfalls in Employment Law
Startup Pitfalls in Employment Law
Hiring your first employees is a major step for a young business, one that comes with a new set of new legal challenges and risks. This blog will discuss some of the major legal pitfalls in hiring. Note that this post doesn’t discuss the contractor/employee distinction (which is also very important) because that was covered in a previous post by Sunny Uppal on April 21, 2019.
Don’t Try This at Home
Employment law did not develop with small startups in mind. It emerged at a time when low-paid industrial workers needed protection from massive industrial employers, and it shows. Employment law generally assumes that employers have the upper hand in bargaining power and fairly deep pockets.
For startups, this means that you should always obtain legal information or advice before proceeding with your first hiring. Attempting to draft your own employment agreements (or not using written agreements at all) is walking blindfolded into a minefield of legal issues. Even lawyers have difficulty drafting some provisions to be enforceable, but they can at least assess risks and steer away from the more dangerous areas.
Get it in Writing from Day One
Handshake deals are common in the business world, and while lawyers are generally wary of unwritten agreements that is doubly true in the employment context. The problem is, absent a written agreement, a contract is “deemed” to arise regardless of the parties’ intentions and the terms of that contract will be decided by statute or by the courts. As an employer, these deemed contracts will rarely be preferable to a written agreement and can create uncertainty and risk.
The other issue with these unwritten agreements is that any later written arrangement is treated not as a new contract, but as a modification of the existing contract that arose when the relationship began. This creates a problem of consideration: the legal concept that if a contract is to be enforced in court, it must be an exchange of meaningful value between parties. The problem in this case is that the later agreement can be treated as a modification of the old contract, so if nothing new is being offered then the court will use to the old contract instead. Consider the following example: Jessica hires her friend Dave to do some bookkeeping for her without a written agreement. As the business grows, Jessica begins to look for financing but investors want to see papered employment agreements, so she asks Dave to formalize their relationship in writing at the same pay, hours, benefits, etc. In this scenario, the second contract is likely void for lack of consideration since Dave is providing a benefit to Jessica (a written contract for her investors) but receiving nothing in return except for the benefits he already receives under the old contract. This means their relationship is still governed by the unwritten contract, including the terms that arise by operation of statute or common law. It is important to get employment agreements in writing from the start, to avoid unwanted terms.
All That is Written is not Gold
While it is important to get employment agreements in writing, doing so doesn’t provide complete assurance that the written terms will be enforced. A major area of concern for startups is the possibility that an employee will start a competing business: startups often have low barriers to competition, so it is important to set up proper protections that will be enforceable.
A common tool to this in is the non-competition clause, or “restrictive covenant”. The idea is to prevent a former employee from becoming a competitor by setting up a competing business or going to work for a rival, using the experience they gained as an employee against the employer. While common, non-competition clauses are a tricky area of law. The Supreme Court has been reluctant to enforce such clauses on the grounds that they make it difficult for employees to find work in their area of expertise, which imposes a burden on their ability to earn a living. This means that non-competition clauses require careful drafting, and even then it is wise not to rely on them entirely.
Another way to protect yourself from competing against a former employee is to include strong intellectual property provisions into the employment contract that prevent the employee from wielding the knowledge they gained during their employment against you. Either way, seeking the proper legal assistance is critical.
Kevin Lee is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Employment Standards Code, RSA 2000, c E-9; Kent v Bell, (1949) 4 DLR 561.
 Greater Fredericton Airport Authority v NAV Canada, 2008 NBCA 28.
 J.G. Collins Insurance Agencies v Elsley, (1978) 2 SCR 916.
Factors to Consider when Starting a Business
You have an idea. You may even have a plan. The question is how do you do turn this idea into a “real” business? There are several factors you’ll need to consider when starting a business, two of which are absolutely crucial: business structure and finance. One of the first decisions you’ll need to make is what structure your business will take. This decision will have legal and tax implications, so you must select one and operate within that structure’s guidelines. There are three common business structures in Canada:
1. Sole Proprietorship
You are the business and own 100% of it. Choosing to do business as an sole proprietor is your simplest option, and one that many small business owners prefer. The advantages of it are the freedom of full control, minimal costs, tax advantages on your personal income, and undivided earnings. However, as a sole proprietor you are also accountable for all parts of your business (including debts and losses), and creditors can claim your personal assets as well as the business if you fail to pay.
A partnership is a group of two or more who set up a business together. The benefits of starting a partnership are the inexpensiveness to set it up, shared losses and profits. However, since there’s no legal difference between you and your business you’re still liable for all business activities like a sole proprietor. Additionally, you may experience conflict with a partner that could potentially damage the business outlook.
A corporation is a separate legal entity from you and is set up formally with a number of shares divided between yourself and others, indicating ownership in the corporation. The advantage of a corporation is keeping your assets separate from the company, so if the company goes insolvent it is less likely you will be personally liable. Likewise, if you exit from the company, the corporation will live on without you. One unique aspect of the corporation is the ability to sell shares of the company to raise capital it.
Another key consideration is how to finance your business. Even if you have the greatest idea in the world and decided on the right business structure, your opportunities will be limited if you don’t have the capital necessary to get the business off the ground. Until you have a steady stream of revenue, and even after that, you will likely need to finance the business. Key assets are essential to the business, if you don’t have the money to strike when the iron is hot you may lose out on a once in a lifetime opportunity. Entrepreneurs often report that getting financing is the most challenging aspect of starting a business. There are, however, both government and private-sector sources of financing that can help you get your business off the ground. Two common forms of that financing in Canada are:
Any liability or obligation of a corporation is a debt. Debt can be short-term, such as trade credit advanced to the corporation by its employees, or long-term that actually forms part of the company’s capital structure. The benefits of debt to the company (borrower) is the ability to raise capital without selling any shares. The benefit to the creditor is that, in addition to receiving interest payments, if the company goes insolvent there is a degree of certainty over repayment of the debt.
Equity can be described as an ownership interest in an incorporated entity, represented by shares. The benefit of equity for the company selling it is the likelihood of more financing. The benefit of the entity purchasing the equity is, in addition to dividend payments, the ability to sell the shares for a higher price as the company increases in value. One significant aspect of equity vs. debt is that equity is subordinate to debt, meaning greater risk (and reward).
It is essential to understand the options for structuring and financing your business. There are legal and tax implications depending on what form your business takes and the financing it receives. For more information on choosing a business structure or financing options, it’s a good idea to consult with a qualified lawyer or accountant.
For information on how to register a business, visit: https://www.alberta.ca/register-business-name.aspx
Bradley Mills is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 Royal Bank of Canada: Choosing a business structure, online at: <https://www.rbcroyalbank.com/business/pdf/Choosing%20Business%20Structure.pdf>
 Government of Canada: Financing your new business, online at: <https://canadabusiness.ca/starting/financing-your-new-business/>
 Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, Third Edition, LexisNexis Canada Inc. (2018).
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.