Case Study: The Legal Services Needed for a Growth Start-up

Breakdown of the Legal Services that a Growth Start-Up Requires – A Case Study: Carbon Engineering Ltd.
In July of 2018, Carbon Engineering Ltd. (CE) announced that it had raised $11M to commercialize its technology that creates fuel from air. This was the 4th round of financing in the company’s history dating back to 2012[1] and comes just after they were able to demonstrate proof of concept at scale. The company published research showing conversion of atmospheric carbon into transportation fuel for less than USD$100 per ton with their pilot-plant in Squamish, British Columbia.[2]
CE has found significant success, as start-ups go, so far and is clearly a technology driven business. According to their website, CE owns 10 patents and patent pending applications as well as fully licenses 3 more.[3] However many hopeful entrepreneurs may be surprised to learn just how much of a start-ups legal resources – time and therefore money – relates to the area of intellectual property law. According to Professor Tingle, Bryce C. Tingle, LL.B, LL.M, Associate Professor and N. Murray Edwards Chair in Business Law at the University of Calgary, a growth start-up will generally end up with a legal budget allocated as follows:

• 60 per cent towards corporate finance;
• Only 5 to 10 per cent on intellectual property; and
• The rest to general solicitor work such as employment and contract matters.

Corporate Finance
For a growth start-up, it is a race against the clock to secure the next round of financing before the current one runs out. In this regard, CE is no exception since it has existed for approximately 6 years and is only now entering the phase where it will commercialize its technology. Therefore it safe to assume that the company has not been generating any significant sales or positive cash flows so far and has only been spending money. In this situation, the work to seek and secure the next round of financing begins immediately after the last round has closed. Even for CE, this $11M of financing structured as a convertible loan bridge was “raised in anticipation of an equity financing, which is expected to be completed as soon as possible.”[4] As much as the development of the technology and the business around it is the primary focus of the start-up, none of that can happen without the resources necessary to do it. Therefore financing is antecedent and its importance is reflected in the legal budget of a growth start-up, taking up the major share.
General Solicitor Work
For CE, partnerships continue to be crucial to the development of their technology as they’ve designed it to incorporate existing industrial equipment and practices to deliver a product that is both cost effective and scalable.[5] Examples of this include:

• CE’s air contactor structure is modelled on commercial cooling tower technology, and the design has benefited from close collaboration with SPX Cooling Technologies, a leading vendor in the industry;
• The design for CE’s pellet reactor was adapted from Royal HaskoningDHV’s Crystalactor water treatment technology, which was developed for water treatment plants;
• CE’s calciner design has been developed in collaboration with TechnipFMC, a leading provider of fluid bed systems; and
• The ability to synthesize of clean transportation fuels was enabled through a partnership with Greyrock Energy, whose gas-to-liquids platform was integrated into CE’s process.[6]

These partnerships illustrate the nature and complexity of the agreements that a novel technology may need to enter into in order to find success. Each one of these agreements must be represented with a tailor-made legal contract. And this is aside from the basic agreements made with suppliers and eventually customers.
With the success CE has had, the company has also experienced increases in its headcount. Within the last six months, they have seen a 33 per cent rise in full-time staff with new positions in virtually every department and the company plans to continue building its employee base in 2018 as it accelerates towards commercial deployment.[7] One can therefore understand how the general solicitor type work for a startup grows at a rate equal to the company overall and dictates a significant share of their legal budget.
Intellectual Property
For many growth start-ups, the technology lies at the heart of the business and is a critical component in need of protection. However intellectual property matters tend not to carry the fully repetitive nature of other legal matters. There may be an ongoing need to defend the company’s intellectual property from numerous challenges or repeated infringement. However, patent applications only need to be filed once and the company will not produce patent worthy ideas at the same rate it grows in terms of size measured in dollars spent or headcount. Therefore the weight that intellectual property law matters impose on the legal budget of a growth start-up generally pales in comparison to the other types. However, that is not to imply that they are less important.
CE may actually be exceptional in this regard. It would not be unreasonable to estimate that 20 per cent of its legal resources would be needed for intellectual property law matters, given the large number of patents related to the technology. The company also provides a topical Canadian example to examine the breakdown of the legal services that a growth start-up generally requires.

References:
[1] https://pitchbook.com/profiles/company/108045-46
[2] https://globenewswire.com/news-release/2018/07/12/1536582/0/en/Carbon-Engineering-raises-11M-to-commercialize-its-technology-that-creates-clean-fuel-from-air.html
[3] http://carbonengineering.com/media/
[4] http://carbonengineering.com/carbon-engineering-raises-11m/
[5] https://www.environmental-expert.com/news/carbon-engineering-thanks-partners-and-vendors-for-continued-collaboration-768286
[6] Ibid
[7] http://carbonengineering.com/carbon-engineering-raises-11m/

Colin Patterson is a third year student at the Faculty of Law, University of Calgary, and is a JD and CPA candidate.