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
Both stock grants and stock options are tools which employers use to motivate their employees to keep up the hard work. These tools would align the interests of the employees with that of the shareholders. They benefit the employees when working for a startup that lacks the pay/job security. These two forms of compensation will also discourage employees from quitting their jobs until the options or stocks vest. Options and grants, however, are very different from each other.
Stock grants occur when the company pays part of the compensation of the employees in the form of corporate stock. In most instances, there are some restrictions on these granted stocks so that they can be designed to keep the employees working for the company for a set period of time. For example, if the company awards an employee 1000 shares of stock which will vest over two years, the employee will retain the stock only after two years of employment. He will lose the stock if he leaves the company prior to vesting.
When awarded stocks, the employees would have to pay tax on theses stock the same year they were issued. It should be noted that share can only be issued for past, not future, services.
Stock options give the employee the right but not the obligation to buy a set amount of the company’s stocks at a set price within a specified time frame. Stock options are always subject to vesting schedules. In most instances, option agreements expire once an employee leaves the company. As a result, vesting schedules is a great way to induce an employee to stay.
It should be noted that because of the fluctuation of the stock price, stock options can be valued less than the employee cost, making them worthless. By contrast, the net worth of stock grants are much more stable and will not become zero unless the company goes out of business.
Regarding the accounting issues, since 2001, companies have to record the “fair value” of the stock options on the day they are granted, which is recorded as a company expense.
The Advantages of Stock Grants and Stock Options
Both of stock grants and stock options can discourage the employees from quitting through vesting schedules. They are both important for the startup because the company does not need to pay cash directly. As a result, they put less pressure on the cash flow.
The Differences between Stock Grants and Stock Options
One obvious difference has been mentioned above: stock grants are always worth something, however, stock options can be worth nothing at all if the company's share price falls more than expected. Then, what can be done to encourage the employees to stay at the company in this situation? There are two solutions: 1. To keep existing options as is and to issue new options at a new attractive strike price. 2. To cancel old options and to issue new ones (TSXV rules require shareholder approval for this if the company cancels and reissues options within 12 months).
The other side of the argument is equally strong: the returns of stock options can be much higher although they are risky. Therefore, to balance the risk and reward profile of the compensation package, the employer may award some options along with some stock.
From the employee’s perspective, stock options are also more flexible, because, unlike grants, they frequently have an early exercise option, so an employee intending to leave the company can exercise his options before the end of the vesting period and garner some of the benefit without having to stay at the company. 
Rong Gao is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Hunkar Ozyasar, Stock Grants Vs. Stock Options, https://budgeting.thenest.com/stock-grants-vs-stock-options-20564.html
 Alice Stuart, Stock Grants Vs. Stock Options, https://finance.zacks.com/stock-grants-vs-stock-options-5440.html
WeWork: The Rise and Fall of the Real Estate Disruptor
Overview: Founders, Business Plan, Value Proposition, Strategy
To best understand the story of WeWork, it is easiest to start it its origin and founder. Adam Neumann (“Neumann”) appears to be the ‘classic’ entrepreneur. He was ambitious, charismatic, and overconfident. He was also a talented pitch artist, as it is no small feat to bring in over $12.8 billion in financing over his time at WeWork.
It wasn’t until his third venture, GreenDesk, that ultimately began Neumann’s path to start-up stardom. The idea was sustainable co-working space. The business proved to be profitable in its first year of operation, however, GreenDesk was sold as the two founders differed in opinion with their main investor on the company’s direction. The two founders then started WeWork, with the only change being a shift from a ‘sustainable’ to a ‘community’ concept.
The Founders identified an opportunity in the market following the economic crisis in 2008. Neumann stated, “During the economic crises, there were these empty buildings and these people freelancing or starting companies. I knew there was a way to match the two.” This was part of the Founder’s value proposition – individuals and start-ups renting office space without the need and cost of renting out a space larger than they needed. The business model entailed WeWork taking out a cut-rate lease on a floor or two of an office building, chopping it up into smaller parcels and then charges monthly memberships to start-ups and small companies that want to work close with each other. This ‘working close with each other’ was the second part of WeWork’s value proposition. It identified ‘community’ as the main product to sell to its members. The WeWork ‘community’ entailed: open floor plans, lounge amenities, social activities, and floor plan arrangements that were designed to promote entrepreneurs to utilize fellow members' skills and networks.
Setting ‘community’ aside, and looking at the fundamental business plan, it is apparent it could be easily replicated. When a business does not derive its value from any type of intellectual property or technology, it must put rapid growth and brand recognition at the forefront of its strategy. WeWork did this on an incredibly impressive scale. WeWork used a large amount of financing to expand at a rapid pace into over 110 cities across 29 countries.
Financings: (Information from: https://craft.co/wework/funding-rounds)
Over the span of 9 years, WeWork grew to an incredible $47 billion placing it as the highest valued private company in the United States in early 2019, ahead of the likes of Space X, Airbnb, JUUL, etc.
However, the company came crashing down to earth when WeWork filed for its IPO in August of this year. The prospectus faced harsh criticism from public markets as investors and analysts balked at the overinflated valuation and expressed major concerns about the company. This ultimately resulted in WeWork having to pull its’ IPO. Some of the major issues identified by the public market were the business model, profitability prospects, corporate governance and leadership.
a. Profitability and Business Model
The profitability of the company was put into question both short term and long term. WeWork had a net loss of $1.6 billion in 2018, and nearly $700 million in the first 6 months of 2019. It is not uncommon for start-ups to faces losses in their early years but you want to see net loss is shrinking as a percentage of revenue. Whereas, with WeWork the prospectus stated, "These expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future.”
A major concern was if WeWork’s economics could survive the inevitable real estate slump. WeWork was charging high per-square-foot prices but was also locking itself into long-term leases at record rents. There was clearly the prospect of a tenant exodus amid a recession or to cheaper competition. As of 2019, WeWork had committed to $47.2 Billion in future payment obligations but had only received $4 Billion in committed revenue from memberships.
b. Leadership & Corporate Governance
The issues surrounding WeWork’s corporate governance were also a major issue. First and foremost, Neumann had an incredible amount of power in WeWork. His class ‘B’ and ‘C’ shares carried 20 votes to the 1 of the class ‘A’ shares. This allowed for him to still maintain control of the company, even after SoftBank had invested over $10 Billion. Neumann was also said to have engaged with some questionable conflicts of interest with WeWork. When the company undertook to trademark the ‘We’ name, it was then revealed Neumann and the other co-founder had already owned the ‘We’ trademark in a separate corporation and made the company purchase it for over $5.9 million. WeWork also leased properties that Neumann had an ownership stake in. Neumann also received extremely low interest rate loans from the Corporation in excess of $30 million. Neumann’s wife also received a senior management position with the company and was said to possess the power to appoint a new CEO if Neumann were to become incapacitated or die.
Because of the failed attempt at an IPO, which now appears actually necessary for funding and not just an exit for investors, WeWork was in need of money quickly. SoftBank, which was already its largest investor, came to the rescue with a package of $5 billion. However, that package was not without scrutiny and further showcases the failures of the board. Specifically, criticism surrounding the package that Neumann received, which included: $198 million consulting position, $970 million for his stock, and a $500 million credit faculty. It is no surprise to hear of criticism considering reports stated that WeWork had delayed layoffs because it couldn't afford to pay severance.
There are plenty of learning lessons for the start-up community and investors resulting from WeWork’s fall. Start-ups can mitigate many of these by ensuring proper safeguards developed in their initial startup process. Legal counsel acting for the company needs to ‘founder proof’ the organization, and prepare for the inevitable transition from the initial founder and management team to a more experienced and suitable one, likely endorsed by the major investors of the company.
In WeWork’s case, it faced major financial difficulties removing power from Neumann. This could have been avoided had there been tighter board governance and attention placed on the voting power within the organization. It should have been apparent to the board from the ill-advised spending and poor media attention Neumann was getting for the company that they needed to move on to a better management team. However, the power structure of WeWork made this extremely difficult and extremely expensive. WeWork was not ‘founder-proofed’.
Another oversight was that WeWork had no employment agreement with Neumann. For someone to be as important to a company as they touted, it was irresponsible of the board to not have an employment agreement with him. He could have just walked away at any point and this was even identified as a risk in the IPO disclosing. Ultimately, Neumann’s exit was needed, but this could have been a disastrous oversight.
As noted above, rapid expansion made sense for WeWork, but it must be undertaken at a responsible rate and direction. WeWork began venturing into areas that were not core to its business which required a lot of capital that was not producing income. Those new ventures coupled with its massive debt laden growth in real estate, became too costly for the company to become profitable. This profitability was quickly identified once the IPO disclosures became absorbed in the public market.
Another issue was the extremely optimistic $47 Billion valuation, which clearly wasn’t reality. This can hurt the company two-fold. First, a more realistic valuation would have not received as much push back from the public markets. Secondly, your investors will not be happy when their investment becomes much less valuable when the more realistic valuation is placed on the company.
Lastly, the corporate governance practices remain of vital importance. History shows that start-ups fail more often than succeed, so to reduce those chances of failure, planning and execution of these must be done at the outset of any venture. Ensure your start-up has the proper agreements and bylaws in place.
Ty Buhler is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 Jason Sheftell, “WeWork gives alternative to working at home with swanky buildings across NYC” (22 July 2011), online: New York Daily News <https://www.nydailynews.com/life-style/real-estate/wework-alternative-working-home-swanky-buildings-nyc-article-1.1044412>
 Allana Akhtar, “Adam Neumann built a global coworking empire. These are the cities with the most WeWork offices, and how much they cost.” (22 October 2019), online: Business Insider <https://www.businessinsider.com/global-cities-with-the-most-wework-offices>
 Jon Banister and Ethan Rothstein, “Here’s everything you need to know from WeWork’s landmark IPO Prospectus” (14 August 2019), online: Bisnow <https://www.bisnow.com/national/news/coworking/heres-what-you-need-to-know-from-weworks-ipo-prospectus-100361>
 Alex Konrod, “Inside the Phenomenal Rise of WeWork” (5 November 2014), online: Forbes <https://www.forbes.com/sites/alexkonrad/2014/11/05/the-rise-of-wework/#26eaf94a6f8b>
 Supra at note 3.
 Kevin Dowd, “10 big thing: WeWork’s IPO in peril” (8 September, 2019), online: PitchBook <https://pitchbook.com/news/articles/10-big-things-weworks-ipo-is-in-peril>
 Supra at note 3.
Build An Effective Board Of Directors For Your Startup
Every company is required by law to have a board of directors. The board is responsible for the overall direction of the company and for making major decisions, such as hiring and firing senior management, approving a budget and keeping the company financed through equity investments and debt financing.  Therefore, building a strong, effective board of directors is very important for your company’s success.
There are some considerations when building the board of directors for a startup.
Have The Right Number Of Members
At the early stage, 3-5 directors are appropriate number for a new company. Too many directors at this stage will make scheduling an issue and be a drain on your funds. Generally, after the initial seed round, the company will have to allocate a board seat to the corporation which has led that seed round. If the founders still want to keep control of the board, it is better for them to retain two seats and the new investor to have one seat. It should be noted that when you accept a new investor, you might have to allocate a new board seat for it. Thus, if you do not want a certain person on the board, you’d better refuse that person’s investment.
At some point, if the board is getting too big or if the investment size doesn’t merit a board seat, instead of giving out more board seats, the company might allow investors to act as “observers.” That is, they can come to and participate in the board meetings, but they do not get a formal vote.
In order to avoid a tie vote, you are highly recommended to have an odd number of board members.
Create A Diverse Board
Establishing a board of directors with different knowledge, expertise, age and backgrounds can be a powerful force for your company's success. A diverse board can provide the company with unique perspectives. You might need a marketing expert, a financial expert, and an exit expert on the board, as well as an advisor who might help guide decisions and aid in negotiations.
Provide Good Compensation For Directors
Compensation is essential, so keep that in mind and consider giving them access to a percentage of stock instead of money. A common amount given is 1 percent of stock or expenses per quarter plus a meager retainer.
Choose People Who Can Participate Fully And Share The Same Vision For The Company
It is important to have board members who can dedicate significant time to the company. The board members should not just be available for scheduled meetings, they should also be available when urgent issues arise. Thus, it is better to have board members who are in close proximity to the company as you can meet face to face when some important issues emerge.
Please keep in mind to establish a board of directors who share the same vision and long-term goals for the company. If the members have different vision, the probability of risk of pulling the company in opposite directions will increase.
Have Independent Directors
An independent director is not a founder or an investor or an employee of the company. Appropriate independent directors can bring their previous business and operating experience to the company. They can also provide the company with their contacts which might be a great asset for the company. However, you should always have independent directors who can establish a long-term relationship with the company and who would like to dedicate significant time to the company. It would be great if the independent directors can provide hands-on mentorship.
Rong Gao is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Samer Hamadeh, Adam Dinow, What you need to know about startup boards, https://techcrunch.com/2016/11/05/what-you-need-to-know-about-startup-boards
 Alejandro Maher, Build Board of Directors: Simple How To Guide for Startups, https://www.upcounsel.com/build-board-of-directors-simple-how-to-guide-for-startups
Data Processing Regulations in Canada – a Primer on PIPEDA
According to the Canadian federal government Canada has more computers per capita than any other country worldwide. Canadians are also the heaviest internet users worldwide with the average Canadian spending 40 hours online per month. However, our collective internet use comes with risks to both individuals and business. In fact, 70% of Canadian businesses have been victims of a cyber-attack.
Therefore, it is crucial that Canadian businesses are aware of their responsibilities regarding how to handle personal information of their users.
PIPEDA is the Personal Information Protection and Electronic Documents Act. This federal privacy law for private-sector organizations outlines the ground rules for how businesses must handle personal information in the course of their commercial activity. PIPEDA applies to private sector organizations in Canada that process personal information in the course of commercial activity. All businesses operating in Canada and handle information that cross Canadian provincial or national borders are subject to PIPEDA.
In a 2017 holding the Federal Court of Canada has found that PIPEDA will apply to businesses established outside of Canadian jurisdictions as long as “real and substantial connection” exists between a business’s activity and Canada. This effectively includes all Canadian startups.
Appointment of Processors
Under PIPEDA any organization is required to use contractual or other means to provide a comparable level of protection while the information is being processed by a third party. The failure to have appropriate confidentiality agreements in place with third party contractors has been found to be a breach of the accountability principle. These agreements do not have specific provisions or requirements. The industry standard is an acceptable metric (i.e. industry standard for health data).
Transferring Data Outside of Canada
PIPEDA generally permits even non-consensual transfer of data outside of Canada provided the organizations use contractual or other means to provide a comparable level of protection while the information is being processed by a third party. However, it is good practice and required by some jurisdictions (Alberta) that if an organization uses a data processor outside of Canada they specify the foreign jurisdictions in which the transfer is taking place and for what purposes the foreign service provider has been authorized to process data on their behalf.
Notice of Breach
PIPEDA underwent a number of amendments in 2015. This included a three-pronged notice requirement in the event of a security breach. The three include:
A. a description of the circumstances of the breach;
b. the day on which, or period during which, the breach occurred or, if neither is known, the approximate period;
c. a description of the personal information that is the subject of the breach to the extent that the information is known;
d. a description of the steps that the organization has taken to reduce the risk of harm that could result from the breach;
Failure to report a breach or to maintain records as required is an offence under PIPEDA, punishable by a fine of up to C$100,000.
Businesses, especially startups, should proactively conduct an audit of their existing consent policies and practices in order to ensure they are compliant with the new GOMC. Businesses should be ready and prepared to demonstrate compliance with PIPEDA in particular relating to these new consent requirements. Periodic review and reassessment of best practices is also highly recommended.
Rights of First Refusal, Pre-Emptive Rights and Piggyback Rights: Restrictions on the Ability to Transfer Shares and What You Should Consider
Rights of First Refusal, Pre-Emptive Rights and Piggyback Rights: Restrictions on the Ability to Transfer Shares and What You Should Consider
You have started a business and have decided to raise capital by issuing equity. You want to incentivize early investment so you offer to protect potential shareholders’ shares by creating A Shareholders’ Agreement that would ensure their ownership stake is protected. A Right of First Refusal (“ROFR”), Pre-emptive Rights, or Piggyback Rights seem like the perfect forms of protection and incentive. However, if you are not careful, they can create overly restrictive share transfer abilities and discourage future investment. If you want to impose restrictions on the ability to transfer shares, then it is important that you understand the purpose of those restrictions and how you can draft them so they are not overly restrictive.
Rights of First Refusal
A ROFR requires any shareholder intending to sell their shares (“Intending Shareholder”) to first offer them to their fellow shareholders or the company. ROFRs also grant shareholders the ability to control who their fellow shareholders are. It is a reasonable device to prohibit the sale of shares to competitors as long as it is not too onerous or time-consuming.
There are two kinds of ROFRs. The first kind, a Hard ROFR requires the Intending Shareholder to acquire a bona fide offer from a third party to acquire their shares before shares are offered to fellow shareholders. The second kind of ROFR is a soft ROFR, which permits the Intending Shareholder to first offer the shares to the other shareholders, and then, if not taken up, offer them to third parties at the price offered to the other shareholders or higher.
Hard ROFRs can make it difficult for shareholders to sell their shares because a potential third-party investor can easily lose a deal. Soft ROFRs are less restrictive because they must be exercised before any potential third-party purchaser is identified. If a ROFR is going to be included in a Shareholders’ Agreement, a Soft ROFR would provide more flexibility for shareholders to sell their shares. Further, regardless of what sort of ROFR is implemented, the ability for shareholders to sell a certain percentage of their shares before the ROFR is triggered is a reasonable and effective addition to a ROFR.
Pre-emptive Rights provide current shareholders with the right to participate in future financing and are frequently included in early-stage Shareholders’ Agreements. This right to buy future shares can be used to protect early investors’ shares from being diluted when a company decides to issue more shares.
While the use of Pre-emptive Rights can be beneficial to shareholders, it can also serve as an obstacle to a company looking to attract investment from outside investors. The injection of non-professional investors into financing can result in an inability to provide a workable structure that includes Venture Capitalists, and as a result, stunt the growth rate or ability of a company.
If Pre-emptive Rights are to be used, they should be accompanied by either or both a Sunset Provision and a Pay to Play Provision. A Sunset Provision would provide the Pre-emptive Rights only for the period the shares are cheap and early stage capital is being raised. In other words, the Pre-emptive Rights Provision would terminate after a certain period of time (For example: two years after the execution of the Shareholders’ Agreement). A Pay to Play Provision requires existing investors to invest on a pro rata basis in subsequent financing rounds or they will forfeit certain or all preferential rights. This discourages the strategic use of Pre-emptive Rights in future financing rounds.
A Piggyback Right requires that an Intending Shareholder permit other shareholders to sell their shares along with it on a pro rata basis. The rational for this device is to ensure that shareholders with this benefit can exit a company at the same time and rate as the shareholder subject to the right. The issue with a Piggyback Right is that it can delay and drag out potential sales of shares because they require a notice period (to the other shareholders), and a buyer for more than one shareholder’s shares must be found. This can discourage not only potential buyers, but also shareholders, due to the difficult tasks of finding purchaser(s).
Piggyback Rights should be used with caution, and potentially limited to irreplaceable executives and majority shareholders. It shouldn’t matter if an indifferent shareholder decides to sell their shares, however, if an executive shareholder decides to sell all their shares, then other shareholders should have to opportunity to sell their shares as well as this could be an indication that the company’s value is going to decline.
Many forms of restrictions on the ability to transfer shares exist. ROFRs, Pre-emptive Rights and Piggyback Rights are but a few such restrictions that can be used to protect shareholders. However, if these provisions are included in Shareholders’ Agreements without understanding how they may implicate the ability to transfer shares, it can halt a company’s ability to attract investment in the future. If restrictions are to be imposed on the ability to transfer shares, they should be included in a manner that does not make their application absolute and avoids barriers that make the ability to transfer shares too onerous or impossible.
For more information contact the BLG Venture Clinic.
Suleiman Semalulu is member of the BLG Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 Bryce Cyril Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, (Canada: LexisNexis, 2018) [Tingle].
 Sara C. Pender, “Canada: Five Beneficial Clauses To Consider When Drafting A Shareholders’ Agreement” (July 19, 2013), online (blog): Mondaq < http://www.mondaq.com/canada/x/252080/Shareholders/Five+Beneficial+Clauses+To+Consider+When+Drafting+A+Shareholders+Agreement>.
 Tingle, supra note 1.
 Joshua Kennon,” Understanding Shareholders Pre-emptive Rights” (February 8, 2019), online (blog): Investing for Beginners < https://www.thebalance.com/what-is-the-preemptive-right-358100>
 Tingle, supra note 1.
 Ibid; Shanlee von Vegasack, “A Brief Introduction to Unanimous Shareholder Agreements” online (blog): BD&P < https://www.bdplaw.com/content/uploads/2016/06/Shareholders-Agreements.pdf>.
 Tingle, supra note 1.
Location is Everything - Choosing Where to Incorporate
So you’ve made the decision that incorporation is right for your business, but there’s another critical incorporation decision ahead – where do you incorporate? In Alberta, incorporation is governed by the Business Corporations Act (the “ABCA”). Federal incorporation is governed by the Canada Business Corporation Act (the “CBCA”). There are a number of factors differentiating provincial and federal incorporation to guide your decision.
The cost of provincial incorporation is $275 plus service fees. The cost of federal incorporation is $200 for online applications or $250 for paper applications.
While incorporating a federal corporation appears less costly in terms of incorporation fees, there is an additional cost consideration for a business seeking to incorporate federally – federal corporations are also required to extra-provincially register in the provinces in which they will carry on business. The definition of “carry on business” triggering the extra-provincial registration requirement includes running a business, having an address, post box or phone number, or offering products and services for a profit. The fee to register an extra-provincial corporation in Alberta is $275 plus service fees.
The ABCA requires a business to have its registered office in Alberta. The requirement to have a registered office in Alberta is not satisfied by merely having a post office box in Alberta. The requirement is a physical address in Alberta accessible during normal business hours. The ABCA requires shareholder meetings to be held in Alberta unless all shareholders entitled to vote at the meeting agree to hold it outside of Alberta.
The CBCA allows a federally incorporated business to have a registered office and hold annual meetings in any province in Canada.
The CBCA entails additional paperwork by requiring a corporation to file annual returns. Current annual federal filing fees are $20 (online) or $40 (paper filing). The filing requirements must be completed annually, whether or not there have been director or address changes for the corporation.
The ABCA has its own annual return requirements. These requirements also apply to registered extra-provincial corporations. A federal corporation registered in Alberta will have to file annual returns under the ABCA to comply with the statute. A corporation operating in Alberta has more onerous filing requirements if it incorporated federally as opposed to provincially.
Federal incorporation allows a business to use its corporate name across Canada. This degree of name protection can only be defeated by a trademark. Federal name searches are therefore more rigorous than provincial name searches.
Provincial incorporation only allows a business to use its corporate name in Alberta, and a corporation will need to conduct a name search in each additional province in which it wishes to carry on business. There is a risk that its corporate name will be rejected in another province, requiring the use of an alternative name.
Corporations Canada maintains a register of the Registered Office Address, Directors, Annual Filings, and Corporate History of federal corporations, publicly available online at no cost. Provincial corporations have relative privacy with respect to the accessibility of their corporate data, as such information from provincial corporations is not publicly available online, and a fee is required for a search.
The ABCA permits the establishment of Unlimited Liability Corporations – this is an unusual incorporation structure that makes the liability of shareholders unlimited in extent and joint and several in nature. This structure is not supported by the CBCA.
Federal incorporation may have the advantage of prestige from global recognition standpoint, as a Canadian corporation is more recognizable than individual provinces.  This is primarily a consideration for businesses intending to operate internationally.
Ultimately, a corporation is not permanently confined to the jurisdiction in which it was originally incorporated. A corporation can choose to change from provincial to federal incorporation, vice versa, or from one province to another, by way of a continuance. Both the ABCA and the CBCA contain provisions allowing corporations from another jurisdiction to effectively re-incorporate under their statute.
For further assistance with incorporating under the ABCA or the CBCA, contact the BLG Business Venture Clinic. We can assist with drafting articles and bylaws to get your corporation set up the right way and avoid costly changes down the road.
Ana Cherniak-Kennedy is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 RSA 2000, c B-9 [ABCA].
 RSC 1985, c C-44 [CBCA].
 Open Alberta, “Registry agent product catalogue” (2019), online: Government of Alberta <https://open.alberta.ca/publications/6041328>.
 Corporations Canada, “Services, fees and turnaround times – Canada Business Corporations Act” (2017), online: Government of Canada <https://corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06650.html>.
 Corporations Canada, “Steps to Incorporating” (2016), online: Government of Canada <https://corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06642.html#toc-06>.
 Service Alberta, “Registry agent product catalogue” (2019), online: Government of Alberta <https://open.alberta.ca/publications/6041328>.
 ABCA, s 20.
 ABCA, s 20(4).
 ABCA, s 20(6).
 ABCA, s 131.
 CBCA, s 19(1).
 CBCA, s 263.
 Corporations Canada, “Policy on filing of annual returns – Canada Business Corporations Act” (2012), online: Government of Canada <https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs02544.html>.
 ABCA, s 268.
 ABCA, s 292.
 Corporations Canada, “Is incorporation right for you?” (2016), online: Government of Canada <https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06641.html>.
 Corporations Canada, “Search for a Federal Corporation” (2019), online: Government of Canada <https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpSrch.html>.
 ABCA, s 15.2(1).
 Corporations Canada, supra note 20.
 ABCA, s 188; CBCA, s 197.
Jurisdiction to Incorporation
Corporation is a common business form in start-ups. It is adaptable the changing circumstances and it is the only structure that can take advantage of government programs. When incorporating your start-up, the jurisdiction to incorporation must be considered.
Where do the powers come from?
The provincial power is explicit, written under s. 92, para. 11 of the Constitution Act, 1867. The paragraph states that each provincial legislative assembly may individually make laws in relation to the incorporation of companies with provincial Objects. The federal power is implicit, mostly stemming from the general power of the federal government under s. 91 of the Constitution Act, 1867 over peace, order and good government. The power of incorporation is implicit in other enumerated federal powers as well, such as navigation and shipping and the trade and commerce clause.
Although it has been determined both federal and provincial governments may enact laws regarding incorporation of businesses, the precise distinction between the federal and provincial power has not been fully determined. The provincial legislation has often been seen as more limited, since the constitution grants only the power for the incorporation of corporations having “provincial objects.” However, the limitation that flows from it has been narrowly interpreted. A corporation may incorporate under provincial law even if it carries business that is closely related to an area with federal jurisdiction, such as banking. A corporation under federal jurisdiction may also choose to limit its business to an object or purpose that is of provincial nature.
For a start-up business, finances and efficiency should be an important consideration when incorporating. Compared to the federal process, the provincial incorporation process is lower in fees and lawyers would not have to deal with bureaucrats all the way in Ottawa. Many corporate lawyers like to recommend incorporation in the home province of the company and its counsel for these reasons.
Kara Cao is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 John Deere Plow Co. v. Wharton,  A.C. 330
 Referece re Dominion Constitutional Act, s. 110
 Bonanza Creek Gold Mining Co. v. R.,  1 A.C. 566
 Re Bergethaler Waisenamt,  M.J. No. 42, 29 C.B.R. 189
 Colonial Building and Investment Association v. Quebec (Attorney General) (1883)
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
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.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.