Shareholder’s Agreement for Startups
Overview
A shareholders’ agreement is an agreement among the holders of shares in the startup corporation. There is not a “one size fits all” shareholders’ agreement, as the document should be customized to fit the needs of the corporation and its shareholders.  A properly drafted shareholders’ agreement can provide direction for the possible challenges facing a growing company.  A few examples are; selling of shares, new investors, founders disagree, and there is a deadlock after a vote. 
A shareholders’ agreement regulates rights, obligations, and relationships between shareholders, provides for common understanding among founders and investors, regulates day-to-day operations, and formalizes processes to follow when an investor leaves the company or new investors buy-in.
Risks of not having a Shareholders’ Agreement
When companies do not have a shareholders’ agreement they are not protecting themselves from possible difficult situations that may arise.  Problems could include; if a founder leaves the company, if a founder starts another similar project, if a new partner joins, if a founder is not producing, or if there is a disagreement between shareholders.  A shareholders’ agreement would establish actions to take in each of these situations and many others.  Therefore, not having a shareholders’ agreement would increase the legal uncertainty for the company and the shareholders.
Clauses in a Shareholders’ Agreement
Here are some of the main clauses you may find in a shareholders’ agreement.  As noted earlier in this blog, each shareholder’s agreement would be modified to fit the needs of the company.  The main clauses are:

• Shareholders rights and obligations clauses: these clauses establish the decision making process, how the shareholders’ meeting will take place, how the vote operates, and the compensation of founders.
• Protection clauses include: founders’ commitments, vesting conditions, non-compete clauses, and non disclosure agreements.
• Exit clauses: would regulate the terms of a future investment in the company or possible exit, drag and tag along clauses, and buy out.
• Operational and organizational clauses: regulates the legal structure of the company, appointment of directors and their limitations, and the shareholders’ contributions.

Common Mistakes in Shareholders’ agreements

• Allowing transfer of shares without restriction and without consent of the company.  This puts the company at risk of having shareholders who do not share the same ideas or direction of the current shareholders.  Without restricting the transfer of shares, a corporation is at risk of losing control to a new investor.
• Placing too many restrictions on shares can also be a mistake.  As discussed earlier, a shareholders’ agreement should make the company enticing to new investors.  New investors can be scared off.  One of the ways to prevent this is an anti-dilution clause, as investors do not want their stock in a company to get diluted.

Final Comments
A company with a solid shareholders agreement is in a better position to attract new investors and better protected from future legal complications.  The shareholders’ agreement is vital for startups and could be changed and adapted to the needs of a growing company.  It is important to create the shareholders’ agreement to be able to grow with the company and not restrict outside investment.

Marty Birky is a 3rd year law student at the University of Calgary's Faculty of Law. He is a student at the BLG Business Venture Clinic for the 2017/2018 year. 

What Should an Entrepreneur Know: Basic Concepts of Contract Law
 
At some point in the life of every start-up business, entrepreneurs will ask one variation or another of this question: “can I get a contract that achieves this?” Sometimes, this question is presented as an action plan, “I want to have an employment agreement!” At times, it is given as a matter of fact, “we already have a contract.” Whether a contract does exist, however, depends on whether the purported agreement meets the requisite legal elements of a contract. Since contracts proliferate every aspect of a business, entrepreneurs can benefit from understanding some basic concepts of contract law.
 
What is a contract?
While specific types of contracts are used for a variety of purposes, a contract is in essence a legally enforceable agreement between two or more parties to do something or refrain from doing something.
 
What are the essential elements of a contract?
Every contract must satisfy three elements: offer, acceptance and consideration. In all cases, courts will look at whether there was a meeting of the minds; that is, if the parties have a common understanding of the contract.

• Offer: An offer is an expression of one party’s (the offeror’s) intention to enter into a contract on certain terms. It demonstrates the offeror’s willingness to be bound if the offer is accepted by the other party (the offeree). An offer may be expressed by word or conduct, as long as such expression communicates the offer to the offeree. An offer must also contain specified terms; a vague expression of interest when the offeror is trying to test the waters is not an offer. Whether something constitutes an offer must be objectively determined in light of all the surrounding circumstances: would a reasonable person regard the particular communication or conduct as an offer?
• Acceptance: The offeree’s acceptance of the offer must be unequivocal. The acceptance must express the offeree’s unconditional willingness and unreserved assent to the terms proposed by the offeror. Any variation of the terms (such as a counter-offer) is a rejection of the offer. Acceptance can be express or implied by conduct or silence, and must in either case be communicated. Sometimes an offer may stipulate a particular method of communicating acceptance (for example, by specifically requiring a signed acceptance and rejecting other modes of communication); in such a scenario, only the prescribed method is effective for communicating acceptance. Similarly, if an offer prescribes a deadline for acceptance, acceptance must be within the time. If an offer does not prescribe a deadline, the offeree must communicate acceptance within a reasonable time.
• Consideration: Consideration is the value that the parties exchange. A common form of consideration is money paid in exchange of services, but consideration can also be given in refraining from an action. Courts generally enforce only contracts that are made under seal or supported by consideration, not gratuitous promises. Consideration has been described as “some right, interest or profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”.

 
What circumstances might vitiate a contract?
There are several scenarios under which courts may declare a contract to be void or unenforceable.

• Misrepresentation: Misrepresentation occurs one party makes a material statement of fact that turns out to be false.  The false statement must go toward a material fact, which is determined objectively: would a reasonable person be influenced by the misrepresented fact to enter into the contract? The misinformed party may be able to rescind the contract on the basis that it was induced to enter into the contract by misrepresentation.
• Mistake: Mistake can arise in different situations; there may be a mistake in assumption, a mistake as to the terms of the contract, a mistake as to the identity of the contracting party (often in the context of fraud) or a mistake in recording the parties’ agreement in the written document signed by the parties.
• Duress, Undue Influence, Unconscionable Transactions: A contract may also be void on the basis that the circumstances under which the parties entered into the contract demonstrate that one party was taking advantage of the other. Duress refers to threat that coerces the will of the party into entering the contract. Undue influence may exist where the relationship between the parties had the potential for one party to place trust and confidence in the other, and the transaction was unfair. Unconscionable transactions refer to substantially unfair bargains involving parties in unequal positions such that the stronger party could take advantage of the weaker party.

 
As always, there are exceptions to the concepts outlined above. The different considerations that must go into the formation of a contractual relationship constitute only one of many reasons that entrepreneurs should seek legal advice at the outset. This blog post canvasses only the most basic concepts of contract law concerning the validity of a contract. Stay tuned for another blog post on some common terms in a commercial contract.
 
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Tiffany Bennet is a 3rd year law student at the University of Calgary. She is enrolled in the BLG Business Venture Clinic, where she assists clients under the supervision of corporate lawyers from Borden Ladner Gervais LLP. 

Intellectual property can be an important issue for start-ups. Technology (or other proprietary information) can account for a substantial portion of a corporation’s value, especially in the early stages of a business. You have probably heard of patents, trademarks, and copyright but there are also other types of intellectual property. If the appearance of a product you are developing is an important element of your business plan, you may want to learn more about industrial design.

Industrial design refers to the “features of shape, configuration, pattern or ornament and any combination of those features that … appeal to and are judged solely by the eye” [1] in a finished product. Further, the Canadian Intellectual Property Office (CIPO) recently clarified that colour can also be a part of the combination of features that make up the design.[2] More simply: industrial design means the aesthetics of a finished article.

Registering an industrial design with CIPO can protect a product’s appearance. This protection is provided by the Industrial Design Act[3], last for ten years[4], and does not preclude protection of the same product via patent or trademark.[5] A product’s design can differentiate it just as much, if not more, than the technology that product contains or the brand associated with it. Consider: an Eames Lounge Chair (brand = Herman Miller) or a Kitchenaid stand mixer. Although industrial design would not protect the underlying code, it can protect the aesthetic aspects of software (graphics, icons, computer-generated animations) if certain requirements are met. For example, Apple registers industrial designs with CIPO to protect graphics that appear in its apps (see: industrial design registration no. 172083).[6]

If you would like more information about industrial design or other forms of intellectual property, feel free to reach out to us! A student at the clinic may be able to draft a memo that provides the information you need.
 
Britta Graversen works with the BLG Business Venture Clinic and is a third year student at the University of Calgary Faculty of Law. She has presented on IP law at the Haskayne School for Business to ENTI 317 students. 
 
[1] Industrial Design Act, s 2.
[2] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr04233.html
[3] R.S.C. 1985, c. I-9
[4] Industrial Design Act, s 10(1).
[5] United States Playing Card Co.'s Application, Re (1907), [1908] 1 Ch. 197 (Eng. Ch. Div.); Werner Motors Ltd. v. A.W. Gamage Ltd. (1904), [1904] 2 Ch. 580 (Eng. C.A.); Werner Motors Ltd. v. A.W. Gamage Ltd. (1904), 21 R.P.C. 137; Moody v. Tree (1892), 9 R.P.C. 333.
[6] https://www.ic.gc.ca/app/opic-cipo/id/dsgnDtls.do?appNm=172083&lang=eng&status=OK