Written by Ayman Khan
JD Candidate 2025 | UCalgary Law

Startups often begin with an idea birthed by a single entrepreneur or a group. Most companies have more than one founder, and the life cycle of a start-up company shows that these founders pool their skills together to create a viable entrepreneurial venture, buoyed primarily by the hopes, dreams and ambitions of the founders. Thus, start-ups also represent a labour of love from the point of view of the founder, who may resist any changes or challenges to the path visualized for the proverbial brain-child of the founder.
The skillset required for these initial few stages in a start-up’s life is oftentimes different from the skillset required to further grow such an enterprise once it is established. This leads to conflicts, mainly over vision and plans for the start-up. There may also be issues due to the temperament and competency of founders, which did not prove to be a hindrance during the initial stages but have now reared their head after growth. A 2008 Harvard study found that 50% of founders were no longer the CEO after their venture passed the two-year mark[1]. This indicates that most start-ups and nascent enterprises realise the need for professional management fairly quickly into their life-cycle as Founders’ skillsets are critical primarily at foundation of the company.
This leads to several issues as Founders may all be loyal to each other, thus making removal much more difficult. It may also be rendered even more complex by the nature of start-ups as the majority of employees at the onset may also have directly been hired by the founders personally. The aforementioned Harvard study found that 4 out of 5 entrepreneurs in such scenarios are forced to step down from the CEO’s post, with most also being shocked that investors had insisted that they give up control [2]. All of these factors only serve to increase the likelihood of issues with founder ousting. A start-up’s leadership transition from founder to professional management may thus make or break the start-up.
Thus, there is a need to “Founder Proof” companies to prevent such founder conflicts from potentially sinking the company. The first step in founder-proofing a startup is to establish a comprehensive founders' agreement. This document outlines each founder's roles, responsibilities, and equity distribution, along with procedures for handling disputes and exit strategies. Said agreement should also address decision-making authority, conflict resolution mechanisms, and the process for adding or removing founders, in order to prevent conflict. Critically, the agreement should be drafted in a manner that prevents “hold-up risks” or deadlocks, wherein the consent or a particular action is required on part of a founder in order to move forward with a decision. This could also take the form of decision-making procedures wherein the approval or consent of all founders is required. Another potential hold-up risk may arise from onerous exit procedures for founders, it is thus prudent to ensure that founder and officer exits do not contain unnecessary requirements. Therefore, it is advisable to seek legal counsel when drafting this agreement to ensure that it complies with Canadian business laws and best practices. The Business Venture Clinic shall be able to assist with providing an informational memo regarding such.
Another essential element in protecting a startup is implementing strong corporate governance practices. Incorporating the business as a corporation under the Alberta Business Corporations Act [3] creates a legal framework that defines shareholders' rights, board responsibilities, and officer roles. By structuring the company with a well-defined board of directors and adopting robust corporate bylaws, founders can ensure that key decisions are made transparently and with accountability to each individual founder or officer, thus reducing the likelihood of conflict or ambiguity.
Intellectual property (IP) ownership is another critical factor in founder-proofing a startup. Founders must ensure that all IP, including software code, branding, and proprietary processes, is assigned to the company rather than individual contributors. This is particularly important when founders collaborate on innovations before formal incorporation. Founders should use written agreements such as a separate IP assignment agreement and a non-disclosure agreement (NDA)  in the series of agreements that form the individual’s employment agreements, in order to establish clear ownership rights. Registering trademarks, patents, or copyrights further protects the startup's valuable assets. Failure to register IP ownership with the company as opposed to individual founders may lead to negative behaviour as it does not align the incentives of the founders with the company, thus leading to the founder having too much power.
Finally, founder-proofing requires a strong focus on financial controls and transparency. Establishing clear financial reporting processes, budgeting protocols, and expense tracking systems ensures that all founders have visibility into the company's financial health. This may mean, amongst other measures, defining the company’s mandate realistically, not including contradictions when it comes to officer and founder responsibilities (especially those responsibilities that are fiscal management and reporting), and having clear time frames and milestones for debt and financing agreements. Additionally, startups should implement written financial policies that outline expense approvals, investment decisions, and revenue distribution to reduce the risk of financial mismanagement.
By implementing a comprehensive founders' agreement, establishing strong governance practices, protecting intellectual property, and ensuring financial transparency, Canadian entrepreneurs can effectively founder-proof their startups. Taking these proactive steps not only safeguards the business from internal conflicts but also enhances its credibility with investors and stakeholders, thus leading to more positive outcomes. Building a resilient company requires planning and foresight, therefore founder-proofing is a crucial component of ensuring long-term success for any company, particularly start-ups.


[1] Wasserman, Noam. "The Founder's Dilemma," Harvard Business Review (2008) <https://hbr.org/2008/02/the-founders-dilemma>

[2] Ibid

[3] Business Corporations Act, RSA 2000, c B-9,

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[1]. 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.[2] 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.[3]
           
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.[4] 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
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.[5]
 
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.[6] 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.[7] This discourages the strategic use of Pre-emptive Rights in future financing rounds.
 
Piggyback Rights[8]
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.[9] 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.
 
Conclusion
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.

References
[1] Bryce Cyril Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, (Canada: LexisNexis, 2018) [Tingle].
[2] 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>.
[3] Ibid.
[4] Tingle, supra note 1.
[5] 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>
[6] Tingle, supra note 1.
[7] Ibid.
[8] 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>.
[9]  Tingle, supra note 1.

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:

1. a written agreement to which all the shareholders of a corporation are or are deemed to be parties, whether or not any other person is also a party...

that provides for any of the matters enumerated in section 146(1)....[ii]
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.

References
[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.

Standard Form Agreements – What are they and what is often in them?  
Starting a business can be daunting and require a lot of time and energy.  One of the last things a start-up may want to waste time on is drafting a standard form agreement, or even an agreement at all. 
 
A standard form agreement (“SFA”) can be either for services or widgets.  The agreement is in essence a template agreement that has been drafted once with certain areas left blank, such as the effective date for example, or with alternatives that can be selected depending on the circumstances and the same agreement can be used for several different transactions.  Think about how much effort would be consumed drafting a new form for every time your new start-up agreed to provide services to another company?  Having an SFA can greatly reduce the amount of time and money spent on drafting.
 
Often, people will try draft these agreements themselves by taking clauses from templates available on the internet.  One may conclude that these clauses are in every contract and they should be in yours.  But those templates are not specific to your business and including several clauses from different templates may result in those clauses contradicting one another.  Further, the clauses that you have included may not actually reflect your intentions and the start-up may be left vulnerable.
 
Depending on the nature of the start-up, an SFA can be a good starting point for negotiations.  It is not uncommon for two parties wanting to enter into a contract to exchange several drafts with markups, eventually leading to the executable document.  Additionally, if the other party provides you with their SFA, you will be able to contrast that against your own to determine where it is different and if it is agreeable. 
 
Below is a discussion about several clauses that are often included in SFAs.  Often these clauses can be found on templates on the internet and one may be inclined to include them without really understanding what the clauses are or how they operate.
 
Terms, Payment, Etc.
SFAs will often include the term of the agreement, price, payment, and penalties.  An SFA provides a great starting point for any negotiations regarding the aforementioned.  Including term, price, payment, and penalties provides an anchoring point if any of these are negotiated.  Further, it establishes a more efficient communication of the expectations of the party providing the SFA, which can have a better result than beginning the negotiation low balling each other.
 
The term can be renewed automatically, can trigger the parties to negotiate at a certain date, or simply expire on a certain date.  The SFA can also spell out the expectations of the parties in regard to payments, late payments, interest, and any other penalties.  These provisions must be drafted carefully to ensure none of the provisions contradict one another.
 
Representations and Warranties
Familiar with representations and warranties? Without sufficient knowledge of what these are, a start-up may be at risk.  Representations are statements of a party made before or at the time of entering into a contract that may form part of the contract if so intended, but if the representation is not part of the contract and is inaccurate, it could result in rescission of the contract.[1]  Further, depending on the nature of the representation, it could give rise to damages if it was fraudulent or negligent.[2]  Warranties can be statements within the contract, or can be implied into contracts, that are collateral to the main purpose of the contract and can give rise to damages if breached.[3]
 
Templates found online may attempt to limit representations and warranties.  However, if they are not specific to the start-up, attempting to limit them may be redundant or not actually place a limit on any representations and warranties.  A proper understating of what representations and warranties are and how they operate will better serve the start-up.  A lawyer will be able to assist the company in the drafting of these clauses.   
 
Liability and Indemnification
A good SFA will accurately describe any limitations on liability and whether either party will indemnify the other in specific circumstances. These clauses can be difficult to draft, and the advice of a lawyer may more accurately reflect the drafting party’s intentions.  Further, a well drafted clause will demonstrate to the other party what the expectations are regarding liability and it will provide a good starting point for any negotiations regarding limitations on liability, if the SFA is not “take it or leave it”.  The parties can also choose to limit the penalties in certain circumstances.  For example, the parties may agree that to any extent a party is liable for damages, those damages are limited to the amount paid for the services.
 
Indemnity clauses can also be very difficult to draft depending on the situation. Indemnify means to compensate for harm or loss which is the legal consequence of an act or forbearance on the part of one of the parties or some third person.[4]  In essence, the party indemnifying is assuming and guaranteeing to reimburse or compensate the indemnified party for any loss or harm that falls within the circumstances agreed to.[5]  The historic use of indemnity clauses has resulted in specific terminology to accurately describe which party is indemnifying the other and in what circumstances. Again, discussing indemnification clauses with a legal professional can help ensure that the clause in your SFA meets your expectations.  Taking clauses from the internet could result in accidentally switching the indemnifying and indemnified parties due to the complex language that is often found in these clauses.
 
Force Majeure Clause
Another common clause is a “force majeure” clause.  Force Majeure clauses generally operate to discharge a contracting party when “a supervening, sometimes supernatural, event” beyond the control of either party makes performing the contract impossible.[6]  Proper drafting of these clauses can outline the situations which would frustrate the contract and possibly relieve the party who is suffering from the force majeure event of their duties under the contract, or suspend them until the effects of the event are no longer causing issues.  Every contract may not need to contain a force majeure clause, so you may want to discuss with a lawyer the particular situation and whether it is necessary.
 
Dispute Resolution
One of the most devastating things that could happen to a start-up is litigation.  It can be a huge drain on capital and time which could be better spent on advancing the start-up.  One possible way to reduce the amount of time and money spent is to include a dispute resolution clause in the SFA.  The mechanisms can include how disputes are governed, what triggers a dispute, what the process is, who will be the mediator or arbitrator, where the meetings will occur, among others.  Hopefully the clause will lead to a faster resolution than the traditional court process and possibly save the business relationship from degrading to a point that is beyond repair. 
 
Another clause that is often included in standard form agreements is a clause describing the governing law if there is a dispute.  If you are dealing with parties that are located in other jurisdictions, this may be a clause you want to include in order to ensure the dispute will take place in your home jurisdiction.  Further, some jurisdictions costs are assigned to the “loser” of the dispute, which is good news for the start-up if it comes out on the winning side.  Additionally, some jurisdictions allow for the parties to agree to waive their rights to a jury trial which is also a benefit as they can be quicker and cheaper.[7]
 
Confidentiality Clauses
Confidentiality clauses are frequently found in SFAs.  This is especially true when the sharing of sensitive or personal information is required.  Several things may be overlooked in drafting these clauses such as how long they should last, what is covered under the clause, what occurs if there is a breach of the clause, etc.  Compiling a clause from different templates off the internet can result in a piecemeal clause that may contradict itself, the law, or place the parties in a place with impossible obligations to fulfil.
 
In relation to confidentiality clauses, a clause can be drafted to place an obligation on a party using your device or software to not reverse engineer your design.  Again, consult with a legal professional to ascertain how to accurately incorporate this into your standard form agreement to protect your device or software.
 
Conclusion
An SFA can be a useful tool for any start-up that needs to either buy or sell services or widgets.  Although initially there are some costs associated in having an SFA drafted, there are many advantages to having a well drafted SFA.  This is a small investment compared to costs of the issues that can arise from a poorly drafted SFA.  The internet can be a wonderful place for information but trying to decide what clauses to copy and paste might not be the best idea when a person is unsure what the clauses mean or how they are intended to be used.  The information above may shed some light on how these typical clauses are typically used and in what scenarios.  When in doubt, legal advice should be sought to ensure the start-up has what it needs to achieve the desired result.
 
Sheldon McDonald is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.

[1] John Yogis et al, Barron’s Canadian Law Dictionary, (Hauppuge, NY: Barron’s Educational Series, 2009) (updated as necessary) sub verbo “representations”.
[2] Ibid.
[3] Ibid sub verbo “warranties”.
[4] Axa Pacific Insurance Co. v Premium Insurance Co., 2003 ABQB 426 at para 11.
[5] Yogis, supra note 1, sub verbo “Indemnity”.
[6] Atlantic Paper Stock Ltd v St. Anne-Nackawic Pulp & Paper Co., [1975] 1 SCR 580 at 584, 10 NBR (2d) 513 (SCC).
[7]  A trial without a jury can proceed quicker because there is less time used on selecting the jury, informing the jury of their duties, and familiarizing the jury with the law.  Additionally, if more time is spent in the court room, the costs will also increase.