common legl mistakes companies make before raising money

LEGAL MISTAKES COMPANIES MAKE BEFORE RAISING MONEYRon Segev and Marius AdomnicaSegev LLP

September 7, 2016

Segev LLP

INCORPORATE EARLY

Multiple advantages to incorporation◦Limited liability◦Easy to sell interest in your business and

investors comfortable with the structureIncorporating early (when your

company’s assets aren’t worth much) can make things simpler down the road

Segev LLP, 310 – 318 Homer St., Vancouver, BCTel: 604-629-5400, Email: m.adomnica@segev.ca

CHOOSE THE RIGHT SHARE STRUCTURE

Unlimited number of of common (voting) shares for the founders

Unlimited number of “Blank Cheque” preferred (non-voting) shares to be issued by the directors◦Investors usually seek specific terms

relating to preferred shares, this allows company to issue shares on those terms without amending articles later on

KEEP YOUR CORPORATE RECORDS IN ORDER

Hold Annual General Meeting (just a resolution)

File annual reports – no filings for 2 years means your company dissolved, assets go to government.

Keep your company minute book in good shape:◦ Investors will want to look at it when doing their

diligence – if it’s not in order they will lose confidence in the company

◦Reconstructing everything a few years down the road will be a lot more effort than keeping everything updated as time goes by

CLARIFY FOUNDER RELATIONSHIPS

Agree on shareholdings and roles of each founder

Remember that company and founders are separate entities

What happens if founders disagree on a major decision?

Dealing with these issues:◦Shareholder Agreement◦Founder Vesting/Employment Agreement

SHAREHOLDER AGREEMENTS

Agreement between founders and the company setting out their rights in relation to certain matters

Corporate statutes and articles often not enough to deal with all problems that can arise, having an agreement in place can help head off many of these issues

Best to get it done early in the process, when everyone on same page

COMMON SHAREHOLDER AGREEMENT CLAUSES

Drag along rights – If majority of shareholders want to sell their shares, minority shareholders must sell as well.Tag along rights – If majority shareholders want to sell their shares, minority shareholders can sell on same terms.“Shotgun” clause – Shareholder A offers to buy all of Shareholder B’s shares. Shareholder B must either sell, or buy all of Shareholder A’s shares for the same priceRight of first refusal – If shareholder wants to sell their interest, other shareholders get first option to buy their shares.Right to appoint directors – Shareholder must vote their shares to appoint directors previously agreed to.

VESTING AGREEMENTSDeparture of a founder or key employee

can be extremely harmful to a companyEnsure that founders/key employees get

their shares gradually, rather than all at once, ensuring they have an incentive to stay with the company

Investors want such agreements in place to mitigate risk a founder/key employee will leave

SAMPLE VESTING SCHEUDLE

PROTECT COMPANY IP

For a tech company IP is generally your most important asset

Investors want to see “clean” IP ownership

All founders and employees should sign IP Assignment Agreement in favour of company

Check IP provisions in agreements with previous employers

PROTECT COMPANY IP

Confidentiality Agreements (NDAs) with all third parties and employees from the start

Have internal procedures in place to protect IP.

Register trademarks (makes defending the trademark much easier)

Apply for patents◦ Must apply for a patent within one year of

invention being disclosed to public (if NDA in place, no disclosure)Segev LLP, 310 – 318 Homer St., Vancouver,

BCTel: 604-629-5400, Email: m.adomnica@segev.ca

PAPER YOUR AGREEMENTS

Oral or “informal” contracts are a bad idea:◦ Hard to present terms of the agreement to third

parties (i.e. investors)◦ Ambiguities will inevitably pop up (even without any

ill-intent from either side)◦ Will not cover all the issues they need to cover◦ Increase the chance that a dispute will end up in

litigationInformal contracts increase company’s liability

exposure, thus increasing investor riskGet written agreements whenever possible

CONSIDER SECURITIES LAWS BEFORE RAISING

Cannot issue and sell securities to anyone unless:◦ You have filed a prospectus (expensive)◦ You qualify for an exemption

“Accredited Investor” exemption – wealthy individuals or professional investors

“Friends, Family and Business Associates” exemption – a corporation’s control persons and their family members or friends/business associates (“someone who has known the seller long enough to assess their capabilities and trustworthiness”)Segev LLP, 310 – 318 Homer St., Vancouver,

PRIVATE ISSUER

“Private Issuer” exemption – applies if your company◦ Is not a reporting issuer (public company)◦ 50 or fewer shareholders◦Has restrictions on the transfer of its shares◦Has only sold securities to its directors, officers,

employees, family members of control persons, current security holders and accredited investors

Can lose exemption if not in compliance with the above

CONSIDER ELIGIBILITY FOR GOVERNMENT PROGRAMS

National Research Council - Industrial Research Assistance Program (IRAP)

SRED Tax Credit EBC Tax Credit Industry-specific programs (Telefilm Canada, etc.) National Research Council concierge service (1-855-

534-8433) Some of these programs have eligibility requirements,

often important for investors that you qualify (i.e. EBC Tax Credit)

Good idea to review the requirements for the programs and ensure your company remains eligibleSegev LLP, 310 – 318 Homer St., Vancouver,

QUESTIONS?

CONTACT INFO

Ron SegevEmail: ron@segev.caPhone: 604-629-5402

Marius AdomnicaEmail: m.adomnica@segev.caPhone: 604-629-5405

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