get a good legal head start(up) - lwlaw.com
TRANSCRIPT
Get a Good Legal
Head Start(up)
October 27, 2012 Presentation to SFU Venture Connection By: Mark Longo, Partner, LaBarge Weinstein LLP .
Open Doors.
Close Deals.
Today’s Agenda 1. Before You Start
2. Forms of Businesses & Incorporation Decisions
3. Tax Planning
4. Founder Agreements
5. Reverse Vesting
6. HR Agreements
7. Intellectual Property
8. Commercial Contracts
9. Financing Your Business
10. Selling Your Business
About LaBarge Weinstein LLP • A business law firm established in 1997
• Recognized as the leading national firm for technology
and knowledge-based companies
• 40+ professionals serving clients across Canada and
abroad from offices in Ottawa, Toronto, Waterloo and
Vancouver
• Full service business law practice, including:
Corporate/Commercial
Securities, Corporate Finance & Debt Financing
Mergers & Acquisitions
Intellectual Property and Licensing
Taxation & Estate Planning
Human Resources
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Some Recent LW Deals
Closed over $6.5 billion in M&A transactions and $5.5B in VC
and venture debt transactions since founding in 1997
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• Your corporate and legal foundation must facilitate future rounds of financing
• Your foundation must be ‘exit friendly’
Begin with the End in Mind …
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Case Study # 1:
Before You Start
Before You Start • If employed, review your current employment
situation
What do your current employment terms say?
Are you subject to a non-compete or non-solicit? Are your new partners?
Will you or your partners be
perceived as having taken
confidential information from
your employers?
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Before you Start (Continued)
• Review the legal and business landscape of your proposed business
Are there special legal impediments to starting your business? Existing license or franchise restrictions? Regulatory barriers?
What licenses or consents are required? From regulators or franchisors?
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Case Study # 2:
Forms of Businesses and
Incorporation Decisions
Forms of Businesses
• Means of Conducting Business Sole proprietorship
Partnership/Limited Liability Partnership
Corporation
• Considerations Type of business
End goal
Tax considerations
Liability
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Incorporation Decisions
• Jurisdiction – Federal vs. Provincial vs. Delaware
• Types of Shares Common
Non-voting
Preferred
• Audit or No Audit
• Directors
• Officers
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• Allocating Shares Tax considerations
Incentive considerations
Shareholders agreement
• Board of Directors
Composition and role
In the “closely-held” company
With the arrival of investors
Incorporation Decisions (Continued)
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• Canadian Controlled Private Corporation (“CCPC”)
status is key:
750K Lifetime capital gains exemption for founders
Refundable SR&ED claims
• Family trust = Potentially millions in tax savings
Founder is a trustee and a beneficiary…you call the shots
(including paying only yourself if you like)
Timing is key:
Early establishment of trust is optimal but not essential
Tax “freeze” can be used later if needed
Inexpensive to establish - use it for 21 years
Tax Planning
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Case Study # 3:
Founder Agreements
• Assumes “traditional” high tech startup model
Largely “technical” founders come together to design
and build product
Financial, sales, marketing, executive roles
may be added at outset or later
Financing likely required
Main sources of compensation going
forward: equity and salary
Founder Agreements
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• How to value relative contributions to business?
• What if a founder departs early for any reason?
• How is the company run? Legally? Practically?
• How are new hires to be compensated?
• Laying a groundwork for future investors
• Tax considerations
• Can a founder sell his or her shares?
Founder Agreements (Continued)
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• IP and Confidentiality Agreements
Assigning pre-incorporation IP to company
Confirming company ownership of after-created IP
Ensuring confidentiality
• Founders Agreement can provide for:
Board membership
Holding board meetings
Special approval requirements
Founder Agreements (Continued)
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• Typically, everyone is restricted from selling
shares except:
To family, trust or corporations for tax planning
If they offer shares first to other founders (“ROFR”)
Other founders can also sell their
shares to the buyer
Dealing in Shares
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• What is reverse vesting?
Some or all of shares issued to a founder can be repurchased by the company
Conditions can include remaining with the company over time or achieving milestones
As conditions are met, specified number of shares are no longer subject to repurchase right
Good for tax purposes, as founder is deemed to hold all shares on the first day they are issued
Reverse Vesting
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• Tax considerations dictate that the earlier that shares are issued, the better
• Intra-Founder considerations dictate that shares should reward contribution to business and longevity with business
• Accomplished through a contract
Either a shareholders agreement or a
“reverse vesting” agreement
Reverse Vesting (Continued)
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• Often some shares are vested on the day they are issued, to recognize past contribution to business
• If founder leaves the company:
Unvested shares repurchased at cost
Vested shares can be placed under a “voting trust”, where remaining founders have right to vote the shares
• Departure from the company might be defined as resigning or being terminated
Reverse Vesting (Continued)
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Case Study # 4:
HR Agreements
Employment Agreement
• Job Description
• Compensation & Benefits Package
• Confidentiality/Ownership of IP
• Non-Compete
• Non-Solicitation
• Termination Provisions
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Independent Contractor
Agreement
• Deliverables
• Compensation
• Confidentiality/Ownership of IP
• Term and Termination Provisions
• Ensure individual is truly an
independent contractor
Stock Option Plan
• Provides for the grant of an “option” to acquire shares in the Company
• Purpose: To attract and retain key employees, directors,
advisors, etc.
To align goals of option holder with those of the shareholders
• Control exercise of options using a vesting schedule
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Case Study # 5:
Intellectual Property
Intellectual Property • Did you get advice on your IP strategy?
• Did you transfer your pre-incorporation IP?
• Signed IP agreements for everyone: Founders
Employees
Consultants
Advisers
• The dangers of a faulty
IP trail…
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Intellectual Property (Continued)
• Trademarks
• Patent Applications
• Copyright Registrations
• Trade Secrets
• Website Terms of Use
• Privacy Policy
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Intellectual Property (Continued)
• Establish procedures for the protection of trade
secrets and other confidential information
• Use Non-Disclosure Agreements
• Consider registering
intellectual property
• Open source software
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Non-Disclosure Agreement
• Used in discussions with third parties to protect confidential information
• Can be mutual (two-way) If both parties are disclosing
sensitive information
• Can be one-way If Company is the only party
disclosing information
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Case Study # 6:
Commercial Contracts
Commercial Contracts • Sales Contracts – consumer protection
• SaaS agreements
• Licensing License revenue approaches
Royalty (per unit, percentages)
Up front
Service and maintenance fees
The perils of exclusive licensing
• Channel Sales Agreements
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Case Study # 7:
Financing Your Business
Financing Your Business
• Sources of Financing Accelerator programs
Friends and family
Government grants
SR&ED tax credits
Seed/Angel Investors
Venture Capital
Bank financing
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Securities Law Considerations
• Comply with applicable securities laws: NI 45-106: exempt distributions from Prospectus/ registration
Need comparable US federal/state exemptions for US investors
• Private placement Prospectus Exemptions: Private issuer exemption
Friends & Family
Accredited investor (Canada and US)
Employees, officers, directors, consultants
• Resale restrictions apply to exempt share purchases
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Seed Financing Documents
• Subscription Agreement (equity or debt)
• Convertible Promissory Note
• Shareholder Agreement
• Investor Rights Agreement
• Cap Table
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Venture Capital Financing
• Form of Investment Convertible debentures
Preferred shares Priority of payment (liquidation preference)
Guaranteed return on investment
Redemption rights
• Other Considerations Due diligence
Loss of control
Valuation
Loss of liquidity
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Financing Due Diligence
• Due diligence can make or break a deal
• Proactively create virtual data room
• Deals have a finite time to close
• Don’t give investor reason to walk
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Term Sheet Crib Notes Drag-Along: right of subset of shareholders to force exit .
Right of First Refusal: right to buy portion of shares to be sold by
shareholder .
Co-sale Rights: right to sell shares on same terms as shares to be
sold by shareholder .
Pre-emptive Rights: right to buy portion of shares offered for sale
by company .
Protective Provisions: shareholder approvals over certain
corporate matters .
Information Rights: right to regular financial and other reporting \
Observer Rights: right to attend board meetings in non-voting
capacity
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Case Study # 7:
Selling Your Company
$$$elling Your Company
• Selling for cash or shares or combo
• Acquisition structures: Asset purchase
Share purchase
Merger/amalgamation
• Deferred consideration: “earn outs”
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$$$elling Your Company (Continued)
• Representations and warranties
• Liability issues: Indemnities can last for years
Escrow/holdbacks
• Be prepared for insanely rigorous due diligence
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Non-Legal To Do List
• Network in the Valley (e.g. C100) and
locally
• Take advantage of government programs
(e.g., SR&ED, IRAP, etc.)
• Surround yourself with great mentors
• Become “EBC” eligible
Information Sources • Canadian Venture Capital Association: www.cvca.ca
• National Venture Capital Association: www.nvca.org
• BCSC: http://www.bcsc.bc.ca/privateplacements.asp
• Basil Peters’ blog: www.angelblog.net
• www.startupcan.ca
• www.startupcompanylawyer.com
• www.seriesseed.com
• http://www.marsdd.com/articles/co-founder-
agreements/
• www.sprouter.com
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Mark Longo, LL.B., MBA
Partner, LaBarge Weinstein LLP
(604) 630-0448; [email protected] @markjlongo .
Open Doors.
Close Deals.