Canada: Are You Ready For VC? 10 Legal & Business Matters To Address

Last Updated: March 26 2014
Article by Stuart English

1. Protect your Ideas

Digital media and other technology companies derive most of their value from their innovative ideas, or intellectual property (IP). That IP isn't nearly as valuable, and you won't be nearly as attractive to venture capital (VC), if you can't stop others from copying or using your IP.

Before you go to market and tell the world about your great ideas, find out what protection is available for your IP. There are some basic steps you can take (without spending a lot of money) to ensure your IP is not used by others, and continues to give you a competitive advantage. Consider patent and trademark registrations, and make sure employees and others developing or having access to your IP assign any rights to you and enter into confidentiality agreements.

You should also check to make sure you're not using someone else's IP in a manner that's infringement, which can happen even if it's independently developed by you (not copied).

2. Incorporation

Most businesses should be carried on through a corporation, keeping business assets (including your valuable IP) and liabilities separate from those of individual owners (or shareholders) and providing a vehicle for investment, whether that's VC or seed capital from angel investors, founders, family or friends.

Incorporate early and avoid the added complexity and cost of transferring the business to a corporation later.

Once you've incorporated you should maintain the corporate records properly, particularly documents relating to the issuance of shares (more on this below), appointment of directors, and authorization of changes to the principal corporate documents (such as the share terms and other provisions in the articles of incorporation). Without proper records, VCs may be concerned that prior transactions have not been properly authorized or are not in compliance with applicable laws, which can adversely affect the corporation or the VC's rights as a shareholder. Even if these deficiencies are unlikely to actually cause problems, VCs will be concerned these "skeletons in the closet" may hurt their ability to sell the company or take it public.

3. Issuing Shares

When issuing shares of a corporation:

  • Pick your shareholders with care – consider whether you want the person to be an investor in your business; even a small shareholder can be a nuisance and hard to get rid of (without a shareholders' agreement with the right provisions). More on this below.
  • Consider securities laws – make sure each issuance of shares is exempt from securities laws applicable to public offerings (IPOs). They generally will be for founders and family, but friends and angel investors may not qualify. VCs will want to know the prior share issuances are not "off side" – another "skeleton in his closet" that makes your company less attractive and may hurt your ability to raise funds.
  • Document the issuance of shares properly – without this, you may not be able to show with certainty the number of shares issued and who the shareholders are, or demonstrate compliance with securities laws, which can be a major concern to VC.

4. Shareholders Agreement

You need a shareholders agreement to deal with:

  • Decision-Making – What decision-making (or control) shareholders have (or don't have). Relying on a "majority rule" (based solely on shareholders voting rights) without a shareholders agreement is fraught with problems – it can result in shareholders, large or small, having too much control over some decisions, or not enough over other decisions.
  • Finances – How the business will be funded; that is, obligations of existing shareholders to advance additional funds or give guarantees, and any restrictions on accepting new shareholders (such as pre-emptive rights) or obtaining bank loans.
  • Distribution of Profits – How any profits will be distributed, whether as dividends or bonuses to employee shareholders.
  • Sale of the Company – Absent a shareholders agreement, shareholders generally cannot sell, or be forced to sell, their shares, and a sale of the corporation's assets may be blocked by minority shareholders. You may want the right to buy back shares after a shareholder ceases to be actively involved in the business (which, following death, can apply to a shareholder's heirs). A majority of shareholders should be able to force a sale of the company if not all shareholders agree – a "drag-along" provision is essential to be able to force all shareholders to sell their shares.

5. Key Contract Provisions

Contracts key to your business (e.g. IP licenses, long term or large value customer contracts) should have appropriate provisions when dealing with matters such as ownership of IP, liability, indemnification, termination, and assignability. You should have a good standard form contract for ordinary course repeat transactions (e.g. end user license agreements) and have significant "one-off" agreements reviewed by a lawyer.

VCs will review contracts as part of their due diligence, and serious flaws, particularly those that fail to protect ownership of IP or leave your company exposed to potentially large liabilities (even if only contingent and unlikely to materialize), can jeopardize a deal.

6. Business Strategy and Proof of Concept

Do you have a well thought out business strategy for your business? What is your value proposition, how will you go to market, which market and verticals are you targeting, what's your pricing strategy, how are you going to scale the business, and do you have product development roadmap? If some of these pieces are not yet defined or clear, approaching VCs too early may produce a negative first impression and hinder your chances of raising capital.

Unless you're a serial entrepreneur who has made money for a VC before, it is unlikely that a VC would invest in your business before seeing proof of some traction of your product/service in the market. It's important to win a couple of meaningful clients to validate the potential of the product/service to VC.

7. Pitching your Business to VCs

VCs meet hundreds of companies and need to quickly decide whether the business they are looking at deserves investing their limited time. Listening to pitches every day makes it relatively easy for a VC to rapidly brush off less attractive opportunities.

Before getting in front of one of them make sure your pitch is well rehearsed, short and crisp. At a high level a few key elements should come across very quickly and clearly:

  • what is and how big is the market opportunity
  • what is the value proposition of the business to address the opportunity
  • why is the business going to win against competitors
  • what is the business model and business strategy
  • management team competence and ability to execute
  • what are likely exit scenarios

8. How Much is Needed and How Will the Funds be Used

When trying to raise money for your business, one of the first questions will be around the amount and use of funds. A clear idea of the amount needed and how this ties to the growth of the business (backed by a business plan and financial model) will be expected.

One dilemma often facing entrepreneurs is the speed at which to ramp up the business, which is often contingent on the availability of resources and capital. For VCs it's critical to understand how the deployment of more or less funds is going to translate into top line growth. The quantum of the funds sought should be considered in this context and should provide flexibility to allow the business plan to still be executed if growth this materializes more slowly than anticipated. You don't want to run out of funds because you're six months behind in your plan.

9. Value Expectations

At the early stages, the value of a technology company is highly debatable and subjective. A number of factors will play a role including the size and growth potential of the market, scalability and competitive advantage (including IP protection) of the technology, path to profitability, capability of the management team (skillset, prior experience building a business successfully) etc. Ultimately, it comes down to the prospect of the business generating cash flow in the future, which depends on many assumptions. Views on these assumptions, and therefore value, will differ.

Speak to as many VCs as you possibly can and get their view on how they would value your business. It is important for you to be realistic. If the general consensus on the value of your business is significantly less than your own valuation, consider the following:

  • If you've talked to a sufficiently representative group of VCs and they all indicate a similar value, then probably that's what the market is willing today to price a business in your sector and with your characteristics (this may have a lot to do with perception of the attractiveness of a sector at a given point in time)
  • Investors are investing to make money and need to believe that a market risk adjusted return can be achieved.
  • This will likely not be the last time you need to raise funds, and it will be important from a story and optics perspective to do the next round at a higher valuation (it's all about growth). If you price too high today you may be pricing out future investors, increasing the risk of a "down" round (a financing done at a valuation lower than the previous), and have unhappy investors on board.

10. The Right VC for Your Business

What are you looking for? Not all VCs are the same and you'll be well served by doing due diligence on them, just like they'll do on you and your business. It is a good idea to start this process early, before you're running out of money, so that you'll have time to explore different options and have more flexibility.

When you take VC money you also partner with sophisticated investors that will have a say in how you run your business. At a minimum, you should be comfortable with the individuals (who will most likely be sitting on your board) and find out about their experience with other investments and entrepreneurs.

What do potential VCs bring to the table? Is it only capital, or are they going to be able to open doors for your business? Will they be passive or active investors? What is their attitude? Will they back you up if things get tough (e.g. provide more funds) or run for an exit? What kind of rights are they looking for as part of their investment? Will they be an asset or a liability when trying to attract more investors down the road (connections, reputation, terms of their original investment, association with a strategic party, etc.).

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.