Canada: How To Set-Up Your Start-Up

As anyone who has been part of a technology start-up likely knows, the founders' to-do list for ramping-up the business is long, and there are only so many hours in the day to get through it. However, one step that should always be given the proper time and attention is the legal structure of the business. Below are several of the key legal steps that most start-up tech businesses should do either before, or as they start doing business.

Incorporate

Incorporating has many benefits for a start-up, and the most important is likely the limitation of the shareholders' liability from claims made against the business. Many entrepreneurship textbooks and articles tell start-up entrepreneurs that they can save a few dollars by incorporating without the help of a lawyer. It's true that it may be less expensive at the outset, but chances are the start-up will end up paying more later to have its Articles of Incorporation amended and the corporate structure modified. Or worse, if the incorporation and corporate organization are done incorrectly, the start-up could be setting itself up for a costly lawsuit, and its shareholders may even fail to benefit from the company's limited liability protection. It is prudent to seek accounting and legal advice before incorporating and incur the cost of having the incorporation and corporate organization done correctly. The founders can then enjoy the peace of mind, and the extra time to work on other things, that comes along with it.

Issue Shares

The founders of a start-up will typically be its shareholders. The proportion of shares (percentage of ownership) allocated to each shareholder needs to be determined when the start-up is incorporated and organized, and will often depend on factors such as the level of skill, experience or funds contributed to the business by each shareholder.

Many tech start-ups like to issue shares to founders that have special restrictions that prevent the shares from immediately vesting to a founder, but instead the shares are designed to vest (become fully owned) over pre-determined intervals. These shares normally include a requirement that for the shares to vest the founder must still be working for the company, thereby providing an incentive and reward to founders who stick around with the business.

Get a Shareholder Agreement

At the same time as the start-up is being incorporated the shareholders should be entering into a shareholder agreement to establish, among other things, the rules for how fundamental decisions about the business will be made, how the business will initially be financed (including possible obligations on the founders to provide funding in a cash-call or give personal guarantees to a lender), and how share sales by a shareholder, or the sale of the entire business, will be dealt with by the company.

Create Incentive with an Employee Stock Option Plan

Many start-ups seeking rapid growth choose to issue stock options to key employees to give an incentive to the employees and to align the employees' interests with the company's. Giving an employee stock options can also be an effective way for a start-up to avoid paying the employee a high salary before the business can afford to do so. The rules and requirements of the stock options will be established in an employee stock option plan, which will govern things such as when and on what conditions the employee will be able to exercise the options to obtain shares. Typically, an employee's ability to obtain the shares will depend on certain performance objectives being met by the employee or the business, as well as the employee still being employed with the business at the time the shares are issued. If the start-up intends to have an employee stock option plan, the shareholder agreement should be structured to accommodate stock options being issued and future shareholders coming on board.

Protect the Business with Employment Agreements and Restrictive Covenants

Many businesses go on to regret not having their employees enter into employment agreements and restrictive covenants (such as non-competition and non-solicitation agreements) when the employees are hired. By having employment agreements in place the business can establish the employee's performance expectations and termination entitlements for notice or severance pay. Under an employment agreement the business and the employee can agree to severance entitlements which may be substantially less (or more) than the employee would otherwise be entitled to receive if no employment agreement were entered into. Employment agreements can also include provisions confirming that any intellectual property produced by the employee in the course of his or her employment becomes the property of the business. Employment agreements should be entered into before the employee starts working.

In the tech sector in particular, ensuring that founders and employees enter into non-competition and non-solicitation agreements (or including these restrictive covenants in employment agreements) can be critical for protecting the start-up's marketspace, customer base and employees when a founder or employee leaves the business to work elsewhere.

The foregoing provides a short overview of several of the common legal steps and agreements that a tech start-up should typically complete to establish its legal structure, position itself for growth and protect itself and its shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions