Legal Landmines and the Role of Legal Counsel for Startups

Alberta innovators and entrepreneurs continuously develop new ideas with limitless potentials. However, these ideas can often become inflexible by legal landmines or obstacles during the legal process. These “legal landmines” may relate to business or ownership structures, tax considerations, lease issues, financing issues, investors, consulting agreements, employment contracts, and intellectual property, among others.

This article identifies some of the “legal landmines” that startups may face and some of the key considerations startups will want to consider during its initial stages.

Business Structure and Ownership

One of the first questions that startups must decide is what form of business structure or ownership structure they want to use. Some examples are sole proprietorships, joint ventures, partnerships, and corporations.

Each structure has its own benefits and drawbacks, and a certain structure may be better suited for some startups over others. Some considerations are (1) how many people are involved in the business, (2) if there is more than one individual involved, what is each person entitled to, (3) tax consequences and considerations, (4) liability considerations, and (5) planning for an eventual exit strategy.

Specifically, when creating a corporation or incorporating, the incorporation process can be complex and there are several things’ startups will want to consider. The process involves (a) choosing a corporate name, (b) what share structure the corporation will use – the types of shares and amount of shares available, (c) what jurisdiction the startup will incorporate under – whether provincially, federally, or territorially, (d) what should be included in the bylaws, and (e) who will be the corporation’s directors and officers, amongst other things.

Further, founders will want to consider whether they need to or want to implement any agreements upon incorporation. These may take the form of shareholder agreements, unanimous shareholder agreements, or another form. These agreements may or may not be necessary, but they can create important protections for founders and investors and significantly reduce the risk of litigation in the future.

Financing and Investors

Additional issues for startups relate to financing and investors. Financing availability can cause great difficulties and may often be the primary concern for founders. Without financial support and backing, it is quite difficult for startups to progress forward.

However, a startup will want to be careful when obtaining financing and taking on investors or consultants. If a startup is relying on consultants for advice relating to managing cash flow, raising capital, or marketing, the startup may want a consulting agreement in place to properly define the relationship and each parties’ rights.

If and when a startup takes on investors, they will likely want an investor agreement in place to properly document the relationship and what the investor is entitled to based on their investment. Further, when taking on investors, there may be securities law considerations as securities laws do not only apply to companies listed on a stock exchange.

Employees and Contractors

When a startup is seeking assistance or additional workers, they will want to consider whether this help should come in the form of an employee, independent contractor, or something else. Each relationship comes with its own considerations and drawbacks. For example, employees can come with additional costs, such as obligations if the employee is terminated without cause, but the relationship may be continuous and ongoing, and the employee may exclusively work for the startup. Alternatively, an independent contractor relationship will usually have fewer associated costs, but the independent contractor may work for other companies and the relationship may be limited to a specific task. It is also important to note, depending on the nature of the relationship, a contractor may be classified as a dependent contractor for employment law purposes or a personal service business for tax purposes. Either of these classifications will eliminate many of the perceived advantages of an independent contractor versus an employee. It’s important to identify the risks and properly address them in any related employment or contractor agreement.

Intellectual Property

Startups will want to ensure that their intellectual property is properly protected. Intellectual property rights can include patents, trademarks, copyrights, and trade secrets. As part of this consideration, startups will want to ensure that their trade secrets and intellectual property are properly protected from those that they contract with and the broader public. This means that confidentiality should be properly address in agreements and contracts, including employment agreements, investor contracts, and financing agreements.

Conclusion

This article is not intended to identify all “legal landmines” that may impact startups. However, this article identifies some of the potential issues startups may face and how lawyers can help navigate these issues.

To assist our current clients and our future clients with overcoming these “legal landmines”, McLennan Ross has developed McLennan Ross Secure Start. For only $2,500 + tax, McLennan Ross will provide assistance to startups and help them navigate some of the issues identified in this article.

Click here for more information about McLennan Ross Secure Start or contact one of our lawyers.