15 Legal Concepts Every Start-up Should Know About - BHF presentation for FounderFuel

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15 Legal Concepts Every Start-upShould Know About

February 25, 2014

▫ Corporate Lawyers Fred Dionne (Stikeman, Osler, blue HF) Julien Saulgrain (Clifford Chance, Willkie Farr, McCarthy, blue HF) Karen Park (LaBarge Weinstein, blue HF)

▫ Paralegals Annette Laroche (McCarthy, De Grandpré Chait, blue HF) Emilie Cyr-Lemieux (blue HF)

▫ Strong Of-Counsel Network We have surrounded ourselves with a strong network of

professionals (tax, IP, R&D, accounting, labor, litigation)

Our team2

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Corporate “stuff" The basics: shareholders, directors, officers, minute books, filings Others: share terms and dilution, shareholders agreement, stock

restriction, stock option plans

▫ Raising capital: Equity Debt Crowdfunding, S.A.F.E., Grunt Fund

▫ Protecting your IP and IP-related contracts

▫ Other important commercial contracts

15 legal concepts for your StartupCo3

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

You are in charge!

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Unfortunately… you need legal “stuff” to run your business

▫ You are responsible for your legal contracts and other documentsand related budget

▫ Organization is key… and will save you $$$ Minute books Corporate resolutions Keep your counsel informed Scan your contracts and other legal documents

1- Be organized and manage your legal fees5

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Corporation Provincial vs. federal incorporation

▫ Shareholders Elect the board of directors Limited liability

▫ Board of directors Fiduciary duties Personal liability

▫ Officers Run the day to day operations

▫ Creditors Secured or unsecured

2. Corporation, shareholders, directors,officers and creditors

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Corporate obligations Annual approvals: financial statements, directors, officers, auditors Resolutions in writing vs. general or special meetings

▫ Filings Corporate filings (company registrars): federal and provincial Tax, R&D filings Other filings: Patents, trademarks, etc.

3. Annual maintenance7

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Common shares Issued to: founders, employees/consultants friends & family and seed round investors

Typically voting rights and rights to dividends Any $$$/assets to be distributed among shareholders on a sale or

winding up of the company = shared among the common shareholders

▫ Preferred shares Issued to investors Voting rights and rights to dividends Priority over the common shares to receive $$$/assets to be distributed

among shareholders on a sale or winding up of the company Convertible into common shares : optional vs. automatically Often redeemable after a set number of years

4. Share terms (1): common vs.preferred shares

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ General No anti-dilution: preferred shares convert (1:1) into common shares Anti-dilution rights are standard for preferred shares When does anti-dilution kick in?

▫ Weighted average anti-dilution Most common approach Adjustment to the conversion price, taking into account: Price and amount of $$$ previously raised Price and amount of $$$ raised in the subsequent down-round

▫ Full ratchet anti-dilution More dilution of founder shares Investors maintain the same level of ownership as on initial investment May deter new investors Conversion Price is equal to the issue price of the dilutive financing

5. Share terms (2): conversion priceand anti-dilution

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ The issuance of securities is subject to securities legislation: of the province where the subscriber resides of the province where the issuer of securities conducts its business

▫ Prospectus ($$$) vs. no prospectus ()

▫ Rely on private issuer exemptions

▫ What is a « qualified investor » ?

▫ A violation of securities laws is your biggest nightmare

6. Raising capital (1):equity and qualified investors

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Convertible debenture What is it? Optional vs. automatic conversion Time of repayment: maturity and default May be secured or unsecured

▫ SAFE (Simple Agreement for Future Equity) What is it? Automatic conversion Time of repayment: no maturity date Unsecured

▫ Grunt fund What is it?

7. Raising capital (2): convertibledebentures, SAFE and grunt funds

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Forms of Crowdfunding

Donation and Rewards (OK)

Equity Crowdfunding (not OK yet but probably soon)

▫ In the US JOBS ACT (Jumpstart Our Business Startups)

▫ In Canada OSC and the AMF are working on it

8. Raising capital (3): crowdfunding12

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ What is a Shareholders Agreement

▫ Board of directors: board member vs. observer

▫ Information right (financial and other relevant information)

▫ Special majority approval: certain matters requiring approval ofspecial majority (e.g., 2/3) of shareholders

▫ Pre-emptive right: right for shareholders to participate in newissuances of shares, so as to limit the dilution of the shareholders’ownership

▫ Non-Compete and Non-Solicitation

9. Shareholders agreement (1):governance and issuance of shares

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ General: general prohibition vs. permitted transfers

▫ Right of first refusal upon a sale of shares

▫ Tag-along upon the sale of StartupCo

▫ Drag-along upon the sale of StartupCo

▫ Buy-back of shares in certain events affecting a shareholder (death,disability, termination of employment)

10. Shareholders agreement (2):exit and transfer of shares

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Granting stock options is a popular performance incentive

▫ The ESOP governs the issuance of stock options: Standard vesting terms of the options Requirements to exercise options Treatment of options on termination of employment

▫ Vesting: The schedule of when issued options can be exercised for shares by

the optionholder A percentage of the granted options may vest monthly or annually over

a period of years (often 3-4 years)

▫ To exercise options, the optionholder must pay the exercise priceand become a party to the shareholders agreement

11. Stock option plan (ESOP) and vesting15

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ What are restricted shares?

▫ A stock restriction agreement sets out the terms of therepurchase/forfeiture: Events that trigger the right of repurchase/forfeiture Purchase price per share upon a triggering event Time when shares cease to be restricted shares

▫ Reverse vesting Schedule of when restricted shares cease to be restricted

12. Stock restriction agreementsand reverse vesting

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15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ You are always (a bit) protected

▫ Know your IP: Open source elements how proprietary is your code /software?

▫ Source code: Do not disclose/transfer/license your source code… ever (if possible) The source code escrow alternative

▫ IP Assignment clauses: a must… everywhere (in employment,service and other commercial agreements)

▫ Confidentiality: you, employees, suppliers

▫ Registration: patent, trademark, copyright. Yes but … $$$

13. Protecting your IP17

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ Development services agreements StartupCo as service provider StartupCo as client

▫ License agreements Inbound vs. outbound Licenses EULAs, SDKs

▫ Testing your products: beta test/evaluation agreements

14. IP-related contracts18

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

▫ NDAs: beware… they may be nastier than you think

▫ Website agreements Terms of Use / Terms and Conditions Privacy Policy

▫ Agreements with suppliers (ISPs, data centers, rack spaces…)

▫ Others Cloud services Distribution: reseller, referral

▫ Always maintain flexibility for change of control / assignment

15. Other commercial contracts19

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

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Q&A

15 LEGAL CONCEPTS FOR YOUR STARTUPCO | FEB 2014

Frédéric Dionnefdionne@blue-hf.com | 514-907-9318

Julien Saulgrainjsaulgrain@blue-hf.com | 514-544-1044

Karen Parkkpark@blue-hf.com | 514-907-1889

www.blue-hf.combig firm quality, small firm fees

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