Editor’s note: We’re delighted to introduce the first Canadian Startup Lawyer blog by Rob Cowan, Partner at McInnes Cooper. This will appear monthly on Rob’s blogging site, StartupLawyer.ca, and Entrevestor.
Each month, Rob will select a topic that arises frequently in his work with leading Canadian startups, and provide the advice that sets young companies on the course to success. It cuts through the jargon and complexities of the legal world to help founders – and their followers – avoid mistakes that can soak up time and money down the road.
We’d like to thank Rob Cowan and McInnes Cooper, a leading Canadian firm for startups, for working with us on this initiative and sponsoring our site.
This is my first in a regular series of blogs to the legal issues facing startups, so it makes sense that I should start off with the first stage of setting up a technology-based company.
First of all, let me clarify that my comments in this and subsequent blogs will not refer just to IT companies but to companies in the life sciences, cleantech and oceans segments. We’re interested in all scalable companies with proprietary technology. And if you’re forming that kind of company, there are things you should be aware of from the first step.
From a legal point of view, you’ve got to set out to protect yourself and your ideas even before you incorporate. You have to make sure that you take steps to protect each individual on the team as well as the team itself. I subscribe to the prevailing view that companies have the best chance of success if they’re formed with two or three co-founders rather than a single founder. But you have to make sure it’s the right team for you and that it’s structured properly.
I’ve found the litmus test for a good startup is communication. If you find you’re not talking to your co-founders, or there is one huge issue you can’t discuss, it may be a sign that this team isn’t going to work out. Better you find this out early on in the life of your startup. Startups are hard and you need a strong team to work through the inevitable lows.
Even if you do have a good team, there are a few steps you should take. First, you have to decide how to divide the pie before you start baking it. The co-founders will have to sit down and decide how to divide ownership of the company, which should be done on a rational examination of each person’s contribution.
Problems arise at this stage if a co-founder thinks he or she has contributed more than the others or assigns a dollar-per-hour figure to his or her contribution. In other words, don’t go in with the attitude that “I bring more to the table” or “I earn X dollars per hour so I should get Y dollars out of it for so many hours a week.” It’s a startup. No one earns what they’re worth in the early stages.
Everyone’s contribution should be respected. The team also has to realize that team members may depart in the future, because of a disagreement or better opportunity or whatever. The founders should protect themselves through a vesting of their shares, which means that if someone does leave then the company can claw back some or all of their shares. The Founders’ Agreement must stipulate what happens if founders are no longer involved in the business.
Finally, you have to protect your idea. You have to ensure you can get all the creators of the intellectual property to assign it to the company. That usually means that when you incorporate, assign the IP to the company in exchange for shares.
The final stage of protecting the IP may be a patent, but it’s not a given that this will be the best way to protect the intellectual property. Get the best advice possible on this. If your idea is worth pursuing, it’s worth paying to make sure all parties and their idea are appropriately protected at the outset.