Legal documents for your start-up
Legal contracts for your start-up

So you’re starting a company, eh?

The law (believe it or not) is here to aid Ontario start-ups in both protecting and commercializing their innovations and here are a couple of hidden traps to watch out for as you launch your Facebook killer!

NDA

We all know I’m referring to non-disclosure agreements, likely the first document any start-up will sign in its lifetime. Simple and sweet, with tons of online versions floating around. You meet up with an investor, customer or partner and they flip you an NDA. You know, the usual.

Or is it?

As I tell my clients, there are no standard NDA’s.  Read them!  I’ve had clients who were presented with an NDA on a PC screen in the offices of a multi-national semiconductor company in the Valley and were asked to click on “I Agree” before stepping into the meeting room. OK, fine, a $1 billion company won’t want to sign our NDA form, but that doesn’t mean we shouldn’t have a chance to read the fine-print.

Two things to watch out for:

  1. Make sure it’s a mutual NDA: It protects disclosures by both parties, so both you and the big guys are secure that your information will be treated confidentially
  2. Watch for whether the NDA protects verbal disclosures (i.e. what you say in the meeting, as opposed to the PDF of your business plan).

PO

OK, you can stop salivating now. Even the idea of that first purchase order for a start-up hits the spot, doesn’t it? You know, the big-money PO with all those fine-print terms and conditions on the back. “Who cares,” you say, “Show me the money!” (Yes, I have watched Jerry McGuire like a dozen times… not afraid to admit it.) You have spent all your grandparents’ life-savings on developing a neat gadget and now you have a buyer — great news! What is there to fear?

How about losing your ownership of the intellectual property in the gadget? A leading software company (which shall remain unnamed) has in their standard PO terms a little clause that basically says “we buy your product, hence so we own it”. Not a good long-term strategy for building value in a start-up if you give up the IP in your product on the first sale.

INC

As in: Your-Start-up Incorporated. Easy-peasy, right? Just download a form from Industry Canada and self-incorporate. “We’ll deal with it later — let me get the name registered.” I can’t tell you the number of times a client is faced with a term sheet to finance or buy the company, and we have to rush to restructure the company, re-incorporate and/or get signatures done (hopefully there are no disgruntled employees) for the deal.

Two things to watch out for:

  1. Who owns the shares (you, your wife, your holding company etc.) has important tax consequences on exit… as in more or less money in your pocket.
  2. If you have been operating for a while under a business name (no company registered), you could be hit with a tax bill from CRA unless you do a proper roll-over of the existing assets into INC.

A bad incorporation can hit you where it hurts most. So why have a bad start to your start-up?

Three acronyms to remember: NDA, PO, INC.   Keep them in mind and hopefully you can get your start-up on the running track with the right pair of sneakers. Good luck!

Original posting on the Ministry of Research and Innovation blog.

Arshia Tabrizi

Arshia advises start-ups in the IT and cleantech industries as the Founder of Tabrizi Law Office PC, a boutique technology law firm in Toronto. See more…