A STEP-BY-STEP GUIDE TO GROWING A TECHNOLOGY BUSINESS:

The Legal Aspects

A Bennett Jones PresentationToronto, Ontario

Lisa Abe-Oldenburg, PartnerBennett Jones LLPOctober, 2012

Growing a Technology Business

• Objective: To build a viable business selling technology to make profit

Key Steps:1. Set up your technology business structure2. Raise financing, receive government grants and tax

breaks3. Hire developers, employees, subcontractors and

suppliers4. Protect ownership of your intellectual property in

technology5. Commercialize your technology by licensing and

distribution

1. Set up your technology business structure

• Sole Proprietorship• Simple business name registration where individual person

owns all assets and liabilities, income/losses• Risk: No limits on liability – all personal assets at risk

• Partnership• Simple partnership name registration• Partnership Agreement• Risk: No limits on liability – all personal assets at risk• Liability for employees' and partners' actions

1. Set up your technology business structure (cont.)

• Corporation• Separate legal entity – like a person, it can own assets incur

liability• Liability limited to money and assets invested in the company by

the shareholders or lenders, except for certain types of liability, e.g. environmental, taxes, wages, personal guarantees (often required by bankers)

• Incorporation under Federal or Provincial Business Corporations Act by filing Articles – sets up shares

• Governance structure set up in By-Law, Shareholders Agreement and by statute: shareholders appoint directors who then appoint officers of the company

• More confidential, as private company registration doesn't disclose names of shareholders to the public

Basic Corporate Governance Structure

Which Business Structure to Choose?

• Factors to consider:• Number of owners• Limited liability• Perpetual existence

• Dissolution may cause tax problems• Participation in business• Initial costs• Continuing costs:

• Accountants, annual returns, etc.• Financing• Citizenship and residency• Income tax implications• Research tax credits

Partnership/Shareholder Agreements• How are meetings to be held? What if there is a tie in votes –

who gets the casting vote?• How will profits be split? When can dividends be declared?

Tax year end?• Who is to sign cheques, contracts, promissory notes, loans,

etc.? Limits on signing authority?• What if there is a material change in the business?• How can business assets be sold?• How and when can loans, bonuses or other payments be

made to a shareholder/partner, director or officer, or their relatives?

Partnership/Shareholder Agreements (cont'd.)

• Who decides if the business will enter into contracts, partnerships or joint ventures with others?

• When can one partner or shareholder be forced to sell or buy shares?

• How will each person’s share be valued in the event that there is a buy-out?

2. Raise financing, receive government grants and tax breaks• Seed capital, e.g. additional shareholders, partners, angel

investors, VCs, joint venture companies• Government grants, tax credits, e.g. SR&D• Loans – financing agreements• Public offerings (IPO), underwriters – consider start-up on

smaller stock exchanges• Key factors for Investors: incorporation, management,

history (track record), profitability, assets (intellectual property)

• Risk: loss of ownership, personal guarantees

3. Hire developers, employees, subcontractors and suppliers• Non-disclosure and confidentiality agreements

• Before, during and after employment• Prior to talking to potential investors, customers or suppliers• Only way to protect trade secrets

• Employment contracts• Supply, subcontracting or outsourcing contracts• Non-compete agreements or clauses• Transfers of IP ownership (assignments and waivers)

• Creations on-site, off site, during or after hours• Warranties and indemnities for infringement

• Corporate policies, e.g. IP development and procurement• Training and supervision

4. Protect ownership of your intellectual property (IP) in technology• Note: IP is unique to each country – need searches and protection

in each jurisdiction based on local laws

• Patents – need to be registered under Patent Act• Trade-marks - in words or logos; register under Trade-marks Act

for national protection; common law rights also may arise from use in Canada

• Copyrights – exist automatically under Copyright Act - works owned by developer (or company that employs them)

• Other statutory IP, e.g. Industrial Designs, Integrated Circuit Topographies, Plant Breeders’ Rights

• Trade Secrets (Common Law)• Warning: When inventions are disclosed to public, lose ability to

obtain a patent (subject to grace period in some countries)• TIP: Confidentiality/Non-disclosure Agreements (NDAs) and IP

searches are critical

What are some of the Rights that exist in Intellectual Property?• s. 3(1) Copyright Act – produce, reproduce, perform,

publish, translate, and depending upon the work, convert, adapt, present, communicate by telecommunication, rent; s.14, moral rights of author (integrity, association, anonymous)

• s. 42 Patent Act gives patentee exclusive right to make, construct, use and sell the claimed invention

• s. 19 Trade-marks Act – use registered TM in respect of wares or services throughout Canada

• other, e.g. duties of confidence, enforcement rights, right to sue, right to file applications or prosecute pending applications, indemnity rights, royalty rights, options

5. Commercialize your technology by licensing/distribution and responding to RFPs• License Agreements – ability to retain ownership and “sell”

the same technology more than once for multiple fees/royalties• Non-exclusive – sole – exclusive? Sublicenseable?• Who is the licensee? One company? Its affiliates? End users?

Distributors? Subcontractors? Service providers? Sublicensees?• Scope of rights, e.g. make, use, sell, copy, distribute, modify, publish,

translate, transmit by telecommunication, sublicense• Restrictions , e.g. by territory, product, process, CPU, users, etc.• Fee structure: fixed vs. variable, taxes, currency• Term and termination: perpetual (survives termination) or specified

term? For cause or convenience?• Ownership of modifications/derivative works• Warranties, indemnities, limits on liability

• Responses to RFPs and procurement process – ensure legal review

Conclusion• Structure your technology business and financing carefully• Have the right agreements in place to deal with potential

risks• Ensure you own all critical IP – get proper

transfers/assignments and waivers from all employees, subcontractors, suppliers and outsourcers

• Ensure your IP is protected by searches and registration – in each country where you may be doing business

• Must have NDAs and non-competes• Commercialize your technology world-wide by licensing• Hire distributors and build a global customer base to make

your technology business more profitable