Contracts for Startups 101

If you can read code (any type of code), you can read a contract. Yup – that’s right, contracts and coding have a lot in common. In fact, many of the skills I learned as a web programmer have helped me with drafting contracts. Show some code to a lawyer, and they’ll probably look at you like you’re from Mars. Show a contract to a programmer, and they’ll probably think the same. But at the end of the day, coding and contract drafting are extremely similar exercises that rest on having a logical base on which to build upon. So with that in mind, I thought it would be useful to have a short post on how to read a contract if you see things through the eyes of a programmer.

Variables are an integral part of any code. You set your variables up at the beginning in order to be able to use them later on. Let’s take an example for a financing:

<?php
//variables
$var1 = 100000;
$var2 = 50000;
$total = $var1 + $var2;
//Output on page
echo “An amount equal to $”.number_format($total).” shall be invested by the Investors in the Corporation.”;
?>

(Go ahead and test it. It works!)

What did we do here? Variable 1 is $100,000. Variable 2 is $50,000. So when the script runs, the number $150,000 appears as the result after the dollar sign. Now let’s take an example using contract drafting:

“Investor 1 Amount” means $100,000.
“Investor 2 Amount” means $50,000.
“Total Investment” means the sum of the Investor 1 Amount and the Investor 2 Amount.
And then, in the body of the contract, you would have “An amount equal to the Total Investment shall be invested by the Investors in the Corporation.

In each case, we need to define variables to use them in other parts of the document. The code actually produces a number. Contracts don’t do that, so we simply restate the defined term instead.

But as you can see, the logic of programming applies to contracts in a very similar fashion. Hopefully, if you can understand programming, this post has helped make reading contracts a little less daunting.

Incorporation

So you’re ready to take the plunge and incorporate. Fantastic!!

But before you run off to some website which offers you a low-cost incorporation service (and I’m sure that same website will tell you how unnecessary lawyers are at the incorporation stage), here are some things to think about:

  • Are you going to incorporate federally or provincially? (Do you know the difference?! Or why one would be preferable over the other for your particular circumstances?)
  • Where will you be registering the business?
  • Will the founders acquire all of their shares immediately? How many shares will you issue to each? Ten? A million? What will be the subscription price?
  • Will there be any restricted stock?
  • Are you going to issue any options to key employees who are not necessarily founders? (Oh, you are? Well, what does your stock option plan look like?)
  • Do you have your employment agreements ready to be signed?
  • Ditto for your confidentiality and intellectual property assignment agreements?
  • Wait… You mean the low-cost incorporation service doesn’t offer all these? You mean they have big disclaimers saying they don’t provide legal advice and will not be held responsible for your mistakes in incorporating?! Can’t find the answers in their Q&A?!!

Ok, I’ll turn down the sarcasm. Seriously, consult a lawyer before you do anything on this front. I can’t tell you how many startups come and tell us that we don’t need to look at their minute book because “everything is done”. The second we starting asking any one of the questions above, shoulders droop, gazes are averted and frustration sets in…

Save yourself a lot of time and believe it or not, some money, and go see a lawyer first. It’s almost always more expensive for a lawyer to clean up mistakes like this than it is for the same lawyer to do the work correctly from the start.