Founding

So you saw the Social Network and started chatting with some friends. You’ve got some great ideas and you think you can turn those ideas into a viable business. You’ve finally decided to take the plunge and found a start-up. First off, congrats! Now, any idea what you’re in for? At the time that the Social Network came out, Mark Zuckerberg, in trying to play down some of the myths about founding a startup, said this about founding Facebook:

“I mean, the real story is actually probably pretty boring, right? I mean, we just sat at our computers for six years and coded.”

Mark Zuckerberg

It’s incredible, but that short sentence speaks volumes.

It’s boring?

I suppose what Mr. Z was trying to say is that real life isn’t like the movies. It’s not all glitz and glamour (in fact, there’s very little of that). Founding a startup is hard work, and if you think that it will be anything other than work, work, and more work, you’ve got another thing coming. And often times, it can be a bit tedious – anyone who has ever done any programming will tell you that (and yes, I’ve done some programming – it’s how I paid my way through law school).

It takes years

Although the actual act of founding a company isn’t too lengthy a process, the work involved in bringing an idea into fruition, while at the same time creating a business around that idea, can take years. Rome was not built in a day. And in today’s world, you have to continuously improve and reinvent yourself – lest you get invaded by barbarians who pillage your town (I’m looking at you, Odoacer…). So if commitment isn’t your thing, you may want to rethink the whole startup gig.

You’re not alone

Chances are you’re not a one-man (or woman) show. You’ve got a small group of initial founders, but the size of the team will evolve over the years. Right from the start, you need to think about who makes up that founding team and what each person brings to the table. You’ll also need to think about what happens when someone leaves (willingly, or otherwise) and what happens when you want to bring someone new on board. You’ll also need to think about selecting the right advisors (lawyers, accountants, investors, etc.).

The point is that there are tons of things to think about when you’re just starting out. And it’s OK to feel a bit overwhelmed. Just remember that founding a startup is a long term commitment which will make you sweat, laugh and cry, but also remember that you’re not doing it alone. There are people who will rely on you, and there are people you can rely on too.


Idea vs. Business

What’s the difference between an idea and a business. I can’t tell you how many times I’ve come across young entrepreneurs who, although they have no shortage of ideas, don’t understand that the idea is not enough. As Thomas Edison once said, “The value of an idea lies in the using of it.” Don’t forget this.

It seems like everybody these days has “app fever” (and the only prescription is more cowbe-… financing!). Angels and VCs do not invest in ideas… They invest in the businesses which are run by people who have ideas (and dedication, ambition, and dedication, and more dedication… and did I mention dedication?). So what makes a business, you ask? Well, Investopedia defines it as:

An organization or enterprising entity engaged in commercial, industrial or professional activities. A business can be a for-profit entity, such as a publicly-traded corporation, or a non-profit organization engaged in business activities, such as an agricultural cooperative.

Investopedia

If you’re in a startup, you can ignore the last part of the definition (non-profits don’t make good financing targets!). But if we look at the first sentence, there are a few keywords to consider: organization, engaged, activity. Boil this all down, and you get an “organization which is engaged in some sort of activity in the hope of some day making a profit” (we’ll talk about those in a later post). Apps are not organizations. It’s best to think of them as products or services. These are things a business offers.

Organizations involve people. They require leadership and teams. These teams put into action the ideas which drive the “business” by engaging in certain fundamental activities. If you’ve ever taken a marketing class before, you may have heard of the 4Ps (product, price, promotion, place) and the 4Cs (consumer, cost, communication, convenience). I won’t go into them here, but you can get a short summary on Wikipedia. So if you really want to impress some potential investors, know your business, not just your idea.

Date Your Angel!

So you’re out at an event and someone starts chatting you up around the free pizza table… You talk about yourself, but you’re careful not to talk too much about yourself. (You’re sensitive to that sort of thing and don’t want to come off too “full of it”…). You ask your new friend about themselves. What they do. What they’re into. What they’re looking for in a relationship. They smile,  you smile back. Seems like things could get interesting…

STOP.

Just because that cute girl or hunky guy at the bar is making eyes at you, doesn’t mean you should take them home without getting to know them a little better.

THE SAME RULE APPLIES TO ANGEL INVESTORS.

Angels will be among the first people you meet who are looking at your startup as an attractive investment opportunity. Take the time to get to know them before you start signing on the dotted line of the term sheet. (Actually, the lines aren’t dotted any more… somehow the expression still sticks though…). Just because someone is ready to throw some money at your startup, it doesn’t mean you need/should take it.

Your investors are with you for the medium to long term. They’re going to ask for certain rights in their term sheet. They’re going to ask you and your startup to perform certain obligations. And in exchange, you should be asking for more than just money. Good mentorship in the early stages is paramount. And in the era of crowdfunding and alternative financing opportunities, mentorship is probably more important than the money itself. So make sure that your angel is the right “fit” for you.

How do you know what makes a good fit? It’s the same as any other relationship. Do you communicate well together? Do you have similar interests? Do you dedicate enough time to one another? And by the way, just like any other relationship, it takes lots of hard work to make it a success over the long term. If the plan is to take the money, issue the shares, and have a few meetings and then never speak to one another again, you’re wasting your time and theirs… Not to mention giving up valuable equity which could be put to better use with a more appropriate investor.

So, word of advice: Date your Angel. Put your best foot forward, and demand that they do the same. You each owe it to yourselves before going any further down the rabbit hole.

Boards: Directors’ Obligations

What does it mean to have a seat on the board? It means responsibility. It means long term strategic planning. It means keeping an eye on the bottom line. But above all else – at least, in Canada that is – it means acting in the best interests of the corporation.

And that, my dear friends, is a very loaded expression. But instead of telling you what it does mean, it’s perhaps more helpful if I tell you what it does not mean. Under Canadian corporate law, acting in the best interests of the corporation does not (well, at least not necessarily) mean acting only in the best interests of shareholders. This is a key distinction between Canadian and US corporate law.

In the Canadian context, shareholders are certainly important, but there other considerations. In fact, here it is straight from the Supreme Court of Canada:

In considering what is in the best interests of the corporation, directors may look to the interests of,inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. (see the BCE Decision at paragraph 40)

To some of my American readers this may seem preposterous, but it is the law in Canada. Let me reiterate the point with another quote from the Supreme Court of Canada:

The fiduciary duty of the directors to the corporation is a broad, contextual concept.  It is not confined to short-term profit or share value. (See the BCE Decision at paragraph 38)

So whether you are a founder or an investor, before you take a seat on the board, make sure you understand that the decisions you make as a director have to be in the best interest of the company, and not in the best interests of your pocketbook. This does not mean that the two are mutually exclusive. But there may be times where both founders and investors alike have to make decisions which are not in their personal interests, but are in the interests of the corporation. Failure to do so exposes the director to claims of oppression and breach of statutory duty.

So take a seat, but take it with your eyes open.

Corporate Names: Choosing a Name

Choosing a name for your company usually involves a pen, a note pad and a lot of head scratching.  You want to pick a name that people will remember – something catchy – which is easy to write or type. But what don’t you want?

Easy. You don’t want a name for your company which violates someone’s trademark. And you don’t want to pick a name which is illegal.

Trademarks and company names

We’re lucky that in Canada and the United States, there are federal databases for trademark registrations. Other jurisdictions around the world have them too, but let’s keep the focus on Canada for a moment. Trademarks are a form of intellectual property which entitle the owner of the trademark to exclude others from using their trademark for unauthorized purposes. Who decides what’s an authorized purpose? The owner of the trademark.

In Canada, CIPO is where you’ll want to run a first check of the name for your company through the trademarks database in order to see if it is actually part of someone else’s trademark.

Sometimes, a company doesn’t go as far as registering a trademark, but will use a trade name (or “nom d’emprunt” in French). Think of it as a form of unregistered trademark. This unregistered form of intellectual property also entitles the owner to some rights (although not as clear cut as the registered form). For this reason, Industry Canada requires incorporators to submit a NUANS report prior to incorporation which shows that no other CBCA corporation uses the proposed name for your company. In Québec, you’ll want to run a search on the website of the REQ to see if anything pops up as well, whether you’re incorporating under the QBCA or simple registering to do business in Québec.

One of the trickiest issues comes up when a corporation has incorporated without a specific name – meaning Industry Canada or the REQ has simply assigned a number (ex. 1234567 Canada Inc. or 1234-5678 Québec Inc.). These corporations may also have trade names which they have indicated to the REQ, but it won’t be readily apparent because of the numbered legal name. So keep an eye out for those when picking a name for your company.

Language laws and naming regulations

You also need to think about applicable language laws and naming regulations. For example, you can’t pick a corporate name which is prohibited by law, misleading or otherwise restricted by regulation. Little known fact: you can’t call your CBCA incorporated company “Parliament Hill Inc.

And you also need to make sure that if you are doing business in Québec, you have a French language version of your name – even if your name is a made up word with no obvious French language equivalent.

So before you settle on a name for your company, before you begin investing money in logo design and brand image, run the name by your lawyer. A couple of bucks spent early on can save you thousands later, and a whole lot of headaches.

Assigning Intellectual Property

So you got together with a bunch of other people and built a really cool new application which you think you can build a business around. One person had a keen eye for design and created a great user interface. Another person could write amazing code. And you were the one who came up with the idea in the first place.

All of that stuff: code, design, idea, information, content, etc… You know what that is? It’s intellectual property. And one thing’s for sure, if you’re going to start a new company and make a go of it, you need to assign the IP to the corporation once it’s incorporated. As it stands now, if you have not assigned the IP, your company doesn’t own the code, the design or the idea behind it all.

If the corporation doesn’t own the IP, then it does not own the most fundamental asset behind the business you want to build. Investors don’t invest in empty companies. They invest in companies with assets (i.e., IP) and smart teams who can build the business.

Assigning IP is not a complicated process – a simple contract between each founder and the company immediately following the time of incorporation is all that you need.

And if ever you have more IP developed by third party contractors or employees, you’ll want something similar from them to make sure that each has assigned all of the IP they’ve developed for the company, to the company.

These IP assignment agreements are frequently coupled with some confidentiality obligations, and a waiver of moral rights. They aren’t expensive to prepare (heck, some law firms (like mine) give them away for free to small companies). And for goodness sake, don’t just grab something off the internet you found somewhere and think that it will work for you. Laws vary from jurisdiction to jurisdiction, and accordingly, agreements relating to intellectual property may not work in one place even though they work just fine in another. Call you lawyer and get it done right.

Corporate Names: Language Requirements

Lot’s of people ask the question: What’s in a name? Well, naming your company is an important consideration. It’s integral to your brand and identity as a company, but as you may have guessed, there are also some legal implications.

If you’re doing business here in Quebec and you want to incorporate, you have two options. You can either incorporate federally under the CBCA, or provincially under the QBCA. I won’t repeat all the mechanics that go into incorporation and registration when you pick your name, but I did want to go into some language requirements relating to registering a business here in Québec.

You’ll need to think about the French-language version of your company’s name. In fact, at the time you register to do business in Québec with the REQ, you’ll need a French-language version, whether you’ve incorporated under the QBCA or the CBCA. If you don’t have one, the REQ will not register you to do business here.

The basic rule you need to remember is that made-up or invented words are not considered French. The big trend in naming companies lately is to take ordinary words and remove some letters, usually vowels (think Tumblr… and not Tumbler). So let’s say your company’s name is something like Tble (instead of table), or Pillw (instead of pillow). You won’t be able to register that name in Québec, even if, for example, you’ve incorporated with that name under the CBCA (or even some place else like Delaware or Europe). So what’s the solution? Instead of trying to register Tble, you can try registering something along the lines of Les Entreprises Tble, or Services Tble, or use some other expression which reflects what your company does.

Why? That’s a long and complicated story. But at the end of the day, the Québec government will only communicate with your business in the French language, and therefore, a French-language version of your company’s name is required. This rule will apply regardless of jurisdiction of incorporation, because it isn’t about incorporation but rather about registration.

Time to do Business in Canada

Pond Hockey

I travel to the US a lot (my wife is from Philadelphia) – and one of the things that never ceases to surprise me is how “foreign” Canada seems to some south of our border. So let me try and demystify Canada, and show you how great a place it is to invest and do business.

If you want to skip ahead and look at some interesting resources for investing in Canada, take a look at the Canadian Trade Commissioner Service website. And if you’re all about the numbers, they’ve put together a nice set of infographics.

Over the next few posts, you’ll see some general stuff about Canada, some basics about different strategies for investing in Canada, and some commentary on the resources (many of them taxpayer-funded resources) available to encourage foreign investment in Canada.

If you have some thoughts about other topics you would like to see, send me a message!