Launching a new business for the first time is not always easy. There many factors to take into consideration – whether financing, marketing, customer acquisition or dealing with legal issues. Many new businesses place legal concerns on the back burner due to costs and time constraints. They assume that legal problems can be dealt with later, but it may be too late or even more costly to fix.
As a mentor for various Canadian startups and entrepreneurs such as OCAD’s Imagination Catalyst, George Brown’s DigiFest, Oshawa’s Community Innovation Lab and Osgoode Hall Law School’s, Hack Justice, I noticed that are common mistakes and legal issues that business failed to take into consideration from the outset.
Founders needs to be aware that by pitching, sharing a business plan or asking for a money could put them offside securities laws.Businesses think that they need to spend less in order to succeed. This is taught to entrepreneurs by the accelerators and start up incubators that teach them about the “lean” start up model as developed by Eric Ries in his book, “The Lean Startup”.
However, the principles behind The Lean Startup are not to be thrifty. Rather, being “lean” according to Ries, means to continuously test a start up’s vision instead of spending years developing it and introducing it to a customer afterwards. It’s this misconception and misinterpretation of this concept that gets businesses into trouble, especially by failing to get their legal ducks in a row. The following checklist outlines ten common mistakes start ups make by trying to save money on legal costs. Hopefully will help them take the necessary legal steps to be successful in the long run. Spending money wisely saves a business money and headaches later on.
- Choosing A Business Name Without Rights To an Online Presence
It is important to choose a business name that a business can use online with a website and social media presence. A business should ensure that they can have exclusive right to use it in association with the goods and services of their company to prevent others from hijacking or diverting attention from their brand. A tool to check for a domain and social media name availability is at Name Check, but there are many others.
It is advisable to check the trademark potential and social media status of a business name before proceeding with registering, incorporating or attempting to trademark a business. Once you have checked for its availability online and the potential for trademark protection, then a business should proceed to register it.
- The Business Name Does Not Comply with Applicable Legislation
The Trade-marks Act, the Canada Business Corporation Act, and Canada Corporation Act have certain requirements when choosing a business name. There are many factors and limitations in choosing a business name. Generally, the business name should be unique and not confuse a consumer with the goods, services, or trademarks of another business. The name should also not falsely describe the business.
- Failing to Trademark A Business Name
A business must obtain the necessary federal, provincial/territorial and municipal permits and licences, Business Number, registered business name, GST/HST number, corporation income tax, payroll and import/exports accounts. In Alberta, one applies to the Corporate Registry to register cooperatives, corporations, extra-provincial registrations, non-profit companies, societies, trade names and partnerships. In Ontario, this is all done with ServiceOntario. Other offices for other provinces can be found here.
Similarly, instead of obtaining proper legal advice, a startup may use generic templates, like shareholder agreements, found on the internet. The danger is that legal concepts found in foreign laws may not be applicable to contracts in the business owner’s jurisdiction. Some people assume that just because they obtained a business registration and/or domain registration and all the necessary requirements for registering a business, that they own the name. This is not true. A business still has to file for a trademark. It’s advisable to do so after the recommended name and trademark searches to ensure they have all their rights protected.
Although hiring a lawyer to do a proper name search that costs money early on, it is worth it in the long run. A lawyer will help and supplement Google, industry and business directory searches with NUANS (Newly Upgraded Automated Name Search) searches. The NUANS report provides a list of similar corporate names and trademarks to the proposed business name and reserves that name for 90 days. It is a mandatory requirement before a new corporate name can be approved in most provincial and territorial governments.
A business may fail to trademark their brand or identity to save money so they can put funds into their invention, venture or idea instead. However, trademark protection should always be a priority for any business owner.
- Failing to Obtain International Trademark Protection
If a business conducts its operations in the US or Europe, then it is advisable to also obtain copyright, trademark and patent protection in those other countries at the outset and not just in Canada. Failing to do so can jeopardize a business’ trademark from being protected in those jurisdictions. The last thing a business wants is to be ready to launch after pitching to funders and investors only to find out that someone else holds the trademark rights. It’s important for founders to think about where their markets are or could be in order to protect their brand in those markets.
- Failing to Properly Secure the Intellectual Property Rights from Co-Founders, Employees, Licensees etc.
A startup may fail to spend money to obtain the intellectual property rights (patent, trademarks, copyright, including moral rights) from independent contractors such as website developers, software engineers, programmers, graphic designers and their own employees working on and developing ideas and improvements to existing intellectual property rights. It’s important to also ensure that any founders or part time independent contractors are not also employees of another company that could be a competing business. Further, the work or contribution they could be doing for their new company could belong to the employer creating conflicting and competing interests.
- Disclosing an Invention Outside of the Time Limitation to File a Patent
A patent gives the owner of the patent exclusivity over the right to that invention for a certain period of time in a particular jurisdiction. New business owners make the mistake of disclosing an invention without the necessary protections and then lose their right to filing a patent leaving it vulnerable for competitors to come in and steal their ideas. It is advisable to not disclose the invention where possible and if absolutely necessary, then to ensure that any parties that an inventor wishes to disclose to, signs a non-disclosure agreement (“NDA”) that has been vetted by a lawyer. In addition, business plans should note that all information contained in them are confidential and proprietary.
- Failure to Sign Agreements with Co-Founders
A startup may take on a co-founder as a way to get free services and not spend money at the outset. In the end, they may find that their partner/co-founder does little to contribute to the business which ends up becoming more expensive in the end. Proper shareholder agreements, intellectual property assignment rights from employees, and co-founders assigning all intellectual property rights to the company are important.
A startup may take on a co-founder as a way to get free services and not spend money at the outset. In the end, they may find that their partner/co-founder does little to contribute to the business which ends up becoming more expensive in the end. By incorporating early instead of waiting later, a company can ensure that the founders are issued shares “subject to vesting”. This would prevent a founder from leaving a company and then returning once the venture gets financing or go public. All founders should assign all inventions, ideas, and anything they worked on or contributed to the company’s proposed business. This way, if a founder leaves, a company is not in jeopardy of losing the intellectual property rights that go with it.
- Use of Generic Non-disclosure Agreement and Templates
A business may fail to customize an NDA by using templates they obtained from others or on the internet. As a result, certain proprietary formulas or business ideas may not have been included in the NDA resulting in those ideas not being protected.
Similarly, instead of obtaining proper legal advice, a startup may use generic templates, like shareholder agreements, found on the internet. The danger is that legal concepts found in foreign laws may not be applicable to contracts in the business owner’s jurisdiction. For instance, a template from the internet may have a clause stating that the governing law is in London, UK but the parties may both reside in British Columbia.
- Failing To Put Together a Proper Pitch Deck or Business Plan
It is important for a business to have a good business plan which can even be a one page business plan. The principles for creating a good business plan can be found in the book, “Running Lean” created by Ash Maurya where he talks about “The Lean Canvas”. Alexander Osterwalder modified this idea into the “The Lean Model Canvas”. The Lean Model Canvas consists of the following elements:
- Value Proposition or Mission Statement
- Competitive Advantage
- Key Metrics
- Distribution Channels
- Customer Segments
- Cost Structure
- Revenue Streams
- Legal Disclaimers
Without the competitive edge including intellectual property rights or a good business plan, it is difficult for investors, backers or funders to want to invest in a business. Most important, are the legal disclaimers to ensure that the business owner is not violating securities law as further discussed below.
- (Unknowingly) Violating Securities Laws
Founders needs to be aware that by pitching, sharing a business plan or asking for a money could put them offside securities laws. There are securities laws and rules when presenting to potential investors. It’s important to not add any slides or information regarding fundraising or financing to potential investors such as investment opportunity slides, “ask slides” etc. not permitted under securities legislation. Similarly, it’s important to add a disclaimer on any opening slide presentations to make it clear that the business is not soliciting investment from the attendees or potential investors. If a company is pitching to solicit funds, then they need to ensure they are in compliance with the rules around general solicitation. The business plan should be limited to the product, concept, marketing, strategy, team, vision and competitive edge.
In the rush to get launch a business, a new entrepreneur may miss the important details or be sloppy in protecting their ideas or assets. A business owner may even make things worse in the interest of saving money and time in the short run.
While Eric Ries expounds on the virtues of having a “lean” start up model, the misinterpretation has resulted in many start ups taking the concept of being lean to the extreme and not spending money in areas where they should. Hopefully, this legal checklist dispels that myth and spending money wisely is more important than being lean when starting a new venture. Investing money in the right legal advice at the outset to protect a business’s brand, inventions, intellectual property and proprietary interests will protect a business in the long run.