Estates Blog: Promises made, but not put in the will

Last summer I hired an associate, Adam Veroni, to add estate planning, wills, and trusts to the services offered by Intrepid Law. This is a nice complement to the business succession planning expertise we have, which can help to ease the transition of your business to the next generation of leaders. Adam has recently started writing on common issues in estates law, and will be focusing on estate planning issues for farms, and persons with disabled children to boot. I’ll be posting links to his articles here as they become available.

His most recent blog:

Promises Made Outside of a Last Will and Testament

Verbal promises made by a deceased prior to his or her death in respect of the inheritance of property, are not testamentary dispositions and the estate trustee is not bound to abide by such promises when distributing the assets of the deceased’s estate. The estate trustee appointed under the will has the responsibility to distribute the estate according directions contained in the will, not according to promises made outside of it.

However, there are limited circumstances where the courts will intervene under their equitable jurisdiction to enforce promises in the name of fairness.

Read the full article here:

https://estatesandwillstoronto.wordpress.com

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Estates Blog: If you don’t have a will, what can your executor actually do?

Last summer I hired an associate, Adam Veroni, to add estate planning, wills, and trusts to the services offered by Intrepid Law. This is a nice complement to the business succession planning expertise we have, which can help to ease the transition of your business to the next generation of leaders. Adam has recently started writing on common issues in estates law, and will be focusing on estate planning issues for farms, and persons with disabled children to boot. I’ll be posting links to his articles here as they become available.

His first blog:

Powers of an Estate Trustee without a Will

The decision to create a will is often neglected or people may ultimately decide to leave their estate to be distributed according to the law. In deciding whether or not to make a will, one should consider the powers of the estate trustee with or without a will, and whether it would be in the best interest of the estate to have well defined trustee powers to deal with estate assets.

Read the full article here:

https://estatesandwillstoronto.wordpress.com/

What’s a cooperative?

There are a lot of different models available to people to set up their businesses, but one of the most underused is the cooperative model. Frankly, I find it odd that so few startups consider using a co-op, given the shift towards people-centric companies, corporate social responsibility, social enterprise, crowdfunding, and the sharing economy. In many ways, co-ops are ideal for these types of ventures, since the primary aim of a cooperative is to benefit its members. It’s up to the members to decide what “benefit” means, so co-ops are often about more than just maximizing profits.

Perhaps unfamiliarity breeds avoidance. The co-operative corporation is an odd beast, and far less common than corporations, partnerships, and proprietorships. A lot of folks don’t even know the co-op exists as an option. Hell, a lot of business lawyers I know have never touched the things, and just gloss it over in the “other” category when talking about business structures. Its weirdness makes it difficult to understand. Co-ops are a mash-up of business and not-for-profit corporations, with partnership-esque decision-making, which are sort of public companies, and report to a separate branch of government than every other business in Ontario.

the-people-dont-know-their-true-power-tc-cartoon-sad-hill-newsIt’s high time we blew the dust off the ol’ girl, and maybe you won’t think co-ops are so weird and scary after all. You might even start to think that your business would do well as a co-op, in which case, we should talk.

There are a LOT of possible variations in co-ops, so I’ll stick to the basics in this article. The goal is to give you an idea of the broad strokes, and I’ll leave the details for later articles. I’m going to talk about:

  • What a co-op is
  • Advantages and disadvantages
  • Types of ownership
  • Types of co-op
  • The basics of financing a co-op, and
  • The basics of decision making

So what is a Co-op Anyway?

Co-operatives are democratically-run businesses governed by those who use their services – their members. Co-ops generally rely on member participation to make the wheels turn. Members pool their money, goods, or services, have a say in decision making, and share in the profits or losses of the co-op’s business. Members can be human people, corporations, and not-for-profits.

cooperative-movementAs we’ll see below, a co-op can be set up with shares, like a business corporation; or without, like a not-for-profit. Co-ops with shares can sell them to members and the general public to raise capital. Co-ops without shares may operate as not-for-profits, and apply for charitable status.

Decision making is one-member, one-vote, so each member has an equal say. Members can be broken down to stakeholder groups, where each group’s votes may be weighted differently, kind of like in a partnership.

Once they reach 35 shareholders or lenders, co-ops become somewhat like a public company, and have to distribute information about the business and its finances to potential investors. The annual financial statements of a co-op must be audited, to ensure that the co-ops accountants are preparing the statements by accounting norms. Ontario co-ops are regulated by the Financial Services Commission of Ontario, rather than the Companies Branch

Advantages

  • Egalitarian – while corporations can allow their stakeholders to participate in ownership through stock option plans and the like, such plans are often carefully controlled to prevent those stakeholders from controlling the company.
  • Democratic – each member has an equal say.
  • Cheaper to set up and run than stock option plans or large partnerships – though the rules governing co-ops can be a bit tedious, many of the rights and responsibilities are written in the law, rather than being custom creations
  • Shared resources – members can get access to more and better equipment or facilities, increased negotiating power when buying/selling, shared marketing costs, etc.
  • Networking and education – members have access to people who face similar challenges, and make contacts up and down the supply chain.
  • Limited liability – a co-op is a “person” in the eyes of the law, which takes on its own liability. Members and shareholders personal assets are protected, and they only stand to lose what they invested.
  • Flexibility – co-ops have a huge array of options on goals, structure, financing, decision-making, and services.
  • Double or triple bottom line – benefits to the members aren’t limited to a share of the profits.

Disadvantages

  • Startup costs – are typically higher than for simple incorporations or partnerships. It takes more legal and accounting work to get ’em off the ground.
  • Offering statements are required to raise money – which takes time and money to prepare, and there are ongoing disclosure requirements.
  • Annual financial statements must be audited – which adds an extra annual operating expense.
  • Decision making can be slow and difficult – especially when there are a lot of members, or stakeholder groups with different interests. Think of how much of a pain in the ass the membership meetings of a condominium can be…
  • Unfamiliarity – because there are relatively few co-ops, compared to other business forms, government and foreign entities may have a hard time wrapping their heads around how to deal with you.

Membership Shares, or Members?

You have two options when incorporating a co-op – ownership through shares, similar to a regular ol’ corporation – or control by members, similar to a not-for-profit corporation. Choosing between the two usually comes down to two things:

  • Whether the co-op’s purpose is to operate like a business and turn a profit, or to provide a service on a break-even or non-profit basis; and
  • How much capital is needed to get started and run the co-op. The greater the need for capital, the more likely it is you’ll lean towards shares.

Consult with your lawyer and accountant before choosing which way you’ll go.

Shares

Shares are just a bunch of rights in the co-op. Most of these rights centre on control (voting), profits (dividends), and ownership (right to a share of the net profit if the business is sold or wound up). Every co-op with share capital must issue at least one type of “membership shares”. Each membership shareholder gets one vote at members’ meetings to do things like electing the directors, setting the rules (bylaws) of the co-op, choosing an auditor, approving annual financial statements, and major business decisions like selling or dissolving the co-op. Different types or membership shares may have slightly different rights.

You also have the option of creating and selling different types of “preference shares” to raise money. Like a regular business corporation, you can get pretty creative with the rights that the preference shareholders have, like priority on dividends, to be bought out or redeemed, to be paid part of the proceeds of liquidation, to receive information, and to receive a portion of the net profits of the co-op each year as a patronage return.

Members

For co-ops without share capital, there are only members, who fill much the same role as membership shareholders, above. The biggest consequence of this type of co-op is that its only financing options are membership fees, loans from members to the co-op, and loans or other debt from outside sources.

Multi-Stakeholder Co-ops

In these bad boys, members are organized into stakeholder groups, depending on what they contribute to the co-op. Each stakeholder group has certain rights as a group, such as appointing directors to the board, or to receive a lower or higher share of the co-op’s profits.

Types

There are four basic types of co-op in Ontario

  • Worker-owned

    Exactly what it sounds like. Only workers can be members of the co-op, and at least 75% of employees of the co-op must be members. An example would be Toronto’s Co-op Cabs, where each taxi license holder is a member of the co-op, and gets a share of the net profits of the company rather than revenues from their specific cab.

  • Consumer

    Businesses, often in retail, which are owned by their customers for their mutual benefit. Resources are pooled to buy in bulk, then the savings are passed on to the members. The most common are credit unions, green energy, insurance, and grocery stores. I’ll lump housing co-ops in here too.

  • Producer

    Producers of a certain product, or a certain category of goods band together to share common expenses like warehousing, equipment, shipping, and marketing. Most people have seen farmers’ co-ops, which often have warehousing and large equipment, as well as buying farm supplies in bulk. Producer co-ops could work for any business from lumber, to crafts, to booze.

  • Multi-stakeholder

    Here, many different groups of interests recognize that they’re all in the same boat, and band together for common gain. These groups could include workers, producers, service providers, consumers, and supporters of a certain cause. Health care and social services are common areas for this form. There’s a big push towards sustainable food co-ops right now, bringing together farmers, land owners, seed banks, grocers, and restauranteurs.

Dolla Dolla Bills Y’all

A co-op model can allow a business to take a fundamentally different path than a regular corporation. The directors of corporations are voted in by shareholders to maximize the value of the shares. Co-ops exist for the benefit of their members, which can far broader than simple monetary gain. That’s not to say that a co-op can’t turn a profit. It’s just up to the members as to how far up the priority list profit falls. The rules on how money comes into and flows out of a co-op are different than regular corporations too.

Money In

Besides profits from the sale of goods, the most common fundraising method is membership fees – an annual fee that members must pay to stay members. In most cases, this isn’t a large sum. Co-ops can also charge fees for use to members or the public – like an hourly rate for use of equipment and facilities, or for sales leads they generate for their members.

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Debt Financing

As with any business, a co-op can borrow money, known as debt financing, from a variety of sources. Co-ops can, and often do, require their members to loan money to the co-op, which is common in agricultural co-ops where production is cyclical. They need the cash up front to float the year’s operations, and the loans are paid back when the harvest comes in. They can force members to re-invest profits earned from the previous year as member loans as well.

Co-ops can borrow from banks, government, and other private lenders, same as any other business. They can also apply for government grant funding.

Equity Financing

Co-ops with share capital can raise money by selling preference shares. The magic number is 35, meaning that if there will be 35 or more people who own securities (shares and debt) when the sale is done, the co-op has to file an “offering statement” with the Financial Services Commission. This is similar to, but less demanding than, what a corporation must do before “going public”. The goal of the offering statement is to ensure that the investors know what they’re investing in. The exact requirements vary depending on the co-op, but the result must be a full, true, and plain disclosure which answers any reasonable question an investor may have. There are a few exceptions which mean you don’t have to file one for small numbers of investors, and small amounts raised.

Money Out

Aside from paying operating costs, wages, tax, and debt, there are rules about how the profits of the co-op are paid out. What’s left after operating expenses are paid, but before tax, is called the “surplus”.

A co-op can set aside some or all of its surplus to create a “reserve fund” of retained earnings for its future expenses, and it can pay out the surplus through dividends and patronage returns.

Dividends

Dividends are paid out of a co-op’s after tax income. The member or shareholder is taxed on the dividend (not as regular income), meaning some tax credits are available to them.

The maximum dividend allowed on membership shares is the prime lending rate +2% per year. There’s no cap on dividends to preference shareholders, so the rate of dividend is what’s set out in the Articles of the co-op.

Dividends may be paid in more shares of the co-op as well, which allows the business to reinvest the profits, and increase the equity holdings of the shareholders.

Patronage Return

This posh sounding term is the profit share a member is entitled to based on how much business they’ve done with the co-op. This is the main way in which members receive their profits. Patronage returns are paid out of the pre-tax income of the co-op, and are taxed as income for the member.

Different rules apply to different types of co-op, but the way patronage returns are calculated is set out in the bylaws. Worker co-ops, for example, pay patronage returns based on hours worked, or total compensation paid each year. Producer co-ops may account for the relative profits earned from different products contributed to the co-op (a ton of strawberries may turn a higher profit margin than a ton of potatoes. No offence to potatoes.)

Non-members may also be paid a patronage return, so long as the return for non-members is the same or less than what’s paid to members.

Decision Making

As with a corporation, co-ops have three levels of decision-making – members, directors, and officers.

Members

Each member, or membership shareholder, has one vote at meetings of the members. Members have to attend a meeting in order to vote – they can’t send a proxy to vote in their place.

Most votes are decided by a simple majority of votes, after a resolution has been discussed. The key decision members are called upon to make is to elect the board of directors, or removing them if need be. They also approve audited financial statements, and vote on resolutions proposed by members.

Members have a say in other major decisions, which require a 2/3 majority to pass. These include changing the articles of the co-op, adopting new bylaws, and approving the sale or merger of the co-op.

5% of members can call a meeting, or propose member resolutions. 10% of members can force a directors’ meeting to pass a new bylaw or resolution.

Directors

Elected by the members, the directors have a fiduciary duty to run the co-op in the best interests of the members. All directors must be members of the co-op, and there must be at least three directors on the board. The board is responsible to set the strategic direction of the co-op, and appoint the officers to manage its day-to-day affairs. They vote on things like approving new members, budgets, major contracts, and expansion plans.

Officers

Appointed by the directors, officers oversee operations, and supervise the lower-levels of leadership. Officers are employees of the co-op, and except for the President and chair of the board, they don’t have to be members. The duties of the different offices are listed in the Cooperative Corporations Act. Most co-ops will delegate a certain amount of decision-making power to officers, such as the ability to sign contracts up to a certain amount, to hire and fire employees, and to do the co-op’s banking.

Conclusion

So, there you have it, co-ops in a nutshell. This is by no means a complete guide to co-ops in Ontario, but I hope it proves to be a useful starting point. If you’re looking at starting a business or non-profit, take a good, give co-ops due consideration.

There are a ton of good resources out there for information gathering, including a whole series of guides from the FSCO, and the Ontario Co-operative Association that can help you to get started.

As always, I’m happy to help you birth your cooperative business baby. Reach out.

 

Mike Hook
Intrepid Lawyer
mike@intrepidlaw.ca
@MikeHookLaw

Risk Management for Event Promoters

Date:  Wednesday, September 23, 2015 – 19:00 – 21:00
Location: The Richmond, 477 Richmond St. W. #104
Price: Free, but a donation to GlobalFire’s capacity building mission to Nicaragua is requested. Donations over $20 are eligible for a tax receipt.

Anyone who’s ever got it in their head to throw an event knows there’s a financial risk involved. What you may not know is just how much legal risk you’re taking on, or how to protect yourself. If GI Joe taught us anything, it’s that knowing is half the battle… so join me on September 23, 2015 to get in the know about how to limit your liability as an event promoter. This event will be useful for those who organize events, or deal with event organizers for:

  • Music – concerts, clubs, raves, and festivals
  • Food & Drink – festivals, pop-ups, markets, taste-and-buy
  • Sports – tournaments, leagues, charity runs, competitions
  • Weddings
  • Travel – group or themed trips
  • Public gatherings – rallies, pillow fights, yoga-ins
  • Conferences

This event will feature a presentation on the key ways that you can manage your risk, a Q&A session, then the cash bar will be open, and youll have an opportunity to network with other local event promoters of all stripes. If there’s enough out of town interest, I will webcast it as well.

This event will be a fundraiser for my upcoming deployment to train first responders and provide access to clean drinking water in rural Nicaragua with GlobalFire. There’s no set cover charge, but I ask that you pay what you can. Contributions over $20 are eligible for a tax receipt.

It’s an open invitation, so please feel free to circulate the event to people in your network who may be interested.

The Facebook event page is here:https://www.facebook.com/events/935981106467567/

Speaker Bio:

I’m a small business lawyer in Toronto, working with socially, environmentally, and ethically responsible entrepreneurs. In my spare time, I’m also an experienced event promoter, small business owner, and international disaster response volunteer.

You can learn more about me, and what I do by visiting my website at: http://intrepidlaw.ca/

For more information, you can reach me by email at: mike@intrepidlaw.ca

Beware the Entrepreneurship Industry

This may be a controversial post. You’ve been warned. This post is from my point of view as an advisor to small business. I realize that I occupy a place in the “industry” landscape, and that like the bigger wheels in the machine, I too turn a profit from providing services to small business. As a lawyer, however, I have a duty of loyalty to my clients – called a fiduciary duty. It isn’t optional, it’s the law. This means a bunch of things – to be competent and diligent in my work, to act in my clients’ best interest, honesty, and to keep your information confidential. Most of the other people you’ll come in contact with in the business world don’t have such a duty – and therein lies the risk that we call “doing business.”

I’ll get to the point.

I’ve noticed a trend towards the industrialization of entrepreneurship these days, and the more I think about it, the less comfortable I am with it. When I say “industry”, I’m talking about making labour systematic. The same business model that created the assembly line to make business more “economically efficient” is now being applied to entrepreneurship. There’s big money to be made. Investors and big business have realized that in many cases it’s more economically efficient to buy innovation than to innovate.

But how do you groom small, innovative businesses into ones that will slip neatly into the world of big business, and global financial markets as they grow? The answer is to industrialize entrepreneurship. As this system gains momentum, there’s an explosion of organizations which provide ready-made solutions to most of your small business needs.

Most of these organizations exist to make money….

… off of you…

… and none of them owe you a duty of loyalty.

I’m not saying that these organizations are out to get you. There are plenty of amazing collaborators out there. All I’m saying is that a healthy dose of caution, and an unhealthy dose research before getting into bed with them is in order. Any time you give up equity (shares) in your company it’s like taking on a business partner. They invest time, money, and resources in making your company grow. With the money comes the expectation of profit. You, as the one with the business or idea, will want to be assured that your partners will pull their weight, and that you’ll have a way out if they don’t. In return, there are some pretty thick strings attached to the investment. They’re gamblers in a way. Gamblers with a much bigger stack than you, more experience in these kinds of deals, and an uncanny ability to lawyer plucky little startups into the ground if they feel wronged. Choosing the wrong horse to hitch your wagon to could cost you your business.

In this article, I’ll talk about two of the big growth sectors in the entrepreneurship industry – high risk investors, and growth programs. I’ll deal with high risk investors first – angel investors and venture capital. Then I’ll move on to the growth programs – incubators and accelerators.

High Risk Investors

The starting point to understanding high risk investors is to understand the basic business proposition from the investor’s point of view. Angel investors, and to a greater extent, venture capital, are betting on the success of your business. In return, they demand returns commensurate with that level of risk. Particularly for VC, they may invest in ten companies, and only get a return on one – meaning the one that hits, they’ve got to make all the money back that they invested in all ten, plus a healthy profit margin – otherwise they’ll be out of business. That means they’re going to do almost everything in their power to make sure that they get their money back. This includes attaching strict, investor-friendly terms to the financing. This also includes using their networks and contacts to spur growth. They’re putting a lot of eggs in your basket, and approach the deal accordingly.

Angels

An angel investor is a wealthy person or group of investors who are willing to pony up startup capital for businesses that they think will succeed. Some angels specialize in raw startups, while others are only interested in companies that have already reached a certain critical mass. While the term “angel” might make them seem benevolent, they’re planning on making money off of your work. Their investment buys a part of your company – between 10-50% typically – and often gives the investor a say in how the business is run. They think they can make money on your idea – and if you don’t do it for them, they may take the reins and do it themselves. Angels see the end-game too, where they can realize the return on their investment. Cashing in. This often means selling the business – either to a third party or by taking the company public. If your end game is different, you may have found the wrong angel. If selling isn’t their goal, they might intend to grow your company in a way that benefits their other business interests.

Angel investment is attractive because as soon as they’re on board, it’s in the angel’s interest to use their connections and experience to help the business. A good angel can open up supply or sales channels that were previously out of reach, guide you through tough negotiations, and provide mentorship to help you develop your business skills. On the other hand, an angel whose intentions aren’t so angelic could take control of the business, fire you, and force you to sell them your shares at a discount. If they have a bad reputation in the business community, you could be tainted with that as well. I’ve seen all of these things and more. Do your homework, and get advice before, during, and after negotiations with angel investors.

Venture Capital

Venture capital is a different beast altogether. VC is usually a fund where many professional investors, serial entrepreneurs, large companies with innovation budgets pool their money together. The fund is managed by specialists who look for high-growth, high-potential businesses to invest in. Usually they’re looking for an “adolescent” business, rather than a raw startup, will invest for several years, and expect a return of around 10 times what they invested over that time. VC will usually get paid out first – often within 1-2 years – and take a percentage of ownership of the company. Venture capital is usually a one-way ticket to an initial public offering, and your investors will do what they must to ensure they get a return. They’ll appoint board members to shepherd their investment, and often have a good deal of say in hiring for key positions. They may replace you as the CEO if they have someone who’ll do better. The investment will usually be a high-interest loan, and secured with shares in the company which will pay the VC back first if the company goes belly-up. The exit plan almost always involves taking the company public. VC is more complex than that – but the important take-away here is that it’s very, very pricey money.

VC is attractive because, if it works, you get rich when the company is sold or taken public. VCs will lend based on their valuation of the idea, rather than their ability to secure their investment on the assets of the company, like a bank would. The downside is, once the VC comes on board, the business ceases to be your baby. Your interests aren’t aligned – the VC is looking out for their investment, not for the best interests of you, the company, or the employees. Most venture capital funds focus on building up the pool of money they manage, rather than mentoring and guiding the business – they’ll often appoint outside board members to represent their interests. The strings attached are large, and tied tightly.

Dealing with High Risk Investors

High risk investors can take your business to the next level in a hurry, and are sometimes the only viable option to fund your research and development. This is especially true for businesses built on ideas, rather than physical assets. Be very, very careful about who you’re dealing with, and understand the deal that you’re making before you sign on the dotted line. Do your research. Get legal and accounting advice. Shop around, and keep these in mind when you’re exploring your options:

  • First, foremost, and always remember – if they’re willing to fund you, then you have something they want. You have leverage in negotiations, and should only take a deal that works for your company.
  • What’s the business/industry background of the people you’re dealing with? What other companies have they worked with, and what results did they get? Talk to those companies, and get a no-bullshit assessment.
  • Who will be appointed to your board? How many other boards do they serve on?
  • Who are their advisors – accounting, legal, etc – and do they come as a package deal? Are they encouraging you to get independent advice before signing?
  • What’s their exit plan? Does it mesh with your vision for the business?

If the investor can’t give you a good answer to those questions, or stands in the way of you finding the answers on your own, run away as fast as you can.

Predatory investors can be hard to spot… until it’s too late. I’ve got a bunch of horror stories from people in my network who jumped at what looked like a good deal… and when they landed, the investor owned the company, and the founder ended up with only a fraction of the value they’d built. They’re smart people who make their living by getting other people to do the grunt work for them… and unscrupulous investors know how to cover their bases. Be cautious, and put in the time and effort to understand them, their goals, and what they expect of you before committing.

Growth Programs

Incubators & Accelerators

These two get lumped together because they fulfill roughly the same role at different stages of a company’s growth. They are, at their core, great business models, and can do a whole lot to nurture the development of your company, and your business skills as a founder. The basic premise is that they’re in the business of investing in startups. An established business person, or group of ‘em, will bring in a company, or group of ‘em, and invest in the company in hopes that it will grow. Most will invest a combination of money, marketing, office space, production and design support, mentorship, and access to their personal networks. They’ll set a pretty rigorous training schedule in business skills, which members are required to go through. In return, they take a piece of your company.

Incubators are typically a long-term involvement, around 2-3 years’ worth, with no set schedule for growth. Most will bring in companies of a similar type into a common working space in hopes that ideas will flourish. Often, incubators will put their own management teams in place – directors and officers – once the grunt work to bring the idea to fruition is complete. Incubators typically take up to 20% of your company for the role they play in incubating your idea.

Accelerators are usually a set business development program to spur rapid growth – hence the name. The program takes place over 3-6 months, and is aimed at companies that have reached a certain stage of development. That program typically involves a couple of “funding rounds” from VC, and may also involve tacking directors and officers of their choosing on to your management team, or full-on replacing the founders in those roles. Accelerators usually take less than 10% of your company for their services.

Who Sails the Ship?

The most value in a growth program is the network that comes along with it. When done right, incubators and accelerators can provide value that’s almost unparalleled. You can get specialized advice and training that will help you to understand and speak the language of business, interpret financial statements, and refine your pitch. Most valuable is the access you get to their well-established business network of advisors, mentors, financiers, and other graduates of their program. That cuts both ways, however. When you climb aboard that train, you’re committing to doing business the way they teach you to do business. While some incubators and accelerators have altruistic intentions, many more are an elaborately constructed way to make money off of your efforts, or to cherry-pick talented business people for their own organizations. It’s a business farm, and you’re the cash crop.

For example, law and accounting firms view successful incubators and accelerators as a way to get new clients. I’m one of them, as an advisor at Ryerson’s DMZ, and a mentor at HumberLaunch. I’ve met several clients that way. Strangely, in the cash strapped world of startups, my competition is largely huge national law firms. These firms will offer cut-rate startup packages, as a loss-leader.  They take a hit on their fees in the short term, in hopes that you’ll grow enough by the time the discount period runs out that you’ll have enough in the bank to pay their rates. That business development strategy means that they’re looking to minimize their short term losses incurred by giving away their services. This can mean standard-form business agreements that aren’t customized to your situation and business. The work is pushed to junior lawyers, law students, and clerks to “cut their teeth” on. A free client’s phone calls are returned after the paying clients’ work is done. That said, big firms have specialized skills, particularly to grow startups into publicly-traded companies, that sole practitioners like me just don’t have. Do your homework.

Dealing with Growth Programs

Moral of the story is, as it was for investors, to know who you’re getting into bed with before signing on the dotted line. Any time you give up equity in your company, you’re taking on a business partner. Like any other partner, you want to make sure that they’ll pull their weight, and know what’s involved in getting yourself out of the deal if need be. The excitement of winning a business plan or pitch competition, or beating out hundreds of other applicants for one of a few positions shouldn’t stop you from doing your due diligence. Here’s some questions to know the answers to before you commit:

  • Who owns the incubator or accelerator?
  • How much of your company do they take, and what conditions are attached?
  • Who are their lawyers, accountants, marketers, and preferred investors? Are you free to choose your own, or do you run with theirs? What’s their interest and relationship?
  • What expectations are there of you?
  • What’s the exit plan? Are they building your company to sell, or take public?
  • Do they have your interests at heart, or do their loyalties lie with the person they have a pre-existing relationship with? What’s the advisor’s interest?
  • Who else have they launched? Did they deliver what was promised? Did their goals shift under the influence of the advisor network? Talk to their “graduates” and grill them on their experience.

Conclusion

Angel investors, venture capital, incubators and accelerators are all tools that are available to help you build your business. As with building anything, it’s important to use the right tool for the job. The right deal is a solid foundation from which to launch your company – you’ll get the mentorship, support, and training to bring your idea to market, build lasting business relationships, and make a bunch of money in the progress. The wrong deal can cram your square peg of a business into the round hole of their interests, and drag you down the long, unpleasant road to failure.

Be strategic. Think about what the end-state will be, when all is said and done. If you’re 100% owner now, and an incubator takes 20%, accelerator takes 10%, and venture capital takes 30%, what does that leave you with? Remember, you’ll be the last to get paid. What if the on-paper value can’t be pulled out for a certain number of years? Is 40% of a $10 million company more valuable to you than 80% of a smaller one? Is your product a flash-in-the-pan, or is it something that will still be relevant when you can cash out? Are you comfortable working with, and being beholden to the people you’re doing business with for that amount of time?

There’s no such thing as certainty in business. That’s what makes it simultaneously frustrating and fun. Do your research, and I strongly strongly strongly recommend getting experience, professional help to review, understand, and negotiate the deal before you sign over part of your company. At the very least, legal, accounting, and ideally an impartial business advisor/investment banker with experience in the types of deals you’re looking at.

After all, “All things will be clear and distinct to the man who does not hurry; haste is blind and improvident.”
– Livy, Ad Urbe Condita Libri, 9 BC

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Contractors & Copyright – don’t be held over a barrel

Most of the time I meet a new client, they’re in some sort of crisis. Often it’s a crisis of their own making, in which they’re so deeply mired in that they can’t self-extract. I greatly prefer to work on constructive projects where problems are anticipated, planned for, and ideally never become reality. I’m sure every entrepreneur feels the same way. Far too often, however, my first piece of work for a business is in dispute resolution rather than project-building. Some mistakes that seem like molehills at the time turn into mountains more quickly than anticipated. One common mistake that many small business owners make is to assume that they own all of the creative works that were made for their business by outside contractors – website and branding, most frequently.

Like your Business Depends On It…

For many companies nowadays, creative works – logos, graphic design, custom-built website code – are at the very core of their business. They can be part of your lead generation, customer services, e-commerce, promotions, and product education. For web-based businesses, much of the business’ actual value is in its “goodwill” – or the je ne sais quoi that makes your business profitable. Your web store ain’t going to generate much profit if it’s not online, well-maintained, and has proper user support, after all. Your brand ain’t going to expand very well into new markets if you’re restricted in how you can use your logo and graphics. If you ever hope to sell the business, pass it on to your kids, or bring investors on board, they’re going to want to know that the value of the business is secure. This is why it’s important to be certain of what your business owns. We do this by getting the rights to use creative work that’s made for your business in the way you want to use it. We law-nerds call that a “license”.

Without a license in place, an unscrupulous contractor can hold your company over a barrel for more money and threaten copyright enforcement proceedings if you use what they created. Shady? Hell yes, but it happens disturbingly frequently. I’ve seen it over and over, especially with coders building custom websites for internet-driven businesses. The designer gets to 80-90% completion so the business is fully committed, then work “stops while we work out licensing terms”. All of a sudden they want an annual fee to use the code, to be hired on to maintain and support the site, or to be paid every time you re-use the logo in a new setting. In the meantime, they lock down the 90% complete work so you can’t access it, and your business hangs in limbo.

That’s why It’s hugely important to negotiate the terms of the license – that is, the things you are and aren’t allowed to do – before you start working with the contractor. That’s the point where you, as the customer, have the most leverage, and can get the terms that best suit your needs. There are lots of graphic designers and web-coders out there – it’s a buyer’s market – so don’t be afraid to shop around. It’s easiest make sure that there are terms of license in the services contract that you sign, or an “assignment” of the rights that you need to deal with the work as needed. Otherwise, you’ll need to negotiate a side agreement. Only fools rush in – as soon as you’ve paid the contractor and work has begun, your leverage decreases. Now they have two things you need – your money, and the creative work – and you have neither.

Copyright

Our first stop on this magical journey into licensing is a quick look at copyright. Copyright is the right to produce or reproduce the creative work or any major part of it, to publish or exhibit the work, to perform it, communicate it, rent it, or to authorize any of the above. It applies to all original literary, dramatic, musical, and artistic works, performances, sound recordings, computer programs, and communication signals, which I’ll call “creative works”. Copyright is designed to protect the creator of the work by giving them the exclusive right to profit from what they made.

Copyright protection comes into being as soon as the work is made, and applies to work-in-progress as well. It’s an automatic thing, so the creator doesn’t have to take any steps to register it in order for the work to be protected. Registering copyright work with the Canadian Intellectual Property Office is evidence of ownership, however. Registered or not, copyright lasts for the rest of the creator’s life, plus 50 years afterwards.

Employee or Contractor?

This article is meant for those dealing with outside contractors. Most small businesses will hire a contractor or company to do their creative work – like I did for my kickass business cards – as there’s not enough work to keep a designer busy as an employee.

If you’re lucky enough to have an employee who’s skilled in the ways of creating things, you don’t need a license or assignment. Any work an employee does in the course of their duties as an employee belongs to the employer. That rule is a fundamental part of the employer-employee relationship. That rule can be opted out of by contract.

An independent contractor, on the other hand, will own the copyright in whatever they create. This is true whether the contractor is an individual, partnership, or corporation. The line between employee and independent contractor can be blurry, and there’s a lot of grey area in the law. It boils down to how much control the employer exercises over the worker. The more control – like setting hours and place of work, ownership of tools, having the chance of profit and risk of loss – the more likely it is that they’re an employee in the eyes of the law.

If there’s a chance that a worker could claim they’re an independent contractor, you’re better safe than sorry. Get a license agreement or an assignment of intellectual property rights in writing.

License

A license is a contract giving permission to do something you’re not ordinarily allowed to do. We deal with licenses all the time – a driver’s license allows you to drive a car; a software license allows you to use a computer program; a liquor license allows a bar to sell alcohol; even a Blue Jays ticket is a license to go to the game and occupy a certain seat. Here, I’m talking about the right to use a copyrighted creative work in the ways your business needs to operate.

So, what things might you want to do? The main “rights” granted in creative works include the right to:

  • Use the work
  • Make copies of the work
  • Modify or improve the work
  • Distribute and redistribute the work
  • Sub-license the work

Certain rights, called “moral rights” will always belong to the designer, and can’t be assigned to another person. Moral rights include the right to the integrity of the work, and the right to be associated with the work (or remain anonymous, as the case may be). The creator can waive their right to enforce their moral rights.

Licenses can be exclusive, meaning that the creative work was made just for you, and nobody else can have it, not even the designer, or non-exclusive, meaning that the designer can re-use or re-license out the same design. Exclusive licenses make more sense when there’s a great deal of custom work involved, the creative work is central to your business, there’s risks your competitors might steal your model, or you’re laying out some serious cash to get the work done. Non-exclusive rights work better for simpler, more generic work – like basic web design or package deals – where there’s little risk of losing out if your competitors have something similar.

The most general of all is an open-source license. Sometimes called “copyleft” or a “permissive license”, open-source means that anyone can copy, distribute, and modify the work for any purpose, and without fees. There are several types out there, with varying limits on what can and cannot be done. Many web programming platforms, such as WordPress and Drupal, are subject to open-source licenses for any “derivative” works – as in, anything that’s made to tack-on to their platform must be distributed as open-source as well.

Pro-Tips

The toughest part in negotiating a license is finding the balance point where your business is protected, but the person doing the creative work has the freedom to use the tricks of the trade they’ve picked up to continue to earn a living. That’s why it’s important to know precisely what is being licensed, and what you’re using it for. The most certain way to achieve that is with a written license agreement.

Here are a few things your business can do to make sure you’re in the best position:

  • Know what you’re going to want to use the work for, and ensure that the designer is willing to give you those rights
  • Research what the industry standards are for licensing or assignment in the designer’s field of work
  • Get the license terms or assignment of rights in writing before you pay the designer, and before work begins
  • Know for sure whether the designer is an independent contractor or employee
  • Host the work-in-progress on your own servers, not the designer’s
  • Work with designers in your own jurisdiction – as enforcing an international contract can be all but impossible

Of course, there’s no joy quite like the joy a lawyer can bring to your life by taking the dreary contract drafting work off of your hands… I happen to know a guy… 😉

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Record-Keeping 101

In a recent blog, I mentioned how important it is to keep detailed and accurate business records. We lawyers will harp on the importance of having records of certain things as evidence in case someone sues your ass. For myself, a compulsive organizer, I figured I’m pretty much on top of keeping what I need to keep… until I met Lisa Ricciuti. Lisa is a fellow entrepreneur who helps businesses to develop effective information management systems. She sports a couple of Masters degrees in Library & Information Studies, and Archival Studies, plays bassoon like a champ, and has a penchant for craft beer. What follows is a guest blog, penned by her, which will help you to understand why good record-keeping is important, and some tips on how to get yourself started.

Over to you, Lisa!

Record-keeping 101: A Few Basics

With so many things going on as a small business owner it’s easy to let the paperwork pile up.  “I’ll get to it later,” we say, shoving papers into a folder marked “Misc.” or saving documents into a desktop folder named “Important Sh*t.”  Most of the time this “filing system” remains undisturbed until disaster strikes in the form of a lawsuit, deadline, computer crash, virus, or security breach.  Suddenly it’s really important to know what you have, where it’s stored, and how you can access it.

There are laws and regulations setting out minimum recordkeeping requirements – what must be kept, how it must be maintained (e.g. where the data is stored), and for how long. For example, accounting, corporate, and employee records all have different rules. Laws apply to businesses that collect & use personal information of customers, suppliers, and contractors. Limitation periods for lawsuits apply to your business, which will also influence what you keep and for how long you keep it.

A number of options exist, almost all of which can be customized to meet the needs of your business.  For many small business owners, the cost and effort involved to set up a sophisticated recordkeeping system isn’t warranted, but that doesn’t mean that your choices are limited to “save everything” or “do nothing.” Although “doing nothing” may seem tempting at times, it leaves your business open to unnecessary information risks, most of which could be easily avoided by documenting (and implementing) processes & procedures related to your routine business.

The “let’s save everything, just in case!” policy

This type of policy has the potential to be damaging and costly.  On the surface it may seem like an easy and quick way to do what the law requires and your business needs;  however, it is no substitute for managing business records based on sound policies and defined procedures.

First of all, the “Save Everything” policy can never be enforced unless you plan on disabling the delete key.  Unless you’re prepared to do that, you won’t be able to comply with your own policy, let alone enforce it with your staff.

Secondly, saving everything comes with a number of hidden costs that are often not considered, including the price of digital storage.  While the price of digital storage has dropped significantly in the last decade making it seem like an attractive option, there are costs that go along with maintaining and managing it.  The more you keep, the more time and money you’ll spend to back up, restore, and manage the volume you’ve accumulated.  It also makes searching for data more difficult, costing you valuable time.  Additionally, some records must be kept where the business operates, which may limit or prevent off-site or cloud storage.

Thirdly, saving everything makes it really easy to lose track of what’s there.  Just imagine what you would care about in the following scenarios:

  • Hacking or security breach
  • Virus
  • Disaster (physical or digital)
  • Lost/Stolen/Damaged hardware (thumbdrive, laptop, smartphone, tablet, etc.)

If you save everything, how could you know what was compromised?  If you had to do a restore, would you want to restore everything, or just the things that have value for you or your business?

Tips

If you are starting a new business, it may take some time to figure out which types of documents you are creating and how they need to be managed.  Even for established businesses, the influence of mobile work options and new technologies requires many organizations to re-think the best ways to manage documents and information.  Following the tips below will give you a starting point for thinking about your recordkeeping. Even if you decide to call in an information professional, implementing some of these best practices will make it easier (and cheaper) for them to help you.

  • Identify which business records must be made and kept because you need them to operate or they are required by law.  
  • Determine how long each category of business records must be kept in addition to any other recordkeeping requirements such as those related to handling personal information or maintaining data where the business is operated. This is often based on a combination of business need and legal requirements
  • Save strategically. Set rules about when and how you will dispose of records that are no longer useful, even those that only exist electronically.
  • Understand where/how your business is creating records. This includes, but is not limited to: email, social media channels (e.g. Tweets, Facebook/LinkedIn posts, YouTube channels, blogs, etc.) and all paper/electronic documents.
  • Identify core business records, organize them, and know where they are stored. For example documents related to incorporating or registering, contracts, agreements, financial statements & other financial records, professional opinions (e.g. legal/financial), meeting minutes and infrastructure.
  • Develop policies related to records & information management. Enforce them.
  • Standardize naming conventions for documents, folders, and tags (labels). This means everybody names everything the same way.  Communicate this to your staff, or if you work alone, write it down for reference.  Even having everybody record the date the same way can make a big difference.  For example: Vendor – Document Type – Date (MMM/YY) = OfficeMax – Receipt – Mar15. 
  • Define & document core processes & procedures. Records are often created to record a transaction point in a given process.  When processes are streamlined and defined, it makes it easier to identify when a record must be captured to validate/verify the work performed.
  • Devise rules for handling drafts and versioning. Some questions to consider: Will you keep all the drafts and the final version, or just the final version?  How will you track versions as it moves to completion or in collaborative projects?
  • Designate time to deal with the paperwork, even if it’s in an electronic format. This can be a great Friday afternoon project.

Additional resources:

ARMA (Association of Records Managers and Administrators) International

AIIM (Association for Information and Image Management)

Or try searching in your area for an Information Management Professional!

Lisa Ricciuti
Smart Info Management Services
The Deletist Blog
@thedeletistblog
lisa@smartinfomanagement.com

When do you give employees time off?

One of the more monumental-seeming tasks for a business owner is learning how to deal with employees. In Ontario, most workers are protected by law – mainly the Employment Standards Act, or ESA for short. The ESA sets out the bare minimum for workers’ rights in the Province, including minimum wage, working hours, termination & severance pay, and time off. It’s extremely important to follow those rules, as the consequences for failing to do so can be dire.

In this article, I’m going to talk about the time off part of the equation – namely, when the law requires you to grant your employees unpaid leave, and under what conditions. A few new categories were created last fall, so it’s a good refresher. It’s important to have an understanding of why and when employees can take time off so that you can build leave into your HR policy and business planning.

Not all workers are protected by the ESA, and certain parts of the law don’t apply to people in certain professions. For instance, unpaid internships are illegal in Ontario, unless you’re a professional student like in law or medicine. In that case, you can work ‘em like rented mules and pay them nothing… ever wonder why we lawyers are a humourless lot?

Vacation

Employees who are protected by the ESA are entitled to a minimum of two weeks of vacation time per calendar year. Those two weeks must be paid with vacation pay, which is a minimum of 4% of the employee’s gross wages actually earned in that 12 month period. If you’ve granted more vacation time in the employment contract, then you have to honour that amount.

Entitlement to vacation is not reduced by layoff, illness, or leaves of absence.

Unpaid Leave of Absence

Workers who are protected by the ESA, whether part or full time, permanent or temporary, may have the right to take unpaid leave for the following reasons:

  • pregnancy and parental,
  • personal emergency,
  • family caregiver,
  • family medical,
  • critically ill child care,
  • organ donor,
  • crime-related child death or disappearance, and
  • deployment as a military reservist.

An employee may be entitled to more than one of these leaves for the same event. Each leave is separate, and taking one doesn’t affect their ability to take any of the others.

Pregnancy and Parental Leave

Pregnancy leave is up to 17 weeks of job-protected, unpaid time off work. The worker must have started employment at least 13 weeks before the baby’s due date.  The employee is eligible to receive employment insurance during this leave.

Parental leave may be taken by any new parent – birth, adopting, or by relationship – once a child is born or comes into their care. Birth mothers may take up to 35 weeks of parental leave, usually dovetailing in with their pregnancy leave for a total of 52 weeks. Birth mothers who do not take pregnancy leave, and all other new parents can take up to 37 weeks of parental leave, starting within a year of the child coming into their care. Parents may, but don’t have to, take their leave at the same time as the other parent.

To be eligible, the worker must have worked for you for at least 13 weeks before the baby came into their care, and must give you at least two weeks’ notice before starting leave.

Personal Emergency Leave

Personal emergency leave is unpaid, job-protected time off work for up to 10 days per calendar year. It’s only available to employees of companies who have 50 or more employees.

This leave may be taken for illness, injury, medical emergency, or related matter of the employee, their immediate family member, or dependent. The employee should inform you as soon as possible – whether that’s before or after they’ve begun the leave.

The 10 days do not have to be taken consecutively. Part days can be counted as a full day.

Family Caregiver Leave

Family caregiver leave is unpaid, job-protected time off work to care for family members or dependent relatives who have a serious medical condition. A “serious medical condition” is evidenced by a medical certificate issued by a physician, registered nurse, or psychologist. The certificate may have listed on it a period during which the condition is “serious”, or if no time frame is indicated, it’s valid until the endof the calendar year. You may request a copy of the certificate from the employee.

Employees may take up to 8 weeks per calendar year, per family member requiring care. The weeks do not have to be taken consecutively, but taking any one day off in a particular weeks counts as having taken the entire week off.

The employee should inform you as soon as possible – whether that’s before or after they’ve begun the leave.

Family Medical Leave

Family medical leave is unpaid, job-protected time off work to care for family, extended family, or people who are “like family”, who have a serious medical condition with a significant risk of dying within 26 weeks.

A person who is qualified to practice medicine must issue a certificate stating that the individual has a serious medical condition with a significant risk of death within 26 weeks. The employee must provide you with a copy of the certificate. If the person is “like family”, you may request a copy of a “Compassionate Care Benefits Attestation” form

Family medical leave is for up to eight weeks in a 26-week period with respect to each person being cared for. If other people are taking leave to care for the same person, the eight weeks must be shared. The eight weeks of family medical leave do not have to be taken consecutively, but taking any day in a week counts as using up one week.

Again, the employee should inform you as soon as possible – whether that’s before or after they’ve begun the leave.

Critically Ill Child Care Leave

Critically ill child care leave is unpaid, job-protected time off work to provide care or support to a critically ill child. The employee must work for you for at least six months before they’re eligible to take this leave.

A critically ill child is someone:

  • who is under 18 years of age,
  • under the employee’s legal guardianship, and
  • whose baseline state of health has significantly changed and whose life is at risk as a result of an illness or injury.

A physician, RN, or psychologist must issue a certificate stating that the child is critically ill, requires the care of one or more parents, and sets out the time period of care. You may request a copy of the certificate.

The employee must give you written notice that they’ll be taking the leave, and provide a plan in writing setting out the weeks they’ll be taking off. Ideally this is done before the leave starts, but can be done after. The employee must give you reasonable notice before changing the dates in the plan.

Critically ill child care leave can be up to 37 weeks in a calendar year. If the child remains critically ill at the end of the year, the employee may be eligible for additional leaves. The weeks need not be taken consecutively, but taking one day off in a week uses up the entire week of leave.

Organ Donor Leave

Organ donor leave is unpaid, job-protected leave for the purpose of undergoing surgery to donate a kidney, liver, lung, pancreas, or small intestine to a person. Generally, organ donor leave begins on the date of the surgery, but it may begin earlier if specified in a medical certificate.

The leave is for 13 weeks, with the possibility of extension for up to an additional 13 weeks if the employee is not yet able to perform their duties. A medical certificate is required for an extension. If possible, the employee must provide two weeks’ written notice before beginning or extending the leave.

Crime-Related Child Death or Disappearance Leave

Leave is available to employees whose child dies or disappears where it is probable that it resulted from a crime. The employee must have worked for you for at least six months to be eligible for the leave. If it is probable that the child was a party to the crime, the employee is not eligible for the leave.

An employee may take up to 104 weeks after the death of a child, and up to 52 weeks after the disappearance of a child. The employee must inform you in writing that they will take this leave, and provide a written plan indicating the weeks in which the leave will be taken. In most cases, an employee must take the leave in a single period.

Reservist Leave

Military reservists, those handsome devils, who are deployed on an international or domestic operation to assist with an emergency or its aftermath are entitled to unpaid leave for the duration of the operation. For international operations, the leave includes pre- and post-deployment activities required by the military.

The employee must have worked for you for at least six months, and must give reasonable advance notice in writing of the deployment dates when possible.

General Points

  • Leave doesn’t affect the employee accumulating seniority or length of service.
  • You must continue to pay employer contributions to pension, life & health insurance, accidental death insurance, and dental plans. If a benefit plan requires both employer and employee contributions, and the employee notifies you in writing that they will not be making their payments, then you don’t have to pay either.
  • The employee is entitled to come back to the same position they held before their leave, if it still exists, or to a comparable position if it does not.

Simple, right?

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Lawyer Stuff 101 – What Does a Business Lawyer Do?

This is the second in my series of articles on how you, a business owner, can use your lawyer most effectively. The most frequent conversation I have when meeting with new clients is to explain the role of the lawyer in advising a business. Many have never worked with a lawyer before, or worked with one in a different area. Why are we useful, and what the hell do we actually do that adds value to your business? Once you know what we do, it’s much easier to use us effectively – saving you time, money, and heartache as your company evolves.

A lawyer’s job is to help businesses to understand and manage risk. Full stop.

On Risk

Most entrepreneurs are going into business because they have a great idea – a product or service that they believe they can sell. The act of going into business is risky in and of itself. You’re putting your time, money, reputation, and relationships on the line. The business world is a scary place, especially when you’re the small fish in the pond. Your competitors are constantly working to out-manoeuvre you. Your employees, contractors, investors, customers and suppliers have expectations and problems of their own. The tax man knocks on your loudly and frequently. There’s a maze of regulations to navigate.

Many of those risks are sight unseen for entrepreneurs. Some manage to bob and weave through them by chance, blissfully unaware of close calls. Often in a first meeting I have the unpleasant task of lifting the veil, and giving them a peek at the troubled waters they’re sailing in. Sometimes the business owner walks away with more worries on their mind than they came with. It’s not a fun realization for them, and it’s my least favourite part of the job. It is, however, reality.

The risks exist whether you realize they do or not. Would you rather not know, and be blindsided when something happens, or understand where the risks lie, what the potential consequences are, and be able to make plans to avoid them and minimize their effect on your business?

Keep your head in the sand if you like, but Stats Canada has found that 20% of startup businesses fail within the first year, and 50% don’t survive three years. The businesses that succeed tend to have sound legal and accounting advice from an early stage. If you have sound advice, and the business still fails, you’ll likely end up on more stable ground afterwards – with your personal assets, reputation, and relationships relatively intact.

Lawyers help businesses to manage risk in three main ways:

  • Advising on sound business practices
  • Advising on appropriate legal structures and relationships, and
  • Advising when insurance is wise

Each of these risk management techniques ties in with the others. I’ll talk about each in turn.

Sound Business Practices

The most common, cheapest, and often most effective is to cover your own ass by doing business the right way. Most of these don’t need a lawyer to dream up or implement.

The most common business disputes are about differences between what was promised and what was delivered, billing and payment disputes, employer-employee relationships, and on-premises injuries. Businesses frequently deal with Consumer Protection Act, employee safety, and harassment and Human Rights Code complaints. Complying with government regulation – such as licensing, zoning, Building Code, Fire Code, access for disabled persons, anti-spam, import/export rules, and tax are also sources of friction and risk. It can be a lot to deal with, but there are a few habits that’ll make life easier for you:

  • Do your reading. There is a ton of information out there from government websites, regulatory bodies, accountant and lawyer’s blogs, insurance companies, incubators, entrepreneur groups, and industry publications. Read it all. A responsible business owner knows what laws and regulations govern their industry, and what they need to do to colour between the lines.
  • Put it in writing. If there’s a dispute, what actually happened doesn’t matter – only what can be proved. Written records are more convincing than memory. If you do business over the phone or face to face, keep notes and send a follow up email summarizing what was said and agreed upon. Put employee job descriptions in writing.
  • Keep everything. Having things in writing is useless if you delete it too soon. The limitation period (meaning, the amount of time someone has to bring a lawsuit) in Ontario is two years after the problem is discovered. Do the math, and figure out how long to keep the records after dealing with someone. An IT nerd can burn years and years of data to DVD for you if storage space is an issue.
  • Don’t over-promise. Sometimes the pressure to make a sale can be immense, especially in the cash-poor early days of a business. It’s hard enough to keep people happy even when you do what you say. If you over-promise and under-deliver, or take on work you’re not equipped to do, it’ll come back to bite you in the end. The rear end…
  • Have policies in place. Especially if you have people working for you. There are tons of free resources from the Ministry of Labour, and HR professionals that can get you started. It’s wise to bounce these off your lawyer to make sure they’re current.

As your company grows, your lawyer and other advisors can help to flesh out the practices and policies in a way that suits your business.

Legal Structures

Here’s where I come in. While business practices are a good start, there’s no substitute for on-point legal advice to help minimize business risk. Legal advice costs money, and if you’re in the habit of seeking it before acting, you may wonder what the actual value added to your business is. Legal advice is a bit like bear repellent – the only way you know it’s working is that there are fewer bears around… but if a bear shows up on your doorstep with a lawsuit, the value becomes much more clear. Maybe I went too far with this analogy… I digress…

Sadly, much of what I do is work to clean up my clients’ self-inflicted messes. They try to save money on legal fees by trying to be their own lawyer. Sometimes the damage is irreparable. I’ve watched businesses go down in flames because of vague, improperly drafted contracts. I’ve seen clients held hostage by independent contractors because they didn’t put anything in writing before work started. I’ve seen people’s businesses stolen out from under them because they didn’t think independent legal advice was worthwhile. Even when the business is salvageable, they often end up spending two or three times as much to fix the problem than they would have on legal advice in the first place.

The business lawyer’s role usually falls in one of three categories:

  • Internal relationships. Clearly setting out the roles, responsibilities, and expectations between the founders of the business is essential. Sooner is better – ideally before the business starts to make (or lose) money. No matter what the form of business is, and no matter how good the intentions are at the start, as soon as money is involved, people’s recollection of the deal and expectations can change in a hurry. A house divided against itself cannot stand.
  • The back end of the business. Not only should your business structure make sense from a tax perspective, it should protect the founders, and facilitate long-term growth as much as possible. There are several forms of business available, each with their benefits and obligations. Choosing the right one, and keeping it in good standing with the government and other regulators is critical. Lawyers know what records need to be kept, and what approvals must be secured before taking certain actions. Investors and potential buyers will want to see that the proper decision-making processes were followed in running the company.
  • External relationships. Customers, suppliers, employees, investors, creditors, partners, joint-venturers, government, regulators, landlords, tenants, neighbours, industry associations, and advisors will all be looking out primarily for their own interests, as you should be for yours. Contracts are useful to set out what’s expected of each party, which I covered in detail in an earlier blog. Call your lawyer before trying to enter, break, or change a contract. You may also need help understanding what regulations apply to your business, and help you to colour between those lines.

Insurance

I’m no expert in insurance – my knowledge is limited to knowing when to recommend when it might be appropriate, and how it fits into your overall risk-management plan. I typically recommend insurance options to cover the gaps between your business practices and legal structures, and the risks you can’t hedge against that way.  A few of the common types are:

  • Commercial general liability. This coverage can cover slip & fall and other bodily injury, defamation, emotional pain and suffering, false advertising, medical expenses, and tenant/occupant liability.
  • Disability & key person. As discussed in my articles on contingency planning, these policies can help keep the business afloat if the owner/operator or a key employee is killed or injured and unable to work.
  • Directors & officers. A company can agree to protect its directors and officers in the event that they’re sued for things they did in the course of their duties.
  • Business interruption. Protecting against loss of income in the event of fire, flood, equipment breakdown, and other events beyond the business owner’s control.

Written opinions of lawyers, accountants, and other professionals which recommend a specific course of action as being legal or viable can also be a form of insurance. Your business should be able to rely on those opinions to make its decisions. If an opinion is wrong, and the business suffers losses as a consequence, it’s up to the professional (or their insurer) to make it right.

Bear in mind that insurance is a contract as well – so read it. Know what you want to be covered for, and make sure it’s included in the policy. Have an idea of what amounts of coverage you need for each type of insurance. Ensure it covers liability occurring in the places where your products or services will be delivered. Do some research into the reputation and claim denial rate of the insurance company you’re thinking of dealing with. Call your insurance agent when starting a new aspect of your business. Insurance is supposed to provide peace of mind – which ain’t much use if you don’t actually know what you’re covered for.

You probably already know that there’s a lot more to entrepreneurship than meets the eye, if you’re doing it well. Getting legal advice can be a delicate balancing act as far as cost vs. benefit – especially when cash is tight in the early stages. Sometimes you need more work than you think, other times you need less. Each business’ needs will be different, and the only way to know for sure is to ask questions. Know what you don’t know, and get an expert when you need one. I happen to know a guy…. 😉

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Legal Aspects of Business Succession Planning

At long last, I’m celebrating the new year by finishing off this series of succession planning articles. I’ve already talked about the big picture, and how to make sure your business can continue to run if something happens to you. Now it’s time to talk about how you can retire. This isn’t something that should be done in a hurry – it’s wise to give yourself a few months to make the plan and expect it to take years to live out the plan.

There are four main ways that business owners hand over control and operation of small businesses to a successor:

  • Passing the business to a family member,
  • Selling the business to management or employees over time,
  • Selling the business in one fell swoop, or
  • Passing the business in your will (if you want to stick it out ‘til the bitter end…)

Despite the different terms I’m using, all of above except the last are selling the business as far as the tax man sees it. Each of these routes allows you to cash out – or extract the value you’ve built up in the business. Even though the end result of each is similar, the legal path you’ll need to walk to get there is different in each case, with some common elements between them. I’ll talk about each option below. What will work for you depends on what you want, the tax costs, and what is realistic for your business, successor, family, and employees.

Before I dig into the guts of succession, I’ll touch on a few issues that will pop up no matter which way you opt to go – both of them have to do with the almighty dollar.

Valuation

No matter what route you choose, valuing the business will be a pain in the behind. Valuing a business for sale, transfer, or estate purposes can be tricky. As you likely know already, “tricky” is usually lawyer-speak for “expensive,” so brace yourself.

There’s no single formula to value a business. The bigger and more diverse the company, the trickier it is to value. “Tangible assets” – like machinery, inventory, and accounts receivable – are pretty easy to put a price on, while “Intangible assets,” – like client lists, intellectual property, social media influence, or a recognized brand – are more difficult. Equally tough is when you, the owner, are a big part of the business’ worth.

Businesses can be valued by a number of different ways, but the two most common are:

  • Agreement between the buyer and seller
  • Valuation by an accountant, auditor, or certified business valuator

Agreement on price is the cheapest, but the price that you agree to with the buyer might not be the amount that tax is assessed on. You report the sale price, but the CRA will deem the sale to have been made at fair market value. Funnily enough, the CRA rarely finds that the sale happened at a lower value than what was reported. You may end up on the hook for more taxes than you calculated, which cuts into your retirement nest egg.

The CRA and tax courts tend to stick to valuations made by certified business valuators (very expensive), and sometimes accountants (moderately expensive) for tax purposes. Hiring one of those dudes to value your business could cost more than you’re willing to spend… but sometimes the up-front cost of paying a valuator is lower than the potential long-term cost of an extra tax bill. It’s worthwhile to at least have the conversation with your accountant.

Tax Efficiency

Speaking of the CRA, most transfers or sales of businesses can be made cheaper by getting sound accounting advice on how to minimize the tax on the transfer. The more the business is worth, the more likely it is that the transfer will be tax-driven. “Tax-driven” means that your accountant is telling your lawyer how to arrange the purchase and sale so that you (and possibly the buyer) pay the minimum tax possible.

A note of caution on accountants – not all of them know tax. Many small business accountants are good at preparing annual income tax returns, and helping to manage cash flow, but aren’t experts on the tax implications of selling a business. Even if you’ve been with your accountant for years, don’t be afraid to shop around. Moral of the story? Get accounting advice early in the succession planning process.

With that out of the way, here’s the rub:

Four Ways to Transfer Your Business to a Successor

Passing to Family

Selling or passing all or part of the business on to a family member can be a sale, gift, or some combination of the two. There are a number of ways to work this, but what’s best for most small businesses is a gradual transfer of operational control and profit share.

On the operations side, a gradual transfer of responsibility gives your successor a chance to get up to speed on how the business works, build relationships with key customers, advisors, and suppliers, and allows you to pass on the lessons and values you’ve picked up along the way.

As far as profit sharing, if the business’ cash flow can stand it, you may want to continue to draw some sort of income from the company. If not, an incremental buy-out by the next generation or the business itself – usually 5-10% of the value of the business per year – might give you 10-20 years of “income” out of the value you built in the business. That incremental buy-out is usually good for the successor as well, as they don’t have to come up with all the money to buy the company right away. It could also be done as an incremental buy-in, where some of the successor’s pay is in shares, which dilutes your ownership of the company over time.

So long as you own shares in the company, you should consider life insurance. The more your stake is worth, the more this makes sense. Insurance policies pay out directly to the beneficiary – your successor or the company itself – to buy back the shares, and keep those shares out of your estate.

The typical legal documents involved in a family succession include:

  • Unanimous Shareholders’ Agreement – which can set out the terms of any buy-out or buy-in, valuation, insurance, and your continued role in the company, if any. Each shareholder signing it should have independent legal advice.
  • Share Freeze – is a fairly complex transaction where the value of the company “freezes” at a certain date, and you’re issued shares that reflect that frozen value. The successor gets new shares which will capture any further growth in value. The company then buys back the freeze shares over time and cancels them. Your freeze shares could have dividend and voting rights that allow you to continue to share in the profits and management of the company.
  • Trusts – where your shares are managed by someone else on behalf of your successor. These are useful when one or more of your successors doesn’t yet have the age or experience to run the company completely. Trusts are also useful if you’re separating ownership and operations of the business between two or more people.
  • Will – if you pass away before the transfer is complete, you can set out how your shares are to be dealt with. Ensure that the terms of your will match with the terms of any shareholders’ agreement, trust documents, and so forth.
  • Powers of Attorney – if you’re incapacitated before the transfer is complete, who will oversee the management of the company, and manage your shares? Any requirements or restrictions on how the attorney is to act should be set out. This must jive with all the other documents.

On the tax side of things, transfers of property to family members are not at “arm’s length”, and are taxed differently than sales to non-family members.

Selling to Management or Employees

Long-term managers and employees can often feel like family, and a transfer to them can be done much in the same way as to a family member. It can also be done in concert with transfer to a family member – perhaps 51% control of the business will stay in the family, while 49% will go to the employees who will continue to run it. If the employees or managers have the funds available to buy right away, it can be a one-and-done sale, or a phased buy-out or buy-in. These transfers are typically done over 3-5 years, and are “arms-length”, meaning that different tax rules apply than to transfers to family.

Assuming that you’re being bought out, rather than simply giving the shares to the employees, this process will be more formal and legalistic. You should insist that the buyer get independent legal and tax advice so they can’t come back later and say that they didn’t get what they bargained for.

Before writing anything up, you should hash out with the buyer the broad strokes of how the transfer will be structured, and how the buyer will finance the purchase. It can be any combination of:

  • Employee stock option plans – where employees are paid shares as part of their pay, and your ownership and control of the company is diluted over time.
  • Purchase and sale agreement – a contract between the buyer and the seller that sets out all of the key terms of sale. It can include employee stock options, or it can be a straight up purchase of the assets or shares of the company.
  • Shareholders’ agreement – as above.
  • Service agreement – especially if it’s a one-and-done purchase, the buyer may want your services and advice as an employee or independent contractor. They may want you to continue to sit on the board, or to serve as an officer of the company.
  • Indemnity and releases – where the company agrees to protect you for the consequences of legitimate actions you took while a shareholder, officer, or director of the company, and release you from any liability for actions taken after you transferred ownership or control. These are often included in the purchase and sale agreement.

The buyer should conduct due diligence before buying, particularly if you’ve been the one to handle the back-end workings of the business such as dealing with lawyers and accountants. It’s important that the buyer knows what they’re buying, the financial history and projections of the company, and that the books and records are in good order.

Lastly, you’ll want to make sure that your will, trust documents, powers of attorney, and domestic contracts jive with the deal you’ve made.

Selling to Third Parties

If you can’t find anyone in your family or business who’s willing or able to take over from you, it may be time to prepare your business for sale. I won’t go in to too much detail, as I’ll cover sale of business in a separate article, but it will require some legal work to prepare for due diligence.

Due diligence is when the buyer digs through the corporate records to make sure that they know what they’re buying. You should be proactive to make sure that the minute book, employee agreements, accounting records, lists of assets and liabilities, leases, real estate ownership and mortgages, intellectual property, debts, shareholder relations, taxes, and licenses are in good order.

Passing the Business in your Will

Many business owners approach is “I’ll just pass everything in my will.” This is a mixed-bag approach that chooses to duck the costs of preparing and implementing a succession plan, while sacrificing certainty and control.

The upside to this approach is that there’s minimal headache and expense for you in the here and now. It can work very well when your successor is clear – perhaps an only child who’s been working in the company for years, and knows what you know.

The downside is that you may handicap the next generation’s ability to run the company. If the business is asset-rich, but cash-poor, the tax bill on the estate might cripple the company. You will have no control over what happens after you’re gone. Your beneficiary will be stuck with making the tough decisions you’ve abdicated from. It also risks infighting between beneficiaries, or with the company controlled by people who don’t know or care about the business.

I’m not saying leaving the company in your will is a bad decision – just know what risks and benefits you’ll be passing on to your successor before you make the choice.

Phew, that was a long one… I promise I’ll write something more entertaining soon…

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw