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Can a Founder Legally Promise Equity in a Company that Doesn’t Yet Exist?

Serial entrepreneurs are constantly coming up with the ‘next big idea’. During the excitement of starting the process of building a business, incorporating might not be the first thing on an entrepreneur’s mind. Employees might be promised shares in a corporation that doesn’t even exist. Can the employees enforce this promise?

 

Contractual Promises Made Pre-Incorporation

 

An oral or written agreement promising to provide equity in a company that has not yet been incorporated can be considered a valid agreement.

 

In Fedel v Tan, Tan entered into an oral agreement to provide 40% equity to Fedel in their new seaweed derivative company that had yet to be incorporated. The company was incorporated one year later, with Fedel and Tan as directors of the company. 100% of the shares were issued to Tan, however, Tan had promised that Fedel would still receive 40% of the equity. Fedel continued to work as vice-president of the parties’ company. 10 years later Fedel argued that he was entitled to the 40% ownership interest promised by Tan. The court held that the oral agreement made pre-incorporation was a valid agreement, as the parties’ actions proved that the parties intended to be partners in their company, each holding equity in the company.

 

 

Benefits of Incorporating Immediately

 

Although parties can create binding vesting contracts prior to incorporation, there are a number of benefits to incorporating a business immediately:


 

Investors: When searching for investors to invest in your next big idea, they will be looking to invest in a legal entity, rather than financing individual founders. It is a good idea to have the company incorporated before looking for investors and funding.

 

Employees: Founders may decide to pay new employees out of their pocket prior to incorporation. However, hiring employees by a legal entity can result in tax benefits, and IP assignment from the employee to the company. Furthermore, it eliminates the additional step of entering into a second employment agreement after incorporation.

 

Intellectual Property: If you are coming up with the ‘next big idea’, it is likely that you will have some IP to protect. It is also likely that you will want the IP to be the property of the company, and not individual founders. Incorporating the business will protect the IP of the company and will ensure that IP is assigned to the legal entity. Incorporating early is also a good idea where founders want to protect their unique company name.

 

Check out Clausehound’s Small Business Law Library for standard incorporation documents, such as Articles of Incorporation!

 

 

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Enterprise Toronto Presents the Small Business Money Forum on March 7, 2017

 

Sniffing out awesome startup events, we’re venturing out of the doghouse to check out Enterprise Toronto’s 2017 Small Business Money Forum in Toronto on March 7th!

 

Are you looking for ways to fund your business? Want to understand how to get access to credit? Interested in understanding market conditions so that you can build your customer base?

 

 

Join TD and the City of Toronto for a full-day session focused on helping small and medium-sized businesses get connected to financial resources to help them grow and succeed.

 

To purchase event tickets, please click here.

 

Event Details
Tuesday, Mar.

7
9:30 a.m. – 3:30 p.m.
Toronto City Hall, 100 Queen St. W., 3rd Fl.
Council Chamber

 

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Clausehound.com regularly curates a list of innovation and entrepreneur-focused events. Events we like have insightful speakers and provide attendees an opportunity to network with entrepreneurs, and learn from others within the community.

Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound.com offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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As a Programmer, Are You Committing Intellectual Property Theft by Abstracting Ideas Learned at Work Into a SaaS Product?

In this day and age, technology is taking over every aspect of our lives. Ideas developed for one area can be modified with ease and adopted in another area. If you are starting your own business, you need to protect your intellectual property to avoid someone else using your hard work in a different market. But what if you come up with an idea while working on a different project?

 

 

What is intellectual property theft?

Intellectual property theft is the stealing of creative ideas. In the area of start-up businesses, intellectual property is a huge concern. After all, you are dealing with new ideas in its early stages with significant progress to be made. As a programmer, you come across new ideas all the time, which may inspire some ideas of your own. The challenge is making sure that you aren’t taking anything that is not yours. The line between committing intellectual property theft and the creation of new ideas is not always clear, but the agreements you have signed as a developer may give you some clues about where to draw the line.

Source

 

Master Service Agreement

Start with the Master Service Agreement. If you are performing work for someone, your specific tasks, duties, and obligations should be clearly outlined. A well drafted Master Service Agreement will define your intellectual property rights as of before the work begins with the developer, while the work is in progress, and after the work is completed. These definitions are extremely important and often hotly negotiated, as is the ownership of these types of intellectual property. You may wish to make sure that the definition of client confidential information is not so broad that it includes all ideas developed during the term of the agreement.

 

Click here to see Clausehound’s Master Service Agreement!

 

 

Employment Agreement

If you are an employee, the rights you have as a developer may be a bit more limited.

Most employment contracts will contain language which requires you to transfer all rights to intellectual property created during the course of your employment. Some agreements allow employees to develop ideas independently, if they are developed outside of work time and without the use of employer intellectual property or confidential information.

 

Click here to see Clausehound’s Employment Agreement!

 

Under the Copyrights Act, if the work is created in the course of employment under a contract of service, then the employer will be the owner of the copyright in the work created by the employee. What this means is that you cannot retain any rights to work created during the course of your employment if you do not have an agreement that allows you to retain that right. Copyright includes artistic work but may be much broader and can include work related to technology.

 

Under the Patent Act, courts have decided that the employee will retain ownership pursuant to two exceptions. First, if you are “hired to invent”, which means hired for the purpose of creating ideas for your employer, then you would not be able to claim those ideas as your own. Your employer retains those rights and any ideas that you have. The second exception allows the employer to obtain the rights if you transfer those rights to the employer in an agreement.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Are All Arbitration Provisions in an Employment Agreement Enforceable?

Whether a particular arbitration clause will be enforceable depends on the way in which the clause is drafted. Generally speaking, if (i) the clause is clear, (ii) arbitration is made mandatory, and (iii) the contract can otherwise be enforced, the arbitration clause will be enforceable.

 

Source

 

Arbitration Provisions

It’s best to start with a brief rundown of what arbitration provisions should include. A basic arbitration clause will be an agreement between the parties to use arbitration instead of the courts in the event of a dispute. The clause should be broad enough to cover all types of disputes and questions of interpretation of the contract. If the clause is not broadly worded, one of the parties could argue that the particular dispute was not within the scope of the arbitration clause.

 

The clause should either specify the following details, or incorporate a set of arbitration rules that provide for such details as:

  • how many arbitrators will be chosen to decide the matter;
  • how an arbitrator is to be chosen (both parties must agree upon someone, and if they are unable to reach a decision within a specified time frame, a mechanism must be in place for the choice of an arbitrator);
  • the rules of the arbitration process (there are many standard sets that can be referenced—for example, see the ADR Institute of Canada’s Arbitration Rules);
  • the seat or location where the arbitration will take place;
  • the language to be used during the arbitration process; and
  • the applicable governing law and jurisdiction.

 

Check out Clausehound.com for sample arbitration clause language!

 

Unenforceable Arbitration Clauses

There are two main reasons why courts have held arbitration clause to be unenforceable – bad drafting and matters of public policy.

Source: Jérome Dessômmes – ÉCRIVAINS CONSULT/Wikipedia

 

Bad drafting

If the arbitration clause creates too many ambiguities, or if arbitration is not clearly mandatory, the  bad drafting of provisions may cause the clause to be unenforceable.

There are a few main areas of concern that have been identified by the courts:

  • The arbitration process and procedure should either be written with great detail to avoid the possibility of either party claiming their obligations were unclear, or reference should be made to a recognised set of arbitration rules which themselves contain this detail.
  • To convey obligation and enforceability, mandatory language should be used in the provisions instead of optional language (for example, using “shall” or “must” instead of “may”).
  • Time periods need to be specified (in the contract or in a set of arbitration rules) for when notice of arbitration should be given, how much time is to be given at each step of the arbitration process, and by when the process should be completed and a decision given.

 

 

Public policy

Sometimes an arbitration clause can run afoul of public policy. This has been especially true in the United States, notably in situations where there is a great inequality of bargaining power between the parties to the contract.

 

One concern expressed by American commentators relates to the cost-effectiveness of arbitration. An examination of case law by Wigdor LLP in New York discussed how arbitration provisions can be invalidated if the costs involved are excessive in a way that “could preclude a litigant from effectively vindicating [his or her] federal statutory rights in the arbitral forum.”

 

Another point of growing concern relates to how arbitration can create, as National magazine puts it, “an alternate system of justice” that more often than not rules in the company’s favor and leaves litigants feeling like they have not rightfully received their day in court.

 

To see standard employment agreements and arbitration provisions, visit our Small Business Law Library!

 

This article was co-authored by Alina Butt.

 

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Check out StartupTech Unleashed’s roadshows in Toronto on February 27th and in Waterloo on February 28th!

Sniffing out awesome startup events, we’re venturing out of the doghouse to check out StartupTech Unleashed’s roadshows in Toronto on February 27th and in Waterloo on February 28th!

 

StartupTech Unleashed’s events offer an intimate environment that will give you a chance see some great startups in all different fields, to learn from other founders, partake in great speaker sessions, engage in demos and much more. Their 2017 Roadshow tour is designed to highlight and showcase innovative talent in the Toronto & Waterloo startup and tech communities. They help bring local founders, tech enthusiasts, and investors together to showcase new talent and ideas and to foster innovation.

 

 

This is StartupTech’s inaugural launch of roadshows and summits and they are on a mission to promote  growth and support talent in the North American tech ecosystem! StartupTech Unleashed started out as a simple group to help share ideas, foster support and assist fellow business owners. It has evolved from a small business group to a large organization with members and events in multiple cities.

 

 

Keep your eyes peeled for members of Clausehound.com’s team at all StartupTech Unleashed events! As a member of the startup community, Clausehound continues to grow our business and network by meeting other up-and-coming entrepreneurs at these events!

For more information, please see StartupTech Unleashed’s 2017 event calendar

 

–  –  –

Clausehound.com regularly curates a list of innovation and entrepreneur-focused events. Events we like have insightful speakers and provide attendees an opportunity to network with entrepreneurs, and learn from others within the community.

Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound.com offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Clausehound.com is excited to announce a new collaboration with Cyberbahn – a Thomson Reuters Business

Links from this article:
Clausehound.com

 

Clausehound.com is thrilled to announce a new collaboration with Cyberbahn, a Thomson Reuters business. This initiative aims to offer Clausehound users the ability to use Cyberbahn products directly from Clausehound’s learning materials and agreement drafting tools. This added functionality will enable entrepreneurs to access Cyberbahn’s full suite of entity management, incorporation, registration and information filing services as a direct link from Clausehound.com.

 

Click the image below to see Cyberbahn’s full suite of legal tools!

 

About Cyberbahn: Cyberbahn is committed to providing real-time legal support services that exceed your expectations, helping you achieve better results for your business & clients. Cyberbahn’s services include many crucial corporate governance and registration services, including: corporate and business searches, comprehensive name searches, corporate database management software, corporate information filings, and business incorporation and registration services. No matter what your business requirements are, Cyberbahn’s services will help your business be more productive than ever.

 

 

About Clausehound.com: Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Our $10 per month DIY Legal Library hosts tens of thousands of legal clauses, contracts, articles, lawyer commentary and instructional videos. Our professional version offers a concierge service that will assist you to should you have any questions while trying to source an agreement.

 

Clausehound

 

We’re both very excited to be support local business growth and enable entrepreneurs to pursue their business dreams!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Do you run a social enterprise? Apply to the Booking.com Booster to be eligible for up to €500,000 in grants!

Clausehound.com’s community partner, Impact Hub, is launching a social accelerator in conjunction with Booking.com. If you operate a startup that has a positive impact on the environment, preserves and promotes cultural heritage, or seeks to promote inclusive growth in tourism that supports local communities, we encourage you to apply to the Booking.com Booster by March 1, 2017 to be eligible for up to €500,000 in grants!

 

About Booking.com Booster:

The program will culminate with grants of between €100,000 to €500,000 given to a number of the finalist ventures, with a total pot of €2 million available. The accelerator will have 8-12 finalists who will be invited to Amsterdam from June 5-23 where Impact Hub Amsterdam and Booking.com will co-deliver a scaling accelerator. Finalists will receive mentorship from Booking.com and Impact Hub for 6-9 months following the accelerator.

For further information about the Booking.com Booster, please visit https://booster.bookingcares.com/

 

–  –  –

Clausehound.com regularly curates a list of innovation and entrepreneur-focused events. Events we like have insightful speakers and provide attendees an opportunity to network with entrepreneurs, and learn from others within the community.

Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound.com offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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How Can I Prevent Employees from Posting Material on Behalf of my Company?

Links from this article:
Source
NDA
Small Business Law Library

During World War II there was an expression designed to keep people from sharing seemingly unimportant information with others, especially in public places: “Loose lips sink ships.” Today that public space is the internet, and the “loose lips” of employees can quickly tarnish a company’s reputation or divulge confidential information. The key is to make it very clear that the company has specific expectations about how employees will (or will not) communicate online about the company.

 

Source

 

The informal approach 

The simplest way to make your expectations clear for your employees is to meet with them face-to-face and let them know their obligations and responsibilities. It makes the imperative personal and serious. There’s nothing more crystal-clear than looking them in the eye and telling them whether they can or cannot talk about certain things outside of work, and if they can, what the parameters are for sharing information approved to be released.

 

 

This is most effective if timed correctly. It makes the most sense to inform employees about such expectations shortly after hiring them. If you wait too long, they won’t realize that their conduct and the habits they have formed are in breach of your expectations. One systematized way of debriefing employees is to send out an informal information letter. You can use this to:

  • Remind employees of their responsibilities to the company relating to confidentiality and what information they can and cannot share, and in what ways
  • Remind employees they can’t share such information with anyone, including friends and family, and especially not the Internet—at least not without prior approval
  • Specify how long this obligation is to survive, be it forever or just until the end of their employment

 

Implement company guidelines

It’s a good idea to more formally write down and disseminate a company-wide policy that describes the company’s policy and guidelines on what constitutes acceptable or unacceptable sharing of information and representation of the company outside of work.

 

Making an electronic copy of the guidebook available on every employee’s computer and drawing it to their attention ensures that an employee can’t say you never told them or they had no way of knowing!

 

Source

 

Set it in (contractual) stone

If you really want to make sure your employees are under a legal obligation to do nothing that could tarnish the reputation of the company, include language in the employment contract requiring employees to adhere to the company policies as revised from time to time.

Include confidentiality and non-disparagement clauses in the contract, or have them sign an NDA. Make sure these clauses include express provisions that forbid discussion of the company or company business on social media or with the press, without express authorization by the company.

 

To see a standard employment agreement, visit our Small Business Law Library!

 

Conclusion

The threat of dismissal for breach of their employment contract is likely the best incentive when it comes to encouraging employees to uphold their employer’s image on the internet. Setting clear expectations early on can save everyone much grief—and keep loose lips from sinking the company ship.

 

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Disclaimer: This database is provided for informational purposes only and copying, downloading, or use of any content on this site in any way does not create a lawyer-client relationship with the reader. ClauseHound Inc. does not provide legal advice, nor should any advice from ClauseHound Inc. be construed as such. Read the Full Disclaimer