Tips and traps from Pitblado’s tech law team
Technology touches just about every business. Although your business lines may be strictly bricks and mortar, you’re still using technology, even if you aren’t selling it. Internet, wireless and computers? Everyone uses them; all technology-related.
It used to be that our tech law team dealt almost exclusively with people whose service offerings involved technology. That’s no longer the case. We’ve put together a list of what we’re seeing in the trenches. Regardless of what you’re selling, our experience as tech lawyers is likely to have some relevance.
Getting it right, the first time. Bad agreements can be costly, particularly when it comes to tech. While business always involves a certain amount of “bootstrapping” or “doing it yourself”, don’t do it to your own detriment. In our experience, it often costs more to fix bad agreements, than to have something professionally drafted by someone experienced in that area of law. A well-drafted tech agreement doesn’t have to be complicated or expensive, but it does have to function in the way you want it to. The same goes for shareholder agreements. If someone misses the mark in drafting, the end result may lead to uncertain consequences that fail to match your expectations and understanding—sometimes with significant financial costs. Our advice is to do it right, the first time.
When to incorporate? This one comes up a lot. We think there are a few important points to consider. One, is your business taking on increased risks and potential liability? Carrying on business through a corporation can help shelter your personal assets from the hands of creditors and other claimants. Two, is your business generating profit? If so, a corporation can help unlock additional tax planning and accounting options. Keep in mind that as your business matures, you’ll generate goodwill and other assets, such as intellectual property, that can have significant value. The more value you have, the more you’ll need to consider additional steps to try to mitigate any immediate tax consequences that are associated with transferring to the new corporation these assets which were likely developed and/or acquired prior to incorporation. Further to the point above, one of the benefits of hiring a lawyer to assist with incorporating a business is that a good lawyer can set you up with a proper share structure to ensure your business can accommodate future growth.
Privacy isn’t just a privilege. For a while, many consumers of legal services viewed privacy as “nice to have” but not “need to have”. No more. Customers and other vendors expect businesses to be able to demonstrate robust privacy and data management procedures. Failing to have your privacy house in order can eliminate opportunities. If a data security incident happens, the first step will be to plug the breach, and then to assess the harm that was done. We’ve seen how hard that task is, if a business is unable to understand its data flows and data inventory. And while Canada’s general private sector privacy law doesn’t currently carry significant financial penalties, the proposed new privacy law that’s on the horizon will. Now is the time to act.
Cyber security. In any given year, about one-fifth of Canadian businesses report being impacted by cyber security incidents. Despite this, only a fraction of businesses have written policies and plans in place to manage and address a cyber incident. We strongly recommend having plans and policies in place before an event occurs. Businesses should also consider any contracts they have with third-party service providers and ensure that these contracts contain appropriate provisions to support the organization’s tech and cyber security framework. For instance, does your contract require the service provider to promptly notify you of all tech and cyber security incidents and provide information about each incident? Do they have mitigation strategies in place, or carry insurance policies that cover cyber security losses? All of this can matter, both before, during, and after a cyber security attack.
“Build to Sell” (even if you don’t think you will). The tech market can be unpredictable—and lucrative. If a deal comes knocking on your door, you’ll want to make sure that your business is positioned to attain the most favourable outcome. This means dealing with, and appropriately documenting, intellectual property issues to ensure your business owns what you think it owns. It is much harder to patch over chain of title issues (i.e., proving intellectual property ownership) when a deal is on the table, and the person from whom you need a signature is aware of the leverage they hold. You’ll also want to make sure that your contracts with third parties allow for a variety of sale scenarios. Whether this involves a change of control of your business or assignment of the contract to a third party, you’ll want the flexibility to adapt to a variety of scenarios so you’re not hemmed in to contractual terms that have the potential to negatively impact your deal. If you’re selling a company, the buyer will want to be sure that all of the company’s shares are accounted for in the deal. It’s very important to ensure your “cap table” (showing ownership of all shares and agreements which are capable of becoming shares, like convertible notes, SAFEs, warrants and options) is in order.
Questions? We can help! Please contact a member of our tech law team for more information and legal advice tailored to your particular circumstances. www.pitblado.com
