Tag Archives: foreign law

Investors don’t care where your Startup is Incorporated

Many founders I speak with are concerned about where their startup is incorporated and how this could impact fundraising opportunities in the United States.  In reality, this concern is unfounded.

Any sophisticated investor considers the product/service, team, market potential and other commercialization factors before, if at all, considering where a startup is incorporated.  In some circumstances, an investor may request that the startup alter its jurisdiction of incorporation but whether or not they proceed with the investment is determined 90% by quality of the company over jurisdiction of incorporation.  As relayed to me by Canadian founders, “if an investor passes because you’re a Canadian company, that’s not the real reason for passing“.

Where an investor requires your startup to be incorporated in the U.S. there is a simple process for creating this structure that I discussed in a previous blog post – The Canadian-U.S. Swap: Moving an Early-Stage Startup to the U.S.

Canadian founders should focus on building a compelling product/service and not waste energy worrying about minutia of incorporation.  Sell investors on your company and any issues concerning where your company is incorporated can be worked out between your legal counsel and investors.

Your DMCA Registration is Expiring

The US DMCA (Digital Millennium Copyright Act) contains very useful provisions that provide a company with a safe harbour (in the U.S.) from copyright infringement committed by users of the company’s website or other online service.  For technology companies, especially those that permit users to contribute content, this safe harbour is invaluable as, without, liability for copyright infringement committed by users could be a financial disaster – imagine the liability a video upload site could incur.

To be granted the safe harbour, your company must comply with a number of legal requirements, including:

  1.  The posting of certain information concerning a notice-and-take-down process for alleged copyright infringing content, counter-notice to challenge an allegation and compliance with this process; and
  2. Registering your online service with the US copyright office and registering a DMCA agent, who acts as the point of contact for DMCA/copyright infringement claims.

Previously, DMCA agent registration did not expire.  Due to changes in the regulations governing DMCA agent registration, all current DMCA registrations expire on December 31, 2017.  Going forward, companies may register DMCA agent information electronically, each registration being valid for 3 years.  A failure to re-register a DMCA agent will result in the loss of the DMCA safe harbour, even if you previously registered and no change occurred with respect to that agent.

The benefits to the DMCA safe harbour greatly outweigh the minor costs involved in registering a DMCA agent.  Accordingly, we recommend registration to our Canadian clients, even if they do not have a presence in the U.S.  If your company has already registered, be sure to contact your legal counsel to timely begin re-registering your DMCA agent.

Publishing Video Games in Germany

Germany has strict rules governing video game content that large studios and indies need to comply with before publishing or advertising a game in Germany.  Breaching these rules is costly as fines may total $550,000 USD in addition to (in some cases) constituting a criminal offence.  Often, the laws result in modified video game content just for the German market (see: Half-Life, Wolfenstein).

By factoring these rules into development you can facilitate a smooth release in Germany.

1. What Content is Unlawful in German Video Games?

It is unlawful to display violations of human dignity, propaganda material of unconstitutional organizations (especially Nazi symbols), glorify violence and war as well as certain pornographic content.  See Article 4 for the full list.

In addition, it is unlawful to provide content that has the potential to impair the social and emotional development of children if you don’t take precautions to shield children from the content. Depending on style and presentation, games that cover violence, sex or drug use can fall under this category.

2. Does my Video Game Violate German Law?

If you’re unsure whether your game violates German law, there are two ways for your game’s content to be reviewed:

A.  You can have it pre-assessed by the German certified self-regulation organization USK.  The organisation offers basic initial assessments at a flat rate equivalent to $330 USD. You can also apply for an official rating which will prevent your game from being put on the “index list” of restricted content allowing for legal certainty before launching. This assessment entails a test run of the game and costs up to an equivalent of $1,320 USD. For a yearly fee equivalent to $3,300 USD, you can also become a USK member, which includes customized child protection solutions and a certain degree of protection from fines and other administrative measures.

B.  If your game is sold through certain marketplaces (Google Play, Nintendo eShop and Windows Store), you can obtain classification via the International Age Rating Coalition. This system is free to developers and allows you to rate a game using a complex questionnaire.  As of October 2016, IARC will be recognized as an official age classification system by German authorities.

3.  Wont Somebody Please Think of the Children!

As mentioned above, for some games, child protection measures have to be taken.  Examples of such measures include:

A.  tagging your website with an age restriction label; and

B.  restricting game distribution to adults, for example by using an age verification system.

Content that is deemed specifically harmful to children may only be made available to adults in closed user groups.  In addition, if you act as a website provider, it might be necessary to appoint a “Youth Protection Representative” to ensure compliance.

While these requirements are not minimal, it’s important to take them into account if you plan on Germany constituting a portion of your game’s market.

Thanks to guest writer Dominika Wiesner, a German trainee lawyer  working in our office this summer, for her work on this blog post.

Delaware vs Canada Startup Structure

Canadian startups are frequently influenced by U.S.-centric blog posts concerning startup company structure.  Relying on these posts ignores some fundamental differences in how Federal and British Columbia corporations can be incorporated compared to a Delaware corporation.  Indeed, Canadian startups should not ignore such differences as they permit a more lenient corporate structure from which to grow a company.

To start, here is an overview of the Delaware corporate structure typically recommended to startups:

  1.  Authorize 10,000,000 shares.  Delaware corporations must authorize a fixed number of shares at the time of incorporation.  This number can be altered in the future but will require shareholder approval.  The large number is used as: (a) it avoids fractional shares; and (b) looks expensive.
  2. Issue around 5,000,000 shares.  Shares are issued to founders but at least a 1/3 of authorized shares remain unissued for option pool grants and investment rounds.
  3. Allocated shares to option pool.  A certain number of shares are allocated to the option pool.  The art of structuring the option pool, especially in regard to finance rounds, will be discussed in a future post.

Once complete, assuming a 10% pool, 6,000,000 shares (5m founder shares and 1m pool) have been issued or allocated.  The remaining 4 million shares, or 40% of the company, will be reserved for future investment rounds and expansion of the option pool (if needed).

Conversely, Federal and British Columbia corporations are NOT required to authorize, and thereby set a cap on the number of, shares.  Instead, shares can be unlimited, thereby granting the Canadian startup great leeway in granting shares in the future without having to worry about running into the authorized share limit that Delaware corporations face.

Here is what the same startup, incorporated Federally or in British Columbia, would look like structurally:

  1. Authorize an unlimited number of shares.
  2. Issue about 5,000,000 shares.
  3. Allocate the option pool, fixed or rolling.  Given that shares are unlimited, you are not forced to set a fixed number of shares to constitute the option pool, although you could.  Instead, you can set the option pool size as a rolling % of issued shares creating an automatically adjusting pool size regardless of the number of shares issued in the future.

Ultimately, the Federal/BC startup is not faced by the same rigid share structure, governed by the authorized share requirement, that a Delaware startup is, thereby taking away a few of the corporate structure challenges that U.S. startups often face.  With unlimited shares, the Canadian startup’s future share grants are only restricted by the corporation’s constituting documents, agreements with shareholders or third parties and BC corporate law.  Conversely, the Delaware corporation needs to review how a share grant will reconcile with the number of authorized shares and, if needed, increase that number and seek shareholder approval to do so.

Of course, if you want to structure the company exactly like a U.S. startup, you certainly can authorize a fixed number of shares in your Canadian startup!