I frequently encounter early-stage startups with too many share classes.  If you have read previous posts, you know that I advocate for a simple share structure for early-stage companies (usually common and, if needed, non-voting common).  If more complex structures are required in the future, they can be created then.

When you are considering your startup’s share structure, consider creating only those share classes that you know you need now or will need.  To that end, ask the following questions before creating any share class:

1.  What is the share class to be used for?  You need to understand the purpose served by each share class.  Don’t create share classes because a third party tells you to or because you see other companies with similar structures.  Each share class should have a reason for existing.

2.  When is the share class to be used?  If the share class is to be used at some point in the future, consider whether that class will 100% be suited to that hypothetical future event or will it need to be modified to suit that future event?  Further, what is the likelihood of the future event occurring?  If it seems unlikely the shares will be used in the future, consider not creating that class.  For example, I question the value in creating preferred shares to be used for future investors as you currently do not know what terms those hypothetical investors will want on the preferred share class.

3.  Will your share structure agitate investors?  Perhaps you do have a future use for 4 share classes but what is the impact of this share structure on your capital raising activities?  Will startup investors, used to seeing common share structures (and maybe a non-voting common), take issue with your complex share structure?  This especially could be the case where you can’t explain the reason for the structure.  Always consider how outsiders will view your share structure.

In sum: don’t create share classes without a reason – even if your lawyer says so!  A founder should know their company structure and why it was created that way.

While many agreements are entered into online, some online companies continue to operate partially offline.  Challenges arise when offline contracts require agreement to an additional online contract, such as a Terms of Service.  This is not to say that offline contracts can’t incorporate online contracts, rather, the online contract must be properly presented to the user signing offline to be enforceable.

When integrating an online contract into the terms of an offline contract, include a clear call-to-action on the part of the signatory.  This is a statement that signing the contract indicates acceptance of the online contract OR to only sign the contract if the signatory agrees to the online contract as well.  Ultimately, you want the signatory to indicate acceptance of the online contract clearly and in an informed fashion.

What calls-to-action don’t work?  A recent U.S. court case considered a link, above the signature line, to the terms and conditions (“Download Terms and Conditions”) and determined that this was insufficient to establish acceptance of the online contract.  As such, the mere existence of a hyperlink, without anything more to draw attention to the link, does not establish acceptance of an online contract.

Admittedly, while this post is more technical than most we put online, our goal is to remind our readers that caution should be exercised when trying to incorporate online contracts into the acceptance of an offline agreement.  While not impossible, contract language is pivotal to ensure enforceability of the online contract.

New registration and prospectus exemptions adopted in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia permit startups (and other companies) to crowdfund investment in exchange for equity.  Importantly, investors do not need to be accredited or have a previous relationship with the company.

What are the company requirements?

1.  Have a head office located in one of the above provinces;

2.  Conduct crowdfunding through an online funding portal that meets certain requirements (to be detailed in our next blog post); and

3.  Use, and post on the online funding portal, the required offering document form that details, for example, certain information about your company, the securities being offered, the minimum offering amount and how funds will be used.  The offering document is available at https://www.bcsc.bc.ca/45-535_[F]_Form_1_05142015/.

How much can your company raise?

You can raise up to $250,000.00 per distribution in up to two crowd funding distributions a year.    As such, you can crowdfund a total of $500,00.00 a year (in two separate distributions).

What type of securities can you offer?

Common and preferred shares, convertible securities (that convert into common or preferred shares), non-convertible debt securities (fixed or floating interest rates) and limited partnership units.

Do the investors need to be accredited?

No.  However, each investor is limited to invest up to $1,500.00 per distribution.  As such, one person could invest a total of $3,000.00/year in your company where they invest the total permitted amount in two separate distributions.

You can receive concurrent investments under other securities exemptions, such as from accredited investors, and put these investments toward the minimum offering amount.

Do I need to raise the minimum offering amount?

Yes.  Like a Kickstarter campaign, the crowdfunding exemption requires that you raise the minimum offering amount.  Where you fail to raise the minimum amount, you cannot complete the offering.  Nonetheless, as noted above, concurrent investments under other securities law exemptions can assist with raising the minimum amount.

Are there other requirements?

Of course – this involves law, remember?  Other requirements include, but are not limited to:

1.  The crowdfunding campaign has a maximum duration of 90 days;

2.  Each investor has a right to withdraw their commitment within 48 hours of: (a) their subscription or (b) upon receiving notification that the offering document has been amended; and

3.  A report of exempt distribution and the offering document must be filed with the applicable securities commission no later than 30 days after closing.

The full text of the exemption is available at: https://www.bcsc.bc.ca/Securities_Law/Policies/Policy4/PDF/45-535__BCI___May_14__2015/

In upcoming blog posts, I will discuss funding portals as well as aspects to consider when structuring a crowdfunded investment round.

1.  Securities Law:  If your startup is selling shares or other forms of investment, securities law applies.  In the cross-border context, you may need to comply with the securities laws of your jurisdiction AND those of the purchaser’s jurisdiction.  For example, if a B.C. company sells shares to a U.S. investor, both B.C. and U.S. securities law applies.

Ultimately, as a startup founder, your role is to understand that the securities laws of multiple jurisdictions may apply to a transaction and ensure that your legal advisors address these laws.

2.  Privacy Law:  The privacy laws of every jurisdiction in which your startup has users (theoretically) apply.  In this respect, every startup has cross-border privacy law issues.  Nonetheless, to comply with the privacy laws of every  jurisdiction from which your users originate is, for an early-stage startup, incredibly expensive and time-consuming.

In my opinion, it makes financial sense to comply with the privacy laws of your startup’s jurisdiction and, as your company grows, the privacy laws of each jurisdiction in which you gain traction.  The basis for this approach being the assumption that a company may only face privacy law issues when it achieves traction in a particular market.

3.  Tax:  Need I say more?  Cross-border taxation issues are always a concern when your startup is doing business outside its home jurisdiction.  Tax is far too complex for a brief blog post – simply put, always keep tax in mind.

In sum, all startups face cross-border legal issues, if only due to the borderless nature of the Internet.  At a minimum, it’s important for startups to recognize the potential for the laws of other jurisdictions to impact their company and to plan compliance with these laws.