Shift by Alberta Innovates

Laying the legal foundation when starting a business

June 15, 2021 Paul Barbeau from McMIllan LLP Season 2 Episode 10
Shift by Alberta Innovates
Laying the legal foundation when starting a business
Show Notes Transcript

Starting a business can be fun and rewarding. It's also challenging and not for the faint of heart. There are many matters that need to be taken into account. And legal considerations are amongst those. As our guest on today's episode, Paul Barbeau, puts it, "startups tend to be really cost-sensitive. And they certainly don't want to retain a legal firm that's going to engage in a real legal overkill. All that said though, there are some core principles that startups should really give some time to thinking through upfront and get some basic legal help when they go through that process and that'll lay the foundation for successful growth ."

So let's lay some foundation together. Welcome to Shift.

BIO

Paul Barbeau is a partner in the Calgary office of the Canadian law firm McMillan LLP. A significant part of his practice is focused on helping emerging companies from their initial organization to exit transactions. This includes:
• Early stage organization
• Founder and shareholder agreements
• Capital raising, including angel and venture capital financing, and securities law compliance
• Licensing arrangements and other strategic transactions
• Acquisitions, mergers and sales transactions
• Public offerings

He acts for clients in a range of industries, including technology, health-care, agritech, clean energy and natural resources. He has a law degree from the University of Toronto and an undergraduate degree in business from Brigham Young University.





Alberta Innovates doesn't recommend any particular firm when seeking legal advice when starting a business.  Exercise due diligence and shop around for a lawyer that you feel is best for your circumstances.

Introduction with music

Jon:

So Paul, before we dive into some of the things that entrepreneurs need to consider from a legal perspective, do you have any initial thoughts about the amount of time an entrepreneur or a startup should be paying to the legal matters as they get their legs under them?

Paul:

It's a good question, Jon. I think there are a few things we should think about. I know lots of entrepreneurs, we all have friends who are entrepreneurs. And of course, I've had clients who are entrepreneurs and they bring a lot of talents to the table, technological aptitude, real creative slant to the unique market insights, that sort of stuff. But we all know that they're seriously overworked at times and they're spread pretty thin. And so one challenge we've seen over and over again is a tendency to want to deal with frankly, more mundane things like legal and accounting, and to kick the can down the road a little bit. And there's a perception that not that it's not important, but that it can be dealt with later. And I suppose in a way that's fine. The legal needs of a startup are a lot different than a more mature tech company like, on an extreme end of the spectrum, like a Google or even some emerging companies.

Paul:

And startups tend to be really cost-sensitive. And they certainly don't want to retain a legal firm that's going to engage in a real legal overkill. All that said though, there are some core principles that startups should really give some time to thinking through upfront and get some basic legal help when they go through that process and that'll lay the foundation for successful growth. So I think the idea today is to maybe cover some of those basics that they should be thinking about, but appreciating that they're not maybe doing the gold-plated or Cadillac type service upfront.

Jon:

Right.

Katie:

What is the first step for them? So I've started a business. I'm a up and coming startup and I contact you. What is the first thing you're going to tell me to do?

Paul:

We'd ask some questions first to understand the lay of the land, where you're at. Really, I think for the most part, these startups may begin and the genesis of them is a side hustle because people have their bills to pay and they have other jobs. They've got employers. And so one of the first questions we dig into is what's your current situation. Now this can get overlooked sometimes and it can create headaches if it's ignored down the road and context is everything. Obviously, if you're selling retail at Best Buy or you're digging ditches or for whatever you're doing, and there's no overlap between where you're at now and where you're going, it's not a huge concern. But if you're currently in an industry where there is overlap with your business, your startup, we've got to think about some of those issues and that overlap can be in a number of areas.It could be the technology you're using. It could be the customer base you're going after. It could even be the skillset of the employees you're looking for.

Paul:

And so that would be the first thing we dig into is where you're at and where are you going. As a side note, we do see this and I have seen it pretty recently. We had a client that was looking in the tech space and was looking to get bought by a larger industry player. But the CEO of our client was embroiled in the lawsuit to do with his prior employer. And it had to do with the ownership of some intellectual property. And because of that litigation, there was this overhang on the deal and this concern, and they couldn't really value it because they didn't know what the litigation was going to end up looking like. And as a result, the deal stalled out for the time being. So that's the type of worst case scenario if you don't think about these issues upfront. And I'd be happy to go through some of those issues in a bit more detail, things we'd look at to do with your current employment situation.

Jon:

Right. So it's a matter of doing the due diligence then and going, okay, this is, as you said, this is where I am. This is where I'm moving to. Where are those points of intersection between the future and the present state that could become an issue, could become a sticky point? Especially when you're talking about IP and stuff like that.

Paul:

Yeah. For sure. IP is one of them. There's a handful of other ones and understandably so, entrepreneurs are full of enthusiasm. They're visionaries. They see the future in front of them, but they don't want to leave these loose ends out there and cause grief down the road. So Jon, you mentioned the ownership of IP. There's a few others. And we'll ask, do you have an employment agreement with your current employer? If they do, there's a few things we'll look at in them. One is a non-competition clause and that is what it sounds like. So it's a restriction on your ability to compete with your current employer. And the key features of those, there's probably three. One is what's the geographic scope of it. So in what area are you not allowed to compete? The second one is how long are you not allowed to compete for.What's the duration of it? And the third of it, third point is maybe what constitutes a competitive business.

Paul:

Now non-competition clauses and I'm not an employment lawyer, but non-competition clauses, it's almost the case where the stronger they are, the less likely they are to be enforced by a court. So if you take an extreme example, you can have a non-competition clause that says you can never compete with us in the future, anywhere in the world for the rest of your life. The court would say not enforceable, it's too extreme. This person [crosstalk 00:05:57] has to be able to earn a living, that kind of stuff. But if they are reasonable in those three areas, you should probably run it by some legal counsel moving forward because the consequence of ignoring a non-compete clause isn't just that your former employer could sue you for damages, but they could get an injunction and just stop you from... It could paralyze your business moving forward.

Jon:

Okay. So now the situations we're talking about, that's when you're going into business as an entrepreneur and a startup in a field that's very similar to what your current employer is. Obviously, there's different things to consider if it's perpendicular to what your current employer is doing, although there are still considerations.

Paul:

So the non-compete is you're in the same industry. Even if you're not in the same industry, you may see some other concepts in an employment agreement or some of the corporate policies of your current employer, like a non-solicitation clause. So what that's saying is you can't come back and poach talent. So whether you're in the same industry or not, they don't want you leaving and then capitalizing on the relationships you built there to strip them of their talent. So that's another thing to consider as well.

Katie:

When you were talking about the non-compete provisions in your employment agreement, you mentioned that there's a wait time that you might have to take into consideration. Are people allowed to work? And this might be getting into the minutia, but I don't know the answer. And I thought maybe you did. So, you're leaving your current employer to work in something or to start your own business in something that's very similar. Are you allowed to develop that product or develop that technology, but not sell it while you're waiting out this time period? Does that make sense?

Paul:

Yeah. It does. And there's a couple issues at play there. Obviously, one is that the competition is actually competing. I think if you go into your basement and you start noodling over some things, it's probably going to be fine, but that is intersecting with a different concept of, are you taking the intellectual property or the concepts or specific trade secrets from where you were and utilizing those, developing them and taking them further? That is another component you got to be sensitive to when you go out on your own from your prior employer.

Jon:

Okay. So dabbling in your basement is one thing, moving beyond that and trying to scale that up without any legal exploration is not advisable.

Paul:

Yeah. Just be careful. If it's clear that you're not in competition with your old employer, then I wouldn't sweat it too much. But if you're working at a division of a tech company that's doing, and you're going to take and tackle an area that they've been invested heavily in or looking into, you just got to be sensitive to it because the fallout can be pretty draconian if you're not careful.

Katie:

Okay. So time period aside, you have started up a business. And now you're looking to hire employees. What is the first step that a startup or an entrepreneur take to put their team together?

Paul:

Employees, as we know, are really the backbone of a business and we want to be thoughtful and you want to get the best people. And there's this challenge because you're in a startup and we all know generally they're cost-sensitive. Cashflow is sometimes just non-existent, but you want really talented people, really knowledgeable people that have the catch division and things like that. And there's also a tendency to turn to people that you know and trust.

Jon:

Of course.

Paul:

And with whom you have a relationship. And that leads us to the discussion we just had. You're looking often at people you worked with before at your prior employer. So in some ways, when Katie asks a question about when we're starting to build the team in the new enterprise, you got to be sensitive to some of the same things we just talked about. So the conversation we just had was about you as the founder leaving and starting things up. You got to ask the same questions of people you're bringing over. So what do their employment agreements look like? What access to information did they have? What role were they playing? Are they subject to confidentiality provisions in their old employment agreements or corporate policies? And ultimately, and it's not like when you hire somebody from an old employer or from any other tech company, that they have to strip their brain of any knowledge.

Paul:

There's general industry know-how, general skills that they learned and the development of that, but give some thought and you may need some legal help on this to making the distinction between, on these employees you're bringing over, what's their general know-how, what's their skillset? And then what's confidential information and trade secrets that you want to be careful about not touching?

Jon:

So now you're thinking of all these things. You've done some due diligence at the outset to make sure that you're not crossing any lines. One thing I've always been confused about is the setup of a company. When you look at corporations, partnerships, sole proprietorship, all of that. So now here I am, I'm moving along. What am I even thinking about? Where do I fit? How do I determine I'm a sole proprietor or I should incorporate? I can't get sued.

Paul:

Yeah. Excellent question. And as lawyers, we deal with this all the time, and I think we take, maybe we assume people understand the different concepts more than they do. And it is Greek to a lot of people. They just don't make the distinction. I've had people say, well, they have a business where they're the only owner and they run it and they say, "Well, I have a partnership set up." And it's just like, well, the nature of a partnership requires a partner. So it doesn't really make sense. If you don't mind, I could just give you a quick walk through here of maybe the three principle areas that [crosstalk 00:12:31]

Jon:

Would love it.

Paul:

Your listeners can think about. And as I do this, it's important for me to give the caveat that it's not like one's better than the other. They are suitable for different stages of the growth of a company. And I'll tackle them in order of complexity, from least complex to most. So the least complex organizational form if you could call it that is as a sole proprietor, which means you don't really have a separate legal entity. You are the business. So you're running the business as an individual. You may use a trade name, of course, and there's some benefits to this. It's cheaper. It's good for startups because of that. It's easy. You're the business. So you have direct control over all decisions and the direction you're taking it. And there can even be some tax advantages if it's not profitable in the early stages. The disadvantage of the sole proprietorship is a big one. And it's unlimited liability, meaning that your personal assets can be claimed to repay debts of the business or to settle lawsuits or whatever it may be.

Paul:

So you don't have that shield to protect your personal assets. Now, not all businesses have the same risk or liability profile attaching to what they're doing. And you may carry insurance and it may not be that big of a concern. It depends on the business, but it is something to keep in mind. And then the last point I'd make on sole proprietors is obviously it doesn't really work that well if you have multiple owners or co-founders that you're doing this with. So that's the first one. If you don't have any questions, I can just maybe touch on partnerships really quickly.

Jon:

No, I think that makes sense.

Katie:

Yeah, keep going.

Paul:

Okay. So as I mentioned just a minute ago, a partnership by its definition has more than one person involved. At law, there's a couple of ways to structure a partnership, and I won't bore you with the legal details of it, but you can have a general partnership or a limited partnership. And the distinction is how liability pierces through to the partners above the organization. And all that to say that the liability question is a little bit muddier. In some cases, you can have personal liability as a general partner, and you don't have liability as a limited partner. It's a different tax profile than a corporation. And I won't get too much into that, but you can achieve different tax outcomes through a partnership than you would through a corporation. And maybe the most important point to make is you really have a partnership agreement generally governing it. And what that would cover is two primary things, who owns it, the economics of the enterprise. So usually divided up into units, like a share of a company. And the other one is who makes decisions.

Paul:

So who's the mind and management, who's decides what road the partnership's going down? And that would be covered in a partnership agreement. So if you have multiple founders, co-owners, this is something to consider as well. And then just to wrap up the three, the third one, which everybody's familiar with is a corporation. And unlike a sole proprietor and some partnerships, a corporation is considered at law, and this is important concept, as a separate legal entity that exists unto itself. It's like a person. The law treats it as a person, and it's treated like that for tax purposes, but also for liability purposes. And there's this concept of a corporate veil, which if the company incurs a liability, it belongs to the company, not to the shareholders. So if you are in a business where there's indebtedness or there's a higher likelihood that there would be some significant liability, a corporation is something to think about. It can protect the shareholders.

Jon:

Sounds like the way to go.

Paul:

Yeah, yeah. Now the downside is it can be expensive, so anybody can go into a registry office in Alberta and incorporate an entity. It costs a few hundred bucks, but once you get into taking advantage of the corporate model, then you're looking in shareholders' agreements, and they take time and they're complicated and separate financial statements for the corporate entity. So all that can incur some costs that they might not be ready for upfront.

Katie:

When I'm perusing the startup and entrepreneurial ecosystem online, something that keeps popping up is a founders' agreement. Can you tell me what a founders' agreement is, what that means, and who needs it?

Paul:

Sure. I'd be happy to. So the concept is pretty simple. And because it's an agreement, obviously we can infer that there's more than one founder. You don't need an agreement with yourself. The concept is pretty simple. So it sets out the terms of the ownership, the control, and the economics of the business, where there is more than one founder. So the concept is quite easy. The devil is really in the details of these things. And I think the mistake a lot of entrepreneurs or co-founders make upfront is it goes like this. So they say, look, we're all buddies. We get along great. We hang out, we've got a terrific idea. What could possibly go wrong here? So we don't need to think about this kind of stuff.

Paul:

We trust each other. Don't we? We'll all do the right thing. And we'll sort out the details when the time comes. Now, the problem is if you skip the step and you get farther down the road and there's money at stake and there's maybe a power struggle on who's making decisions and whose vision is the better vision, then you're going to wish you had thought about the issues a bit earlier, no matter how good of friends you are or were at that point.

Katie:

It sounds like a prenup for a company. But actually, that's what I'm hearing?

Paul:

Yeah. I might use that in the future. Great comment. No, you're absolutely right. It's-

Jon:

I think Katie may have trademarked that name though.

Katie:

Yes.

Paul:

We'll take that offline.

Katie:

I'll call my lawyer, Paul [inaudible 00:19:25].

Paul:

You bet. You bet. You're right. It really is, as is a lot of contracts at law. It's basically an insurance policy. What happens if what we don't think happens, happens and how do we deal with it?

Katie:

Speaking of prenups, just to take this a little bit further, so one of the things we notice is husband and wife teams or spousal teams. They create a company together. So would you recommend a founders' agreement in that case as well?

Paul:

Well, it certainly wouldn't hurt to have it, obviously then we're layering on a whole bunch of other really complex issues of family law and things like that. But I think anytime where you have more than one individual actively involved in not just being an employee and we should make a distinction, but founding and creating and having the vision for it, it is good to go through the exercise of putting on paper, okay, what is the business? What are we going to do? What's our objective? Funny enough, actually, the name of the business is a huge sticky point. People spend an inordinate amount of time arguing about what the name of the business is going to be. But more to your point, Katie, things like what's the ownership structure, and that could be fluid over time. Are people active in decision-making or not active? And so you sometimes have to make the distinction like, well, we both put in the same amount of money, but you're better at this. And I'm better than that. And let's set down the roles. What's expected of everybody?

Jon:

And this goes back to what you were talking about with the general partnership and the limited partnership where someone could be, they put in a little bit more money, but their partner is the one that's going to be in charge of the decision-making. That's all outlined in those and the founder' agreement is going to feed into those partnerships.

Paul:

Yeah, absolutely. And remember when you're contributing to these startups, it's not always cash. We often think of what's earning your share in the company. It may be cash.

Jon:

Sweat equity and stuff.

Paul:

Could be sweat equity. So a founders' agreement will say, okay, we're valuing your time at this. And this is the share of the company you're going to earn out based on the amount of time you're putting in. And they're putting in the combination of time or maybe some contacts and maybe some cash. And unfortunately a lot of folks will say, well, we're just going to have a handshake agreement on this and we'll get along. And unfortunately that leads to misunderstandings down the road. I don't think anybody's really has malicious intent. It's just miscommunication or they hear what they want to hear. And then you get down the road and it's like, well, I put all this time in, and this guy, it's like doing a school project. I put all the time in, and then we get the same grade. Let's get real here.

Jon:

Yeah. So I just quickly want to go back when we were talking about partnerships. The general partnership, there could still be liability whereas the limited partnership, there's less liability. You're more protected. Was that generally speaking?

Paul:

Yeah. Fair enough. Maybe I'll just clarify really briefly. So a partnership or a general partnership, all the partners have equal standing for purposes of liability. The way a limited partnership works is every limited partnership has two things. It has at least one general partner, and it has at least one limited partner. The general partner makes the decisions and incurs the liability. The limited partner might invest money or whatever, but to maintain that limited liability status of a limited partner, they can't be involved in running the business. So they're more passive. Now what entities will often do, and this may be more detailed than you need, is they'll set up a corporation to act as the general partner of a limited partnership, which then creates another level of liability protection so it doesn't flow through to the individuals above the structure.

Jon:

Right. Because I would imagine that the person that's becoming the general partner, he or she or they want to protect themselves from liability as well. So that's where they're going to explore more of a corporation or a corporate structure for what they're doing.

Paul:

Yeah. Well-put.

Katie:

Let's talk money. So just to put it bluntly, but so you started a business, stocks, shares, all those things really need to be taken into consideration in the potential or in the events or hopefully that you guys are earning cash. So what does that agreement look like? How does that work?

Paul:

Good question. So we've talked a little bit about the corporate structure and you can use shares as a representation of ownership, which they are, and they also represent control because each share represents a vote generally speaking. Now the challenge I think a lot of entrepreneurs face is that they don't have a lot of cash. So they end up using shares as if it were cash. And so they'll use shares to pay employees, or they might use shares just for service providers. At a law firm, we've been offered shares before instead of paying us in cash. Even if they have debt, sometimes they'll offer shares to settle the debt. So they treat it like a currency.

Jon:

Okay. Sorry, I just got to stop you there. So they're treating it like a currency that [crosstalk 00:25:30] doesn't have a monetary value, but they're betting on the future that one day it will have some monetary value. And when you're receiving the share, so like you described Paul, someone's paying you guys in shares, you're hoping at some point that will develop some financial value.

Paul:

Right. Correct.

Jon:

You're gambling in a way.

Paul:

Yeah. And there's always a disconnect because the founder, the entrepreneur, they've got the vision and they see it as a sure thing. Of course. This is as good as gold. And on the other side, people are like, well, not so sure. I'm not as confident. You got to find a middle ground on the value. The reason I mentioned that when Katie led into this with a question about money and shares and things like that, I think one thing we'd caution your listeners that are in this space is be careful about using your shares as a currency for everything. And there's a number of reasons for that. One is, and maybe I can share a brief anecdote to begin with, so we have a client that is looking at buying another company, which is a small, relatively small private company. And we start looking at them and we see that they have over 1,000 shareholders for this reason. They've been using shares for everything. Now just flip back a bit.

Paul:

We remember shares represent economic ownership in the company to profits or dividends, but they also represent control. So with every share comes a vote, and there's a lot of corporate type transactions, including a sale transaction where you need the majority or all of the shareholders to agree to it. So on this story I'm telling you about, it's a different ball game for us to try and buy a company that has two shareholders. We negotiate with them. We get them to sign the agreement versus one with 1,000. Then we're in a different world of corporate securities laws to try and wrangle them together and do the deal. Now that may not sound like a big deal, but the value of a lot of startups is the play is that they want an exit. They're not planning on running this for 50 years. It's like, I want to build this. And I want out. If they've issued too many shares, they got too many shareholders, it's a really complicated structure, that's a problem. And it creates a value overhang for the company.

Jon:

Right. Paul, you describing that, the light bulb went on for me. Yeah. Because if they want to move out, if they want to exit as you said, but they've been using their shares as currency, it becomes such a huge sticky point that it could in the worst case, make the sale of the company impossible or next to impossible or be cost-prohibitive.

Paul:

For sure. Yeah. You can do it. You have to use different processes like that company would have to hold a shareholders meeting and have a vote. And so it's expensive. It's time-consuming. And it will remove some potential buyers from the equation because they can say, look, there's five other companies I can look at that don't do this brain damage to me. I'm going to look at them first. This is too complicated.

Katie:

And issuing of too many shares would devalue the shares over time too. Right?

Paul:

It's a good point as well because, and Jon, you mentioned this earlier, the value of the shares of a startup, it's all over the map. It's not like there's a stock exchange that they're trading on and there's thousands of people coming to a consensus on what a share is worth. No one really knows of a startup. So much is tied into what could happen in the future. And you're right. So you end up issuing a bunch of shares. You're not really sure what they're worth. So it's quite possible you're issuing way too many shares for the value you're getting in return. And hence you're devaluing the company both from an economic point of view, but this is sometimes more important to the founders, your ability to control the path of the company going forward. So we've come in late on some tech startups.

Paul:

And we find out they've issued shares to all their employees as a form of compensation or whatever. Now, a lot of employees don't want to be owners. They want some upside, but they don't necessarily, aren't asking to own shares. They don't want to own shares. They're happy to be compensated in different ways, but nonetheless, you issued it to them. Not all employees stick around. So let's say an employee gets fired, which is a worst case scenario because then there's some bad blood or they just leave and move on. It's not like the shares automatically revert back to the company. They keep the shares and they move on. And we've had situations where we're trying to track people down at their home or where do they live now, we don't know. We've got to get them to sign off on this deal and that muddies the water as well. So that's another good point and a good area where you need to think about how cavalier are we about using our shares for whatever currency we need them for.

Jon:

This is fascinating stuff, Paul, and I really want to dive into IP in a moment because I know that's a huge issue, especially when you start getting multiple partners, whether it's businesses, a startup working with someone in a research and a post-secondary and the university owning the IP, how does all that work? But before, what are some of the things that an entrepreneur or startup can think of as their personal checklist before they reach out to a firm to say, hey, I need to explore all these things we just spoke about? What are some things they can do on their own?

Paul:

It's a great point because I think too often they won't have articulated well, what they're trying to achieve when they come to a lawyer at first. So we sit there and we're like, well, what are you doing? What's the plan? What's the business? Who's involved with you?

Katie:

And you're doing that as your time is running and you're billing them too. So it's expensive to do it that way.

Paul:

Yeah. So what we would suggest is, and it doesn't need to be fancy and they don't need to dabble in legal mumbo jumbo or jargon or whatever, just write down on a piece of paper, the basics. Who are the founders, who's involved, what's the business? Really what's the business? What does it rely on? Is it IP heavy? Is it relationship heavy? Where do we see ourselves needing to go in the coming years or coming months or weeks in terms of employees, developing certain relationships? If they can articulate well, what are they see... Really what I'm describing is a business plan. If they can articulate well in a business plan, this is a path we want to take. Then as a lawyer, we can see that and say, okay, these folks have thought this out well. And here's three things we need to direct your attention to and it may not be expensive or time-consuming, but we can steer them a bit.

Paul:

If they come with a blank piece of paper and say, hey, I've got a terrific idea for this and it's going to be a world changer. It's like, well, like any bank would ask them as well, do you have a business plan? And then we can get a bit more specific about it. So I would say the first thing is really be concrete in the direction you want to go. And I think also obviously be realistic in your expectations of maybe the timing, how you're going to achieve these results. Things take longer just to get off the ground than they generally think they do and be more patient as well.

Jon:

Be prepared.

Paul:

Yeah.

Jon:

Okay. So are we good to dive in with IP?

Katie:

Yeah.

Jon:

I'm absolutely fascinated by the complexity of it because I look at that from 30,000 feet away and go, it seems so daunting. So here I am a startup. I've got my great idea. I built a prototype doodad. I've done this on my own let's say. I haven't worked with anybody else. We'll establish a couple of different scenarios. So I've done this on my own is scenario one. Scenario two is I've worked with someone else, a friend or a partner to develop this doodad. And scenario number three, I've worked with a research institution, now where we've got a researcher and we've got an institution behind that researcher that's building that IP. So there's three different areas that I'm seeing that are fraught. And there could be more, but let's start with number one. It's just me and my new doodad.

Paul:

And this answer applies to all three of them. The answer comes down to ownership. Who owns the IP? So let's go to your first point. I don't think there's any debate on who owns the IP at least that you know of. And there's different forms of intellectual property. And maybe I can just pause here and say, I don't want to give my partners who are actual, real IP lawyers heartburn by dabbling in an area that I have no qualifications in. So I'm speaking at a high level here and-

Jon:

Yeah. No, that's perfect. Understood.

Paul:

I'll say, this does not constitute legal advice, blah, blah, blah. So I think you've invented something, designed something. You have a path forward. And let's say it's some technology. I think it would be very wise to get a few recommendations on IP lawyers, really qualified ones that you can go sit down with for half an hour or an hour. And oftentimes they'll have an initial intake call that they won't even charge you for. And just say, this is the thing, where do I go from here? And they may do what they do and run their searches and have their conversations with you and give you some good advice about, and it's all obviously contextual and what's the technology and what area is it in. But the key thing to do is earlier, rather than later. And oftentimes before you bring anybody else to the table and share it with them, get some advice on how to protect your ownership of that intellectual property.

Paul:

And that can come in the form of having confidentiality agreements in place, having protection of corporate interest agreements in place, where when you finally are sharing this with others, at the same time, you're making sure that they understand this is my intellectual property. It's not common knowledge, whatever. Now those agreements aren't bulletproof either. So there's other ways of registering intellectual property and your ownership of it that a lawyer can help you with. So that's generally on the first point you made. Now, remind me again of the second one. You did it with somebody else.

Jon:

Yeah. Second one, you're doing it with somebody else.

Paul:

So on that one, it's along the same lines, but I think that's a case where we can double back to the founders' agreement. How do we understand each other's role in this? My undergrad was in business and I have a law degree. I don't know anything about a lot of technologies or sciences or whatever it may be. And if I have a co-founder and he's the genius, then I think we got to be pretty clear about what our expectations are. And I better be clear in the agreement that, well, we share the ownership of this intellectual property because heaven knows I didn't come up with it. I didn't think about it. And that's where we've got to be. The founders' agreement could help.

Jon:

Okay. That makes sense. And the third one, again, knowing that you're not the IP guru, I understand if you just want to avoid that third question altogether. Instead, just say, go talk to an IP specialist because the third, I think is probably the most complicated where now you've got multiple, an institution and different people from different places, your business, a researcher, an institution.

Paul:

Yeah. Great point. And it's complicated. So remember at the beginning we talked about employment agreements. One thing they may make clear is if you are involved in the creation of intellectual property during work hours or as part of your employment, it belongs to the company. So if you're involved in some type of institution that's funding your work, there's no hard and fast rule. You need to understand what the arrangement is with that institution on the ownership of intellectual property that's created in your role with that institution. Or if it's related, you do it on your own time, but it's related to things that you learned at that institution, or unfortunately it's not really binary, there's some nuance to it. It's certainly more complex and worthwhile having a conversation with an IP lawyer.

Jon:

Right. But clearly understand what your role is with your employer or the institution that's funding you.

Paul:

Yeah. Yeah. Well-put.

Jon:

Okay.

Katie:

This is great, Paul, and I think that you left our listeners with something to really think about but to wrap up, what is your best piece of advice, if you were to just give a blanket piece of advice to all the startups and entrepreneurs listening, what would you say?

Paul:

I would probably tell them to focus on their highest and best use, which we talked about earlier, being creative, developing technologies, relationships, and don't neglect, but at the same time, don't neglect the foundation that you need to lay down in order to be successful going forward. It may incur some costs upfront, but it's certainly worthwhile. So my advice is get experts involved earlier, and this may sound like a shameless plug for lawyers or accountants, but it's not. It's really in their best interest. And it's not a huge financial outlay. Get a little bit of advice upfront. It can save you a ton of heartburn down the road.

Jon:

Paul Barbeau, this was fascinating and insightful. Thank you so much for your time.

Katie:

Thank you.

Paul:

Thanks so much for having me. Really appreciate it.