LaBarge Weinstein Quarterly: Winter 2014

January 30, 2014

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We hope 2014 has been a great year for everyone so far! Over the past three months, the team has been hard at work assisting companies and investors in closing nearly $125M in financing transactions!

As usual, our clients have also been busy and have been up to some really great stuff. Here are a few highlights:

The Consumer Electronics Show took place in Las Vegas from January 5^th to 8^th. With over 40,000 in attendance, it was the perfect stage for next-generation innovators to promote their creations. Firm client Blacksumac, developers of the latest home security and automation product, Piper, were honoured with a CES Innovations 2014 Design and Engineering Award. Congratulations Russell!

After nearly 36,000 votes were cast for The Canadian Startup Awards, two LW clients came out on top. Congratulations to Tobias Lütke of Shopify, who won Entrepreneur of the Year and Playerize, who was named Accelerator Graduate of the Year. An honourable mention also goes out to our clients who were runners up: Jack Newton, Clio (Themis Solutions), ePact, Frank & Oak , and Vidyard.

Lighthouse Labs is hard at work planning an open access education event, where 500 non-coders will learn HTML and CSS3. Taking place on February 1^st, at Vancouver’s Rocky Mountaineer Station, this free event will prove that coding isn’t so intimidating after all. LaBarge Weinstein is excited to support The #HTML 500 and we’re looking forward to a great day!

Congratulations to our client, Tweed Inc., which just received a federal license from Health Canada to grow and sell medical marijuana. The company has already started production in a 180,000 square-foot facility in Smiths Falls, which was formerly occupied by Hershey. The licence will allow Tweed to produce up to 15,000 kilograms of marijuana annually. Tweed closed a financing in December and is currently working towards getting a listing on the TSX Venture Exchange.

Why You Shouldn’t Transfer Private Company Shares to a TFSA or RRSP

Transferring private company shares to a Tax Free Savings Account (“TFSA”) or Registered Retirement Savings Plan (“RRSP”) may not be efficient tax planning. Here are some reasons why:

1. The transfer may have tax consequences to you

If the company is a Canadian-controlled private corporation, and the shares you would like to transfer were acquired on the exercise of stock options, the employee benefit (the difference between the exercise price of the option and the fair market value of the shares on the day of exercise) would be subject to tax as a result of the transfer of the shares to a TFSA/RRSP.

If the value of the shares has increased since you originally purchased the shares, you will also realize a capital gain on the transfer of the shares into your TFSA/RRSP. This capital gain will be subject to income tax in the year of the transfer.

2. The tax treatment at exit may not be as favourable

Generally, a sale of shares to a third party on an exit would result in a capital gain in the hands of the shareholder. If the shares qualify, individual shareholders may be able to use their lifetime capital gains exemption, so that the first $800,000 of gain realized would be tax free. The capital gains exemption will not be available on the eventual disposition of the shares, and further, you will have converted capital gains (which have the most favourable tax treatment) to income when the funds are withdrawn from the RRSP.

3. The transfer will use up TFSA/RRSP contribution limits

In most cases, shares held in a private company shares are a highly speculative investment. If the company fails, you will have squandered the TFSA contribution limit or RRSP contribution room that was used to transfer the shares to the registered investment.

4. The investment must be constantly monitored

Once the shares are in your TFSA/RRSP, if at any time in the future you and other shareholders related to you collectively own a significant interest (>10% of any class) in the company, the investment will become a non-qualifying investment and penalties will be applied until the investment is removed from the RRSP/TFSA. In the case of removing the shares from the RRSP, the value of the shares removed from your RRSP will be taxed as income in the year they are removed.

Written by: Dineen Beath

The Ins and Outs of Granting Equity to Your Tech Startup All Star Team

So, you’ve found a rockstar. You’ve networked, coffeed, shot the breeze, followed up, exchanged ideas, seen the vision, shared a beer, had the “we’re just a startup” talk, checked out his or her previous gigs, exchanged some more ideas, seen the vision again, left the bar late, pounded knuckles—it’s all coming into place. Now, with funds thin and your development needs immediate, how do you lock it down?

You’ve got to use your startup’s equity.

The allure of the home run—the fancy cars, the life changer, the kwan. But since every startup is in the same boat, what tools are at your disposal to put your equity offer in the best possible spotlight for that rockstar hire you’ve brought to the precipice?

Here are four things to keep in mind:

First, use restricted stock rather than stock options for as long as you can.

Restricted stock is different than stock options. Candidates get 100% of the stock issued up front, subject to clawback rights that disappear over time—it’s called “reverse” vesting. For Canadians, this structure is great—it starts a two year clock ticking for candidates to get an $800,000 tax holiday on proceeds at the time of the sale. Founders can pitch that benefit to candidates as an incentive to jump in early – once the company’s shares get valued in a financing, restricted stock is basically out.

By the way, don’t sweat the voting rights on the stock that gets issued; you can manage that to your satisfaction by contract through a voting trust or shareholder agreement.

Second, if you need to use stock options, get the strike price right and market it effectively.

You should implement a stock option plan once you’ve done a priced round of equity financing. Your stock option equity grants typically should be issued at the fair market value (FMV) of the shares proposed to be issued (usually your common or ordinary shares). Canadian controlled private corporations can also issue stock options at below fair market value to employees, officers and directors, which is a tactic that is used from time to time in a company’s startup phase when cash is scarce. Get Tax advice before granting options at below FMV.

If you’ve completed a preferred share financing, consider whether to get a third party valuation to establish a common share strike price at a discount to the preferred share price (discounts can be as much as 50%). Valuations aren’t as expensive as you might think, and we have great valuation resources if you need them. Also, keep in mind that there is a “story” to every fair market value or strike price that is set by startups (shhh, don’t tell the Tax people). A “good” valuation for the candidate is one which (legitimately) relies on a previous financing round as its benchmark—it’s still valid for tax purposes, but it may very well offer advantages to the candidate if the startup goes on to complete a financing or sale at an accretive valuation within a reasonable period of time after the hire. Get it right, and tell a good story to pull great candidates onto the team.

Third, go off the farm on your vesting arrangements.

Pretty much everyone knows the “Cadillac” vesting schedule: one year cliff, following by three years’ monthly vesting. However, it’s fair to consider that standard as the right fit solely for the de-risked, fat cat startups sitting on a couple of years’ cash. If your rockstar is taking a hit on salary and giving up all of the catering gems at Facebook, Google, Twitter (or even Kik and Shopify, whose employee grub is choice), why not consider compressing that vesting schedule to three years, or layering in acceleration provisions upon the startup’s sale?

Don’t overdo it, of course, because you’ll face diligence reverb from your future investors if you’ve sprinkled those more generous terms around without getting the return. Having said that, it builds a lot of credibility with your investing public if, as a founder, you’re able to identify great people and do what you have to do to nail them down with effective compensation offers. One thing we wouldn’t budge on is a cliff of some kind—you definitely need a period to try any candidate on for size; some rockstars just don’t show up on stage, they throw TVs and furniture out the window, and ruin everyone’s fun.

Finally, watch the optics on your strike price.

Watch the optics of the absolute value of the strike price you are setting in your equity grants. If the price is ubër high (with one startup we worked with, the option price was $83.45), consider a stock split to increase the number of outstanding shares and reduce the exercise price to something that “feels” like it has a lot of value potential (say for example, $0.8345). Not too high, not too low—simple thing, and easy to fix with your counsel.

As featured in Techvibes; Written by: James Smith

New Venture Capital Funds Recently Announced

Last week in Waterloo, Minister of State for the Federal Economic Development Agency for Southern Ontario, Gary Goodyear, announced the establishment of Northleaf Venture Catalyst Fund – a private sector-led fund of funds and a key element of the Government of Canada’s Venture Capital Action Plan (VCAP).

The Fund had its initial closing with $217.5 million in commitments; $145 million from institutional and corporate investors and $36.3 million from each of the Governments of Canada and Ontario.

Northleaf Venture Catalyst Fund will invest primarily in Canada-focused early-stage and mid-stage venture capital funds, but will also invest directly in some Canadian companies. Northleaf Capital Partners has been selected to act as the general partner for the Fund.

During the same event, Canada’s largest software company, OpenText, announced that in addition to contributing to the Northleaf Venture Catalyst Fund, they are the lead industry sponsor in a newly created $100 million OpenText Enterprise Applications Venture Fund. The Fund, which is expected to close over the next six months, will invest in early-stage companies that develop business software applications.

Having served on the Board of Directors of OpenText since 2009, firm partner, Debbie Weinstein, was in Waterloo for last week’s announcements.

Review of TSX Venture Exchange New Listings Activity in 2013

Each year the TSX Venture Exchange publishes a summary of its “new listings” activity. New listings include initial public offerings (IPOs), qualifying transactions through the Capital Pool Company program, companies completing a reverse takeover and companies moving up from the NEX exchange or down from the TSX. Here are some highlights of the data for 2013:

In 2013 there were a total of 158 “new listings” compared to 240 in 2012 and 334 in 2011. The reduction in new listings activity that we saw in 2012 clearly continued into 2013.

Of the new TSXV listings in 2013 there were just 52 IPOs compared to 125 in 2012. 15 of those were traditional IPOs of operating companies (vs 44 in 2012) and the other 37 were IPOs of Capital Pool Companies (vs 81 in 2012). The rate of both traditional IPOs and CPC IPOs dropped significantly for the second straight year.
Of the new TSXV listings in 2013 there were just 52 IPOs compared to 125 in 2012. 15 of those were traditional IPOs of operating companies (vs 44 in 2012) and the other 37 were IPOs of Capital Pool Companies (vs 81 in 2012). The rate of both traditional IPOs and CPC IPOs dropped significantly for the second straight year.

The amount raised in TSXV IPOs during 2013 was $118.7 Million, down 21% compared to 2012.

Mining issuers showed a 40% drop in TSXV going public activity in 2013 compared to 2012. Only 7 mining issuers went public on the TSXV by way of a traditional IPO in 2013.

In 2013 there were 66 CPC qualifying transactions completed on the TSXV (vs 61 in 2012) and 13 Reverse Takeovers (vs 16 in 2012). These are two categories where the numbers were actually fairly consistent year over year.

Clearly, 2013 was another bad year for TSX Venture Exchange new listing activities. It continues to be a tough market in which to go public on the TSXV. Here’s hoping that things turn around for 2014.

Written by: Shane McLean

Deal Flow Report

Here is a sample of recent publicly-announced transactions that we’ve worked on over the past few months:

Firm and Staff News

We are pleased to announce that Colin Wrynn has joined the partnership at LaBarge Weinstein.

Colin was first hired at the firm as an associate in 2005, after completing his articles. As a member of the Corporate, Commercial, and Securities Group, Colin’s practice focuses on corporate and securities law, with a concentration on mergers and acquisitions and corporate finance transactions, including venture capital financings and private equity transactions. Colin acts for a wide range of clients, from start-ups to well established companies, in a range of industries. He is called to the Bar in Ontario and New Brunswick.

LaBarge Weinstein LLP is also pleased to congratulate Shane McLean, a partner in the firm’s Ottawa office, for being named by Lexpert Magazine as a 2013 Lexpert Rising Stars – Leading Lawyers Under 40.

Shane was presented with the award during the Lexpert Gala dinner at the Fairmont Royal York Hotel in Toronto on November 4, 2013. Lexpert’s Rising Stars is compiled annually with an advisory board of 37 lawyers who lead some of Canada’s top law firms and corporations. It honours Canada’s leading lawyers under 40, from law firms and in-house, and pays tribute to the rising stars of the legal community.

In December, we launched a video series called LW Academy. These clips answer many of the questions that we get from our startup clients on a daily basis. Please visit our YouTube channel to check them out.

Information Worth Sharing

The federal law in Canada relating to not-for-profits (“NFP’s”) and charities changed in 2011 – the Canada Not For Profit Corporations Act (the “New Act”) came into force on October 17, 2011. All organizations created under the old federal act (Part 2 of the Canada Corporations Act) need to continue under the New Act before October 17, 2014. Organizations that do not transition to the New Act will be considered inactive and dissolved by Industry Canada. (Note: If your organization is dissolved, you can apply to Industry Canada to have the organization revived pursuant to the New Act).

If you are a federal organization that has not yet taken steps to continue under the New Act, you should consider doing so as soon as possible. Continuing under the New Act may mean amending the organization’s by-laws which requires member approval, a process which may take some time.

Ontario has also introduced new legislation for NFP’s and charities: Ontario’s Not-for-Profit Corporations Act, 2010 (the “ONFPCA”). The ONFPCA, which is substantially similar to its federal counterpart, is scheduled to take effect in 2014 and existing NFP’s and charities organized under the existing Ontario legislation will have 3 years to continue under the ONFPCA. Under the present draft of the legislation, unlike the federal law, organizations that do not transition to the ONFPCA within the required timelines will be deemed to have complied and provisions of the organization’s bylaws or letters patent will be considered to have been amended, as necessary, to comply with the ONFPCA.

If you have questions with respect to how the New Act or the ONFPCA affects your organization or continuing under the New Act or the ONFPCA (when it comes into force), please contact us and we would be happy to assist.

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