7 mins | 1,350 words
By: Mike McDonald
As an entrepreneur, you may often feel like you’re an explorer on a long, arduous and untested journey, doing your best to reach a well-hidden destination. Like an explorer, you have limited time, energy and resources to take advantage of opportunities as they come. However, unlike past explorers, you do have vast quantities of free information at your fingertips, readily available, 24/7, through the internet. These free resources include instructions on how to self-incorporate your business, step-by-step guides to filing a patent and trademark application, and a myriad of template legal documents. This sounds great but the advantages of the internet can also be its downfall; there is simply too much content available online and it hard to know what to trust. Consider this example: a simple search for “sample license agreement” renders over 110 million+ results on Google. How can you possibly know which agreement is the best your business?
When you are just starting out in business, it is very tempting to believe that there is little risk in using one of these sample agreements as your template. Editing the documents to suit your own requirements is an easy solution, isn’t it?
The reality is: an overreliance on free online templates can have potentially damaging effects to your business in the short and long term.
Consider the story of our fictional client, Alex…
Alex spent years working as a public servant. During the evening hours and on weekends, Alex worked hard to design and develop a new software program called Editify, an add-on to existing photo-editing programs. Over time, Alex’s marketing and demos appeared to pay off when several prospective customers approached them. Thrilled by the response, and after receiving significant pressure to enter a contract from one particular business, Alex did a quick Google search and downloaded a free template license agreement. After changing the names and dates, Alex sent the document off to the customer for signature. Buoyed by this first success, Alex entered into similar agreements with several other customers using the same template.
A few months later, Alex was surprised to see a tweet by that first customer, excitedly announcing the launch of their new software, PhotoStream. PhotoStream had several features that closely resembled features of Editify. Upset by this unexpected competition, Alex called and asked us to review the license agreement. The hunt was on to find out whether Alex had any recourse against that customer. Alex was not happy to learn that the template was, in fact, a joint development agreement which gave certain rights to the customer to use, modify, create and own the rights to derivatives of Editify and to sublicense such derivatives to their own clients. Alex immediately terminated the relationship but couldn’t stop the former customer from continuing to sell PhotoStream. Fortunately for Alex, none of Editify’s other customers became competitors.
Alex delayed the development and rollout of the next version of Editify, this time investing the energy and resources to replace the original agreements. This process included changing all of Editify’s customers’ license agreements so that Alex’s ownership rights to Editify were protected.
Now, let’s all be honest with ourselves: we’ve all been in Alex’s shoes. Who hasn’t searched the internet for information on how to fix a leaky faucet, the pain on our left side and whether it is a symptom of heart disease or the top ten online business tools and how they compare? We’ve all been there, but when it comes to legal documents, we have to remember Alex’s story. Aside from the various costs associated with terminating or “fixing” an agreement that doesn’t properly reflect your business intentions, the story highlights what can happen when there’s lack of familiarity with specialized agreements that address the ownership and licensing of intellectual property.
Commercial agreements often contain words, phrases and clauses with legal implications that can behave like landmines to the unwary entrepreneurial explorer.
Understandably, during your entrepreneurial journey, there will be times when you are unable to access your legal team or other professional advisors. One practical way that you can keep the conversation progressing with potential customers (that is until you are able to receive expert advice) is to carefully read the agreement, keeping in mind our key questions listed below.
These are the questions that our team typically ask our own clients:
- Who is signing this agreement? Are their full legal names used in the agreement? Have you conducted your own independent reference checks to ensure that they are trustworthy and reliable businesses or businesspeople?
- Does the agreement clearly describe the kind of transaction and what the parties wish to achieve by entering into this agreement?
- Following the money trail: who pays whom – what, when, where, why and how?
- Who owns what? Are any ownership rights being transferred, assigned, licensed, loaned, etc.?
- Are there any words in the agreement like “enure” which have a legal meaning that is not clear?
- Is the whole agreement binding or are there some parts that are non-binding?
- Do you agree that the rights and responsibilities of each of the parties are accurately described?
- Do you agree with the kinds of restrictions that are being imposed on one or more of the parties through confidentiality, non-solicitation, non-competition clauses or covenants?
- Are there any conditions and/or milestones that use subjective rather than objective language?
- If you are required to give representations and warranties, are they accurate?
- Are you able to limit your liability to one or more of the other parties?
- Do you understand the extent to which you are being asked to “indemnify” (a promise to compensate for harm or loss) one or more of the parties?
- Are you comfortable with the process to be followed by each of the parties to terminate or amend the agreement?
- Do you understand the implications where the agreement refers to the laws of a jurisdiction other than Ontario and Canada, or to courts outside of Ontario?
- If there is a dispute resolution clause, do you agree with the terms?
It may seem like a long list, but these are just a few of the questions that our firm asks when we review a commercial agreement. The answers often provide us with very useful information. We then incorporate that information into a document that reflects the intentions of the parties at the time that they sign the agreement. The value to you for such a document is unmeasurable. So, when you think “I’ll Google it,” just remind yourself of the future headaches (correction, migraines) that come with the disputes your business could face.
Like Alex and Editify, you may already be using a free sample agreement – this includes the one that “should be fine because it was drafted for my friend by a well-known law firm.” In our experience, the saying “an ounce of prevention is worth a pound of cure” is especially applicable in cases like this. Please take a few minutes and use the questions listed above to consider whether you have already unknowingly taken on any unnecessary risks. If the questions trigger some red flags, consult your professional advisors sooner rather than later; you may be able to quickly take measures to limit your potential exposure. If you don’t know who to reach out to, the Law Society of Ontario’s Referral Service can connect you with a legal professional for a free 30-minute consultation.
As an entrepreneur, your patience and drive can be tested daily by business challenges. With limited time, energy and resources to find solutions to those challenges it may seem that the information available online is a good place to get the information you need and harvest a wealth of free documents. Like the explorer who stumbles upon a mound of bright yellow metal, it can be difficult to assess whether the information or documents are “fool’s gold” or the real prize. Always review the author and/or source of the information. Government-published resources, like the Canadian Intellectual Property Office’s intellectual property guides, can be good sources of framework information for you to get started. By mapping out the potential obstacles and taking proactive measures in preparation, you may find that the expert advice you receive results in the shortcut you need to reach your business goals. We can say with confidence, the initial investment will result in overall savings in time, energy and resources.
Mike McDonald is a corporate and commercial lawyer at MDK Business Law. He joined the firm in March 2019 after working at a large law firm in downtown Toronto. Mike works extensively with small-to-medium sized businesses, advising on various corporate and commercial matters, and assists companies navigate their business challenges from startup to exit. He has also guided companies through both public and private securities offerings, as well as merger and acquisition (M&A) transactions.
Mike earned his Juris Doctor (J.D.) from the University of Ottawa and graduated summa cum laude with a Bachelor of Arts (B.A.), English Communication, from Salve Regina University. When he’s out of the office, Mike is very active in sports, particularly in hockey, where he competed for four years in the National Collegiate Athletic Association (NCAA) as a goaltender. His passion for entrepreneurial ventures comes by him honestly having started his own company, Prospect Productions, as a teenager, which provided prospective collegiate athletes with promotional video services for their recruiting efforts.
About MDK Business Law
MDK Business Law is the law firm for growing businesses. They are also a proud sponsor of the Invest Ottawa Pre-Accelerator Program. We are grateful for their commitment to supporting early-stage tech startups, helping them through the program to validate their ideas and solidify their business foundations.
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