The information in this blog is for general informational purposes only and does not constitute legal advice. Consult a qualified attorney for advice on your specific situation. We make no guarantees about the accuracy or completeness of the information provided. Reliance on any information in this blog is at your own risk.
Founders often see due diligence as a late-stage hurdle—something that happens in a major financing or exit. In reality, the earlier a startup assembles a clean legal foundation, the faster later rounds close and the higher valuations climb. Investors, lenders, and acquirers all perform some form of legal due diligence; if they uncover gaps, they discount price, demand escrows, or walk away altogether.
Below is a practical, Ontario-focused due-diligence checklist that startups can use to self-audit before outside capital or strategic partners start combing through the books. Tackle these items now, and you turn diligence from a scramble into a selling point.
1. Corporate Formation and Governance
Articles and Minute Book
- Confirm incorporation under the Business Corporations Act (Ontario) or federally.
– - Verify articles, by-laws, organizational resolutions, and share certificates are all filed and consistent.
Director and Officer Registers
- Keep updated lists with appointment and resignation dates.
– - Ensure each director has given written consent to act—missing consents can invalidate board actions.
Shareholder Agreements (SHA)
- If multiple founders, a SHA should address roles, vesting, transfer restrictions, and dispute mechanisms.
– - Amend the SHA after each financing to reflect new rights or protective provisions.
2. Capitalisation and Securities Compliance
Cap Table Accuracy
- Reconcile the share register, option ledgers, SAFEs, and convertible notes.
– - Include fully diluted percentages and option pool allocations.–
Prospectus Exemptions
- File Form 45-106F1 for each non-private-issuer distribution.
– - Retain signed risk-acknowledgement forms for Accredited Investor or FFBA exemptions.
Option Plans
- Adopt a written stock-option plan approved by the board and, if necessary, shareholders.
– - Grant options via formal agreements specifying vesting and termination clauses.
3. Intellectual Property (IP)
Ownership Chain
- Execute IP assignment agreements with founders, employees, and contractors.
– - Confirm any pre-incorporation code, designs, or patents are assigned to the company, not held personally.
Patent and Trademark Filings
- Keep a docket of filings, prosecution status, and renewal dates.
– - Check for freedom-to-operate opinions in crowded patent fields.
Open-Source Compliance
- Inventory open-source components and confirm licence obligations (e.g., GPL vs. MIT).
– - Implement a policy requiring engineering sign-off before new licences enter the codebase.
4. Key Contracts
Customer and Revenue Agreements
- Centralise all signed statements of work (SOWs), SaaS subscriptions, or pilot agreements.
– - Note renewal terms, SLAs, and early-termination penalties.–
Supplier and Vendor Contracts
- Document service-level standards, liability limits, and data-protection provisions.
– - Ensure critical contracts are assignable on a change of control.
NDAs and Confidentiality
- Use a standard NDA template; track expiries and carve-outs for residual knowledge.
– - Include confidentiality in employment and contractor agreements to avoid gaps.
5. Regulatory and Compliance
Licences and Permits
- Confirm any industry-specific licences (e.g., fintech MSB registration, medical-device authorisations) are current.
Privacy and Data Security
- Publish a privacy policy compliant with PIPEDA; update it when data practices change.
– - Implement breach-response plans and conduct security audits if storing personal information.
Environmental and Health-and-Safety
- If the startup operates labs or physical facilities, maintain inspection reports and compliance certificates.
6. Employment and HR
Written Employment Agreements
- Include intellectual-property assignment, confidentiality, and termination provisions consistent with the Employment Standards Act.–
Contractor Agreements
- Distinguish true contractors from dependent contractors to avoid misclassification risk.
Workplace Policies
- Maintain compliant policies on harassment, accessibility, and occupational health and safety.
– - For remote teams, clarify jurisdictional employment laws and payroll obligations.
7. Tax Matters
Tax Filings and Payments
- File corporate-income tax (T2), HST, and payroll remittances on schedule.
– - Obtain clearance certificates before distributing dividends to a holding company.
SR&ED Credits
- Keep documentation supporting Scientific Research & Experimental Development claims; CRA audits often demand contemporaneous records.
International Tax
- Register for U.S. state sales-tax collection if selling into the U.S.; penalties for non-registration can accrue quickly.
8. Litigation and Contingent Liabilities
Current or Threatened Claims
- Disclose demand letters, employee complaints, or IP disputes.
– - Document insurance coverage—general liability and directors’ & officers’ (D&O).
Government Investigations
- Note any CRA, OSC, or industry-regulator inquiries and their status.
Warranty Obligations
- Track product warranties and any reserves set aside to satisfy future claims.
9. Financial and Operational Records
Audited vs. Unaudited Statements
- Early-stage companies usually provide management-prepared statements; ensure bank-reconciliation support exists.
Budget vs. Actuals
- Provide variance analyses to show fiscal discipline; investors fear unchecked burn rates.
Cash-Management Controls
- Dual-signatory policies on corporate accounts and documented expense-approval processes deter fraud.
10. Insurance and Risk Management
Coverage Inventory
- Maintain certificates for general liability, cyber-risk, errors and omissions, and D&O insurance.
Policy Limits and Exclusions
- Verify limits align with contract indemnities and customer requirements.
– - Ensure change-of-control continuity for D&O policies to protect directors during an exit.
How AMAR-VR LAW Can Support
A self-checklist is powerful, but professional diligence captures subtleties templates miss. AMAR-VR LAW helps Ontario startups by:
- Conducting pre-financing legal audits—spotting documentation gaps before investors do.
– - Drafting or updating shareholder agreements to align with market standards and future rounds.
– - Perfecting IP ownership chains through assignment agreements and registration strategies.
– - Mapping securities-law compliance so Form 45-106 filings, risk forms, and cap-table records stand up to OSC scrutiny.
– - Co-ordinating with tax advisers on rollovers, option plans, and SR&ED documentation.
Our goal is to convert diligence from a stress point into a valuation asset—so you raise capital faster and on better terms.
Conclusion
Legal due diligence is not a one-time event; it is a living discipline that should start when the company is formed and evolve with each milestone. Founders who maintain accurate corporate records, secure clean IP ownership, comply with employment and tax rules, and document every financing round find that investor diligence becomes a straightforward confirmation, not a discovery mission.
Contact us today for a consultation if your startup is preparing for its first equity raise or you simply want to benchmark your house-keeping against investor expectations. We’ll help you transform due-diligence readiness into a competitive advantage that accelerates both funding and growth.
Frequently Asked Questions (FAQs)
- Why is legal due diligence important for early-stage startups?
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Legal due diligence identifies gaps or risks in a startup’s corporate, contractual, intellectual property, employment, tax, and regulatory frameworks. Addressing these issues early increases investor confidence, accelerates funding timelines, and supports higher valuations by reducing the likelihood of surprises during financing or exit transactions.
– - What corporate governance records should Ontario startups maintain?
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Startups should keep a complete and up-to-date minute book, including articles of incorporation, by-laws, shareholder and director resolutions, share registers, and properly executed shareholder agreements. Board and officer appointments must be documented, with director consents in place to validate corporate actions.
– - How does intellectual property factor into due diligence?
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Startups must ensure that all intellectual property is properly assigned to the company, including inventions created pre-incorporation or by contractors. Patent, trademark, and copyright registrations should be current, and open-source software usage must comply with applicable licensing terms to avoid downstream infringement or compliance problems.
– - What are common securities-law compliance issues that arise?
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Startups must carefully track prospectus exemptions under National Instrument 45-106, maintain accurate cap tables, retain signed risk-acknowledgement forms, and file Form 45-106F1 reports when applicable. Failure to comply can trigger regulatory enforcement or cause future financing rounds to stall during diligence.
– - How can AMAR-VR LAW assist startups with due diligence readiness?
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AMAR-VR LAW conducts legal audits, updates corporate records, drafts protective shareholder agreements, perfects intellectual property ownership, ensures securities compliance, and coordinates with tax advisers on matters such as stock options, rollovers, and SR&ED claims. This proactive approach transforms diligence readiness into a strategic asset that accelerates fundraising and protects long-term value.
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