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Securing outside capital is a watershed moment for any Ontario startup, but due-diligence misfires can torpedo deals that should have closed. Term-sheet leverage disappears fast once investors spot messy cap tables, missing intellectual-property assignments, or undisclosed liabilities. The good news: most red flags are fixable—if you tackle them before you open the data room or book that first pitch meeting.
This guide lays out a practical, Ontario-specific legal checklist that founders can complete in the 60–90 days leading up to a seed or Series A raise. Nail these items now, and you’ll walk into investor meetings ready to talk growth—not gap-filling.
1. Tighten Your Corporate Housekeeping
Minute Book Audit
Pull out (or create) a single binder—or encrypted folder—containing:
- Articles of incorporation, by-laws, and any articles of amendment.
– - Directors’ and shareholders’ resolutions (organizing, option-plan approvals, debt authorizations).
– - Share certificates and a current securities register that reconciles fully with your cap-table spreadsheet.
Shareholder Agreement (SHA)
If you have more than one founder, investors will expect a signed SHA covering:
- Founder vesting or reverse-vesting schedules.
– - Roles, decision-making, and dispute-resolution mechanics.
– - Transfer restrictions and drag/tag-along rights.
Outdated or missing SHAs trigger valuation discounts because investors fear internal deadlock.
2. Scrub the Cap Table
Reconcile Every Line Item
Founders, common shares, SAFEs, convertible notes, warrants, option pool—everything must add up, with dates and signatures. Cap-table chaos lengthens due diligence and can scuttle closings when last-minute anti-dilution math shocks investors.
Check Prospectus-Exemption Filings
If you have raised any money already, make sure Form 45-106F1 reports were filed on time and that copies of risk-acknowledgement forms (F9 for accredited investors, F12 for FFBA) are on file. Late filings can lead to OSC penalties or demands for rescission rights.
3. Lock Down Intellectual Property
Assignment Agreements
Every founder, employee, intern, and independent contractor who touched code, designs, or strategic documents should have executed IP-assignment and confidentiality agreements. Missing one contractor’s signature can delay a sale or financing for weeks.
Moral-Rights Waivers
Canadian copyright law grants creators moral rights even after assignment. Secure a written waiver—investors will ask.
Open-Source Inventory
Catalogue open-source components, noting licence obligations (GPL, Apache, MIT). Non-compliance terrifies acquirers and sophisticated VCs.
Trademark / Patent Docket
Keep a simple chart showing filing numbers, jurisdictions, deadlines, and next prosecution steps.
4. Draft Clean Employment & Contractor Agreements
Employment Contracts
Ontario courts now void termination clauses that conflict—even indirectly—with ESA minimums (e.g., Waksdale v Swegon). Get a lawyer-vetted template with:
- IP assignment, confidentiality, and non-solicit (not non-compete) clauses.
– - Clear probation period.
– - Termination clause limiting severance to ESA minimums plus modest cushion.
Contractor Agreements
Misclassification leads to retroactive CPP/EI, ESA claims, and WSIB assessments. Spell out project scope, payment terms, and confirm independent-contractor status—but audit control and integration factors to ensure the label fits.
5. Implement a Market-Standard Option Plan
Early hires expect equity. A board-approved stock-option plan should cover:
- Fixed or “evergreen” pool size (usually 10–15 % post-money).
– - Vesting schedules (four years with a one-year cliff is standard).
– - Exercise-price protocol: fair-market-value determination, board resolution, and CRA compliance.
– - Post-termination exercise windows (90 days common, with extended periods for good-leavers).
Investors balk at phantom or handshake equity promises that aren’t documented.
6. Clear Regulatory & Tax Commitments
CRA & HST
File corporate-tax returns, payroll remittances, and HST on time; directors can be held personally liable. Investors run lien searches and will require proof.
WSIB
If your business is in a Schedule 1 industry (software design was added in 2024), register and stay current.
SR&ED Documentation
If you’ve claimed R&D credits, maintain contemporaneous labour and experiment records—CRA audits can claw back funds and spook investors.
7. Standardise Key Commercial Contracts
Early customers and suppliers might have signed one-off emails. Convert critical terms into signed agreements that investors can understand. Focus on:
- Assignability on change of control.
– - Limitation-of-liability caps that won’t bankrupt the company.
– - Service-level obligations tied to achievable metrics.
8. Prepare a Data-Room Index
Create folder headings investors expect:
- Corporate & cap table
– - Shareholder & option documents
– - Financials (historical P&L, forecast, capex budget, variance analyses)
– - IP assets
– - Material contracts
– - Employment & contractor files
– - Regulatory filings (OSC, CRA, WSIB)
– - Litigation, disputes, or contingent liabilities
– - Insurance policies (D&O, cyber, general liability)
– - Board & management presentations
Populate each folder with PDFs named “YYYY-MM-DD – Description” so reviewers navigate quickly.
9. Plan Your Securities-Law Strategy
Determine in advance which exemption you’ll use:
- Accredited Investor (AI) – Fastest for angel/seed rounds; gather financial-asset or income evidence early.
– - Offering Memorandum (OM) – Broader retail access but more disclosure and cost.
– - Crowdfunding (NI 45-110) – Small cheques, portal fees, strict caps.
Align exemption choice with long-term capital plan to avoid filing whiplash.
10. Draft a Term-Sheet Playbook
Before negotiating, decide:
- Target valuation range and option-pool increase.
– - Board seat or observer concessions.
– - Liquidation-preference parameters (1× non-participating is standard).
– - Drag-along/tag-along thresholds.
– - Anti-dilution style (weighted-average vs. full ratchet).
Knowing your floor and ceiling speeds up negotiations and projects confidence.
How AMAR-VR LAW Can Help
Our startup practice turns legal housekeeping into competitive leverage:
- Minute-book clean-ups and cap-table reconciliations ready for diligence.
– - IP audits securing assignments, waivers, and open-source compliance.
– - ESA-proof employment templates and option-plan design aligned with CRA valuation rules.
– - Securities-law filings—45-106F1, risk forms, and advisory on exemption strategy.
– - Term-sheet coaching and negotiation of shareholder agreements, SAFEs, or convertible notes.
We operate on fixed-fee packages tailored to seed and Series A stages, so legal spend is predictable and investors know you’re professionally represented.
Conclusion
A polished product demo opens the door; airtight legal hygiene closes the deal. By auditing your corporate records, securing IP ownership, standardising employment terms, and mapping your exemption strategy before you engage investors, you reduce diligence friction, increase valuation credibility, and accelerate funding.
Ready to raise with confidence? Contact us today for a consultation. We’ll help you build an investment-grade legal foundation that lets your startup scale—fast, clean, and funded.
Frequently Asked Questions (FAQs)
- Why is early legal preparation critical before a startup’s first funding round?
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Investors scrutinize corporate records, intellectual-property ownership, cap tables, employment agreements, and regulatory filings during due diligence. Gaps in any of these areas can trigger valuation discounts, delay closings, or even kill a deal outright. Proactive legal housekeeping demonstrates professionalism, reduces investor friction, and protects negotiating leverage
– - What are the most common corporate housekeeping mistakes Ontario startups make before fundraising?
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Typical issues include missing or outdated minute-book documents, inconsistent cap tables, unfiled securities-law exemption reports, incomplete IP assignment agreements, poorly drafted or noncompliant employment contracts, and undocumented customer or supplier arrangements. Each represents a risk flag for institutional investors.
– - How can intellectual-property issues derail financing rounds?
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Failure to secure proper IP assignments, waivers of moral rights, and open-source compliance documentation creates legal uncertainty around ownership of key assets. Investors demand clean, documented IP ownership to protect enterprise value and prevent claims from former contractors or employees after exit events.
– - Which securities exemptions should founders consider for a first Ontario funding round?
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The Accredited Investor exemption under National Instrument 45-106 is typically fastest for early-stage angel rounds, requiring income or asset qualification forms and timely filings. Alternative exemptions such as Offering Memorandum or Crowdfunding routes introduce broader investor pools but require more documentation, costs, and ongoing compliance.
– - How does AMAR-VR LAW support Ontario startups in preparing for successful financings?
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AMAR-VR LAW audits and cleans up corporate records, perfects IP ownership chains, designs ESA-compliant employment contracts, creates market-standard option plans, manages securities-law filings, and provides negotiation support on term sheets and financing agreements. This full-spectrum preparation positions founders to secure investment efficiently while maximizing valuation and minimizing legal risk.