How do I sell my startup?

If you are wondering how to sell my startup, the question is less about price and more about proof. A startup may have few physical assets, so a buyer may be looking at code, a brand and user data, and can ask whether the company actually owns them. The answer can be less simple than a founder expects, particularly where contractors or early collaborators wrote code without a signed agreement. This guide covers the ownership and data questions Canadian law raises, and then the structure of the sale itself. Valuation is a separate topic.

Who owns the code

Under section 13 of the Copyright Act, subject to the Act, the author of a work is the first owner of the copyright. Where the author was employed under a contract of service or apprenticeship and made the work in the course of that employment, the employer is the first owner, in the absence of any agreement to the contrary. That rule covers employees, not independent contractors. For a contractor, the author is the first owner, and the copyright moves to the company only through an assignment, so list everyone who wrote code, designs or copy for the company and note how each was engaged.

Fix gaps with written assignments

The Copyright Act allows the owner of copyright to assign it, wholly or partially, but no assignment or grant is valid unless it is in writing signed by the owner or the owner’s duly authorized agent. If a former contractor wrote core code and never signed an assignment, ask a lawyer how to obtain one before you go to market. The Act also says moral rights may not be assigned but may be waived in whole or in part, so ask your lawyer whether a waiver should accompany each assignment. Keep each signed assignment and waiver with the corporate records, so that you can produce it during the buyer’s due diligence.

Trademarks and patents

Section 48 of the Trademarks Act provides that a trademark, whether registered or unregistered, is transferable, and deemed always to have been transferable, in connection with or separately from the goodwill of the business, and for all or some of the goods or services it is used with, although section 48(2) says a trademark can still be held not to be distinctive if, after a transfer, two or more persons held and exercised rights to use confusing trademarks. Patents carry their own record: the Patent Act says a transfer of a patent that has not been recorded is void against a subsequent transferee if the transfer to the subsequent transferee has been recorded. If you hold registered rights, confirm that the registers show the company, not a founder personally, as owner.

User and customer data

Your user list is personal information. Where the federal Personal Information Protection and Electronic Documents Act applies, its section 7.2 lets organizations that are parties to a prospective business transaction use and disclose personal information without the individual’s knowledge or consent if certain conditions are met, in addition to the circumstances in subsections 7(2) and (3). One is an agreement requiring the recipient to use and disclose it solely for purposes related to the transaction, to protect it by security safeguards appropriate to its sensitivity and, if the deal does not proceed, to return or destroy it within a reasonable time. The other is that the information be necessary to decide whether to proceed and, if the decision is to proceed, to complete the deal. The section does not apply to a transaction whose primary purpose or result is the purchase, sale or other acquisition or disposition, or lease, of personal information. Share user data in stages, and only what is needed.

Third-party and open-source components

Not everything in your product is yours. Ask your developers to list the third-party libraries, open-source components, data sets and paid services the product depends on, and the licence terms for each. Have that list ready for the buyer’s due diligence, and ask a lawyer to read each licence for terms that limit how the software can be sold, sublicensed or combined with other code. Where a licence needs the licensor’s consent to transfer, ask for it early. Keep the list with your records of who wrote what, so that the ownership picture is in one place and tells the same story.

Choose the structure and find the buyer

A buyer can purchase the company’s shares or its assets, including the software and brand, and Treadstone Law’s overview of asset and share purchases says that choice ripples through your tax bill and your liability exposure. Our answer on selling shares or assets compares them. If you have investors, check your shareholder agreement for approval or consent rights before you talk to buyers. BDC says potential acquirers could include competitors or other companies in your value chain, and that a lawyer familiar with business transitions can supply information during due diligence and negotiate the purchase agreement. Our guide on finding buyers for your business covers the search.

A founder’s pre-sale checklist

• Have you listed every person who wrote code, designs or content, and how each was engaged?
• Does every contractor have a signed written assignment, and a moral rights waiver where relevant?
• Do the trademark and patent registers show the company as owner?
• Does your privacy policy cover sharing user data in a sale, and can you share it in stages?
• Do your investors or co-founders hold approval rights over a sale?