Taking On an Investor in Your Ontario Private Company: A Founder's Checklist

Bringing in outside capital changes your company. A well-structured deal can unlock growth, bring valuable expertise, and position you for a future exit. A poorly structured one can leave you with a demanding co-owner, a messy cap table, and legal obligations you did not expect.

Taking on an investor in an Ontario private company involves more legal moving parts than most founders realize. This checklist walks through each stage — before the deal, during negotiation, and at closing — so you know what you are agreeing to.

Stage 1: Before the Deal

Confirm your corporate house is in order

Investors will ask for these before writing a cheque. Get them ready early:

• Certificate of incorporation and any amendments to your articles.
• Current minute book — up to date with annual resolutions, director elections, and previous share issuances.
• Shareholder register — showing who currently owns what.
• Existing shareholders' agreement (if any) — check whether it gives existing shareholders a right of first refusal or requires their consent before you bring in a new investor.

If your minute book is incomplete or out of date, fix it now. An investor's lawyer will find gaps in due diligence, and they will either price the risk into the deal or walk away.

Understand your share structure

What share classes do you currently have? Common shares only, or multiple classes? What rights attach to each? Before you can offer shares to an investor, you need to know:

• Whether your existing authorized share capital allows the issuance you want, or whether an articles amendment is needed to create a new class (preferred shares, for example).
• An articles amendment requires a special resolution (typically two-thirds of shareholders as of writing — verify current thresholds under the OBCA).

Know which securities law exemption you will use

Selling shares in Ontario is a distribution of securities under the Securities Act (Ontario). Without a prospectus, you need an exemption. The two most common for private company financing:

• Private issuer exemption — your company must have no more than 50 security holders (as of writing — verify with the OSC) and can only sell to family, close personal friends, close business associates, or employees.
• Accredited investor exemption — available when selling to individuals or entities that meet income or net-worth thresholds set by securities regulators (as of writing — verify current thresholds with the OSC).

If you are not sure your investor qualifies, check with a lawyer before accepting any money. Issuing shares without a valid exemption exposes you to securities regulatory liability and gives the investor the right to demand rescission.

Stage 2: Negotiating the Deal

Term sheet

Most professional investors will present a term sheet (also called a letter of intent or investment summary) before any formal legal documents are prepared. The term sheet is usually non-binding except for confidentiality and exclusivity provisions.

Key terms to scrutinize:

• Pre-money valuation — this determines what percentage of the company the investor receives for their money.
• Liquidation preference — preferred shareholders often receive their investment back (sometimes at a multiple) before common shareholders see anything in a sale or wind-up.
• Anti-dilution protection — protects the investor's percentage if you later issue shares at a lower price (a "down round").
• Pro-rata rights — investor's right to participate in future rounds to maintain their percentage.
• Board representation — does the investor get a seat or an observer right?
• Veto rights — specific decisions (taking on debt, selling the company, changing the business) that require the investor's consent.

Shareholders' agreement

The shareholders' agreement is the most important document in the deal. It governs the relationship between shareholders for the life of the company. Beyond the items negotiated in the term sheet, watch for:

• Drag-along rights — majority shareholders can force the minority to sell alongside them.
• Tag-along rights — minority shareholders can join a sale the majority negotiates.
• Right of first refusal — before any shareholder can sell, existing shareholders get the first opportunity to buy at the same price.
• Founder vesting — the investor may require that your own shares vest over time (so that if you leave the company, unvested shares can be bought back).

Stage 3: Closing

Corporate resolutions

To issue new shares, the board of directors passes a resolution authorizing the issuance. If a new share class is being created, shareholders pass a special resolution amending the articles first.

Share subscription agreement

The investor signs a subscription agreement — an offer to purchase shares at an agreed price, along with representations about their eligibility to rely on the applicable securities exemption. You accept it by resolution.

Update the share register and minute book

Issue the share certificates (or a DRS entry if your company uses uncertificated shares), update the shareholder register, and file the subscription agreement and board resolutions in the minute book.

Exemption reporting

Some securities law exemptions require you to file a report of exempt distribution with the Ontario Securities Commission (OSC) within a set period after closing. As of writing, these filing requirements and timelines apply to most private placements — confirm the current obligations with a lawyer or on the OSC website.

Red Flags in Investor Negotiations

Watch for these warning signs:

• An investor who resists putting anything in writing until "trust is established."
• Term sheets with conversion or buyback mechanics described only vaguely.
• Liquidation preference multiples significantly higher than the invested amount.
• Broad veto rights over day-to-day operating decisions.
• Clauses requiring investor consent to hire or fire senior staff.

None of these is automatically disqualifying, but each deserves careful scrutiny and negotiation.

Frequently asked questions