Welcome to the September edition of Blakes upRound, a regular publication from the Blakes Emerging Companies & Venture Capital (EC&VC) group that highlights legal developments relevant to venture investors and emerging companies and provides concise insights on recent trends and market developments.

The Blakes EC&VC group is a nationwide practice with lawyers in Toronto, Calgary, Vancouver and Montréal providing transactional and ongoing legal assistance to some of the most dynamic emerging companies in Canada and venture investors from Canada, the United States and beyond. As a full-service business law firm, Blakes provides advice on all aspects of Canadian law relevant to our clients. Our EC&VC practice includes Blakes Ventures, an innovative service offering to support the entire emerging company ecosystem, and Nitro, our legal support program for early-stage companies and founders.

In this Edition

  • Secondary sales and alternative options for companies seeking liquidity

  • Cybersecurity insights, the B.C. government’s plan to tax cloud services and other need-to-know topics

  • Canadian venture financing continues to have a slow year, but certain industries see growth

Market Insights

Secondary Sales 101 When a tech worker joins a startup, the two sides usually strike a bargain in which the employee accepts a reduced salary in exchange for a stake in the company’s upside. This bargain is vital to the success of venture capital-backed companies. The company preserves precious cash to fuel growth, and the employee gets rewarded upon an exit (an IPO or sale of the business) — typically by exercising previously granted options that enable them to purchase shares at a fraction of their current value and, thereby, participate in the exit event as a shareholder.

However, exits can be a long time coming. The significant growth of private capital as an alternative to seeking funding in the public markets means that, on average, companies are staying private longer. On average, they’re staying private over twice as long as in 2000. This creates a situation in which founders and employees hold a valuable but illiquid, and possibly volatile, asset. Reasonably, at some point while the company remains privately held, these individuals may want to realize some of the value of the company’s success and diversify their investment portfolio. Read more in our Blakes Bulletin: Secondary Sales 101.

Legal Update

Founders and investors may find the following insights from our Blakes colleagues helpful and instructive:

Deal Monitor

Data sourced from PitchBook.

  • The year-over-year decline in overall transaction activity has continued. The year-to-date dollars invested was approximately 50% lower in 2023 than the same period in 2022 (which itself was 33% lower than the same period in the record-breaking 2021 period).

  • There has been a reduction in activity across all stages of investment. By some measures, earlier stage (Seed and Series A) investment has declined significantly more than the decline in later stage and growth equity investments. However, this is largely attributable to unusually strong reported activity in Series B financing rounds. Excluding that factor, the decline appears more even across all stages of financing, with seed financing rounds remaining generally stronger than Series A rounds.

  • When considered by industrial sector, a different story appears. While overall deal volume was 50% lower than the same period in 2022, the energy (209%), healthcare (18%), and materials & resources (452%) sectors reported increased investment activity. However, the commercial products & services (-38%), consumer products & services (-51%), financial services (-48%) and information technology (-39%) sectors all reported significant year-over-year declines.

  • In our recent transactions, we continue to see reliance on structured equity rounds and convertible notes intended to provide bridge financing. While companies are working to conserve cash, at least some investors remain willing to allow founders limited secondary participation in financing rounds to achieve some personal liquidity.