VIDEO: How financially liable are you as the director of a tech startup?

“John, how can I mitigate my personal liability as the director of a growing high tech company?”

Tech companies devote resources to protect their source code, but often overlook the details to protect key stakeholders and directors. Directors must ask questions of the finance team to ensure they are adequately protected as well.

The cycle for tech companies typically includes periods of low cash flow where decisions must be made about what should be paid versus what can be paid. Debts that have director liability implications are often overlooked or postponed in hopes that a new round of fi-nancing or SR&ED tax credits will cover the arrears.

Directors must keep their eye on the following:

  • Employee source deductions. This debt has a priority over the assets of the com-pany and ranks ahead of all creditor claims, including those of secured creditors. Should there not be sufficient assets in a corporation, this government claim extends beyond the corporation to all directors. It’s important to note that the Canada Reve-nue Agency does not prorate the amount due by a director.  
  • Employee wages and vacation pay. It does on occasion happen that when cash flow is soft, employees work in the hope that they will get paid their outstanding wages at a later date. If employees are not paid, they can make claims against the di-rectors of the company.
  • Goods and services taxes. When tech companies start to sell products or provide services, they will be required to charge and collect commodity taxes.  Companies could find themselves in a situation where cash flow is soft and elect to not remit this payment. Again, directors are fully liable for these claims on the same basis as employee source deductions.
  • Guarantees provided for secured creditors. When companies arrange financing, their goal is to get the cash. In the heat of arranging the financing, guarantors may forget they have personally guaranteed the debts of the business. If there is a situa-tion where the company can’t continue as a going concern, the claims for employee source deductions and HST rank in priority to these secured claims. This then leads the lender to call on the guarantee, which adds to further claims against sharehold-ers and directors.
  • Landlords. Landlords know that, historically, tech companies are risky tenants. They try to protect their interests by having directors, shareholders or other stake-holders provide guarantees in support of the lease agreement. In the event the com-pany can’t make its lease payments, the guarantors are called upon to satisfy the remaining term of the lease.

"Key stakeholders and directors must pay attention to the details to ensure they are not called upon to satisfy claims not paid by the company in the event cash flow isn’t sufficient to sustain operations. "

In summary, key stakeholders and directors must pay attention to the details to ensure they are not called upon to satisfy claims not paid by the company in the event cash flow isn’t sufficient to sustain operations. 

All directors are jointly and severally liable – one single director could potentially pay any or all of the amounts mentioned above. Don’t let it be you.