legal issues in startups: from company formation to intellectual property rights presented by the...

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Legal Issues in Startups: From Company Formation to Intellectual

Property Rights

Presented by The Jacobs Law, LLC

Travis Jacobs

Stefano D’Agostino

Robert Mihail

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Company Formation and Choice of Entity

Domicile Massachusetts vs. Delaware.

Types of Entities Series LLCs

Massachusetts – Similar Statute to DE, but worth it? Delaware

well-developed case law board protections ease of corporate filings and related state-law

administrative issues

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State Formation Fees

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State Fees Massachusetts

Official fees: LLC: $500 to incorporate plus $500 each year (plus $20?) C Corp: $275 to file articles of organization up to 275K

shares, $100/100K additional shares, plus $100 each year to file annual report (plus $9), $125 + $10 if late.

Delaware Official fees: Faster Service = Higher Cost

LLC: plus $90 to form plus $250 each year (franchise tax) C Corp: $89 to incorporate plus annual tax that depends

on number of authorized shares or assumed no-par capital

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FORMATION FACTORS

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FORMATION FACTORS

How will Capital be obtained? Angel / VC / Other

Current vs. Future Goals & Plans

Tax Considerations – Entity Level vs. Pass-Through

Owners – S-Corp Trap (Tax Exceptions, Citizenship, # of Members)

Management Structure

Type of Business – Insurance, Finance, Professional, Services

Cost – Upfront and Annual

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LLCs vs. C Corporations LLCs are not taxed at the entity level LLC documentation is more elaborate and costly than corporate

documentation State fees are higher for LLCs No stock options incentives for LLC employees Less corporate housekeeping required, faster decision making at

management level IPO will likely require conversion to corporate form

Why could a C Corporation be the best form for startups looking for investors? VCs and other investors usually do not invest in pass-through entities such

as LLC’s. It is expensive and complex to convert from LLC to a C corporation.

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When to incorporate The sooner the better so that the startup can issue shares for a

nominal purchase price before shares pick up value due to later financing – avoid tax issues.

The sooner you incorporate, the faster you get protection for your assets if your business is already up and running

If business is already up and running it may be more cost efficient to incorporate rather than continue paying Medicare and Social Security as self-employed

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Equity Split Equal shares rarely make sense – split should be based on prior

and future expected contributions Questions to ask:

Who’s idea was it?

Who is funding the startup?

What is the shareholder’s role in the company?

Does the shareholder take a salary?

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Financing

Crowdfunding What is crowdfunding? Pros

More time on developing the business and less time on fundraising

Greater and more diverse investor pool Niche ideas can get funding

Cons Investors lack the depth and due diligence tools available to

VCs and sophisticated angels Only accredited investors can invest in equity crowdfunding High cap table

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Financing

Preferred Crowdfunding Models Product in return for contribution Equity/Debt

Choose a model that has an SPV that is itself the sole investor in your startup in order to keep the cap table low.

Beware Federal and State Securities Laws Only accredited investors can invest in startups via public calls. Don’t pay anybody a commission for raising funds unless they are

a registered broker-dealer.

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Financing

VCs and Angel investors how to find them?

Networking and warm introductions

AngelList

you should have your own lawyer

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Product Development, Marketing and Operations

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Have an invention disclosure program in place

Conduct freedom-to-operate before starting on product development direction and at set milestones

Copyright notices Even after 1989, it is better to Include ©, date of first publication,

name of author(s) and “All Rights reserved” on all copyrightable materials.

Proper use of trademarks Nouns vs. adjectives TM vs. ® Consistent use with registration and across media

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Social media and the use of trademarks Hashtags, domain names and even stylized QR codes may

contain trademarks Keyword triggering

Definition: Purchase of another party’s trademark as a keyword to trigger an advertisement – ex: if you search for an iPhone and there is an ad for Samsung Galaxy in the search results

Placing the name of the competitor in the banner advertisement without identifying the true source of the advertisement – likelihood of confusion

No problem if you merely and openly compare goods/services

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Social media and the use of trademarks Guidelines:

Monitor your competitors’ use of your trademark Submit complaints to search engines on improper use of keywords Action against competitor/advertiser

Consider context, pros and cons (misguided fan or intentional harm?)

Do take action against counterfeiters, and misleading/inaccurate information

If cost-effective, outbid competitors on keywords that are confusingly similar with your trademark

Do a clearance search before using hashtags, domain names or any other marks online

Avoid using third party famous marks (blurring/tarnishment) Be truthful and avoid confusion in comparative advertisement

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Social media and the use of trademarks Beware of imposters/fake reviewers Most social media platforms will take action and remove imposter

postings Parody exception (Twitter)

Action against improper use of trademarks on social media platforms is limited under Lanham Act and UDRP Current law is focused on second level domain names but not user names. Mark must be “used in commerce” which may not be the case with

facebook or twitter accounts Solution:

register your brands as usernames on popular/used the most by your consumers social media sites

Create your own pages and use your mark commercially on such social media websites

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Privacy policy for collected customer information

Ensure that IP discussed in marketing materials has been protected prior to marketing release

Ensure that customer communication strategy complies with CAN-SPAM

Ensure that use of social media complies with their terms of service

Agreements with employees, consultants and outside developers must contain: Confidentiality and IP Assignment provisions

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Intellectual Property Rights

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The danger of wearing two hats: Review employment agreement with current/previous

employer and look for IP assignment provisions

Any pre-incorporation IP should be assigned to the company in writing tax-free transaction under Section 351 of the Internal Revenue

Code

Founders, employees and consultants should sign NDA and IP assignment agreements with the startup, otherwise this will become a problem in later investor due diligence.

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Conduct a freedom-to-operate IP due diligence BEFORE choosing a brand, or selling a product.

Just because the Secretary of State’s Office approves your business name for registration it does not mean you should not conduct a trademark clearance search. Sec of State does not consider the USPTO’s federal register, other

states trademark registers or even your own state trademark register.

Beware of Open Source Software When you use OSS, you enter into a license.

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Develop an IP Strategy Build License Monitor Enforce

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Building your IP portfolio Why build an IP portfolio?

Investors like assets and barriers to entry since they provide security and leverage.

Consider patents and trade secrets before any publication Register your copyrightable materials with the US Copyright

Office (35USD) as this will give you benefits such as , standing to sue for copyright infringement, statutory damages and attorneys fees, presumption of originality and authorship.

Choose abstract or fanciful marks not suggestive or descriptive

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Licensing Monetize your IP portfolio Cross Licensing Expand your market reach

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Monitoring Why should you be on the lookout?

Laches Early licensing opportunities Stop infringers before they pick up steam (and financial leverage) Protect your brand Oppose newly published/granted patents and trademarks while you

still can

Sources: USPTO, trade publications, icerocket (social media), technorati

(blogs) Third party monitoring services:

Thomson, Mark Monitor, Corsearch

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IP Enforcement Patents

The dangers of sending out letters accusing others of patent infringement

You can still enforce your patent even if you don’t practice your invention

Don’t sit on your patent rights and if you threaten sue, you should follow up

Trademarks Don’t sit on your trademark rights and if you threaten sue, you should

follow up

Don’t send or respond to cease and desist letters without consulting competent counsel

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Legal Issues in Startups: From Company Formation to Intellectual

Property Rights

Thank You!

The Jacobs Law, LLC

legal issues in startups: from company formation to intellectual property rights presented by the...

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