This page started out as the equivalent of a hand-out for the “Legally Lean” presentation I did in December 2012 for the Houston Lean Startup Circle meetup; I’ve updated and added to it occasionally since then. Thanks again to moderators Javid Jamae and Glenn Gutierrez for inviting me to present, and of course to Greg Wright and the Houston Technology Center for hosting the meetup yet again.
A few resources
Here’s a list of the resources I mentioned last night, with a few extras thrown in. I don’t necessary endorse everything in them. A given document might not be right for your particular needs without editing. Remember that small changes in your factual situation could have a significant effect on your legal position; see also the Cautions page.
Incorporation and investment documents
Renowned startup accelerator Y Combinator and the equally-renowned Wilson Sonsini law firm have posted a set of organizational documents for an angel-investor round.
The Orrick law firm has a large collection of contract forms for startup companies.
The Gunderson Dettmar law firm’s document collection is posted at the Docracy Web site.
Employment agreement form
See this working draft of a set of model provisions. Suggestions and other feedback are welcome in the comments on that page.
Nondisclosure agreement form
If you’re going to talk to someone about your product or service before you roll it out, you might want to ask them to sign a confidentiality agreement, a.k.a. a non-disclosure agreement or “NDA.”
NOTE: Potential investors might be reluctant to sign an NDA. Venture capitalists in particular often flatly refuse to do so. With folks like that, you basically have to take your chances that they won’t “steal” your idea. As a practical matter, though, that might not be a bad bet, because:
- First, investors and others generally do have one or two other things on their minds. They generally see lots of entrepreneurs who are convinced they’ve got a world-beating idea. You’ll probably be lucky to get these investors to pay attention for two minutes. Ask yourself how likely it is that they’ll want to take your idea and spend time and money building a business around it without you.
- Second, contracts aren’t the only thing that discourage bad behavior. If an investor stole someone’s idea, and word got around, then that investor might later find it hard to get other people to talk to him.
- Finally, you have to decide what risks you want to take. Your business might fail because an investor steals your idea and beats you to market. Or it might fail because you can’t raise the money you need to get started. It’s sort of like having to take a trip across the country. You have to decide whether to fly or drive. Sure, there’s a risk you could die in a plane crash flying from one side of the country to the other. But if you drove the same route, your risk of dying in a car crash has been estimated as being something like 65 times greater. As the old saying goes, you pays your money and you takes your choice.
If you decide you do need a confidentiality agreement, you can consider using an NDA form I posted in 2010.
Contract negotiation tips for consultants
Here are some basic points to keep in mind.
General business resources
Would-be entrepreneurs should read the writings of Patrick McKenzie, a.k.a. patio11, on his Web site and in his comments at the invaluable Hacker News site (where at this writing he is #2 on the all-time karma list). Two especially-good comment for beginners are here and here.
If you’re in the Houston area, you should definitely check out the Houston Lean Startup Circle.
Intellectual property tips
IP ownership claims by former employers / clients
- Check everyone’s previous contracts [employment agreements, severance agreements, consulting agreements, NDAs, etc.]
- Check the facts to see whether an employer might owns someone’s IP work product by default
- Hired to invent?
- Set to experimenting?
- Corporate officer?
- Copyrighted work created “within the scope of employment”?
- Get a waiver from the employer?
- Can existing Web content be “re-purposed” for your site? It depends.
- Just because there’s no copyright notice doesn’t mean it’s up for grabs (but a copyright notice is definitely a good idea for your own stuff)
- All kinds of things can be subject to copyright ownership — text, graphics, sounds, videos, sound recordings, data compilations, etc.
- Damages for infringement can include “indirect profits” — MGM Grand Hotel had to pay 2% of its casino profits for unauthorized use of Kismet musical material in its Hallelujah Hollywood floor show.
- Put copyright notices in your code, etc., early
- Form: Copyright © [year of first publication] [owner's name]
- Example: Copyright © 2012 D. C. Toedt III
- Check USPTO and Web for possibly conflicting marks. The test is whether a “likelihood of confusion” exists — it doesn’t need to be a certainty of confusion, but it does need to be more than a mere possibility
- Consider engaging a professional trademark search firm to clear a mark before making big investments in promoting the mark — you don’t want to have to change the name after you’ve started getting traction, and it might cost a lot of money to pay off a senior user. (On the latter point, Apple found that out the hard way with its Mac trademark.)
- Watch out for possible dilution of others’ trademarks, either by blurring or by tarnishment — see, for example, the Victoria’s Secret example
- Check whether you need to file any assumed-name certificates (a.k.a. DBAs) if your corporation or LLC is using a name other than its “legal” name.
Consider filing a provisional patent application, which in essence is a one-year placeholder (with no extensions and no renewals).
A provisional application doesn’t have to conform to formal patent application requirements. It does, though, need to contain an “enabling disclosure.” I sometimes describe enabling disclosure as a hand-off package of written description and drawings that you could give to a competent colleague or team to have them build the invention without “undue” experimentation. (The application must also disclose the best mode subjectively contemplated by the inventor or inventors.)
You can get a head start by doing your own first draft. You can also file a provisional patent application yourself at the USPTO Web site if you prefer not to use a patent attorney. Do that at your own risk, though; it can be useful to have another pair of eyes look at your application.
Watch out for filing deadlines, which are normally drop-dead dates, with no extensions possible. U.S. law provides a one-year grace period in which to file a patent application after the first “disclosure” of the invention. The term “disclosure” has a very specific meaning; see 35 U.S.C. § 102. Most foreign countries are “absolute novelty” jurisdictions for patent filings and have no grace period.
Infringing someone else’s rights
Just because you have a patentable invention, or a copyrightable work of authorship, or a protectable trademark, doesn’t automatically mean you don’t infringe someone else’s pre-existing rights.
For more information about patent infringement, see this 2010 post I did.
Initial tax-related information
If you create an LLC, or a corporation that qualifies to be taxed under subchapter S of the (U.S.) Internal Revenue Code, you’ll need to decide whether, for tax purposes, the company’s income and losses are going to be passed through to its members (the default for LLCs, like a partnership) or whether instead you want to file an election to have the company taxed as a C or S corporation. This is something to discuss with someone who knows tax law.
I found a Nolo article that looks quite useful in discussing the pros and cons of various approaches: http://www.nolo.com/legal-encyclopedia/how-llcs-are-taxed-29675.html.
Employer identification number (EIN)
The company will need to get a federal tax ID. If the company applies for bank financing, or even to open a checking account, the bank will almost certainly require the company to provide a tax ID. You can get a tax ID, or “EIN,” on-line at https://sa2.www4.irs.gov/modiein/individual/index.jsp.
Unemployment tax registration
(For Texas companies, and probably for other states as well:) When you hire your first employee, you’ll need to register with the Texas Workforce Commission and make quarterly unemployment tax payments. See http://www.twc.state.tx.us/ui/tax/unemployment-tax-registration.html and https://portal.cs.oag.state.tx.us/wps/portal/employer.
When you’re ready to start making sales, you’ll need a sales-tax permit. You can get one on-line at http://www.window.state.tx.us/taxpermit/.
Employee tax withholding
The IRS is pretty fierce about the need for employers to withhold (and remit) employees’ income taxes, Social Security taxes, and Medicare taxes. (In some circumstances an officer, director, or manager could be personally liable for a company’s failure to withhold the required taxes, and possibly for up to a 100% noncompliance penalty.) See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employment-Taxes-2 for more information.
State franchise taxes
Check your state’s requirements for filing franchise tax reports and payments.
Also, if you’re doing business in other states, check the requirements of those states. You might have to officially qualify to do business there and pay franchise taxes, income taxes, sales taxes, or all of the above.