L EGAL A SPECTS
OF
E NTREPRENEURSHIP
MGT 896
SYLLABUS AND COURSE SCHEDULE
Version: 1.0
Fall 2 2014
Tuesday and Thursday
1:00 P.M.– 2:20 P.M.
ROOM 2230
N.B. The class schedule is subject to change. Please always check the
course website for the most up-to-date schedule.
Professor Constance E. Bagley
165 Whitney Avenue, Room 5514, 203.432.8398, connie.bagley@yale.edu
Assistant: Liz Viloudaki, 203.432.7514 elizabeth.viloudaki@yale.edu
I.
LEGAL ASPECTS OF ENTREPRENEURSHIP
Legal Aspects of Entrepreneurship focuses on the legal dimensions of entrepreneurship. In this course,
the term “entrepreneurship” includes far more than start-ups. Instead, we will use Professor Howard
Stevenson’s definition: “Entrepreneurship is the pursuit of opportunity without regard to the
resources currently controlled.” Even the largest companies have to constantly review their value
proposition and adjust to changing market conditions.
This course is designed to help students develop the managerial capability of legal astuteness. Legal
astuteness is the capability of entrepreneurs and other managers to work effectively with counsel to
solve complex problems and to protect and leverage firm resources. 1 It requires a set of value-laden
attitudes, a proactive approach, the exercise of informed judgment, and context- specific knowledge of
the law and the appropriate application of legal tools. Like information technology, the legal
dimensions of business should not be treated as an after-thought or add- on to the business strategy
development process. As Tim Hinthorne explained, “[C]orporate leaders who understand the law and
the structures of power in the U.S.A. have a unique capacity to protect and enhance share-owners’
wealth.” 2 Conversely, managers who lack the ability to integrate law into the development of strategy
and of action plans can place the firm at a competitive disadvantage and imperil its economic viability.
Ideally, entrepreneurs and managers work with counsel as partners to craft business solutions that
maximize value while minimizing (and eliminating entirely all unnecessary) legal or business risk. Just
as a lawyer needs a sufficient understanding of how business operates and the strategies for success to
be an effective partner, entrepreneurs need to have some knowledge of legal nomenclature and the
legal principles most relevant to their business.
This is a course for entrepreneurs and other business managers. Legal matters are too important to
delegate to persons who may not understand the broader business objectives. Managers need to
understand the fundamentals of the law just as they need to understand the fundamentals of
accounting, finance, and human behavior. As managers rise in the corporate hierarchy, they
increasingly face legal issues they are ill equipped to handle. Most managers do not have a legal
background. They often do not know the right answers or even the right questions to ask. If an
entrepreneur is not sensitive to what legal issues might arise, he or she will not know when to call in
the lawyers or how to factor their advice into a business decision. Once the issue has turned into a
problem, it is often too late to do anything other than damage control.
Moreover, entrepreneurs often do not have the resources to seek legal advice on every matter. They
may have to act quickly to realize market opportunities and will not have time for a self- taught
tutorial on the law every time a legal issue arises. For example, an entrepreneur planning to leave his
or her current employer needs to know enough law to be sensitive to whether their activities violate
trade secret laws, their fiduciary duties, or contractual restrictions on post-employment competition.
1
2
Constance E. Bagley, “Winning Legally: The Value of Legal Astuteness,” Academy of Management Review, vol.
33 (2008): 378-390.
Tim Hinthorne, “Predatory Capitalism, Pragmatism, and Legal Positivism in the Airline Industry,” Strategic
Management Journal, vol. 17 (1996): 251-270.
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Consider an entrepreneur starting a new software company. That person will have to decide whether
to bring a contact list from the prior employer and whether to hire an engineer employed by a key
competitor. The wrong choice could result in the inadvertent misappropriation of trade secrets and
derail a future venture capital round or an initial public offering. The public disclosure of an invention
in Japan or the European Union before the filing of a patent application can result in the loss of the
ability to charge monopoly rents in those jurisdictions. A start-up that issues stock to individuals or
firms without regard for federal and state securities law requirements will, at best, be required to give
purchasers a put option. At worst, the company will be fined and its founders imprisoned. As Judge
Easterbrook explained when he affirmed the criminal sentences of two founders, “States are entitled to
give corporate managers incentives to learn the law. No one with half a brain can offer an opportunity
to invest in our company without knowing that there is a regulatory jungle out there.” 3
Entrepreneurs who think that they can deal with all of these issues later, once the company has
enough money to hire a good lawyer to handle all that “legal stuff,” are sorely mistaken.
How would understanding law help entrepreneurs and other managers achieve their objectives?
Because a failure to comply with applicable laws can subject a firm to crushing government fines and
ruinous damages awards and land its top executives in prison, any discussion of law and management
must begin with the baseline of what constitutes illegal behavior. The criminal conviction of former
executives at Enron, Rite- Aid, and WorldCom; the payment of record fines by Wall Street firms and
other companies; and the demise of former high-flyers Enron and Adelphia Communications all serve
as stark reminders of the consequences of failing to comply with the law. A company’s reputation and
brand equity can be severely impaired by the lawsuits and ill-will generated by poor legal choices. The
courts now expressly require directors to oversee the company’s compliance with law; they may not
passively rely on company counsel. The practice of strategic compliance management 4 reduces the
likelihood of compliance failures and ethical lapses.
The law is rarely applied in a vacuum and its application to a given set of facts is often not clear- cut.
Most significant legal issues cannot be readily resolved by a binary approach, 0 for illegal and 1 for
legal. There are often shades of gray and degrees of legal risk. A successful manager needs to be able
to assess that risk (often with the advice of counsel) and to factor it into the ultimate business decision
the same way that other risks, such as currency exchange risk, are taken into account.
At the same time, proper use of the law and the legal system can increase realizable value and limit
the downside risk. First, understanding law helps entrepreneurs and their financial backers position
enterprises in the legal posture most suitable for their business. Many legal organizational structures
and governance models are available. The structures offer different degrees of flexibility and
freedom for the parties to define their relationships. Second, law protects a business from destructive
competition by others. Law encourages competition on the merits, not on fraud and manipulation.
3
4
Mueller v. Sullivan, 141 F.3d 1232 (7th Cir. 1998).
Constance E. Bagley, Winning Legally: How to Use the Law to Create Value, Marshal Resources, and Manage
Risk (Boston, MA: Harvard Business School Press, 2005), pp. 50-86.
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Third, law can protect innovations by granting the inventors or their firm’s limited property rights. Value
in the Information Age is defined by what is proprietary and legally protectable. Microsoft Corporation’s
market capitalism has nothing to do with the hard assets, the brick and mortar, on its balance sheet. It is
based on its ability to use copyrights, patents, trade secrets, trademarks, and contracts to sell software at
margins approaching 90 percent. The market capitalization of Amazon reflects not only its current
earnings but also the value of its brand and a loyal customer base. That value would dissipate if the firm
was unable to prevent others from using the Amazon.com name (a trademark) or current employees from
selling the customer list (a trade secret). Finally, law offers managers the ability to make their own
“private law” by entering into contracts enforceable by the power of the state.
What laws does this course cover? This course covers the public laws established by the
federal and state governments, the regulators, and the courts. It also covers the rules of conduct that
people establish for themselves in formal and informal agreements, as well as by voluntary behavior
enforced by law (e.g., acting as an agent).
II.
COURSE OBJECTIVES
The overarching purpose of Legal Aspects of Entrepreneurship is to prepare students to meet the
legal and regulatory challenges and opportunities they can expect to encounter as entrepreneurs,
venture capitalists, and managers of private and public businesses. The course provides a conceptual
framework for understanding both the societal context within which businesses are organized and
operate, as well as the various legal tools available to managers engaged in evaluating and pursuing
opportunities. Legal Aspects of Entrepreneurship will offer strategies and tactics for working with
counsel to use the law as a positive force to increase realizable value while managing the attendant
business and legal risks and keeping the legal costs under control.
The objective is not to teach business students how to think like lawyers, but rather to teach
students how to become more legally astute so they can handle with confidence the legal aspects
of entrepreneurship and management. This includes developing legal literacy and learning what
to look for when selecting an attorney and knowing when to call one.
III.
COURSE AUDIENCE AND APPROPRIATENESS FOR
INTERNATIONAL STUDENTS
This course will be of special interest to students who expect to become entrepreneurs, venture
capitalists, investment bankers, or chief financial officers, as well as to anyone wanting to improve his
or her analytical skills by applying a complicated set of regulations to varying fact patterns. Although
Legal Aspects of Entrepreneurship primarily uses and focuses on U.S. law, the course is relevant to
international students. First, the types of issues raised in the course are issues that every legal system
will address. These include an employer’s responsibility for wrongs committed by employees and a
firm’s disclosure obligations. By sensitizing students to these issues, this course helps students become
more adept at spotting legal issues before they become legal problems. Second, many of the legal tools
addressed in the course, such as contracts and intellectual property protection, are available (albeit to
varying degrees) throughout the world. Third, many international students will work for companies
that either (1) have operations in the United States or (2) import products from, or export products to,
the United States. Because the United States applies its laws extraterritorially to conduct occurring
outside of the United States that has substantial effects in the United States, even managers based
outside of the United States can find themselves sued or prosecuted under U.S. law. For example, two
Japanese firms were criminally prosecuted in the United States for fixing prices for thermal fax paper
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that was ultimately sold by a distributor in the United States even though they reached their agreement
to fix prices while in Japan. Finally, U.S. law has influenced other countries in areas such as
environmental, product liability, and insider trading laws. Students who are familiar with laws
outside the United States are encouraged to bring that experience into the classroom.
IV.
COURSE CONTENT
Legal Aspects of Entrepreneurship has six parts.
Part One
Introduction to the Legal Dimensions of Business reviews the foundations of the
legal environment of business, including agency law and the law of fiduciaries
generally, as well as contract law.
Part Two
Increasing and Capturing the Value of Knowledge Assets centers on capturing the
value of knowledge assets by securing and defending intellectual property rights.
These include patenting inventions and processes to erect barriers to entry, reduce
costs, and generate revenues; protecting tacit knowledge and other proprietary
information as trade secrets; copyrighting works; and creating brand equity through
the use of trademarks.
Part Three
Marshaling Human Resources reviews laws relevant to marshaling the human
resources needed to pursue opportunities, including the application of the concepts
of at-will employment and wrongful termination and prohibitions against
employment discrimination and harassment, as well as executive compensation.
Part Four
Raising Financial Capital introduces students to the legal aspects of venture
capital and the federal and state laws and regulations governing securities
offerings.
Part Five
Buying and Selling a Business addresses a variety of issues associated with buying
and selling a business, including deal structure, representations and warranties, and
deal protection devices.
V.
READINGS
The text for the class is The Entrepreneur’s Guide to Business Law (4th ed. 2012), ISBN 13: 978-0538-46646-2. The book is available on Amazon for $63.83 (used). E Books and electronic copies of
individual chapters are available at www.cengagebrain.com. There are substantial changes from the third
edition so students need to buy the fourth edition as well as a number of business school cases. This class
involves an above-average amount of reading. Students will find it difficult to participate in a meaningful
way in the class discussions if they have not read the materials carefully.
VI.
COURSE REQUIREMENTS AND GRADING POLICIES
Regular class preparation, attendance, and participation are required. There will be three case
write-ups and an open- book take-home final exam. The final exam will consist of a complex
hypothetical set of facts that raises many of the key issues addressed in the course. Students will be
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called upon to identify the issues and their likely resolution; to consider how the protagonist could
have avoided any problems; and to consider any ethical issues raised by the case.
The purpose of grading in Legal Aspects of Entrepreneurship, as in all courses, is twofold. One is to
evaluate students’ performance for purposes of the academic system. The other (and more important)
is to provide feedback on their ability to develop, utilize, and share ideas and conclusions concerning
the topics and situations covered in the course.
The grade for the course will be based on the following components: Class Participation: 30%, Case
Write-Ups 20%, and Final Exam: 50%
VII.
CLASS PARTICIPATION
In a typical class, one or more students will be asked to start the class by answering a specific question
or discussing a specific issue. Preparation for class (including any assignment questions) should be
sufficient to handle such a leadoff assignment. After a few minutes of initial analysis, we will open the
discussion to the rest of the class. As a group, we will then try to complete the analysis of the situation
and address the problems and issues presented in the readings. The cases and hypotheticals will be
discussed in an interactive, Socratic fashion, with follow-up questions by the professor that provide an
opportunity for students to defend and refine their reasoning. Cold calls will be used throughout each
class session to encourage active participation by all. In certain classes, students will have the
opportunity to volunteer to lead off a class discussion or to participate in certain role plays.
The development of verbal skills is given a high priority in this course. The classroom should be
considered a laboratory in which students can test their ability to convince their peers and the
professor of the correctness of their approach to complex problems and of their ability to achieve the
desired results through the use of that approach. Some of the things that have an impact on effective
class participation are the following:
1. Is the participant a good listener?
2. Are the points that are made relevant to the discussion? Are they linked to the
comments of others?
3. Do the comments add to our understanding of the situation and move the discussion
forward?
4. Are the comments informed by an analysis of the course readings?
5. Does the participant distinguish among different kinds of data, such as facts, opinions,
beliefs, and concepts?
6. Is there a willingness to share?
7. Is there a willingness to test new ideas, or are all comments “safe” (e.g., a repetition of case
facts without analysis and conclusions or a repeat of a comment already made by a colleague)?
8. Does the participant pay attention to and interact with other class members?
9. Do comments clarify and highlight the important aspects of earlier comments being
covered?
10. Is there a willingness to be honest even if the honest answer may not be “politically
correct” or what the participant thinks the professor or classmates want to hear?
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The questions above deal with both the process of class participation and (of equal or greater
concern) the content of what students say. As noted above, class participation will be a major
portion of the grade in this course and will be evaluated primarily on the basis of quality not just
quantity.
Because faculty members tend to have somewhat different expectations as to class behavior, I
would like to outline a few of my expectations concerning such matters.
1. There are fourteen sessions in this course. Attendance in every class is considered extremely
important. Please schedule other activities, such as interviews, at other times.
2. In the event that for some unavoidable reason you have to miss a class during the term, you
are responsible for letting me know in advance of class by means of a brief written note or an
e-mail message. Also, if you do miss a class, it is your responsibility to find out from your
classmates what topics were covered and what additional assignments were made, and to
obtain a copy of any materials distributed in class. Except in the event of a duly reported
excused absence, it is also your responsibility to prepare in typed form, and turn in to the
Teaching Assistant, Marge Farquharson (margaret.farquharson@yale.edu), your analysis of
the case assigned for that day.
3. As a courtesy to your classmates and to me, you are expected to be in class, ready to roll, on
time. Anyone coming in late will be a prime candidate for a cold call.
4. I plan to be prepared for every class and expect you will do the same. Because throughout each
class session I frequently call on individuals whose hands are not raised, you should let me
know before the start of the class if some emergency has made it impossible for you to be
prepared adequately for that class. Otherwise, I will assume that everyone in class is prepared.
Failure to notify me in advance of your inability to prepare will have a seriously negative
impact on your class participation grade.
5. Given the importance of class participation, I will seek to learn your names as quickly as
possible. To facilitate that, I ask you to use a name card throughout the course. In addition,
will circulate a seating chart during the second-class session. Once you select a seat, please sit
there every class.
6. I will be happy to discuss the course, your progress, or any other issues of concern to you on an
individual basis. Please contact my assistant Liz Viloudaki at 203.432.7514 or
elizabeth.viloudaki@yale.edu for an appointment.
VIII. OFFICE HOURS AND OTHER ADMINISTRATIVE DETAILS
My office is at 165 Whitney Avenue, Room 5514, and I am available to meet with students
outside of class by appointment. Please see me after class to set up an appointment or send an e- mail to
connie.bagley@yale.edu with a copy to my assistant Liz Viloudaki. If I fail to respond to an e-mail
message in a timely fashion, it is probably because your message got lost in cyberspace. If that happens,
contact my assistant Liz Viloudaki at 203.432.7514, elizabeth.viloudaki@yale.edu.
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IX.
CLASS SCHEDULE
The following class schedule is provisional and subject to changes. We may have one or more visiting
speakers and add or substitute the readings to accompany their schedules. For the most up-to-date
schedule, please always check the course website on courses v2.
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PART ONE: INTRODUCTION TO THE LEGAL DIMENSIONS OF BUSINESS
Session 1: October 21, 2014
Fiduciary Duty: With Power Comes Responsibility
Cases:
The Fiduciary Duties of Partners: Meinhard, Salmon, and the Bristol Hotel
(Yale SOM Case No. 07-032).
Northeast General Corporation (A) (Yale SOM Case No. 07-035).
Study Questions:
1. Did either Salmon or Northeast General violate their fiduciary duties?
2. Steve Jobs left Apple to form NeXT after being replaced as the head of the Macintosh
business. Although he offered to resign as chair of the Apple board, the other directors
persuaded him to retain his board seat. How, if it all, did this affect his ability to hire
Apple employees and build his new company?
To be distributed and discussed during class: Northeast General Corporation (B) (Yale SOM
Case No. 07-036).
Session 2. October 23, 2014
Contracts and Relationships
Case:
Kirkwood (Yale SOM Case 08-058).
Assignment: Kirkwood is a fictional case, based on a variety of actual contract disputes,
involving a contractual relationship between Kirkwood, a publisher of
children’s media, and Maria and Ramon Garcia, a husband-and-wife team of
authors who have developed an educational game and puppet using a
character named Seaside Sam. Seaside, a company owned by the Garcias,
received a flat fee for the game and will receive a share of the puppet
revenues. Kirkwood also agreed to make “reasonable efforts to aggressively
promote” the puppet.
After signing the deal with Seaside, Kirkwood was offered the more
lucrative opportunity to market the Captain Kilogram action figures.
Steve Graham, Kirkwood’s CEO, must now decide what to do. He can
follow through on his original commitments to Seaside or sacrifice
Seaside Sam in favor of doing the Captain Kilogram deal. The latter
would result in only a limited marketing campaign for Seaside Sam.
Reading:
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The Entrepreneur’s Guide to Business Law: Chapter 9: Contracts and Leases (pp.
279-313).
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Study Questions:
1. What are Kirkwood’s legal obligations toward Seaside?
2. What should Steve Graham do? Why?
3. What might Kirkwood have done differently to ensure a better outcome?
What might Seaside have done differently?
PART TWO: INCREASING AND CAPTURING THE VALUE OF KNOWLEDGE ASSETS
Session 3: October 28, 2014
Copyrights
Case:
BitTorrent (HBS Case No. 806-169).
Reading:
The Entrepreneur’s Guide to Business Law: Chapter 14: Intellectual Property and
Cyberlaw (pp. 529-542).
Assignment: BitTorrent involves the entertainment industry’s ongoing challenge to move
toward digital distribution of content while preventing individuals from using
unlicensed software to share computer files containing copyrighted music and
video.
Study Questions:
1. Why haven’t the record companies or film studios tried to shut down BitTorrent? What
actions by BitTorrent would make them more or less likely to sue?
2. Does DCM-Doll Capital Management, the venture capital firm that funded BitTorrent,
have any potential liability for copyright infringement?
3. What could Napster, Hummer Winblad, and Grokster have done to have avoided suit,
or to have given them a stronger position with respect to the legal actions that
unfolded?
4. Does Google’s library search project or its image search feature violate the rights of the
copyright holders of the content Google digitizes? If you were CEO of Google, what
assurance would you want from counsel before proceeding?
5. Is YouTube liable for copyright infringement when its users post copyrighted television
shows and films?
To be distributed and discussed at the end of class: Warner Bros. and BitTorrent (HBS Case
No. 807-012).
Session 4: October 30, 2014
Trade Secrets and Nondisclosure Agreements
Case:
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X-IT and Kidde (A) (HBS Case No. 9-803-041).
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Reading:
The Entrepreneur’s Guide to Business Law:
Chapter 1: Taking the Plunge
Chapter 14: Intellectual Property and Cyberlaw (pp. 516-529).
Assignment: The X-IT and Kidde case deals with two HBS grads who developed a novel
escape ladder. After their company, X-IT, began to gain traction, Kidde, a
much larger competitor, began discussions with the two founders to license
the technology or to buy X-IT outright. In the course of these discussions, XIT disclosed certain information to Kidde pursuant to a confidentiality
agreement. After Kidde began marketing a very similar ladder, the X-IT
founders had to decide how to respond.
Study Questions:
1. What are X-IT’s strongest legal claims against Kidde?
2. What are the pros and cons of suing Kidde?
3. If you were Aldo DiBelardino, what would you do?
4. If you were an outside investor of X-IT, would you fund a lawsuit? Why or why not?
To be distributed and discussed at the end of class: X-IT and Kidde (B) (HBS Case No. 803056).
Session 5: November 4, 2014
Global Licensing
Case:
PrimeSense, Ltd. (A) (Yale SOM Case No. 12-023).
Assignment: PrimeSense involves an Israeli company that has developed an innovative
gestural compter-user interface technology. Its CEO Inon Beracha must now
decide how to commercialize it.
Study Questions:
1. Why did PrimeSense want Apple to sign a non-disclosure agreement with a reverse–
engineering clause?
2. What factors should Apple take into account when deciding whether to sign the
NDA?
3. How should Inon Beracha respond to Apple’s refusal to sign the nondisclosure agreement?
4. Why did Aviad Maizels bring Beracha in as CEO? What risks were entailed?
5. If you were Steve Ballmer, CEO of Microsoft, would you sign an NDA
prohibiting reverse engineering?
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6. What are the most promising applications for the PrimeSense technology?
7. Aside from the NDA, what are the most important elements of any deal with
PrimeSense?
To be distributed and discussed during class: PrimeSense, Ltd. (B) (Yale SOM Case No.13016).
Session 6: November 6, 2014
Patents
Cases:
Association for Molecular Pathology v. U.S. Patent & Trademark Office, Case 11.1, in
Constance E. Bagley, Managers and the Legal Environment: Strategies for the 21st
Century, 8th ed. (pp. 284-285) (posted on classes v2).
Priceline.com v. Microsoft (A) (HBS Case No. 9-802-074).
Reading:
The Entrepreneur’s Guide to Business Law: Chapter 14: Intellectual Property and
Cyberlaw (pp. 542-558).
Assignment: Association for Molecular Biology involves the patentability of isolated gene
sequences. As the U.S. Supreme Court explained in Diamond v. Chakrabarty,
447 U.S. 303 (1980), the case in which the Court held that a live, human-made,
genetically engineered bacterium could be patented, the resolution of such
cases can determine whether research efforts are slowed by want of
incentives or accelerated by the hope of reward.
The Priceline.com case describes Priceline’s dispute with Microsoft/Expedia
over Priceline’s patent for buyer-driven commerce on the Internet. The case is
quite long, as we included the entire Priceline complaint against Microsoft as
well as the actual patent to present a real-life example of the documents at
issue in patent litigation. The study questions below direct students to
specific portions of these legal documents—there are large portions that you
can simply skim.
Study Questions:
1. Review Exhibit 2 of the Priceline.com case, which describes the evolving legal treatment of
business process patents. What issues seem to be in contention?
2. Given the current legal status of business process patents (as described in Exhibit 2), do
you believe that Priceline’s ‘207 patent met the legal criteria? (See in particular the
abstract of the patent on page 24, and the claims that begin on page 61.)
3. How would you explain the behavior of Priceline and Microsoft that led to this dispute?
(Review pages 14 to 17 of the complaint.)
4. What alternatives does each company have now that they have reached this point?
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5. If you were Jay Walker, CEO of Priceline, what would you do? How would you expect
Bill Gates, CEO of Microsoft, to react?
6. Are isolated gene sequences a product of nature and thus patent ineligible?
7. What public policies are involved?
To be distributed and discussed at the end of class: Priceline.com v. and Microsoft (B) (HBS
Case No. 9-802-082).
Session 7: November 11, 2014
University Licensing Agreements
Guest:
James G. Boyle, Director, Yale Entrepreneurial Institute (to be confirmed)
Readings:
Fenn v. Yale University Complaint (posted on classes v2).
Fenn v. Yale University Answer and Counterclaim (posted on classes v2).
Fenn v. Yale University District Court Decision Dated August 19, 2003 (posted
on classes v2).
Skim Constance E. Bagley & Christina D. Tvarno, “Pharmaceutical PublicPrivate Partnerships in the United States and Europe: Moving from the Bench
to the Bedside” (posted on classes v2).
Assignment: The case Fenn v. Yale University involves a dispute in which Yale Professor
John B. Fenn sued Yale University, alleging conversion, theft, tortious
interference with business relationship, and violations of the Connecticut
Unfair Trade Practices Act (“CUTPA”) regarding an mass spectrometry
invention and the patent for that invention, which issued to him as United
States Patent No. 5,130,538 (“'538 patent”) on July 14, 1992. Yale asserted
counterclaims against Fenn, seeking an accounting and assignment of the '538
patent, as well as damages for breach of contract and fiduciary duty, fraud,
negligent misrepresentation, conversion, theft, unjust enrichment, and
CUTPA violations.
Study Questions:
1. What factors should Yale University take into account when deciding whether to
grant an exclusive license on an invention by a graduate student doing research
under the guidance of a Yale faculty member?
2. Should the EU, Japan or China adopt legislation akin to the Bayh-Dole Act?
What are the arguments pro and con?
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PART THREE: MARSHALING HUMAN RESOURCES
Session 8: November 13, 2014
Covenants Not to Compete and Assignments of Inventions
Case:
WebSaver (Stanford Case No. BL1).
Reading:
The Entrepreneur's Guide to Business Law: Chapter 3: Leaving Your Employer.
Louis Lavelle, “Yale MBAs Battle Over an Idea for a Golf Business,”Bloomberg
Business Week (Sept. 23, 2013) (posted on classes v2).
Assignment: WebSaver involves an MBA student who joins several classmates to prepare a
business plan for a class, then decides to form a new venture based on the
business plan after graduation. In the course of planning an initial public
offering, she discovers that errors in the venture’s early stages could
endanger her ability to go public.
Study Questions:
1. What possible claims could Diamondware make against Fine or Next Step based on the
employee non-disclosure agreements that Fine and Salinas signed? What, if anything,
should Fine do about this problem?
2. What are the challenges that Next Step faces with respect to the protection of its
intellectual property domestically and abroad?
3. What factors should Fine consider prior to making a decision concerning Chen? What
should Fine do with respect to Chen? What, if anything, could Fine have done to ensure
that the situation with Chen was resolved at an earlier time?
4. What accounting and tax problems could arise by reason of the last-minute issuance of
stock to Next Step’s employees?
5. What, if any, other legal issues should be of concern to Fine?
Session 9. November 18, 2014
Executive Compensation
Case:
Richard Spellman (A) (HBS Case No. 801-202).
Reading:
The Entrepreneur's Guide to Business Law:
Chapter 5: Structuring the Ownership (pp. 91-115).
Chapter 10: Marshaling Human Resources (pp. 248-249).
Assignment: The Richard Spellman case deals with an entrepreneur who has decided to
leave one dot-com, where he was a VP, to become CEO of another start-up.
The cases focuses on two key agreements that are part of the negotiation—a
restricted stock agreement and an employment agreement. As the devil is in
the details, students will be expected to read each agreement carefully, even
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those sections they might initially dismiss as boilerplate. In the (A) case, we
will see the first drafts of these agreements, prepared by the attorney for the
start-up. In the (B) case, we will have an opportunity to review the final
versions and consider the impact of the changes.
Study Questions:
1. What are the key issues related to the restricted stock agreement? What should
Spellman’s priorities be with respect to these issues, and what resolution of these issues
would constitute a “fair” outcome from your point of view? Be specific as to which
provisions you would want added or modified.
2. Consider the same questions with respect to the employment agreement.
3. Other than the issues specifically addressed in the draft restricted stock and employee
agreements, are there other issues that Spellman should be concerned about? If so, is
there any legal documentation that could give him comfort on these issues?
4. Evaluate Spellman’s progress so far in negotiating the issues on his own. How should he
use his attorney, Tom Miller, in the next phase of the negotiations?
5. Should Spellman file an 83(b) election?
To be distributed and discussed during class: Richard Spellman (B) (HBS Case No. 801-203).
PART FOUR: RAISING FINANCIAL CAPITAL
Session 10. November 20, 2014
Venture Capital Financing
Case:
LAE Enterprises (HBS Case No. 803-025).
Reading:
The Entrepreneur’s Guide to Business Law: Chapter 13: Venture Capital.
Assignment: The LAE Enterprises case involves a start-up that has developed a
revolutionary drug-delivery device and the terms on which a venture
capitalist has offered to fund the company. Please analyze the proposed term
sheet and consider whether the provisions are fair to the entrepreneurs and
the venture capitalists.
Session 11: December 2, 2014
Venture Capitalist on Portfolio Company Board
Case:
Merchant Card Services (A) (HBS Case No. 803-042).
Reading:
The Entrepreneur’s Guide to Business Law: Chapter 6: Forming and Working
with the Board.
Assignment: The Merchant Card Services case deals with a venture capitalist who sits on the
board of a portfolio company and has to decide whether to exercise the
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fund’s contractual right as a preferred shareholder to block a proposed sale of
the company.
Study Questions:
1. Should Romero agree to sell Starling’s preferred stock for the current liquidation value?
2. What effect did the additional protections Starling received in exchange for a higher
pre-money valuation have on the returns ultimately realized by the common and
preferred shareholders?
3. Should Romero and his partner remain on the MCS board?
4. Should Starling exercise its veto right to block a sale of MCS?
To be distributed and discussed during class: Merchant Card Services (B) (HBS Case No. 804014).
To be distributed and discussed at the end of class: Merchant Card Services (C) (HBS Case
No. 804-039).
Session 12. December 4, 2014
Securities Registration Requirements
Case:
SEC v. Edwards, Case 21.2, in Constance E. Bagley, Managers and the Legal
Environment: Strategies for the 21st Century, 8th ed. (pp. 652-653) (posted on
classes v2).
Reading:
Constance E. Bagley, Managers and the Legal Environment: Strategies for the 21st
Century, 8th ed. (pp. 659, 661-665) (posted on classes v2).
The Entrepreneur’s Guide to Business Law: Chapter 7: Raising Money and
Securities Regulation (pp. 173-193).
J. D. Harrision, “Can Crowdfunding Fill Stock Market’s ‘Black Hole’ for Startups and Small Businesses?,” The Washington Post (Aug. 26, 2013) (posted on
classes v2).
Dina ElBoghdady, “Critics Say Crowdsourcing Doesn’t Protect Investors,”
The Washington Post (Oct. 24, 2013) (posted on classes v2).
Study Questions:
1. Is stock in a cooperative association that owns an apartment building issued to tenants
a security within the meaning of the Securities Act of 1933? Is a contract for the sale of
citrus trees with an optional management contract? Is the sale of 100% of a
corporation’s stock the sale of a security?
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2. What public policy considerations underlie the securities registration
requirements and the exemptions from registration?
3. How did the JOBS Act alter the balance between investor protection and capital
formation?
4. What role, if any, do the securities laws play in preventing market bubbles?
PART FIVE: BUYING AND SELLING A BUSINESS
Session 13: December 9, 2014
Buying and Selling a Business
Case:
EMC Corporation: Proposed Acquisition of VMware (HBS Case No. 806-153).
Reading:
The Entrepreneur’s Guide to Business Law: Chapter 16: Buying and Selling a
Business.
Assignment: The EMC case involves the proposed acquisition of VMware, a Californiabased software firm with promising and potentially disruptive technology
that is embroiled in a patent lawsuit with Microsoft.
Study Questions:
1. What is the most important issue for EMC CEO Joe Tucci? For the lawyers?
2. What kind of comfort on the patent litigation do Tucci and EMC’s board need from legal
before going ahead with the deal?
3. What representations and warranties should EMC require from VMware?
4. How can EMC avoid being a stalking horse for other bidders?
Session 14. December 11, 2014
Review
Reading: Constance E. Bagley, “The Entrepreneur’s Top Ten Legal Mistakes” (posted on
classes v2)
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