Temple University:
Legal 101 Business Planning Workshop
February 25, 2014
Presented by Geoffrey Schwartz and Joseph Holovachuk.
Considerations
• Structuring the Company
• Legal Pitfalls to Avoid
• Intellectual Property Issues
• Tips About Business Plans
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Structuring the Company
• Choice of Entity
− “C” Corporation
− “S” Corporation
− Limited Liability Company (LLC)
− Others
• Partnerships
• Sole Proprietorship
3
Structuring the Company
• Considerations:
− Size/Complexity
− Liability
− Tax
− Funding Needs and Sources
− Costs
− Exit Strategy
4
Structuring the Company
• “C” Corporation
− Most common type of entity
− Shareholders generally not responsible for
liabilities
− No restrictions on
• who can be a shareholder
• number of shareholders
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Structuring the Company
• “C” Corporation
− Capital Structure:
• Classes/Series of Stock
• Common, Preferred, Convertible Preferred,
Convertible Debt
• Warrants/Options
− Owners are “stockholders” or “shareholders”
− Board of Directors
• Advisory Board
− Charter/Bylaws
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Structuring the Company
• “C”
Corporation
− Advantages:
• Familiarity
• Ownership Flexibility
• Equity Flexibility
− Disadvantages:
• Double Taxation
• No Pass Through of Losses
7
Structuring the Company
• “S” Corporation
− Shareholders generally not responsible for
liabilities
− Single level of tax
− Restrictions on
• who can be a shareholder
• number of shareholders
8
Structuring the Company
• “S” Corporations
− Advantages:
• “Tax Efficient”
• Pass Through of Losses
− Disadvantages:
• One Class of Stock
• Limitations on Ownership
9
Structuring the Company
• Limited Liability Company
− Owners generally not responsible for
liabilities
− Single level of tax
− No restrictions on
• number or types of owners
• number of classes of equity
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Structuring the Company
• Limited Liability Company (LLC)
− Capital Structure:
• Membership Interests or “Units”
• Common, Preferred, Convertible Preferred,
Convertible Debt
• “Profits Interests”
− Owners are “members”
− Member-managed vs. Manager-managed
− Operating Agreement
11
Structuring the Company
• Limited Liability Company
− Advantages:
• “Tax Efficient”
• Pass Through of Losses
• Ownership Flexibility
• “Profits Interests”
− Disadvantages:
• Investment Limitations
• Administrative Burden
• Self-Employment Taxes
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Structuring the Company
• Important Agreements:
− Employee/Consulting Agreements
• Non-disclosure and assignment of invention
• Non-compete and non-solicitation
• Vesting provisions
− Stockholders Agreement (Corporation only)
− Operating Agreements (LLC only)
− License Agreements
− Customer Contracts
13
Structuring the Company
• Financing the Business
− Who?
• Founders
• “Friends and Family”
• “Angel” Investors
• Venture Funds
− How?
• Equity
• Debt/Convertible Debt
• Bridge Loans
• Venture Debt
• Other
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Structuring the Company
• Financing the Business (cont.)
− Valuation
− Dilution
• 20% of $10M > 100% of $0
− Control
15
Legal Pitfalls to Avoid
• Wrong Structure
• Personal Liability
• Unprotected Intellectual Property
• Sloppy (or No) Recordkeeping
• Oral Agreements
• Tax Issues
• Employment Issues
• Securities Laws
16
Overview
• Why is IP Important
• IP Basics for Entrepreneurs to Know
− Patent
− Trademark
− Copyright
− Trade Secrets
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Why is IP important?
• Intellectual Property is an umbrella term encompassing creations of
the mind, literary and artistic works, designs, and marks used in
commerce.
• What goes into creating IP?
− time
− capital
− resources
− experience
• Benefits
− Fosters innovation
− Creates and supports high-paying jobs
− Drives economic growth and competitiveness
− Rewards Entrepreneurs
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How to the different types of IP
interplay with one another?
• Patents, trademarks, and copyrights protect different types of
intellectual property.
− A patent protects an invention
− A trademark protects names and logos used on goods
− A copyright protects an original artistic or literary work
− A trade secret protects information not generally known in the
trade against unauthorized commercial use by others
• Example – you develop a new type of coffee cup
− Apply for a patent to protect the invention of the cup
− Apply for a trademark to protect the brand name of the cup
− Register a copyright for an advertisement that you use to market
the cup
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Patents
Basics for Entrepreneurs to Know
• What legal rights do patents provide?
• What types of inventions are patentable?
• What are the legal requirements for patentability?
• What are the contents of a patent?
• What are the best practices associated with patents?
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What legal rights do patents
provide?
• A patent is a limited monopoly whereby the patent
holder is granted the exclusive right to make, use, and
sell the patented innovation for a limited period of time.
• The patent is viewed as a “contract with society”
− Inventor provides society with disclosure of the invention.
− Inventor receives a 20 year monopoly to exclude others
from practicing the claimed invention
• The “contract with society” is intended to encourage the
investment of time and resources into the development
of new and useful discoveries.
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What types of inventions are
patentable?
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Patentable
Not Patentable
“. . . any new and useful
process, machine,
manufacture, or
composition of matter, or
any new and useful
improvement thereof.”
• Laws of nature
• Natural phenomena
• Abstract ideas
What are the legal requirements for
patentability?
• Utility – it must be useful
• Novelty – it must be new
• Non-obviousness – it can’t be a mere variation of what
was done before
• Written Description – application must:
− must fully disclose invention
− must be enabling
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What are the contents of a patent?
• A patent generally includes:
− a description of the invention
− one or more drawings illustrating the invention
− at least one claim defining the invention
• The claims provide the metes and bounds of the right
that the patent confers to exclude others from
“trespassing” on the invention.
24
Recent law changes in the United
States
• The United States recently transitioned from a
“first to invent system” to a “first to file” system.
− Under to the old system, the first inventor to
invent wins the patent, even over a prior
application-filer.
− Under the new system, the first inventor to
file wins the patent over second filer of same
subject matter
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Recent law changes in the United
States (continued)
• The new system is really a “first to disclose” system
− Once an inventor discloses his or her invention
publicly, he or she has one year to file a patent
application
− The public disclosure prevents anyone else from
filing a patent application even if they invented the
same invention before the disclosure.
• Note - the majority of other countries require “absolute
novelty” – any disclosure could be prior art.
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Benefits and Drawbacks of Patent
Protection for Entrepreneurs
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Benefits
Drawbacks
• Protect innovation
• Hinder competition
• Provide collateral for
investment
• Improve bargaining position
and attractiveness to
investors
• Promote image as
“innovative” company
• Provide royalty revenue
• Recover R&D costs
• Expense
• There is a risk that no patent
will issue for a filed
application.
• Once filed, there is a long
period before a patent issues.
What are the best practices
associated with patents?
• Be aware of what your company’s innovations
− For any innovations that will be publicly disclosed, consider
filing a patent application prior to disclosure.
− For smaller companies, ensure that core technology is
protected by one or more patents.
• Be aware of your competitive landscape
− Perform a prior art search prior to filing any patent
applications.
− Receive opinions of counsel prior to rolling out any major
new products.
− Monitor competitors’ patent filings and litigation activity.
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Trademarks
Basics for Entrepreneurs to Know
• What legal rights do trademarks provide?
• What are the legal requirements for a trademark?
• How are marks categorized?
• Why register your mark?
• What are the symbols associated with a trademark?
• What are the best practices associated with
trademarks?
29
What legal rights do trademarks
provide?
• A trademark is word, name, symbol, or device that
identifies and distinguishes the source of the goods of
one party from those of others.
• Federal trademark law prevents one party from using
a mark which is likely to confuse consumers as to the
source or sponsorship of goods or services.
− The first to use is referred to as the “senior user.”
− Subsequent users are “junior users.”
• The mark owner is solely responsible for enforcement
of trademark rights.
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What are the legal requirements for a
trademark?
• Legal rights begin to accrue upon usage in connection
with offering goods or services.
• Rights are limited to the geographic region in which
the goods or services are offered.
• A trademark may be eligible for federal registration if
− the mark is not descriptive and
− the mark is not likely to be confused with any pending or
registered marks.
31
How are marks categorized?
• Marks fall into one of four categories:
− Fanciful marks are invented words with no dictionary or
other known meaning
− Arbitrary - known meaning that have but no
association/relationship with the goods protected
− Suggestive marks suggest, but do not describe,
qualities or a connection to the goods or services.
− Descriptive marks are marks are words or designs that
describe the goods and/or services
• The strongest marks are fanciful marks and arbitrary
marks because they are inherently distinctive.
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Why register your mark?
• Registration with the USPTO confers significant
statutory benefits on the registration, such as
− provides nationwide priority based on the filing date
− discourages others from using confusingly similar marks
− provides the right to file a trademark infringement
lawsuit in federal court and to obtain monetary remedies
− provides the ability to prevent importation of infringing
foreign goods
33
What are the symbols are associated
with a trademark?
• “TM” is used to indicate a mark is used in connection
with goods.
• “SM” is used to indicate a mark used in connection
with services.
• ® is used to indicate that a mark is federally
registered; it should never be used unless a mark is
actually federally registered.
34
What are the best practices with respect
to trademarks?
• Before filing a trademark/service mark application,
consider:
− Would there be any likelihood of confusion with existing
marks?
− Is the mark “strong” and non-descriptive?
− Will the public is likely to be able to remember,
pronounce, and spell the selected mark?
− Will the mark have an undesired or offensive meaning if
translated into a foreign language?
• Trademark searches should be performed by counsel
to determine if the mark is available.
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Copyrights
Basics for Entrepreneurs to Know
• What legal rights do copyrights provide?
• What can be protected by copyright?
• When does protection arise?
• What is a work for hire?
• What are the benefits of registration?
• What are the best practices?
36
What legal rights do copyrights
provide?
• Under the U.S. Copyright Act of 1976, the owner of a
copyright has exclusive rights to:
− reproduce the work
− prepare derivative works
− distribute copies
− display the work publicly
− perform the work publicly
• What works are protected by copyright?
− Basically, any work consisting of a modicum of creativity
and reduced to a tangible medium of expression,
including source code and user interfaces
37
What legal rights do copyrights
provide (continued)?
• For works created after January 1, 1978, the term of
copyright for a particular work depends on several factors
− copyright protection lasts for the life of the author plus an
additional 70 years.
− For an anonymous work, a pseudonymous work, or a work
made for hire, the copyright lasts for a term of 95 years from
the year of its first publication or a term of 120 years from the
year of its creation, whichever expires first.
• For works first published prior to 1978, the term of the
copyright will vary according to a variety of factors.
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What can be protected by copyright?
• Copyrightable works include the following categories:
− literary works
− musical works, including any accompanying words
− dramatic works, including any accompanying music
− pantomimes and choreographic works
− pictorial, graphic, and sculptural works
− motion pictures and other audiovisual works
− sound recordings
− architectural works
• These categories are used broadly.
− For example, computer programs may be registered as
“literary works.”
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When does copyright protection
under the U.S. Copyright Act arise?
• When the work is created in fixed form, the work is
immediately protected and the author can immediately
assert rights of ownership
• No publication, registration, or other action in the
Copyright Office is required to secure copyright.
• The use of a copyright notice is no longer required,
although its use still has various benefits.
40
What is a work for hire?
• A “work made for hire” may be
− a work made by an employee within the scope of
his/her employment
− a work which is specially ordered and the author
and other party agree in writing that the work is a
"work made for hire"
• The employer is deemed to be the author and
therefore the owner of the copyright.
41
What are the benefits of registration?
• Although registration is not a requirement for
protection, it provides several legal advantages
• establishes public record of a copyright claim in a work
• may provide evidentiary benefits and increased damage
awards during litigation
• allows the owner to record the registration with the U.S.
Customs Service to prevent importation of items infringing the
copyright
• Registration may be made at any time within the life of
the copyright by the author or the owner of exclusive
rights that make up the copyright.
42
What are the best practices with respect
to copyrights?
• Provide a copyright notice on all important documents
and other tangible works.
− The notice should include
• The symbol © (the letter C in a circle)
• The year of first publication of the work.
• The name of the owner of copyright in the work
− Example: © 2014 Joe’s Coffee Inc.
• Consider registration for any important materials,
including source code.
• For any works generated by non-employees, ensure
that there is an agreement in place specifying that any
work produced will be a “work made for hire.”
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Trade Secrets
Basics for Entrepreneurs to Know
• What legal rights do trade secrets provide?
• Why use trade secrets rather than patents?
• How does trade secret protection arise?
• What are the risks of trade secrets?
• What are the best practices associated with trade
secrets?
44
What legal rights do trade secrets
provide?
• A trade secret is confidential and proprietary
information which a party desires to keep secret.
• Trade secrets are protected by state law, which can
vary in terms of its scope and protections.
• Generally, injunctive relief and possibly damages may
be available if a trade secret is misappropriated.
45
Why use trade secrets rather than
patents?
• May be less expensive- only need to spend what is
necessary to keep the information secret, for example
− keep facilities secure
− non-disclosure agreements from employees and vendors
• Information protected by trade secret doesn’t need to be
“patentable.”
• By definition, a trade secret is not disclosed to the public,
which could provide competitive advantages in some
situations.
• The term of protection for a trade secret has the potential to
last forever - as long as the invention is kept a secret
46
How does trade secret protection arise?
• Under most statutory definitions, to establish the
existence of a trade secret, one must show that the
information alleged to be a trade secret is
− of an appropriate subject matter to be protected as a
trade secret;
− not a matter of common knowledge in the trade and not
readily ascertainable by proper means;
− of value; and
− reasonable precautions have been taken under the
circumstances to maintain secrecy.
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What are the risks of trade secrets?
• If a party does not take steps to keep its confidential
and proprietary information secret, then it may lose
protection as a trade secret.
• For example, if a party discloses its customer list to
the public or allows its employees to disclose this
information, it probably won’t be able to prevent a
former employee or competitor from using the
customer list.
• No protection against those who independently
discover or reverse-engineer the secret.
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What are the best practices associated
with trade secrets?
• For materials that are important to the business,
consider whether patent protection is appropriate.
• Use legal contracts to protect the secret.
− These agreements typically include non-disclosure
agreements and non-compete agreements.
− Often, these agreements are included as part of an
employee agreement that is signed at the beginning of
employment.
• Educate employees on the need for secrecy.
• Ensure that the facilities, including the computing
resources used, adequately protect the secret.
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Conclusion
• There are various forms of Intellectual Property
available to entrepreneurs.
− A patents protects an invention.
− A trademark protects brand names and logos used on
goods and services.
− A copyright protects an original artistic or literary work.
− A trade secret protects technological and commercial
information not generally known in the trade against
unauthorized commercial use by others.
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Tips About Business Plans
• Good Executive Summary
• The Problem and Your Solution
• Lingo/Buzzwords
•
•
•
•
Market
Value Proposition
Sources and Uses of Funds
Financials and Projections
• Organization
• Typos
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