Basic legal issues for entrepreneurs

1. Legal Knowledge for
Entrepreneurs
Glen Caplan – November 22, 2008

2. “Starting companies is like having babies –
fun to conceive but hell to deliver.”
~ Anonymous

3. Overview
 Corporate Formation and Capitalization
 Why should I form a corporation?
 How do I form a corporation?
 What should I be thinking about if I am going to
do so?
 Intellectual Property
 What is intellectual property?
 How do I protect it?

4. Choice of Entity
 Limited liability
 Transfer of ownership
 Tax issues
 Governance
 Continuity of existence
 Capital requirements

5. Sole Proprietorships and Partnerships
 Sole proprietorship
 Simplest (Individual and
business treated and
taxed as one)
 Maximum control
 Unlimited personal
liability
 Difficult to sell; no
continuity beyond life of
owner
 Partnerships
 Pass-through taxation
 Less continuity of
existence
 Unlimited personal
liability of general
partner(s)

6. Corporations and LLCs
 Corporations
 Limited liability for
stockholders
 Continuity of existence
 Ease of transfer of
ownership
 Centralized management
 Tax favored employee
benefits
 Easier to raise capital
 Double taxation
 LLCs
 Limited liability for members
 Pass through taxation to
owners
 Fewer maintenance
requirements
 Flexibility as to ownership
and management rights
 Tax issues regarding
sale/exit events
 Investors more comfortable
with corporate form

7. Jurisdiction of Incorporation
 Delaware
 Most common state of incorporation (over ½ of Fortune 500)
 Well established, detailed case law = Legal Certainty
 Generally flexible corporate code
 North Carolina
 Corporate Code modeled after Delaware
 Reincorporation likely as company matures

8. Charter Documents
 Certificate of Incorporation
 Filed with Secretary of State of the state of
incorporation
 Governing document
 Bylaws
 Sets forth rules and procedures

9. Corporate Governance in a Nutshell
 Board Approval
 Amendments to Charter
 Fundamental transactions
(Sale of assets, merger, etc.)
 Appointment of Officers
 Anything affecting
capitalization
 Material contracts
 Approve compensation /
arrangements with officers
 Stockholder Approval
 Amendments to Charter
 Fundamental transactions
(Sale of assets, merger, etc.)
 Election of Directors
(though vacancies can often
be filled by Board)
 Stock Incentive Plans and
amendments thereto
 Interested director
transactions

10. Typical Capital Structure
 Founders
 Common stock (vesting over time)
 Employees
 Common stock/options (vesting over time)
 Investors
 Convertible preferred stock

11. Key Early Issues - Founders
 Transfer of intellectual property to the
company
 Allocation issues
 Equity ownership, responsibilities and rights
 Vesting of stock
 Rights of first refusal
 Initial funding

12. Key Early Issues - Personnel
 Employees and consultants
 Importance of agreements
 Equity compensation
 Stock vs. options
 Vesting
 Stock option/incentive plan

13. What is Intellectual Property?
 Intangible property rights
associated with inventions
and innovations
 Limited to specific
country/territory

14. Why Does IP Matter?
“Intellectual property is the life blood of almost all life
science companies. In many cases, it is the only true value
a young company owns and the only thing that can protect
against larger competitors. Understanding the breadth and
strength of the patent estate is an important criterion for
investment.”
~ Garheng Kong

15. Types of IP
 Trade Secrets/Know-how
 Patents
 Copyrights
 Trademarks

16. Trade Secrets

17. What can be a Trade Secret?
 Formulas
 Compilations of
information
 Patterns
 Methods
 Devices
 Techniques
 Programs
 Processes
 Project launch dates for
new products
 Marketing plans
 Computer programs
 Negotiated price lists in a
contract
 Customer lists

18. Not a Trade Secret

19. Maintaining Secrecy
 Take affirmative steps to
maintain secrecy
 Mark important and sensitive
documents confidential
 Enter into Confidentiality
Agreements
 Restrict access to offices, labs,
and computers (including
PDA’s and laptops!)
 Regularly conduct employee
exit interviews (reminder of
obligations; whereabouts of
information)

20. Rights Conferred by a Patent
 Exclude others from making,
using, offering for sale, selling,
or importing the claimed
invention
 Limited monopoly granted by
the government in exchange for
disclosure of invention
 20 years from earliest U.S.
nonprovisional filing date (i.e.
patent application filing date)
 Remedies
 Damages
 Injunction

21. Rights Not Conferred by a Patent
 Patent does not give you the right to practice the
invention claimed in your patent
 There may be other patents that affect your
freedom to operate
(patentability v. freedom to operate)

22. Copyrights
 Original works of authorship
 Fixed in a tangible medium of expression
 Perceived, reproduced or otherwise
communicated
 Directly or with use of a machine
 Protectable for limited term

23. Types of Copyrightable Works
 Text-based
 Books, magazines, plays, brochures, software
 Visual Works
 Photographs, paintings, icons, graphics
 Sound
 Sound recordings, song words and music
 Motion Pictures
 Films, videos
 Others
 Mask works, blueprints, etc.

24. Not Copyrightable
 Idea
 Procedure
 Process
 System
 Method of operation
 Concept
 Principle
 Discovery (e.g. mere
facts)
 Lists
 Names, slogans, short
phrases (do not have
sufficient “authorship”
of “original
expression”)

25. Trademarks and Service Marks
 Used to identify and distinguish
the goods of one person from
the goods manufactured or sold
by others to indicate the source
of the goods
 Provide the relevant consumer
with information on quality of
product
 Establishes good will and
loyalty
 Prevents unfair competition or
business practices

26. What can be Trademarked
 Word
 Logo
 Sound
 Color
 Fragrance

27. Types of Trademarks
Levels of Distinctiveness Characteristics
Arbitrary or Fanciful
Example: EXXON, KODAK
Strong
No secondary
meaning required
Little or no
relationship to
goods and services
Suggestive
Example: ULTRACATH
Somewhat
weak
Secondary
meaning may be
required
Suggests some
feature of goods
and services
Descriptive
Example: ATMVERIFY
Weak
Secondary
meaning required
Describes the
goods and services
Generic
Example: ASPIRIN
Unprotectable
No TM
significance
Generic

28. Trademark Tips Summary
 Choose arbitrary or suggestive trademarks
 Consider more than just product names
 Obtain full trademark searches before beginning
trademark use
 Register important trademarks with the US Patent
and Trademark office (and internationally)
 Monitor and enforce trademark rights
 Use trademarks appropriately

29. Guidelines for the Start-Up
Ten Ways to Avoid Losing Intellectual Property Assets
1. Maintain confidentiality
 Avoid loss of trade secret rights
 Preserve patent filing rights
2. Keep good records
 Protects evolving knowledge base
 Defense mechanism in the event of trade secret infringement or
misappropriate claims
 Proof of conception in first to invent filings
3. Secure consultant rights
 Protect against restriction on development rights or claims for
additional payments

30. Guidelines for the Start-Up
Ten Ways to Avoid Losing Intellectual Property Assets
4. Consider noncompetes
 Forestall inappropriate use of information
retained by employees
4. Restrict incoming trade secrets
 Protect against claims of misappropriation
 Protects against corruption of product line
6. Analyze freedom to operate
 Blocking patents
 Necessary licenses

31. Guidelines for the Start-Up
Ten Ways to Avoid Losing Intellectual Property Assets
7. Understand contracts and grant of rights
8. Keep sales people in check
 Loss of trade secrets
 On sale bars
7. Educate employees
 IP policies
7. Conduct IP audits

32. Questions & (Hopefully) Answers
Glen Caplan
Hutchison Law Group
Tel: 919.829.4303
gcaplan@hutchlaw.com
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