Presentation on theme: "Presented by The Jacobs Law, LLC"— Presentation transcript:
1 Presented by The Jacobs Law, LLC Legal Issues in Startups: From Company Formation to Intellectual Property RightsPresented by The Jacobs Law, LLCTravis JacobsStefano D’AgostinoRobert Mihail
2 Company Formation and Choice of Entity DomicileMassachusetts vs. Delaware.Types of EntitiesSeries LLCsMassachusetts – Similar Statute to DE, but worth it?Delawarewell-developed case lawboard protectionsease of corporate filings and related state-law administrative issues
4 Company Formation and Choice of Entity State FeesMassachusettsOfficial 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.DelawareOfficial fees: Faster Service = Higher CostLLC: 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
6 FORMATION FACTORS How will Capital be obtained? Angel / VC / Other Current vs. Future Goals & PlansTax Considerations – Entity Level vs. Pass-ThroughOwners – S-Corp Trap (Tax Exceptions, Citizenship, # of Members)Management StructureType of Business – Insurance, Finance, Professional, ServicesCost – Upfront and Annual
7 Company Formation and Choice of Entity LLCs vs. C CorporationsLLCs are not taxed at the entity levelLLC documentation is more elaborate and costly than corporate documentationState fees are higher for LLCsNo stock options incentives for LLC employeesLess corporate housekeeping required, faster decision making at management levelIPO will likely require conversion to corporate formWhy 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.
8 Company Formation and Choice of Entity When to incorporateThe 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 runningIf 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
9 Company Formation and Choice of Entity Equity SplitEqual shares rarely make sense – split should be based on prior and future expected contributionsQuestions 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?
10 Financing Crowdfunding What is crowdfunding? Pros Cons More time on developing the business and less time on fundraisingGreater and more diverse investor poolNiche ideas can get fundingConsInvestors lack the depth and due diligence tools available to VCs and sophisticated angelsOnly accredited investors can invest in equity crowdfundingHigh cap table
11 Financing Preferred Crowdfunding Models Product in return for contributionEquity/DebtChoose 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 LawsOnly 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.
12 Financing VCs and Angel investors how to find them? Networking and warm introductionsAngelListyou should have your own lawyer
15 Product Development, Marketing and Operations Social media and the use of trademarksHashtags, domain names and even stylized QR codes may contain trademarksKeyword triggeringDefinition: 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 resultsPlacing the name of the competitor in the banner advertisement without identifying the true source of the advertisement – likelihood of confusionNo problem if you merely and openly compare goods/services
16 Product Development, Marketing and Operations Social media and the use of trademarksGuidelines:Monitor your competitors’ use of your trademarkSubmit complaints to search engines on improper use of keywordsAction against competitor/advertiserConsider context, pros and cons (misguided fan or intentional harm?)Do take action against counterfeiters, and misleading/inaccurate informationIf cost-effective, outbid competitors on keywords that are confusingly similar with your trademarkDo a clearance search before using hashtags, domain names or any other marks onlineAvoid using third party famous marks (blurring/tarnishment)Be truthful and avoid confusion in comparative advertisement
17 Product Development, Marketing and Operations Social media and the use of trademarksBeware of imposters/fake reviewersMost social media platforms will take action and remove imposter postingsParody exception (Twitter)Action against improper use of trademarks on social media platforms is limited under Lanham Act and UDRPCurrent 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 accountsSolution:register your brands as usernames on popular/used the most by your consumers social media sitesCreate your own pages and use your mark commercially on such social media websites
20 Intellectual Property Rights The danger of wearing two hats:Review employment agreement with current/previous employer and look for IP assignment provisionsAny pre-incorporation IP should be assigned to the company in writingtax-free transaction under Section 351 of the Internal Revenue CodeFounders, employees and consultants should sign NDA and IP assignment agreements with the startup, otherwise this will become a problem in later investor due diligence.
21 Intellectual Property Rights 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 SoftwareWhen you use OSS, you enter into a license.
22 Intellectual Property Rights Develop an IP StrategyBuildLicenseMonitorEnforce
23 Intellectual Property Rights Building your IP portfolioWhy build an IP portfolio?Investors like assets and barriers to entry since they provide security and leverage.Consider patents and trade secrets before any publicationRegister 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
25 Intellectual Property Rights LicensingMonetize your IP portfolioCross LicensingExpand your market reach
26 Intellectual Property Rights MonitoringWhy should you be on the lookout?LachesEarly licensing opportunitiesStop infringers before they pick up steam (and financial leverage)Protect your brandOppose newly published/granted patents and trademarks while you still canSources:USPTO, trade publications, icerocket (social media), technorati (blogs)Third party monitoring services:Thomson, Mark Monitor, Corsearch
28 Intellectual Property Rights IP EnforcementPatentsThe dangers of sending out letters accusing others of patent infringementYou can still enforce your patent even if you don’t practice your inventionDon’t sit on your patent rights and if you threaten sue, you should follow upTrademarksDon’t sit on your trademark rights and if you threaten sue, you should follow upDon’t send or respond to cease and desist letters without consulting competent counsel
29 Thank You! The Jacobs Law, LLC Legal Issues in Startups: From Company Formation to Intellectual Property RightsThank You! The Jacobs Law, LLC