Presented by The Jacobs Law, LLC Legal Issues in Startups: From Company Formation to Intellectual Property Rights Presented by The Jacobs Law, LLC Travis Jacobs Stefano D’Agostino Robert Mihail

Company Formation and Choice of Entity Domicile Massachusetts vs. Delaware. Types of Entities Series LLCs Massachusetts – Similar Statute to DE, but worth it? Delaware well-developed case law board protections ease of corporate filings and related state-law administrative issues

State Formation Fees

Company Formation and Choice of Entity State Fees Massachusetts Official 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. Delaware Official fees: Faster Service = Higher Cost LLC: 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

FORMATION FACTORS

FORMATION FACTORS How will Capital be obtained? Angel / VC / Other Current vs. Future Goals & Plans Tax Considerations – Entity Level vs. Pass-Through Owners – S-Corp Trap (Tax Exceptions, Citizenship, # of Members) Management Structure Type of Business – Insurance, Finance, Professional, Services Cost – Upfront and Annual

Company Formation and Choice of Entity LLCs vs. C Corporations LLCs are not taxed at the entity level LLC documentation is more elaborate and costly than corporate documentation State fees are higher for LLCs No stock options incentives for LLC employees Less corporate housekeeping required, faster decision making at management level IPO will likely require conversion to corporate form Why 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.

Company Formation and Choice of Entity When to incorporate The 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 running If 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

Company Formation and Choice of Entity Equity Split Equal shares rarely make sense – split should be based on prior and future expected contributions Questions 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?

Financing Crowdfunding What is crowdfunding? Pros Cons More time on developing the business and less time on fundraising Greater and more diverse investor pool Niche ideas can get funding Cons Investors lack the depth and due diligence tools available to VCs and sophisticated angels Only accredited investors can invest in equity crowdfunding High cap table

Financing Preferred Crowdfunding Models Product in return for contribution Equity/Debt Choose 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 Laws Only 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.

Financing VCs and Angel investors how to find them? Networking and warm introductions AngelList you should have your own lawyer

Product Development, Marketing and Operations

Product Development, Marketing and Operations Have an invention disclosure program in place Conduct freedom-to-operate before starting on product development direction and at set milestones Copyright notices Even after 1989, it is better to Include ©, date of first publication, name of author(s) and “All Rights reserved” on all copyrightable materials. Proper use of trademarks Nouns vs. adjectives TM vs. ® Consistent use with registration and across media

Product Development, Marketing and Operations Social media and the use of trademarks Hashtags, domain names and even stylized QR codes may contain trademarks Keyword triggering Definition: 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 results Placing the name of the competitor in the banner advertisement without identifying the true source of the advertisement – likelihood of confusion No problem if you merely and openly compare goods/services

Product Development, Marketing and Operations Social media and the use of trademarks Guidelines: Monitor your competitors’ use of your trademark Submit complaints to search engines on improper use of keywords Action against competitor/advertiser Consider context, pros and cons (misguided fan or intentional harm?) Do take action against counterfeiters, and misleading/inaccurate information If cost-effective, outbid competitors on keywords that are confusingly similar with your trademark Do a clearance search before using hashtags, domain names or any other marks online Avoid using third party famous marks (blurring/tarnishment) Be truthful and avoid confusion in comparative advertisement

Product Development, Marketing and Operations Social media and the use of trademarks Beware of imposters/fake reviewers Most social media platforms will take action and remove imposter postings Parody exception (Twitter) Action against improper use of trademarks on social media platforms is limited under Lanham Act and UDRP Current 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 accounts Solution: register your brands as usernames on popular/used the most by your consumers social media sites Create your own pages and use your mark commercially on such social media websites

Product Development, Marketing and Operations Privacy policy for collected customer information Ensure that IP discussed in marketing materials has been protected prior to marketing release Ensure that customer communication strategy complies with CAN-SPAM Ensure that use of social media complies with their terms of service Agreements with employees, consultants and outside developers must contain: Confidentiality and IP Assignment provisions

Intellectual Property Rights

Intellectual Property Rights The danger of wearing two hats: Review employment agreement with current/previous employer and look for IP assignment provisions Any pre-incorporation IP should be assigned to the company in writing tax-free transaction under Section 351 of the Internal Revenue Code Founders, employees and consultants should sign NDA and IP assignment agreements with the startup, otherwise this will become a problem in later investor due diligence.

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 Software When you use OSS, you enter into a license.

Intellectual Property Rights Develop an IP Strategy Build License Monitor Enforce

Intellectual Property Rights Building your IP portfolio Why build an IP portfolio? Investors like assets and barriers to entry since they provide security and leverage. Consider patents and trade secrets before any publication Register 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

Intellectual Property Rights

Intellectual Property Rights Licensing Monetize your IP portfolio Cross Licensing Expand your market reach

Intellectual Property Rights Monitoring Why should you be on the lookout? Laches Early licensing opportunities Stop infringers before they pick up steam (and financial leverage) Protect your brand Oppose newly published/granted patents and trademarks while you still can Sources: USPTO, trade publications, icerocket (social media), technorati (blogs) Third party monitoring services: Thomson, Mark Monitor, Corsearch

Intellectual Property Rights

Intellectual Property Rights IP Enforcement Patents The dangers of sending out letters accusing others of patent infringement You can still enforce your patent even if you don’t practice your invention Don’t sit on your patent rights and if you threaten sue, you should follow up Trademarks Don’t sit on your trademark rights and if you threaten sue, you should follow up Don’t send or respond to cease and desist letters without consulting competent counsel

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