Mason & Shephard The Ugly, the Bad and the Good Sean Arend April 2007

The Ugly n Documents Broadly Worded n Talk to ATS Customers n Using Employer Resources, Customer Lists n No IP Protection n Prior Invention Disclosure n Investors don’t invest in lawsuits!

The Bad n Relying on “Our Interpretation” n Letter to Co-Worker n Non-Solicit n Inexperience with VCs n Option Proceeds n Residuals Clause

Residuals Clause n Purpose – “use” only n Avoid appearance of impropriety n Allow for mobility in workforce n Protect against liability caused by unintentional use of information retained in memories n OK, if not overly broad n Subject to formal IP rights (prohibit use) n Unaided memory n General ideas, concepts (this the one term that requires adjustment in the Intelisoft NDA)

The Good n Programmed on Vacation/Off- Time with Own PC n Nova Does Not Research or Sell in the Area n Role as mgr of documentation n No “Anti-Moonlighting” n Questionable Enforceability

Enforceability Issues n Non-competes and public policy n Ability to earn a livelihood n Limited by time, scope and geography (must be reasonable) n Employee’s position and activities considered n Inventions n Developed on own time without Company resources n Unrelated to Company’s business

Sample Statutory Notice n In accordance with Section 2872 of the California Labor Code, the foregoing Agreement between you and the Company does not require you to assign or offer to assign to the Company any invention that you developed entirely on your own time without using the Company’s equipment, supplies, facilities or trade secret information except for those inventions that either: n 1.Relate at the time of conception or reduction to practice of the invention to the Company’s business, or actual or demonstrably anticipated research or development of the Company; or n 2.Result from any work performed by you for the Company. n To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable.

The Sequel n Read Agreements Before You Sign n Keep Copies of Every Agreement in Exact Form You Signed It n Maintain Good Relationships with Supervisor, Legal, Human Resources and Senior Officers n Be Aware of Company Treatment of Others Who Leave

The Sequel (cont.) n Be Honest When You Do Communicate n Be Strategic About When, With Whom and How You Communicate n Look for “Win-Win” Positioning With Company (equity to employer?) n Seek Legal Advice in Timely Manner

The Role of Legal Counsel n Help companies develop a legal and capital structure appropriate for nature of business and plans for raising capital n Help design and implement strategy to protect and exploit intellectual property n Provide introductions to financing sources n Help structure and negotiate financing transactions n Help structure and negotiate strategic transactions and commercial agreements

The Role of Legal Counsel (continued) n Early involvement of legal counsel can anticipate issues and avoid mistakes that are costly and difficult to fix later n Do it right the first time! n Pay me (less) now or pay me (more) later

Start-Up Issues n Entity Formation n Founder Stock n Employee Intellectual Property Issues n Raising Capital from Outside Investors n Intellectual Property Strategy

Top Legal Mistakes of Start-Up Companies n Inappropriate entity or capital structure n Failing to anticipate possible split-up of founders n Not obtaining IP rights from founders, employees, consultants n Incautiously hiring former employees of a competitor n Selling stock to unaccredited investors

Top Legal Mistakes (continued) n Indiscriminate issuance of (or promises of) equity for services, small investments, promises n Failing to resolve conflicts with others’ IP rights early n Not developing coherent strategy to protect and exploit IP n Failing to establish trade secret protection

Choosing an Attorney n Large or Small Firm n Referrals n “Fit” n Technology n Responsiveness n Experience with Start-Ups n Cost

Working With an Attorney n Drafting n Term Sheets n Organization n Pro-Active n Attorney-Client Privilege