common legal pitfalls in starting a company
TRANSCRIPT
Common Legal PitfallsAnd How to Avoid Them
7.16.14
Benjamin M. Hron
617.449.6584
@HronEsq
Common Legal PitfallsAnd How to Avoid Navigate Them
7.16.14
Benjamin M. Hron
617.449.6584
@HronEsq
Topics
1. Failing to adequately protect IP
2. Creating sloppy capital structures
3. Issuing securities willy-nilly
4. “Confusing” employees and contractors
5. Entering into onerous B2B contracts
Topics
1. Failing to adequately protect IP
2. Creating sloppy capital structures
3. Issuing securities willy-nilly
4. “Confusing” employees and contractors
5. Entering into onerous B2B contracts
Failing to adequately protect IP
♦ IP is probably your most valuable asset
– Not just patents, trademarks and copyrights … know-how, trade secrets, data, etc.
♦ Do you own it?
– Contribution of initial IP by founders
– “Work for Hire” doctrine
♦ How do you prevent others from using it?
– File with applicable government agency
– Internal Policies; Confidentiality/Non-compete Agreements
Creating sloppy capital structures
♦ Capital is a form of currency
– incentive and reward
– lack of transparency reduces value of currency
– supply and demand applies
♦ Factors to consider
– Capital structures are fluid
– Absolute v. Relative Ownership
♦ Vesting/repurchase rights
♦ Documentation
– If it wasn’t documented, did it happen?
Issuing securities willy-nilly
Important definitions:
♦ Security = essentially anything that has a value tied, directly or indirectly, to the success of the company.
♦ Willy-nilly = in a careless and unplanned way
Issuing securities willy-nilly
♦ Key considerations and consequences:
Consideration Consequence
Corporate Law Issuance invalid
Securities Law Investor rescission rights;
civil/criminal penalties
Tax Law Taxable income for recipient
Contracts Issuance invalid; breach
of contract lawsuit
“Confusing” employees and contractors
♦ Determined by law, not contract
– 20 factor federal test; 3 factor MA test
– Presumption in favor of employment
– Most (every??) startup violates MA law
♦ Consequences
– Back pay/overtime, if paid < min. wage
– Interest and penalties on late withholding taxes
– Civil & Criminal Penalties
♦ Solution: Treat people well …(it’s only cheating if you get caught)
Entering into onerous B2B contracts
♦ Know your rights and obligations
♦ Key Terms
– Representations and warranties
– Covenants
– Indemnification; Limitations on Liability
– Termination
♦ “Boilerplate”
– Dispute Resolution; Choice of Law/Forum
– Assignment
