Legal Issues¶
Lifecycle¶
IDK¶
- IP
- Secrecy
- Speed
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Become the industry-standard, lock-in customers, making it costly to switch
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You need to make sure you have correct owning rights. If you have an employed coder, you implicitly own the code; if you have an independent coder paid on a contract basis, you don’t implicitly own it.
- When you use open-source tools, make sure you’re complying with its license
IP¶
Intellectual Property
Valuable asset to raise capital
Types¶
| Meaning | Duration | Example | Cost | Enhance value | Protect expression | Protect function | |
|---|---|---|---|---|---|---|---|
| Trademark | Mark under which you sell goods and services Developing a name for yourself Do not pick descriptive words/phrases such as “Storage Technology, Analog Devices” www.uspto.gov | Unlimited as long as continued renewal | Apple, IBM, ThinkPad | Cheap | ✅ | ❌ | ❌ |
| Copyright | Right to make copies Federal registration helps Good for music, not for software | 75years | ✅ | ✅ | ❌ | ||
| Trade Secret | Secrets to give yourself an advantage in the market | Lasts as long as you can keep it secret with NDAs | Formula for Coke | ❌ | ✅ | ✅ | |
| Patent | Limited time monopoly Federally-granted right to any system/method that is new, non-obvious and useful Ownership \(\ne\) Right to use | 20years | Expensive | âś… | âś… | âś… | |
| Provisional Patent | Requires meaningful description of invention (claims not required) Fast Nothing happens at the PTO Whatever not mentioned might not covered when filing patent) | 1year | Cheap ( $130 for small entity, $65 for micro) | ||||
| University Licensing (Bayh-Dole Act) | Sponsored research Share royalties with inventors | ||||||
| Combination |
Patent¶
Requirements to get a patent¶
- Novel
- Something new: Prior art must be cited
- Useful
- Patentable subject matter
- Not previously sold/publicly described
- Enabling disclosure
- 1 year window in US only
- Not obvious “to one of ordinary skill in the art”
- Prior art “teaches against”
- Commercial success can show non-obviousness
Obtaining Patent¶
- Determine what to patent
- Determine when to patent
- Prepare one/more applications
- Prosecuting applications
When to file¶
- Before you lose rights
- Before a public disclosure
- Before an “on-sale” bar
- First to file wins under AIA
Parts¶
- Field of invention
- Background of invention
- “Prior Art”
- List of advantages compared to prior art
- Summary of invention
- Detailed description
- Examples of use
- Best mode: what is the best way to implement your invention
- Claims
- What exactly is your invention
If you ever want to enforce the patent, claims is the part that matters. Hence this is where you should spend money for someone else to do, not the other parts.
Typical IP Terms¶
| W/o Equity | W/ Equity | |
|---|---|---|
| Issue fees | $ 50-150k | $ 5-50k |
| Maintenance fees | ~50% of expected RR | ~50% of expected RR |
| Diligence | Can’t leave on shelf | Can’t leave on shelf |
| Royalty as % of Sales | 3-5% | 2-4% |
| Patent costs | $ 25-200k | $ 25-200k |
| Research Sponsorship | Not required | Not required |
Corporation Registration¶
- Delaware, US is the best place to register a company
- Why do it soon?
- Avoid personal liability
- Avoid “partner” liability
- Minimize personal taxes
- Section 83
- Rule
- If you receive “property in connection with providing services”
- You have ordinary income (taxed unto 35%) equal to fair market value of property minus What you paid
- How to overcome
- Separate the time when stock is issued to you from the investment by others, ie incorporate earlier, issue stock & make 83(b) election
- S corporation is preferable over a regular corporation, to avoid double taxation
Forms of Equity Compensation¶
- Restricted stock
- Stock sold/granted outright
- Starts capital gains/SEC holding periods running
- Subject to vesting and buyback by company
- If 83(b) election timely:
- modest/zero income at grant
- No further income unto stock sold, then capital gain
- No employer tax deduction for increase in value
- ISOs (Incentive Stock Options) tax-qualified stock options
- Options compelling with tax requirements
- Only for employees of corporation
- Exercise price = FMV on date of grant
- Typical exercise vesting over time
- No tax on grant/vesting
- Possible alternative minimum tax on exercise
- Taxation upon stock sale - capital grain if holding period requirements met (> 1yr from exercise and >2yers from grant data); no employer deduction
- NQOs (Non-Qualified Stock Options)
- Complete tax freedom in design, but there may be accounting issues
- Discounted options
- Repricing
- Performance vesting
- No tax on grant/vesting
- Ordinary income (and employer deduction) upon exercise
Vesting¶
Conditions on keeping what seems to have been awarded to you
- Time-based vesting
- 3-5yrs
- Monthly, quarterly, annual
- Performance vesting
- Design issues
- Accounting issues
- Accelerated vesting on change in control? IPO?
Forfeiture & Expiration of Vesting Rights¶
- How long after employment ends may vested options be exercised (ISO rules generally limit to 90days)
- Forfeiture if “bad boy” provision violated
- Consequences of violation of non-competition, non-solicitation agreements
Buyback Issues¶
Can company repurchase vested equity for fair value?
- Always
- When employment ends?
- If covenants violated?
- Never?
Securities¶
- Don’t offer to sell securities in a business plan
- Using the business plan to “sell securities” presents problems beyonds VC’s, corporate investors
- Properly paper all deals
- even friendly deals with friends/relatives to avoid misunderstandings
- Under federal law, all offers of securities must be registered with the SEC (very expensive), unless there is an exemption (eg: private placement)
- Avoid public pronouncements
- Blue sky (state securities) laws differ from state to state
- Non-compliance may trigger a recision offer, stop order, personal liability
Private placements
- Use an experienced securities law attorney
- Avoid dealing with individual investors who are not “accredited”
- Include “risk factors” in disclosure materials
- Provide a capitalization table
- SEC 10b-5: don’t make material misstatements of fact/omit to state material facts
- Legends/control number of documents
- Regulation D: Form D filing with SEC