One of the biggest questions small business owners or founders have when it comes to early stage business issues is when do they need to hire an attorney and how do they pick one. I will explain what I think are important qualities and how an attorney can be invaluable, even before the company is formed.
A good startup (some people spell start-up, some use startup) or business attorney needs to be able to see a wide variety of potential issues the company may face and be able to address those with the company or founders. If they simply form a corporation and provide some initial shareholder agreements, bylaws, resolutions, or other initial documentation, that is a valuable service, but there is much more to be examined and addressed in an early stage business. There are many legal or business issues, such as what intellectual property protection is or needs to be in place (e.g. patents, trademarks, non-disclosure agreements), advise the founders about securities laws relating to issuing stock or raising money, preparing for human resources and hiring (e.g. explaining that you can’t just call someone an independent contractor or 1099 and avoid payroll tax withholding obligations), and when to get someone involved in drafting or reviewing contracts. While it is true that “startup law” is really mostly about basic formation and protection of business entities and possibly help with closing initial rounds of funding, the attorney should have a wide general knowledge of many aspects of business and law.
In this day of a new app being developed every day, how does the company owner or management know who owns the code developed and when they could lose control over it?
Most issues of ownership for software code fall into areas of copyright (a form of intellectual property or IP), since they are usually “written works of authorship” and primarily covered by US copyright law. Copyright protection provides the author with protection from reproduction by others. There are times when works can be reproduced without violating a copyright under things such as the “fair-use doctrine,” such as when sample pages from a book are reprinted in a blog with commentary by the blog author about their thoughts or criticisms about what is being said in the book. The rights for copyright protection are generally given to the original author of the work for long periods of time (anywhere from 70 years to over 120 years depending upon all the facts). After that amount of time has passed, the work is considered in the public domain and others can copy it without worrying about infringement.
When someone starts a company, they usually have an idea or vision and a passion to bring that idea or vision to market. Many founders get stuck in a difficult spot that most commonly comes up in the process of raising money. This is what I call a double-edged sword for startup founders, i.e. ownership and control of the company.
Many founders start to form a deep bond with their ideas and visions that are embodied in their new company. They take ownership of those ideas and the company. During the growth phase, they are asked to slowly give up some control of that company, usually through dilution of their ownership % by private sales of stock. One major identified reason that startups face major problems and may result in the company failing is the inability to give up control when the company starts to grow. New investors are coming in to get an ownership stake at a very risky stage in a pre-revenue company in exchange for potentially very high rewards. Part of what investors look for in investments are the ideas or vision, management team, and the passion of that team to drive the company to growth. If the founders are only focused on an exit where they go public or are acquired and retire early rich, investors will be put off by those founders who seem to care more about their own personal wealth than having a successful company. If Mark Zuckerberg would have pitched to investors that he was going to take Facebook public and make the company’s stock worth billions within two years, he would probably not have gotten many of those early investors, at least the experienced ones.
Part VI) Internet & Tech Company IP Protection
So you are working on the hottest new startup and want to know how to protect your ideas when you are out raising money and recruiting new engineers and designers. Here is a brief overview of the types of intellectual property (IP), ways to protect them, and tips for your startup. I will focus on some of the more common issues in internet and tech related companies, although some of these issues appear in other contexts. This information is meant to be an educational overview only and should not be used as a substitute for legal advice or considered an exhaustive discussion of all IP issues. Facts & circumstances can vary, as do laws and regulations by state or other territory, so you should consult with a local licensed attorney to be sure you are properly protected.
Copyright is a protection for original works of authorship that must be tangible. You can’t use copyright protection to protect an idea until that idea is put into a tangible form. The most common ideas people have of copyright is usually with authors who write film scripts or books where they often see the words “copyright” or a c with a circle around it and things like the name of the author and year next to it. The idea of the book is not protected by copyright law, it is when the book is written is when it becomes tangible and subject to copyright laws. In the internet and software context, source and object code can be protected under copyright laws if they are an expression of an idea, not if they are simply the idea themselves.
Many founders are asked during the funding process for a “cap table.” So what exactly is a cap table and where do you get one?
In this article, I will explain what cap tables are, how to prepare one, review capitalization, and the initial accounting associated with startups. This article is meant to be educational only and should not be used as legal advice. Laws and regulations can vary by state and particular circumstance, so if you have specific questions, you should consult a local licensed attorney.
People need to have a basic understanding of what capitalization of a company means before they can really understand what a cap table is. Capitalization is a term that deals with the capital structure of the company. It is made up of the amounts and types of financing used by a company. Types of financing include common stock (which can include founder’s stock), preferred stock, retained earnings, and debt. It provides a general overview of the company’s debt and equity (See Part I to understand equity). You add the long term debt, equity, and retained earnings together for the normal total number. Most people are familiar with a version of this called market capitalization or market cap. That is essentially taking the number of issued shares of common stock times the company’s current price per share for a total number of market cap. It is one number used to determine an estimated value of the company as a whole. It can also change due to accounting changes due to various transactions.