temple university: legal 101 business planning workshop february 25, 2014 presented by geoffrey...

Temple University:

Legal 101 Business Planning Workshop

February 25, 2014

Presented by Geoffrey Schwartz and Joseph Holovachuk.

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Considerations

• Structuring the Company• Legal Pitfalls to Avoid• Intellectual Property Issues• Tips About Business Plans

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Structuring the Company

• Choice of Entity−“C” Corporation−“S” Corporation−Limited Liability Company (LLC)−Others

• Partnerships• Sole Proprietorship

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• Considerations:−Size/Complexity−Liability−Tax−Funding Needs and Sources−Costs−Exit Strategy

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• “C” Corporation−Most common type of entity−Shareholders generally not responsible for

liabilities−No restrictions on

• who can be a shareholder• number of shareholders

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• “C” Corporation− Capital Structure:

• Classes/Series of Stock• Common, Preferred, Convertible Preferred,

Convertible Debt• Warrants/Options

− Owners are “stockholders” or “shareholders”− Board of Directors

• Advisory Board− Charter/Bylaws

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• “C” Corporation−Advantages:

• Familiarity• Ownership Flexibility• Equity Flexibility

−Disadvantages:• Double Taxation• No Pass Through of Losses

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• “S” Corporation−Shareholders generally not responsible for

liabilities−Single level of tax−Restrictions on

• who can be a shareholder• number of shareholders

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• “S” Corporations−Advantages:

• “Tax Efficient”• Pass Through of Losses

−Disadvantages:• One Class of Stock• Limitations on Ownership

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• Limited Liability Company−Owners generally not responsible for

liabilities−Single level of tax−No restrictions on

• number or types of owners• number of classes of equity

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• Limited Liability Company (LLC)− Capital Structure:

• Membership Interests or “Units”• Common, Preferred, Convertible Preferred,

Convertible Debt• “Profits Interests”

− Owners are “members”− Member-managed vs. Manager-managed− Operating Agreement

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• Limited Liability Company− Advantages:

• “Tax Efficient”• Pass Through of Losses• Ownership Flexibility• “Profits Interests”

− Disadvantages:• Investment Limitations• Administrative Burden• Self-Employment Taxes

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• Important Agreements:− Employee/Consulting Agreements

• Non-disclosure and assignment of invention• Non-compete and non-solicitation• Vesting provisions

− Stockholders Agreement (Corporation only)− Operating Agreements (LLC only)− License Agreements− Customer Contracts

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• Financing the Business− Who?

• Founders• “Friends and Family”• “Angel” Investors• Venture Funds

− How?• Equity• Debt/Convertible Debt• Bridge Loans• Venture Debt• Other

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• Financing the Business (cont.)−Valuation−Dilution

• 20% of $10M > 100% of $0

−Control

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Legal Pitfalls to Avoid

• Wrong Structure• Personal Liability• Unprotected Intellectual Property• Sloppy (or No) Recordkeeping• Oral Agreements• Tax Issues• Employment Issues• Securities Laws

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Overview

• Why is IP Important• IP Basics for Entrepreneurs to Know

− Patent

− Trademark

− Copyright

− Trade Secrets

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Why is IP important?

• Intellectual Property is an umbrella term encompassing creations of the mind, literary and artistic works, designs, and marks used in commerce.

• What goes into creating IP?− time− capital− resources− experience

• Benefits− Fosters innovation− Creates and supports high-paying jobs− Drives economic growth and competitiveness− Rewards Entrepreneurs

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How to the different types of IP interplay with one another?

• Patents, trademarks, and copyrights protect different types of intellectual property. − A patent protects an invention− A trademark protects names and logos used on goods− A copyright protects an original artistic or literary work− A trade secret protects information not generally known in the

trade against unauthorized commercial use by others• Example – you develop a new type of coffee cup

− Apply for a patent to protect the invention of the cup− Apply for a trademark to protect the brand name of the cup− Register a copyright for an advertisement that you use to market

the cup

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Patents Basics for Entrepreneurs to Know

• What legal rights do patents provide?• What types of inventions are patentable?• What are the legal requirements for patentability? • What are the contents of a patent? • What are the best practices associated with patents?

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What legal rights do patents provide?

• A patent is a limited monopoly whereby the patent holder is granted the exclusive right to make, use, and sell the patented innovation for a limited period of time.

• The patent is viewed as a “contract with society”− Inventor provides society with disclosure of the invention.

− Inventor receives a 20 year monopoly to exclude others from practicing the claimed invention

• The “contract with society” is intended to encourage the investment of time and resources into the development of new and useful discoveries.

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Patentable

“. . . any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.”

Not Patentable

• Laws of nature• Natural phenomena• Abstract ideas

What types of inventions are patentable?

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What are the legal requirements for patentability?

• Utility – it must be useful• Novelty – it must be new • Non-obviousness – it can’t be a mere variation of what

was done before• Written Description – application must:

− must fully disclose invention

− must be enabling

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What are the contents of a patent?

• A patent generally includes:− a description of the invention

− one or more drawings illustrating the invention

− at least one claim defining the invention• The claims provide the metes and bounds of the right

that the patent confers to exclude others from “trespassing” on the invention.

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Recent law changes in the United States

• The United States recently transitioned from a “first to invent system” to a “first to file” system.−Under to the old system, the first inventor to

invent wins the patent, even over a prior application-filer.

−Under the new system, the first inventor to file wins the patent over second filer of same subject matter

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Recent law changes in the United States (continued)

• The new system is really a “first to disclose” system − Once an inventor discloses his or her invention

publicly, he or she has one year to file a patent application

− The public disclosure prevents anyone else from filing a patent application even if they invented the same invention before the disclosure.

• Note - the majority of other countries require “absolute novelty” – any disclosure could be prior art.

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Benefits and Drawbacks of Patent Protection for Entrepreneurs

Benefits• Protect innovation • Hinder competition• Provide collateral for

investment• Improve bargaining position

and attractiveness to investors

• Promote image as “innovative” company

• Provide royalty revenue• Recover R&D costs

Drawbacks• Expense• There is a risk that no patent

will issue for a filed application.

• Once filed, there is a long period before a patent issues.

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What are the best practices associated with patents?

• Be aware of what your company’s innovations− For any innovations that will be publicly disclosed, consider

filing a patent application prior to disclosure.

− For smaller companies, ensure that core technology is protected by one or more patents.

• Be aware of your competitive landscape− Perform a prior art search prior to filing any patent

applications.

− Receive opinions of counsel prior to rolling out any major new products.

− Monitor competitors’ patent filings and litigation activity.

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Trademarks Basics for Entrepreneurs to Know

• What legal rights do trademarks provide?• What are the legal requirements for a trademark? • How are marks categorized?• Why register your mark?• What are the symbols associated with a trademark?• What are the best practices associated with

trademarks?

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What legal rights do trademarks provide?

• A trademark is word, name, symbol, or device that identifies and distinguishes the source of the goods of one party from those of others.

• Federal trademark law prevents one party from using a mark which is likely to confuse consumers as to the source or sponsorship of goods or services. − The first to use is referred to as the “senior user.”

− Subsequent users are “junior users.” • The mark owner is solely responsible for enforcement

of trademark rights.

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What are the legal requirements for a trademark?

• Legal rights begin to accrue upon usage in connection with offering goods or services.

• Rights are limited to the geographic region in which the goods or services are offered.

• A trademark may be eligible for federal registration if− the mark is not descriptive and

− the mark is not likely to be confused with any pending or registered marks.

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How are marks categorized?

• Marks fall into one of four categories: − Fanciful marks are invented words with no dictionary or

other known meaning

− Arbitrary - known meaning that have but no association/relationship with the goods protected

− Suggestive marks suggest, but do not describe, qualities or a connection to the goods or services.

− Descriptive marks are marks are words or designs that describe the goods and/or services

• The strongest marks are fanciful marks and arbitrary marks because they are inherently distinctive.

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Why register your mark?

• Registration with the USPTO confers significant statutory benefits on the registration, such as− provides nationwide priority based on the filing date

− discourages others from using confusingly similar marks

− provides the right to file a trademark infringement lawsuit in federal court and to obtain monetary remedies

− provides the ability to prevent importation of infringing foreign goods

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What are the symbols are associated with a trademark?

• “TM” is used to indicate a mark is used in connection with goods.

• “SM” is used to indicate a mark used in connection with services.

• ® is used to indicate that a mark is federally registered; it should never be used unless a mark is actually federally registered.

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What are the best practices with respect to trademarks?

• Before filing a trademark/service mark application, consider:− Would there be any likelihood of confusion with existing

marks?

− Is the mark “strong” and non-descriptive?

− Will the public is likely to be able to remember, pronounce, and spell the selected mark?

− Will the mark have an undesired or offensive meaning if translated into a foreign language?

• Trademark searches should be performed by counsel to determine if the mark is available.

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Copyrights Basics for Entrepreneurs to Know

• What legal rights do copyrights provide?• What can be protected by copyright?• When does protection arise?• What is a work for hire?• What are the benefits of registration?• What are the best practices?

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What legal rights do copyrights provide?

• Under the U.S. Copyright Act of 1976, the owner of a copyright has exclusive rights to:− reproduce the work

− prepare derivative works

− distribute copies

− display the work publicly

− perform the work publicly• What works are protected by copyright?

− Basically, any work consisting of a modicum of creativity and reduced to a tangible medium of expression, including source code and user interfaces

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What legal rights do copyrights provide (continued)?

•For works created after January 1, 1978, the term of copyright for a particular work depends on several factors− copyright protection lasts for the life of the author plus an

additional 70 years.

− For an anonymous work, a pseudonymous work, or a work made for hire, the copyright lasts for a term of 95 years from the year of its first publication or a term of 120 years from the year of its creation, whichever expires first.

•For works first published prior to 1978, the term of the copyright will vary according to a variety of factors.

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What can be protected by copyright?

• Copyrightable works include the following categories:− literary works

− musical works, including any accompanying words

− dramatic works, including any accompanying music

− pantomimes and choreographic works

− pictorial, graphic, and sculptural works

− motion pictures and other audiovisual works

− sound recordings

− architectural works• These categories are used broadly.

− For example, computer programs may be regis tered as “literary works.”

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When does copyright protection under the U.S. Copyright Act arise?

• When the work is created in fixed form, the work is immediately protected and the author can immediately assert rights of ownership

• No publication, registration, or other action in the Copyright Office is required to secure copyright.

• The use of a copyright notice is no longer required, although its use still has various benefits.

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What is a work for hire?

• A “work made for hire” may be − a work made by an employee within the scope of

his/her employment− a work which is specially ordered and the author

and other party agree in writing that the work is a "work made for hire"

• The employer is deemed to be the author and therefore the owner of the copyright.

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What are the benefits of registration?

• Although registration is not a requirement for protection, it provides several legal advantages• establishes public record of a copyright claim in a work• may provide evidentiary benefits and increased damage

awards during litigation • allows the owner to record the registration with the U.S.

Customs Service to prevent importation of items infringing the copyright

• Registration may be made at any time within the life of the copyright by the author or the owner of exclusive rights that make up the copyright.

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What are the best practices with respect to copyrights?

• Provide a copyright notice on all important documents and other tangible works. − The notice should include

• The symbol © (the letter C in a circle)• The year of first publication of the work. • The name of the owner of copyright in the work

− Example: © 2014 Joe’s Coffee Inc.• Consider registration for any important materials,

including source code.• For any works generated by non-employees, ensure

that there is an agreement in place specifying that any work produced will be a “work made for hire.”

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Trade Secrets Basics for Entrepreneurs to Know

• What legal rights do trade secrets provide?• Why use trade secrets rather than patents?• How does trade secret protection arise? • What are the risks of trade secrets?• What are the best practices associated with trade

secrets?

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What legal rights do trade secrets provide?

• A trade secret is confidential and proprietary information which a party desires to keep secret.

• Trade secrets are protected by state law, which can vary in terms of its scope and protections.

• Generally, injunctive relief and possibly damages may be available if a trade secret is misappropriated.

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Why use trade secrets rather than patents?

• May be less expensive- only need to spend what is necessary to keep the information secret, for example− keep facilities secure

− non-disclosure agreements from employees and vendors • Information protected by trade secret doesn’t need to be

“patentable.”• By definition, a trade secret is not disclosed to the public,

which could provide competitive advantages in some situations.

• The term of protection for a trade secret has the potential to last forever - as long as the invention is kept a secret

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How does trade secret protection arise?

• Under most statutory definitions, to establish the existence of a trade secret, one must show that the information alleged to be a trade secret is− of an appropriate subject matter to be protected as a

trade secret;

− not a matter of common knowledge in the trade and not readily ascertainable by proper means;

− of value; and

− reasonable precautions have been taken under the circumstances to maintain secrecy.

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What are the risks of trade secrets?

• If a party does not take steps to keep its confidential and proprietary information secret, then it may lose protection as a trade secret.

• For example, if a party discloses its customer list to the public or allows its employees to disclose this information, it probably won’t be able to prevent a former employee or competitor from using the customer list.

• No protection against those who independently discover or reverse-engineer the secret.

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What are the best practices associated with trade secrets?

• For materials that are important to the business, consider whether patent protection is appropriate.

• Use legal contracts to protect the secret.− These agreements typically include non-disclosure

agreements and non-compete agreements.

− Often, these agreements are included as part of an employee agreement that is signed at the beginning of employment.

• Educate employees on the need for secrecy.• Ensure that the facilities, including the computing

resources used, adequately protect the secret.

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Conclusion

• There are various forms of Intellectual Property available to entrepreneurs.− A patents protects an invention.

− A trademark protects brand names and logos used on goods and services.

− A copyright protects an original artistic or literary work.

− A trade secret protects technological and commercial information not generally known in the trade against unauthorized commercial use by others.

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Tips About Business Plans

• Good Executive Summary• The Problem and Your Solution• Lingo/Buzzwords• Market• Value Proposition• Sources and Uses of Funds• Financials and Projections• Organization• Typos

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BERWYN400 Berwyn Park899 Cassatt Road

Berwyn, PA 19312-1183610.640.7800

FAX 610.640.7835

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100 Market Street P.O. Box 1181

Harrisburg, PA 17108-1181717.255.1155

FAX 717.238.0575

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212.808.2700FAX 212.286.9806

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www.pepperlaw.com

Our Locations

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Pepper has expanded from its Philadelphia origins to 11 locations.

Pepper Locations

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For more information, visit www.pepperlaw.com.

temple university: legal 101 business planning workshop february 25, 2014 presented by geoffrey...

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