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 Entity
Formation |
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Selecting between a “C” Corporation, “S”
Corporation or LLC will have real ramifications for the early
stage technology company. Ramifications for entity selection
can include:
- increased self employment taxes
- increased legal and accounting expense
at the early stage when cash flow is critical
- inability to enter into a tax free
merger - the exit strategy of choice for many technology
companies
- inability to deduct reimbursements
of medical expenses
- appearing inexperienced
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| Intellectual
Property |
Trademarks
A protectable trademark is frequently the best barrier to entry
for technology companies. A protectable trademark is the best
way to protect a company’s marketing investment and the
good will generated in the market place. Any business model
that has a component of “we’ll be first to market”
or “we’ll deliver better service” must possess
a protectable trademark or risk losing the advantage. To obtain
a protectable trademark, a proper search, analysis and opinion
is required.
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Copyrights
Most software is protected with a combination of copyright
law and trade secrecy law. (Many companies also use patents
to attempt to protect their software or the processes inherent
in the software). A firm grasp of copyright law is essential
to any software or content licensing, especially when a business
model is hinged upon the license of software from another party.
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Trade Secrets
Many times the best strategy for protecting intangible
property is to keep it secret. Failure to adopt the appropriate
policies and procedures to keep “it” secret can
cause you to lose “it” forever.
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Patents
A patent is a relatively inexpensive means to attempt
to protect the novel aspects of a venture. Although the value
of a business method patent can be debated, the bottom line
is that a patent is not very expensive and it could deliver
significant benefits. Most early stage technology companies
apply for one or more patents and many investors like to see
that one or more patent applications have been filed.
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Confidentiality/Nondisclosure Agreements
Even standard confidentiality agreements (frequently
referred to as “NDAs” – nondisclosure agreements)
have exceptions big enough to drive a truck through so that
they remain “signable” by both parties without protracted
negotiations. A good form NDA is a basic tool of business, and
knowing when a customized NDA is needed in certain transactions
can be the difference between moving the business forward and
dropping it in the sewer by accident.
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Website Terms of Use
Appropriate Website terms of use is a must for all
companies offering any good or service over the Internet.
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| Employee
Agreements |
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Employment agreements clarify the terms of separation, commit
the founders to the same boat and provide investors assurance
that the boat in which their capital resides is the same boat
in which the valuable intellectual property of the company
resides.
Noncompete agreements (frequently within employment
agreements) discourage a management break-up that might result
in two companies pursuing the same original business plan.
Employment agreements and noncompete agreements protect the
venture and the individual adventurers who commit to the venture.
Contrary to myth, noncompete agreements are
enforceable in Georgia, if drafted properly.
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| Raising
Capital |
What type of capital should I raise?
"Green" works quite well for many, yet "strategic"
is better, albeit not always available. Remember that "dollars"
are attached to "investors" to whom you will have
to answer and with whom you will have to work. Once you take
an investor's money, you can't just ignore the investor.
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How do I seek venture capital?
Persistently - VC capital is hard to come by today
for recently minted entrepreneurs. The capital is theoretically
out there, yet you need experience, proof of concept and persistence
to close. Vet the business plan with experienced folk, use warm
introductions to VCs and practice, practice, practice answering
the tough questions. Before chasing VC money, you must understand
how a venture capital firm works as a VC fund's objectives may
be misaligned with your objectives. Chasing VC money is time
consuming - if you'll never get it, don't waste the time.
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Should I "just wing it" in
the VC presentation?
No - you'll likely be branded a fool in the tight VC
community. Prepare for the VC pitch with someone who knows what
to expect - as if you want your personal reputation to grow
from the pitch, regardless of whether the VC thinks the idea
is worth funding. The company presentation should be honed to
the point that the only issues remaining to discuss are the
idea, the plan for implementation and the management team composition.
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How do I seek "friends & family" capital?
Ideally, use a private placement memorandum. In certain
instances, a stock purchase agreement with risk factors will
do the trick.
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Do I need a PPM?
A private placement memorandum is important for raising
capital from groups of investors and for qualifying for certain
exemptions to securities laws. VCs will invest without a PPM
as VCs typically provide the first draft paper work to close
on the investment, and in the word of one VC, "there
ain't anything in a PPM that is gonna help me." However,
many prospective investors will conclude that you are not
serious unless you have a well drafted PPM. PPMs serve legal
and business purposes.
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Is it legal to sell stock to anyone?
No - the sale must fall within an exemption in order
to legally sell unregistered securities. "Securities"
include stock, options, warrants and convertible debt. You should
plan your capital raising efforts such that you don't "run
out" of exemptions.
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| Employment
& Noncompete Agreements |
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Employment agreements clarify the terms of separation, commit
the founders to the same boat and provide investors assurance
that the boat in which their capital resides is the same boat
in which the valuable intellectual property of the company
resides.
Noncompete agreements (frequently within employment
agreements) discourage a management break-up that might result
in two companies pursuing the same original business plan.
Employment agreements and noncompete agreements protect the
venture and the individual adventurers who commit to the venture.
Contrary to myth, noncompete agreements
are enforceable in Georgia, if drafted properly.
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| Exit
Strategies |
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Give serious thought to the exit strategy
before starting-up. The type of entity you select could limit
the types of exits available to you.
Keep the company ready for an exit
as you never know when opportunity will knock. Understanding
your likely exit will help make it happen.
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| Stock
Option Plan for Employees & Advisors |
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Talented employees and advisors will expect options in a technology
venture. An "incentive stock option plan" can deliver
options to employees with very favorable tax treatment for
the employees. Likewise, advisors that help launch the venture
at a time when cash flow is critical will be properly incented
to help the company succeed with options. Using a written
option plan for advisors can increase the available exemptions
for a company to the requirement that the sale of all securities
be registered. In some instances, a "phantom stock option
plan" is more appropriate. In some scenarios, phantom
plan delivers similar economic benefits to an "incentive
stock option plan" without creating additional owners
of the company.
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| Directors
& Board of Advisors |
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A good Board of Directors needs to bring
value to the table. Directors will need to consent to important
events and typically removing a Director could be uncomfortable
politically. A CEO must ensure Director expectations are set
properly and the Articles and Bylaws are drafted appropriately
to avoid problems.
A good Board of Advisors could
mean the difference between success and never getting off
the ground. Yet, one should avoid the "everybody is an
advisor because we don't know what we're doing" look.
Like Directors, Advisors need to bring contacts, experience,
capital or other value to the table.
Non-investing Directors and Advisors
are not for life - so don't marry them.
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| Shareholders'
Agreement |
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As on any journey, some founders will depart from the trail
to pursue other ventures for a variety of reasons before the
company arrives at the land of milk and honey. A good shareholder
agreement clarifies the terms of separation and ensures that
those remaining with the venture can continue the journey
without those dearly departed.
Possessing a well drafted shareholders
agreement reduces the likelihood of contention as the rules
of the game are clearly in writing.
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| Strategic
Alliances |
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Speed to market frequently requires partnering with others
for development, distribution, increased product/service offerings
etc. Balancing revenue generation, control and walk-away strategies
in a strategic alliance requires an attorney who knows the
negotiation points from experience and realizes the “point”
of the alliance is making money, not insulating the company
from every potential lightening strike.
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| Nondisclosure
Agreements |
NonDisclosure Agreements (aka NDAs or Confidentiality Agreements)
Even standard confidentiality have exceptions big enough to
drive a truck through so that they remain “signable”
by both parties without protracted negotiations. A good form
NDA is a basic tool of business, and knowing when a customized
NDA is needed in certain transactions can be the difference
between moving the business forward and dropping it in the sewer
by accident.
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| Software
Development |
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Many technology start-ups have a critical software development
agreement as the foundation for the company's only asset.
The development agreement needs to be solid or the foundation
may be unstable.
- Who is responsible for what?
- Can you switch development shops if needed without delay?
- Do you own what you need to own to implement your business
plan?
- Will your developer be your competitor?
- Is the price an estimate or is it firm?
- Are the deadlines, deadlines?
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| Back to Top |
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| General
Contractor/General Counsel Services |
Carter Allen, P.C. can help manage your legal projects and budgets
by acting as the general contractor/general counsel. Carter Allen, P.C. has its primary lawyers and firms it likes to work with,
but Carter Allen, P.C. is not “married” to them so
it can select and use the best lawyer/firm for your project.
We are not obligated to “use the lawyer down
the hall” if he/she is too busy.
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