The High-touch Legal Services® Blog • For Startup Companies

Many clients ask me to help them form new businesses. On several occasions, however, when there were two or more founders, the business never got off the ground. The common thread running through these situations is that while the founders thought that they had agreed on business terms, each party had unstated assumptions that came out only when legal documents were prepared.

If you find yourself talking about a new business with one or more other founders, here are some issues you should think about:

• If one founder will provide most or all of the financial investment, anticipate that founder will want a return of his investment before any profits are shared.
• If you are inclined to split all rights and obligations evenly, will that be an effective way to run the business? Will you be better off with a single manager who can make all but the most important decisions?
• If there is disagreement on an important issue, how will any deadlock be broken? Here, an agreed-upon dispute resolution procedure in the formation documents can be very helpful.
• When assigning roles, think not only about skills and expertise, but also about personal style. For example, does the presumptive CEO have the skills to manage people and the temperament to thrive in an ever-changing environment?
• Do the founders have comparable sophistication about business issues? If not, the less knowledgeable should be brought up to speed, preferably before counsel begins preparing formation documents.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

A couple of years ago I had one of my greatest thrills as an attorney.

My client owns several patents covering ways to improve the efficiency of certain types of lasers. We had succeeded in licensing a large company for one field of use. We were trying to sign up another company for a second field of use.

All business and legal issues had been resolved when, at the last minute, the licensee’s General Counsel demanded that my client convey, in addition to the patent license, certain broadly-defined rights to my client’s know-how. We refused, explaining that know-how never was part of the discussion, and if my client ever was interested in conveying know-how, it would come at a price. The parties then reached final agreement without the know-how provision.

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In the U.S., copyright protection subsists in a work of original authorship as soon as it is fixed in a tangible medium of expression. 17 U.S.C. Section 102 There is no requirement that the work be registered with the Copyright Office or that a copyright notice be affixed. As discussed below, however, there are circumstances when registration and affixing a notice are advisable.

17 U.S.C. Section 411(a) says that, generally, a copyright must be registered before the owner can bring suit for copyright infringement. Furthermore, Section 412 says that, generally, awards of statutory damages (Section 504(c)) and attorney’s fees (Section 505) are available only if the copyright has been registered. Given that the plaintiff’s actual damages or the defendant’s profits from infringement can be difficult and expensive to prove, awards of statutory damages and attorney’s fees might be the only way that a plaintiff can financially justify bringing an infringement suit.

Statutory damages are awarded in the court’s discretion, up to $30,000 for infringement of a given work (Section 504(c)(1)), or up to $150,000 in a case of willful infringement (Section 504(c)(2)). Note, however, that a defendant can significantly mitigate actual or statutory damages that otherwise would be awarded by proving a defense of “innocent infringement” (see, e.g., Section 402(d) with respect to sound recordings and Section 907 with respect to semiconductor chip products). Presence of a copyright notice can help defeat an innocent infringement defense.

In summary, if you believe there is a reasonable likelihood you will need to bring an infringement suit to enforce your rights as a copyright holder, you should:

• Place a copyright notice on the work and
• Register the copyright with the Copyright Office

Related post: Copyright: If You’re Going to Register, Register Right Away

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Sometimes, in an effort to reduce legal fees, clients conduct corporate annual meetings, and prepare minutes, on their own. Regrettably, if they do not know what they are doing, they can make a mess. Here is a quick overview of how to do things right.

Both California (Corporations Code Section 600(b)) and Delaware (General Corporation Law Section 211(b)) require that every corporation hold an annual meeting of its shareholders to elect directors for the coming year. (In the case of a Delaware corporation, however, the directors may be elected by written consent without calling a meeting.) Any other proper business may be transacted at the shareholder meeting.

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“Texting” is booming in popularity, especially among younger workers. Are your personnel sending text messages on company-provided devices? If so, you should know about the Ninth Circuit’s decision in Quon v. Arch Wireless Operating Co., Inc., 529 F.3d 892 (2008).

Update: On June 17, 2010, the U.S. Supreme Court, in City of Ontario v. Quon,  overturned the Ninth Circuit decision, ruling that the search of employee text messages did not violate the Fourth Amendment prohibition against unreasonable search and seizure because (a) it was motivated by a legitimate work-related purpose and (b) it was not excessive in scope. However, the Court expressly sidestepped the issue of whether employees have a reasonable expectation of privacy in their text messages, so the precautions listed at the end of this post still are relevant.

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From time to time, clients with established businesses have asked me to bring order to their legal affairs. Usually, the request results from an extraordinary, but desirable, event: an acquisition offer, a prospective new investor, or a restructuring for tax purposes. In each instance, however, the client quickly realized that it had not been paying close enough attention to legal documentation.

Although the clients are in different industries, their stories are similar. In essence, they limit their legal activities and expenditures to those required to bring business in the door, satisfy customers’ needs, and pay employees. This approach works on a day-to-day basis, yet when the extraordinary event comes up, the company suddenly needs to devote scarce resources to legal clean-up.

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Due diligence is a routine part of an investor’s decision whether to invest in a company. The company also should conduct its due diligence on the investor.

A couple of years ago, I worked with a company (“Client”) that provided e-mail security products. Previously, Client’s founder (“Founder”) had arranged for an equity investment by a company controlled by an individual in Southern California (“Investor”).

One of Founder’s huge mistakes was not seeking legal counsel to review the terms of the investment. Two of those terms proved to be disastrous for Founder:

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I was retained by a small company that had received a letter from one of its most important software vendors. The letter said the company “may have installed on its computers more copies of… software than it is licensed to use.” It then pointed out that unauthorized duplication of proprietary software violates federal copyright law and the applicable license agreement and that “potential remedies… are significant.” [emphasis added] The letter ended by requesting that my client:

• Audit all of its computers for copies of the vendor’s software and provide the audit results within three weeks
• Not destroy any installed software
• Not purchase any more of the vendor’s software until the matter is resolved

The client’s owner was concerned. She did not know of any illegally installed software; even worse, she was suspicious and uneasy about how the vendor could have such information.

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