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

In a November 30 article (“Trust Me”), the Wall Street Journal offers tips to entrepreneurs who want to gain credibility in the eyes of potential funding sources.

Based on a study of key individuals at 28 entrepreneurial ventures, the article asserts that “the most successful founders were masters at making symbolic gestures that signaled stability and credibility” in four vital areas:

1. Personal Credibility – Example: Revealing personal details that strike a chord with listeners
2. The Company’s Professionalism – Example: Thoughtfully prepared web page and business cards
3. The Track Record – Example: Showing a prototype or a controlled product demonstration
4. Emphasizing and Building Ties - Example: Being associated with prestigious stakeholders

Takeaway: In a tough, competitive economic environment – especially if you are an entrepreneur without a track record – sending a message of credibility is just as important as having a great  product, a large market, and the right management team.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

When a foreign company wants to start up in the U.S., it usually creates a separate corporation here so U.S. obligations and liabilities will not flow back to the overseas parent.

The U.S. corporation needs a federal Employer Identification Number (EIN) – at the very least, to open a bank account, even if the corporation will have no employees in the U.S. In a recent post on its website (Use of Nominees in the EIN Application Process), the Internal Revenue Service recently made it more difficult for foreign companies to obtain an EIN.

To obtain an EIN, the corporation typically provides the social security number (SSN) of a “principal officer”.  In the past, the IRS was rather vague as to what this term meant, stating that it referred to a “president, vice president, or other principal officer”. So, for example, if the corporation’s overseas president did not have an SSN because s/he never worked in the U.S., the corporation could temporarily appoint as vice president an individual who has an SSN, which the corporation then would use to apply for an EIN.

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From time to time, a client corporation wants to enter into a business transaction with one of its directors. An astute CEO, recognizing the potential for a conflict of interest, will ask whether and how such a transaction can take place without violating any laws or any fiduciary obligations to the corporation.

California Corporations Code Section 310 provides that, generally, a transaction between a corporation and one of its directors is permitted if, following disclosure of all material facts and the director’s interest in the transaction, it is approved either by a disinterested majority of the board of directors (usually the easier approach) or by the shareholders.

Absent such approval, the transaction will not be void or voidable if the interested director can prove that the transaction was fair and reasonable to the corporation when it was entered into.

Observation: Obtaining board or shareholder approval in advance usually is quicker, safer and less expensive than trying to prove that a transaction was fair and reasonable after the fact.

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.

This question was asked a few days ago (in different form) on LinkedIn. The following, slightly edited, is the response that I provided:

As is always the case with alleged copyright infringement, the outcome of the case will depend on the facts.

AFLAC v. Assurant, et al. illustrates where the line between what is protected and what is not protected can be drawn. Here is a brief summary:

• AFLAC created, with substantial expenditure of personnel time, certain new insurance policies that, it felt, would provide a competitive advantage because of the narrative style used in the policies.
• Defendant insurance companies copied substantial portions of AFLAC’s policies for their own use.
• AFLAC sued, alleging copyright infringement.
• The Federal District Court found infringement of the non-boilerplate portions of the policies and enjoined the defendants from selling their infringing policies for the pendency of the suit.

The moral: There is not likely to be a problem if you copy routine legal or business terms, but if you copy unique provisions that are important to another company’s business, you might find yourself on the short end of a copyright infringement lawsuit.

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.

I recently met a software developer who wants to start a business. He immediately started talking to me about obtaining a patent. Condensed a bit, our conversation went roughly as follows:

• Dana: Without giving away information that would jeopardize your ability to obtain a patent, what would the software do?
• Developer: It is enterprise customer relationship management (CRM) software.
• Dana: What is novel and non-obvious about it?
• Developer: It will be based on a unique algorithm.
• Dana: You cannot patent an algorithm.
• Developer: I can get a patent on software that implements an algorithm.
• Dana: Perhaps. But there are other means, such as trade secrets, that might adequately protect the software [cut off in mid-sentence]….
• Developer: VCs want to invest in companies that have patents.

Leaving aside the singular focus on VC funding – something that few entrepreneurs obtain (see Realistic Financing Options for Startup Companies) – the would-be entrepreneur was similarly myopic in focusing on a patent as the only type of intellectual property that matters.

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In Satterfield v. Simon & Schuster, the U.S. Court of Appeals for the Ninth Circuit held that the Telephone Consumer Protection Act (TCPA), 47 U.S.C. Section 227, protects consumers against unsolicited text messages to their mobile phones.

Subject to certain exceptions, the TCPA makes it unlawful “to make a call…using any any automatic telephone dialing system…to any telephone number assigned to a…cellular telephone service…” unless the called party has expressly consented to the call before it was placed.

Plaintiff Laci Sattefield had received an unsolicited text message from defendant Simon & Schuster, which (via a co-defendant marketing company) had obtained Satterfield’s mobile phone number from a provider of ringtones. Satterfield had agreed to terms that allowed the ringtone company and its affiliates to send text messages to her. Simon & Schuster was not an affiliate of that company.

The court’s most important holding was that although the TCPA was enacted before text messages existed, it is reasonable to interpret “call” under the TCPA to include both voice calls and text messages. The Ninth Circuit reversed the trial court’s summary judgment in defendants’ favor and remanded the case to the trial court for further proceedings.

The significance of this case: If your company wants to promote its goods or services via mobile text messages, be sure to obtain recipients’ permission to send those messages before they are sent.

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.

At SVASE‘s StartUp-U SFO event last week (Building the Team), a panel member said that a company should not have more than two founders. Although he did not provide additional details or support for his proposition, he got me thinking.

While I have had successful startup clients with up to three founders, four founders often present problems, usually because the founder with the money (the investor) wants more control than the other founders think is reasonable. Some examples:

• It took three tries (preferred shares, 51% of common shares, etc.) before shareholders could devise a scheme that gave the investor a mutually-acceptable level of control and financial return (agreement only being reached after the investor presented the third approach as “take it or leave it”).
• I prepared the operating agreement for a limited liability company (LLC) and presented it to the four members. After two weeks of review and discussion, the members concluded that they could not agree on control issues and stopped forming the business.
• On two separate occasions, four-person groups fell apart – shortly before our initial meeting was scheduled to take place – because of financial conflicts.

Recommendation: The greater the number of founders on your team, the more thoroughly you should examine control and financial issues to make sure you are in agreement before you start building your new business.

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Update: Please see How to pick a co-founder, an excellent post in which angel investor Naval Ravikant opines that two is the optimum number of founders.

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.

Earlier this year, I helped a client recover an Internet domain name that a disgruntled former employee had hijacked shortly after his employment had been terminated.

I prepared a complaint under ICANN‘s Uniform Domain-Name Dispute-Resolution Policy (the “UDRP”) and filed it with an ICANN-approved dispute-resolution provider.

Seven weeks later, the provider ruled in the client’s favor, and the domain name was returned. We were pleased, of course, but my client had to invest a lot of time, anxiety and money to achieve a successful resolution.

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Earlier this year, I wrote about how business founders who agree to split earnings from their venture can find that they have unintentionally created a general partnership (Beware the Unintended Partnership). The problem: Any partner can subject all of the partners to unlimited personal liability for partnership obligations!

This post provides an overview of how an unintended, or otherwise undesirable, California general partnership can be terminated.

Half or more of the partners can decide to wind up the business of the partnership and dissolve it (California Corporations Code Section 16801(1)).

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In Vernor v. Autodesk, the U.S. District Court for the Western District of Washington told Autodesk that despite the restrictions in its license agreement, Autodesk could not preclude its customer from selling AutoCAD software to a third party.

Background: Vernor makes his living selling goods on eBay. On several occasions, when he purchased copies of AutoCAD (at a garage sale or from an architectural firm) and offered them on eBay, Autodesk sent eBay DMCA takedown notices, to which Vernor replied with counter-notices; eBay then reinstated the auctions. Eventually, however, eBay suspended Vernor’s account for one month because of repeat copyright infringement. Vernor brought a suit for declaratory relief to preclude Autodesk from stopping Vernor’s sale of additional copies of AutoCAD on eBay.

The court acknowledged that the AutoCAD license was “nontransferable” and stated that the licensee may not “rent, lease, or transfer all or part of the Software, Documentation, or any rights granted hereunder to any other person without Autodesk’s prior written consent.”

The court pointed out, however, that under the first sale doctrine (17 U.S.C. Section 109(a)), a person who owns a lawfully-made copy of a copyrighted work may sell or otherwise dispose of the copy. The issue, thus, was whether the initial transfer of the AutoCAD packages from Autodesk to its customer was a sale for copyright purposes.

Acknowledging an irreconcilable conflict among Ninth Circuit Court of Appeal cases (thus we probably should expect Autodesk to appeal), the court held that the initial transfer of the software packages to the customer was a sale, for copyright purposes – even though use of the software was merely licensed – because the transferee was entitled to keep the software (there was no obligation at any time to return the package to Autodesk).

The lesson for software licensors: If you provide packaged software and want to preclude licensees from transferring the software to third parties, require that the software be returned to you when it is no longer used or when it is upgraded to a new version. Although this approach could be perceived as a hassle, and there is no guarantee that it will be effective, the Vernor decision puts licensors on notice that typical license terms, alone, may not suffice.

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.