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

From time to time, clients ask me to review their employment offer letters.  Here is a summary of what I believe every offer letter should convey to the prospective employee from the business and legal perspectives.

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Earlier this week, I was called by a professional services provider (“Chelsea”) who was interested in my services. Chelsea had presented a confidentiality agreement – which she had found somewhere – to a prospective client for a large project. The prospect marked up the agreement pretty heavily, in ways Chelsea did not understand, and she wanted to make sure that her legal interests were protected.

I asked Chelsea to forward the marked-up agreement to me so I could see how much work I would have to do to help her. Within one minute, I could see the source of the problem. I called Chelsea. An edited transcript of our conversation follows:

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BusyBox Logo

Erik Anderson developed certain software that he contributed to BusyBox, a compact set of embedded Linux utilities licensed under the GNU General Public License, Version 2 (the “GPL”). In October 2008, Anderson registered a copyright on the code that he contributed.

On September 2, 2009, Anderson’s counsel notified Westinghouse that it was infringing Anderson’s copyright because it was distributing BusyBox – both integrated into Westinghouse televisions and separately with other software – on terms that are more restrictive than the GPL. Westinghouse continued infringing Anderson’s copyright.

Anderson and the Software Freedom Conservancy brought suit against Westinghouse and 13 other defendants on December 14, 2009. Westinghouse initially mounted a defense, but stopped participating in the suit when it filed for bankruptcy.

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One of the great legal myths in some circles is that anyone can cancel any contract within a certain number of days of entering into it. That’s just not true – though you may have cancellation rights under certain circumstances if you are a consumer (rather than a business).

In California, those rights have been summarized by the Department of Consumer Affairs’ “Consumer Transactions with Statutory Contract Cancellation Rights: Legal Guide K-6“.

Some of the more interesting points made in the Guide:

• There is no cancellation period for automobile sales and leases.
• There is an indefinite cancellation period for dance studio services and pre-need funeral contracts.
• There is a 30-day cancellation period for mail or telephone sales orders that have not been filled.

The second portion of the Guide discusses general contract cancellation rights based on circumstances such as fraud, duress, undue influence, or illegality.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

A couple of weeks ago, I answered a question on Avvo about who can sign a contract on behalf of a corporation. This issue comes up from time to time, so I will discuss it at some length in this post.

Authorization to sign contracts is addressed in the corporation’s bylaws and / or in resolutions of the board of directors.

If specific authorizations are set forth in the bylaws, changing those authorizations can be a bit of a hassle, because the bylaws must be amended. As a result, I prefer to have specific authorizations established by the board, with the board’s powers being established by the bylaws. Here is a typical such bylaws provision:

Executing Corporate Contracts. Except as otherwise provided in the articles or in these bylaws, the board of directors by resolution may authorize any officer, officers, agent, or agents to enter into any contract or to execute any instrument in the name of and on behalf of the corporation. This authority may be general or it may be confined to one or more specific matters. No officer, agent, employee, or other person purporting to act on behalf of the corporation shall have any power or authority to bind the corporation in any way, to pledge the corporation’s credit, or to render the corporation liable for any purpose or in any amount, unless that person was acting with authority duly granted by the board of directors as provided in these bylaws, or unless an unauthorized act was later ratified by the corporation.

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When my European clients execute agreements, they routinely initial the bottom of each page, in addition to signing at the signature blocks. Here in the U.S., I see that approach rarely; it is customary merely to sign at the signature blocks.

Several weeks ago I posted a LinkedIn question about this difference. Here are some of the insights that I gained from my colleagues:

• The obvious reason for initialing each page is make it difficult for a party to change the content of an agreement once it is signed. However, with widespread exchange of agreements as e-mail attachments and indefinite storage those e-mails, it usually is easy to reconstruct the final version of an agreement in just a few minutes.
• In the U.S., real property agreements and estate planning documents often are initialed – perhaps because the likelihood of a dispute years later is relatively high.
• Conversely, attorneys with securities or mergers and acquisitions practices, or other commercial practices with lengthy agreements, rely solely on signatures because clients do not want to waste time initialing dozens of pages.
• Nowadays, some agreements are signed digitally, i.e., there is no human signature at all, let alone initials, on the document.

My conclusion: There are some types of agreements that should be initialed. However, in most business transactions, initialing each page is a waste of time.

Related post: How detailed should a legal document be?

Photo credit: Luiz Fernando Pilz via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com

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

An acquaintance recently showed be one of the worst contracts I have ever seen – one of the worst in the sense of unfair and unbalanced, and perhaps even unconscionable.

The company in question provides contract personnel for IT projects. Here is the agreement that candidates have to sign to be proposed for a client’s project [emphasis added]:

1. In Consideration of the time, effort and expenses to be borne by _______________ (hereinafter referred to as Company) for submitting & interviewing you/your resume for a possible [position] assignment, you give the Company an exclusive authorization to submit you as a candidate to the client for such assignment.
2. During the term whereof you will not permit or authorize any other agency or individual to submit you as a candidate for this assignment and agree that you will not offer your services directly or indirectly to the client/clients introduced by the Company to you.
3. In addition, it us understood that you will be available exclusively to the Company for 3 business days from the time of Interview and agree to join the project if selected. You may also be required to travel to other locations as per client’s instructions.
4. Further it is to affirm that you will not back out from starting the project after you candidature has been confirmed by the Company’s client.
5. In the event that you breach the provisions of this Agreement, you agree to pay the Company as liquidated damages and not as a penalty a further sum of US Dollars Ten Thousand.  You acknowledge that liquidated damages in such amount is reasonable under the circumstances in light of the fact that significant damages and expenses will be suffered or incurred by the Company and in recognition of the difficulty and further expense of proving the exact amount thereof.
6. It is understood that this is not an offer or a contract of employment. If you are engaged for the above assignment, it will be pursuant to a separate written agreement with the Company.

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I recently answered an Avvo question about whether personal financial problems would create trouble for the LLC that an individual was forming. The question and answer, substantially edited, are provided below.

Q. I am starting a new company. I wish to establish an LLC. I had a recent foreclosure and they are coming at me for 70k on a 3rd against the property. I also have a credit card judgment for 18k and 30k of other outstanding debt. Question is whether an LLC can protect me. I have investors placing 50-100k in this project and i cannot have any issues moving forward. [Emphasis added.]

A. You will not be personally responsible for the LLC’s obligations (unless you provide a personal guaranty, and assuming there are no “alter ego” problems), and the LLC will not be liable for your personal obligations.

However, it is possible that a personal creditor could seize your LLC membership interest (or the economic portion thereof). For that reason, the LLC Operating Agreement should have detailed membership transfer restrictions and related provisions (e.g., regarding voting rights in the event that membership is transferred to an unapproved transferee).

Photo credit: Thomas Picard via stock.xchng

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

I recently received questions about whether and why Spousal Consents are necessary with respect to certain business-ownership agreements. Here is a summary of the most important points that you need to know.

California is a community property state. If, during marriage, an individual acquires an interest in a business, the individual’s spouse has a community-property interest in that business.

LLC Operating Agreements and corporate Shareholder Agreements often have restrictions on transfers of interests so that founders will not be forced to work with undesirable transferees. Those restrictions could be undercut, however, if an individual’s interest were transferred, by operation of law – such as in the event of divorce or death – to a spouse.

Accordingly, it is customary to have a spouse (or, similarly, a domestic partner) agree to the terms of the underlying agreement via a Spousal Consent. That way, the business and the other owners maximize the likelihood that they can enforce the transfer restrictions against the spouse.

A sample Spousal Consent is available to registered users on the Downloads page.

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Follow-up: A real-life example of an entrepreneur who lost half of his interest in a corporation because he failed to enter into a shareholder agreement, with spousal consent, that included share-transfer restrictions is available on Avvo.

Photo credit: Kostya Kisleyko via stock.xchng

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

Almost a year ago, I posted IP Warranties and Indemnification: How Much is Reasonable? This post addresses a related subject: If you get the other party to agree to indemnify you, who will be around to satisfy the obligation?

A client is in the process of acquiring all of the rights to certain software, which was developed by several recent college graduates who formed a limited liability company (LLC). The client knew to ask for indemnification against claims that the software infringes any third party’s intellectual property rights.

What the client had not thought about, however, was whether the LLC could satisfy the indemnification obligation – which is unlikely, given that the LLC probably (a) has few assets and (b) will be dissolved once the transaction is consummated.

Accordingly, I recommended that we include in the agreement the LLC members’ covenant to satisfy the indemnification obligation if the LLC, itself, doesn’t. The members may be unhappy, but if they want the transaction badly enough, they will agree.

Lesson: An indemnification obligation is only as valuable as the party takes it on.

Photo credit: Anna H-G via stock.xchng

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