The High-touch Legal Services® Blog…for Startups!

© 2009-2021 Dana H. Shultz

Wikileaks and Apple – an Opinion

WikiLeaks logo

The following is taken almost verbatim from my answer to a Quora question and the comments that followed. Q. Was the WikiLeaks iPhone app really violating the Apple App Store “Terms of Service”? Apple spokesperson stated that ?Apps must comply with local laws and may not put an individual or group in harm?s way.? Is that actually the case?

A. Yes (in my opinion). Section 3.2(b) of the iPhone Developer Program License Agreement says:

You will not use the Apple Software or any services for any unlawful or illegal activity, nor to develop any Application which would commit or facilitate the commission of a crime, or other tortious, unlawful or illegal act[.]

(more…)

Which Protections Should be Included in Online Terms of Use?

Knight's armor with shield and mace

This post is based on my response to a LawPivot question from an entrepreneur who wanted to know which protective provisions should be included in his website’s terms of use.

The provisions that bear most closely on protecting website owners include those pertaining to:

  • Disclaimer of warranties made by the owner
  • Limitations on the extent of the owner’s liability
  • Users’ warranties, especially as concerns any information that they may post
  • Users’ acceptable behavior policies, which set the stage for . . .
  • The owner’s right, in its sole discretion, to terminate use privileges
  • Users’ obligation to indemnify the website owner against liabilities that result from user activities
  • A requirement that any lawsuit related to the website be brought at a venue that is convenient for the owner
  • An arbitration provision as a way to avoid litigation (though I am not a big fan of arbitration because it can be expensive and precludes small-claims court, which can be relatively quick and inexpensive)

(more…)

Which Financial Information Must a Corporation Provide to its Shareholders?

Financial balance sheet

The CEO of a client recently asked about the level of financial detail that must be disclosed to a (troublesome) shareholder. The client corporation was formed in Delaware but is located in California, so both states’ laws apply.

California Corporations Code Section 1601 says, in relevant part (emphasis added), that “[t]he accounting books and records of any domestic corporation, and of any foreign corporation keeping any such records in this state or having its principal executive office in this state, shall be open to inspection upon the written demand on the corporation of any shareholder . . . during usual business hours, for a purpose reasonably related to such holder’s interests as a shareholder . . . . Such inspection . . . may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts.”

(more…)

International Contracts: Choice of Law when the Parties Disagree

Logo for OnStartups.com, where Dana Shultz discussed choice of law for international contracts

This post concerning international contracts is based on an OnStartups.com question (edited here) that I answered a few minutes ago. Q. I am drafting a website-development agreement with a firm in India. I am in Australia. I prefer that the agreement be governed by Australian law, but the developer prefers Indian law. What is normally done in similar circumstances?

A. Several thoughts based on my experience international contracts: (more…)

Does My New Employer Now Own My Software?

Quora logo

This post is adapted (with editing) from a Quora question that I answered. Q. I developed a software application on my own, then adapted it for my new employer, where it is used enterprise-wide. What are my ownership rights in this situation?

A. It would help to know whether you signed any type of proprietary information and inventions agreement with your employer. If you did, its terms (obviously) will be of great importance. You did not mention any such agreement, so I will assume, for the purposes of the discussion below, that there is no such agreement.

(more…)

What Must We Do if We’re Going to Be Acquired?

photo of document binders standing next to one another

A successful exit by acquisition is one of the great thrills of entrepreneurship. That exit does not come easily, however. This post discusses, by category, the most important documents and information that you will need to provide during the acquirer’s due diligence process.

Corporate Documentation

  • Articles of incorporation and bylaws, as amended
  • Minutes of board and shareholder meetings and actions
  • Share transfer ledger, including name and address of each shareholder
  • Agreements pertaining to shares and shareholders’ rights (buy-sell, voting rights, etc.)
  • List of holders of option or warrants and all applicable agreements

(more…)

Changing Online Terms of Use: How Detailed Must Notice Be?

Blue change button

In “Changing Online Terms of Use? Be Sure to Give Notice First!“, I explained that if you are going to change a website’s terms of use, you first need to provide notice that the terms have been changed and explain how they have been changed. This post – based on a Quora question and my answer – discusses how detailed the notice must be.

Unfortunately, there are no definitive rules regarding the level of detail that the notice must contain. I have two guidelines that I like to follow.

(more…)

Who Can Sign a Contract for an LLC?

Photo of hand holding a pen, symbolizing who can sign a contract

Several months ago, I answered the question Who Can Sign Contracts for a Corporation? This post addresses who can sign a contract for a limited liability company (LLC).

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The LLC’s Articles of Organization may address who can sign a contract, but this rarely occurs. The subject is more likely to be addressed in the Operating Agreement.

(more…)

Present Assignment is Important for Patents, Too

Stanford University logo

In “Copyright: Why You Need Presence of Mind about Present Assignments“, I wrote about why copyright assignments should be expressed as present assignments (e.g., “I hereby assign”) rather than obligations to assign in the future (e.g., “I hereby agree to assign”). This suggestion applies to assignment of patents, too.

A researcher at Stanford University, in collaboration with Roche predecessor Cetus, developed methods for quantifying Human Immunodeficiency Virus in human blood samples, and correlating those measurements to the therapeutic effectiveness of antiretroviral drugs.

(more…)

What Must We Do Regarding Corporate Board Meetings?

Logo of the Delaware Division of Corporations, symbolizing Delaware law about board meetings

The following question (edited for length) is from Founders Space. Q. What’s the minimum two founders must do regarding board meetings for a startup Delaware corporation doing business in California?

A. You should hold an annual stockholder meeting – or, alternatively, prepare a written consent – at which the stockholders elect the board of directors. See Delaware General Corporation Law Sections 211 and following. (more…)

Recover Your Domain Name, and Perhaps Some Money, Too

Display from defendant Nahum's website at the hijacked domain

From defendant Nahum’s website at the hijacked domain

Just over a year ago (Who is the Master of Your Domain? [or, How to Prevent Domain Name Hijacking]), I wrote about recovering a client’s domain name from a disgruntled former employee via ICANN’s Uniform Domain-Name Dispute-Resolution Policy. A recent case from the U.S. Court of Appeals for the Ninth Circuit (DSPT International v. Nahum) shows that under federal trademark law, an aggrieved domain name owner may be able to recover monetary damages, too.

Defendant Lucky Nahum worked for plaintiff DSPT International and worked with an outside supplier to set up DSPT’s website. Without telling DSPT’s owner, Nahum registered the website’s domain name in his own name.

(more…)

How Can I Revive My Suspended / Forfeited Entity?

Photo of man giving CPR to another man symbolizing post about how one can revive a suspended or forfeited corporation or LLC in California

Yesterday I wrote about how the status of a corporation or limited liability company (LLC) in California might be suspended or forfeited. Please see Why was My Corporation / LLC Suspended or Forfeited? This post explains how one may revive a suspended of forfeited entity.

Section references below reflect California’s new LLC law that took effect on January 1, 2014. See RULLCA Brings New LLC Laws to California in 2014.

The steps required to revive the entity depend on whether it was suspended or forfeited by the Secretary of State, by the Franchise Tax Board, or by both the SoS and the FTB: (more…)

Why was My Corporation / LLC Suspended or Forfeited?

California Secretary of State logo

If you do a business entity search using the California Secretary of State database, you might find that the status of a corporation or limited liability company (LLC) is “suspended” or “forfeited“. This post explains what those terms mean.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Corporations and LLCs have many “powers, rights and privileges” under California law. Those powers, rights and privileges can be taken away if the entity: (more…)

Something You Might Want to Do BEFORE You Kill Your Company

ET Brutus logo

Although failure of a company is no fun, this morning I received an e-mail on this topic that made me smile. Sent with the subject line “Sell Those Dogs!”, the e-mail discusses how ET Brutus* buys the securities of dead or dying companies so owners can recognize losses for tax purposes.

The following excerpts from the ET Brutus website summarize the company’s value proposition: (more…)

How to Resign as Agent for Service of Process (or Disclaim a Corporate Position)

California Secretary of State Form RA-100 - Resignation of Agent

In “Incorporation: Not All (States’) Agents are Created Equal“, I discussed how agents for service of process in California are less formal – in both their appointment and their responsibilities – than registered agents in other states. California agents can resign more easily, too.

Corporations Code Section 1503(a) states that an agent for service of process may resign simply by filing a signed and acknowledged written statement. The Secretary of State? has provided Form RA-100 for this purpose. (more…)

Incorporation: Not All (States’) Agents are Created Equal

"Agent for Service of Process" field from Statement of Information form

In a post last week (FreeRegisteredAgent.com Inaugurates Hall of Shame), I wrote that corporations (and other entities) formed in California do not require registered agents. After replying to a comment on that post and a separate e-mail from another reader, I realize that I should be more explicit about how an agent for service of process (in California) differs from a registered agent (in Delaware and many other states).

Here is the difference:

  • A registered agent typically is picked from a list maintained by the state and is paid for its services. (In Delaware, especially, registered agents are a major industry.) Furthermore, there generally is a requirement that the registered agent be available at its office sufficiently frequently to receive service of process, and it must forward to the corporation notice of its obligation to file an annual franchise tax report. (See, e.g., Delaware General Corporation Law Section 132.)
  • An agent for service of process can be any individual or any corporation (other than the one being formed, and subject to Corporations Code Section 1505) in California and need not necessarily be paid. So, for example, an individual forming a corporation in California can designate himself, or (presumably, with permission) his brother-in-law or his lawyer, as the corporation’s agent for service of process. Furthermore, the Corporations Code does not subject the agent obligations such as availability to receive service. California agents can resign more easily, too – see “How to Resign as Agent for Service of Process“.

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.

FreeRegisteredAgent.com Inaugurates Hall of Shame

Logo for FreeRegisteredAgent.com

I’ve run across another online incorporation / LLC formation service – FreeRegisteredAgent.com – with deficiencies that I must bring to readers’ attention. There now are enough of these companies that I have listed them on my new Hall of Shame page.

FreeRegisteredAgent.com’s claim to fame is that it provides registered-agent services at no charge for one year, and for $99 per year thereafter.

Their Free California Registered Agent Service page touts their service for California corporations, LLCs and other entities. The problem I have is that California does not require any entity to have a registered agent, so after the first year, companies are paying for a service that they don’t need!

(more…)

WSJ: Startup Obtains Financing via LinkedIn

Wall Street Journal website (WSJ.com) logo

Yesterday the Wall Street Journal published a fascinating article (Dear Contact: Send Cash) about a startup that obtained first-round funding of approximately $350,000 via LinkedIn.

The founder sent an appeal to his 700 contacts, offering ownership of 2% of his company in exchange for approximately $35,000. Within eight days, ten investors (the target number) were lined up

The founder must have had an impressive set of contacts. In any event, I’m impressed – this was a creative approach that saved the founder a huge amount of time.

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.

Are LLC Memberships Securities that Must be Registered?

California Department of Corporations logo

The following are (somewhat edited) an Avvo question and my answer: Q. Is it necessary to file a Form D securities exemption when forming a California limited liability company (LLC) and only issuing an interest to the forming members?

A. The short answer is “no“. The somewhat longer answer is as follows: (more…)

Lamebook v. Facebook: Trademark Infringement or Protected Parody?

Logo for Lamebook, whose trademark dispute with Facebook is the subject of this post

Lamebook is a site that features particularly lame or funny (and sometimes vulgar) Facebook posts. That company has brought suit against Facebook, seeking a declaratory judgment that Lamebook is not infringing Facebook’s trademark.

Several months ago, Facebook asked Lamebook to change the name of its service, alleging that the company’s name both infringes and dilutes Facebook’s famous mark. A letter from Facebook’s counsel lays out the elements of these allegations. (more…)

Corporate Suspension and Personal Liability are Two Different Things

LinkedIn logo

This is an edited version of a LinkedIn question and my answer. (They no longer are available there because LinkedIn removed its Q&A feature.) Q. In California, does suspension of a corporation automatically “pierce the corporate veil” resulting in personal liability (suspension for non-payment of taxes would seem to be the ultimate in “disregard of corporate formalities”)?

A. In my opinion, mere failure to pay taxes does not constitute disregard of corporate formalities or the basis for an alter ego finding. (more…)

Why did both the President and the Secretary of the Corporation Sign that Document?

John Hancock's signature

Contracts and other documents usually are signed on behalf of a party by a single representative (see Who Can Sign a Contract for a Corporation?). However, at least in California, important documents often are signed on behalf of a corporation by two officers, such as the President and the Secretary. This post explains the reason for two signatures.

Corporations Code Section 313 says, in relevant part (emphasis added) that: (more…)

No, You Can’t Marry a Corporation

Bride standing with groom kneeling

Now for something on the lighter side, a Quora question and my answer: Q. If marriage is a constitutionally protected right between people, and corporations are guaranteed the rights of a person, is it possible to marry a corporation? (Emphasis added.)

A. No. Marriage is reserved for natural persons (let’s not get into which pairs of natural persons). Corporations and other business entities are artificial persons.

Photo credit: Andrew C. 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.

Online Incorporation: It’s Time to Call Out Inadequate Providers

The Company Corporation's logo

I have not been a big fan of online incorporation and LLC formation services. (See, e.g., Forming an LLC Online: You Get What You Pay For.) However, the way a client recently was treated by one of these services – The Company Corporation – convinces me that it is time to expose their shortcomings and add them to the Hall of Shame page.

The client used The Company Corporation to incorporate in September 2006. Two months later, the client retained me to provide a variety of services. (more…)

How Old Can a Copyrighted Work Be?

Cover of Time Magazine published March 3, 1923

Cover of Time Magazine published March 3, 1923

Sometimes people want to know whether a work is so old that it it can be copied without any possibility of infringing anyone’s copyright. This post provides the answer (in the United States).

Before January 1, 1979 – when then-existing copyrights were automatically extended to 95 years from the end of the year in which the copyright was secured – copyrights were in effect for 28 years, with extension, if requested, for a second 28-year period (total of 56 years).

So, the earliest a work could have been copyrighted (which, at that time, required publication with a copyright notice) and still received the automatic extension was 56 years before January 1, 1979, i.e., January 1, 1923. The copyright for such a work would expire on December 31, 2018 (after 95 years).

(more…)

Directors’ Fiduciary Obligations: Delaware vs. California

Logo of Walt Disney Company, whose directors' fiduciary obligations were judged by Delaware law

Delaware: Paying Ovitz $130 million was not grossly negligent.

In Why are So Many Corporations Formed in Delaware?, I stated that Delaware law minimizes directors’ responsibility for decisions that have made. This post explains my point by comparing Delaware and California law regarding directors’ fiduciary obligations. (more…)

Which Financial Information Must a Private Company Provide to Employees with Vested Stock Options?

Quora logo

This post is based on a Quora question that I answered (Q and A are somewhat edited). Q. Which financial information must a private company provide to employees with vested stock options?

A. In California, Corporations Code Sections 1500 and 1501 specifies records that must be kept by each corporation. Shareholders’ rights to inspect records are set forth in Sections 1600 and 1601.

I know of no comparable statutory provisions with respect to holders of vested options, however. Unless the stock option plan grants you such rights, the easiest way for you to gain such rights would be to exercise your option with respect to one share and, then, exercise your rights as a shareholder.

Related post: Which Financial Information Must a Corporation Provide to its Shareholders?

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.

What is a Sublicense Agreement?

LinkedIn logo

This post is based on a LinkedIn question that I answered recently. (The Q&A no longer are available at LinkedIn, which has discontinued that feature.) Q. What is a sublicense agreement?

A. A license is an agreement by which the owner (the licensor) of something (in the case of the LinkedIn question, a trademark) grants, to someone else (the licensee), rights that are less that all of the rights to that thing. “Licensing 101“, and the download to which it refers, provide basic information about licensing. (more…)

In Delaware, No Par Value Can Cost a Bundle

Delaware Division of Corporations logo for post about shares without par value

In “How Many Shares Should My Corporation Authorize and Issue?“, I warned that “If you are forming a Delaware corporation with a large number of shares, be sure to specify a low par value, such as $0.0001 per share, to avoid having to pay excessive annual fees to the state.” This post gives more details about this issue.

There are two methods for calculating Delaware’s annual franchise tax. (more…)

How Can I Change the Name of My Corporation?

The word "CHANGE" on the side of a machine

Sometimes a corporation needs to change its name – perhaps its products or services have changed, or the name is similar to another company’s name, or there is a better way to suggest what makes the company special. This post explains how easy it is for California and Delaware corporations to change their names. (There are exceptions, but the following will apply under most circumstances.)

California corporations:

(more…)

Why Your Lawyer Need Not Sign an NDA

Cover page from California Business and Professions Code

Once in a while, when I send an engagement letter, the prospective client wants to add confidentiality provisions to protect its trade secrets. The following is the explanation that I provide as to why such provisions – let alone a separate nondisclosure agreement (NDA) – are not required in an attorney’s engagement letter.

California Business and Professions Code Section 6068 specifies the fundamental obligations of an attorney. Subsection (e)(1) states that each attorney must “maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” (Emphasis added.) Attorneys in other states have similar obligations.

(more…)

Copyright: Why You Need Presence of Mind about Present Assignments

One page from a calendar

In Independent Contractors: How to Assign Copyrights, I provided sample language for an independent contractor’s assignment of copyrights to a client. This post explains why the present assignment aspect of that language is critical.

Here (with emphasis added) is the relevant portion of the pivotal sentence:

Contractor hereby irrevocably assigns, transfers and conveys to Client all of its right, title and interest in and to the Deliverables, including complete, unconditional and worldwide ownership of all intellectual property rights in any draft or final version of the Deliverables.

(more…)

Forming an LLC: Figuring Out What’s Really Required

LinkedIn logo

Here (slightly edited) are a LinkedIn question and my answer (which no longer are available at LinkedIn because it Q&A feature was discontinued). Q. I need to get an operating agreement for my Nevada LLC startup. I plan on selling membership in the future. There are online services that do this for cheap, but I’m unsure about doing that. This is a bootstrapped startup, so I have very little/no cash to pay for an attorney at this point in time. Plus I haven’t been able to find a good referral to a NV business attorney.

A. I’m afraid that I can’t provide a useful direct answer to your question (I don’t know how to get something – especially something good – for nothing), but I can provide some warnings because I see several red flags popping up.

(more…)

NDA Nets Plaintiff $50 Million

Dur-a-Flex Logo

Dur-a-Flex v. Laticrete International illustrates the value of a well-drafted nondisclosure agreement (NDA) – not to mention one that includes an attorneys’ fee provision.

Dur-a-Flex developed a trade-secret process for producing colored sand. Laticrete was a long-time Dur-a-Flex customer and the only customer for this product.

When Laticrete’s orders dropped significantly, Dur-a-Flex suspected that Laticrete was using the Dur-a-Flex process in violation of the NDA that Laticrete had signed.

(more…)

What Lawyers Want from Social Media

Over the weekend, I presented “Social Media for Lawyers” with colleagues Mark Ressa and Brett Burlison at the State Bar of California Annual Meeting.

I estimate that we had approximately 60 attendees. (Pretty good, considering that there were prior presentations on social media at the four-day conference!)

Attendees’ area of greatest interest was search engine optimization (SEO) – how to show up on the first page (preferably, high on the first page) of relevant Google searches.

(more…)

Presenting “Social Media for Lawyers” at State Bar Annual Meeting

On Saturday (September 25), at 2:15 pm, I will be on a panel presenting “Social Media for Lawyers” at the State Bar of California’s 2010 Annual Meeting. With 25% of my new clients during the past year coming directly from my online activities, I have been asked to help fellow lawyers understand that the law must be practiced with an eye on the future, rather than being stuck in the past.

As the sole business / transactional lawyer on the panel (Mark Ressa practices family law, and Brett Burlison is a personal injury lawyer), I have a different perspective from that of my colleagues. The topics that I will discuss include:

  • Blogging successfully
  • Using social media sites (LinkedIn, Avvo) to generate blog traffic
  • Developing an effective social media methodology (why, who, what, where, when, how)
  • Complying with ethical requirements (testimonials, confidentiality)

* * *

Follow-up: What Lawyers Want from Social Media discusses what I saw and learned at the session and provides access to our PowerPoint slides.

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.

How to Assign a Patent Application to Your Startup

Detail from an illustration of a machine by Leonardo da Vinci symbolizing a patent application

Detail from an illustration of a machine by Leonardo da Vinci

Your invention is so novel and non-obvious that you have submitted a patent application to the U.S. Patent and Trademark Office. Good for you!

Furthermore, you have formed a legal entity to turn the patent, once it issues, into a revenue stream. (See Should I form an LLC or a corporation?)

This post explains how you can assign the patent application to your new entity so your startup company can begin conducting business. (more…)

Make Sure that Your Release Means What It Says

Title page from the California Civil Code enacted in 1872 for a post about the potential effect of Civil Code Section 1542 on a contractual release

Title page from the California Civil Code enacted in 1872 and published in 1880

I recently prepared a Stock Redemption Agreement pursuant to which one of the founders would leave a corporation (my client). The agreement included a General Release by which the parties would release one another from all liability. The corporation’s CEO had a difficult time understanding the need for, and the significance of, a provision that cited a particular Section of the California Civil Code.

California Civil Code Section 1542 says:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor. (more…)

How Can I Switch from a Sole Proprietorship to a Corporation?

Sample Articles of Incorporation

This post is based on (and is an edited version of) a Quora question and my answer. Q. How do you switch from a sole proprietorship to a corporation? You do, of course, want to keep all your intellectual property and brand and street cred and so on. Can you treat that as equity?

A. Yes, you can treat the assets of your sole proprietorship as the consideration for which your shares are issued. You need to create an agreement by which you (as an individual) assign those assets (including the intellectual property rights therein) to the corporation. This is, of course, a friendly transaction, so the assignment agreement can be simple – no need for endless pages of legal boilerplate to protect against litigation that never will occur.

Related post: How to Assign a Patent Application to Your Startup Company

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.

Foreign Companies: Form a Corporation when You Come to the U.S.

United States flag, symbolic of the desire to form a corporation when a foreign business comes to the US

I have seen a recent increase in the number of foreign companies inquiring about doing business in the U.S. Their most frequent question: Should they just open a branch office here, or should they form a corporation or other legal entity? They almost always form a corporation. Here’s why: (more…)

DMCA Takedown: How Soon is “Expeditiously”?

Copy of takedown notice on Dana Shultz letterhead

A client’s former employee / co-founder departed to form a competing business. Violating the client’s copyrights, he posted dozens of the client’s images on his website and blog. I sent takedown notices to the website’s and the blog’s service providers (see “Terms of Use and the Digital Millennium Copyright Act [DMCA]”). I wondered how expeditiously the service providers would respond.

17 USC Section 512(c)(1)(C) provides a “safe harbor” incentive for service providers to remove, or disable access to, infringing works expeditiously. Unfortunately, “expeditiously” is not defined (see “Defining Expeditious: Uncharted Territory of the DMCA Safe Harbor Provision“).

(more…)

Why Do We Need a Corporate Records Book?

Corporate Kit from Attorneys Corporation Service, Inc., symbolizing corporate records

Corporate Kit from Attorneys Corporation Service, Inc.

I recently answered a question on Quora. If you incorporate a company [in Delaware], should you purchase a corporate kit? My answer about corporate records books, and a follow-up exchange about providing records electronically, are reproduced, slightly edited, below.

A: When I form a corporation for a client, I include a corporate records kit in the fee (and do similarly for LLCs) because:

  • It is important – both to the company and to any shareholders or directors who may have an inspection right – that there be a single specified location where the complete, up-to-date corporate records book is kept.
  • The kit includes share certificates, which should be prepared – including applicable securities and restrictive legends – and signed to protect against allegations by third-parties that ownership interests were transferred to them.
  • The kit includes a corporate seal, which may (or may not) be helpful or necessary at some point.

(more…)

What Does the Chairman of the Board Do?

GavelEarlier today I answered the following Quora question: What does the Chairman of the Board do?

Here is the answer that I provided:

The Chairman of the Board does what the Bylaws and the Board of Directors say s/he will do. Here is some typical Bylaws language: (more…)

What Should We Put in an Employment Offer Letter?

Photo of a "Sign Here" sticker symbolizing an at-will employment offer letter

From time to time, clients ask me to review their current form of employment offer letter.

As a result, I am writing this post. It is a summary of what I believe every offer letter should convey to the prospective employee from the business and legal perspectives.

Offer Letter Business Terms

From the business perspective, the letter should lay out the most important characteristics of the position: (more…)

Need an Angel Investor? Consider AngelList

AngelList Logo

AngelList Logo

There are plenty of companies seeking seed-stage financing, and plenty of seed-stage investors. How can they find one another effectively? AngelList is one answer.

Started in February 2010, AngelList is a straightforward application of social-media principles: (more…)

Why are So Many Corporations Formed in Delaware?

Delaware Division of Corporations logo, symbolizing why so many corporations are formed in Delaware

I recently answered the question “Is it best to form an LLC in Delaware?” on Quora. In response to a user comment, I opined on why so many corporations are formed in Delaware. My opinion, slightly edited, is reproduced below.

First, I’ll point out that I have what may be a minority opinion, so others may well disagree. (more…)

Am I in Trouble if My Accountant Used His SSN to Get My Corporation’s EIN?

Internal Revenue Service logo

Late last year (see Foreign Company Alert: Obtaining an EIN may be your Biggest Challenge in the U.S.), I wrote about the procedure by which a U.S. entity may obtain an Employer Identification Number (EIN) when its foreign owner lacks a social security number (SSN). I recently answered an Avvo question about what to do when the specified procedure is not followed.

The questioner’s accountant had used his (the accountant’s) SSN to obtain an EIN online for his client’s corporation because the client’s foreign owner had no SSN. The client suspected – correctly – that this was not the right thing to do (the Internal Revenue Service “does not authorize” this action).

(more…)

If You Provide a DMCA Takedown Notice, Provide It Properly

Logo of Perfect 10, a company involved in DMCA takedown notice litigation

In Terms of Use and the Digital Millennium Copyright Act (DMCA) I described the six elements that a copyright owner must include in a DMCA takedown notice sent to a service provider that is hosting infringing content. Perfect 10 v. Google shows that a DMCA takedown notice will not be effective if it lacks the required information.

Perfect 10, which creates and sells photos of nude models, brought suit against Google, alleging, among other things, copyright infringement based on caching and hosting of photos.

(more…)

WSJ: Super-Angels Fill Funding Gap

Many startup companies are betwixt and between when it comes to funding: They need too much for angel investor groups, but too little for venture capitalists. According to the Wall Street Journal (‘Super Angels’ Alight), there is a new breed of investor that fills the gap, the “super angel”.

What makes these angels “super” is their ability to attract other investors. Whether collaborating with one another informally or through recently-formed funds, they can invest $1 million or so and be satisfied with an exit a few months to a few years later.

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.

Small-company CEOs Can Be Accused of Sexual Harassment, Too

Photo of Rita Risser

Rita Risser

I am especially pleased to welcome Rita Risser as a guest writer – not just because her post about sexual harassment is this blog’s first guest post, but because I have had the pleasure of knowing, and staying in touch with, Rita ever since we met at Boalt Hall.

As CEO of a small company, you may imagine that the recent resignation of HP’s CEO has no relevance to you and your organization. Think again.

Whenever employees or contractors are let go, they are more likely to bring claims for harassment, whistle-blowing and more. The worse the economy, the less likely they are to find other jobs and the more incentive they have to pursue alternative sources of income through lawsuits.

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Using Someone Else’s Agreement Might Be a Mistake

Paper stamped "Rejected"

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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Attention LLC Members: You Have the Right to Be Heard

Sample LLC Notice of Meeting of Members

I have written about annual meetings of corporations’ shareholders (Annual Meetings: The Basics). Although limited liability companies (LLCs) have no obligation to hold, and typically do not hold, annual meetings of their members, meetings of members can take place.

Section references? below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

For California LLCs,? meetings of members are governed by Corporations Code Section 17704.07.

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Open Source Developer Wins Big – But Can He Collect?

BusyBox Logo

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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When Should We Have our First Annual Meeting of Shareholders?

Rows of empty chairs

Having read Annual Meetings: The Basics, a fan of this blog asked the following question: When must we hold our first annual shareholder meeting?

The answer is stated by implication, rather than directly, in applicable statutes (which depend on the state of incorporation).

California Corporations Code Section 600(c) says, in relevant part:

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You May Be Able to Cancel that Contract – If You’re a Consumer

California Department of Consumer Affairs Logo

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.

Another Reason Why Employees Should Not Disclose Their Passwords

Computer screen showing user name and password for login

Their are obvious security-related reasons why businesses do not want employees to give their computer passwords the third parties. With the recent decision in Multiven v. Cisco Systems, the U.S. District Court for the Northern District of California has given us a legal reason, as well.

Peter Alfred-Adekeye (“Adekeye”), a former Cisco engineer, left Cisco to form plaintiff Multiven. After his departure, Adekeye used a Cisco employee’s password, with the employee’s permission, to download certain proprietary Cisco software.

(more…)

Forming an LLC Online: You Get What You Pay For

Mannequins with "sale" signs symbolizing forming an LLC online

Update (November 17, 2010): I have decided to start identifying by name providers of corporate and LLC online formation services who, in my opinion, have delivered inadequate service to my clients. (The clients used those providers before retaining me.) The inadequate provider referenced, below, in this post is Rocket Lawyer, which has been added to the Hall of Shame page.

Update (April 27, 2011): I had a cordial conversation this afternoon with Rocket Lawyer’s VP of Sales & Business Development. He acknowledged that, last year, Rocket Lawyer was using a filing service (filing operations are outsourced) that did not meet the company’s expectations. He reported that the current filing service is performing at a much higher level and that Rocket Lawyer is paying closer attention to ongoing support of its customers.

* * *

Almost a year ago, I suggested (in Can I form an LLC without a lawyer?) that entrepreneurs seeking to save money when forming a limited liability company would be better off buying a book from Nolo than using an online LLC formation service. I now believe that more than ever.

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Can I Assign My LLC Membership?

For Sale By Owner Sign

Recently I have received several questions about assigning LLC (limited liability company) memberships. Here is a brief summary of California law on this topic.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The applicable statutes are Corporations Code Sections 17705.01-17705.04. If assignment of membership interests (known as “transferable interests” under RULLCA) is not covered in the LLC’s Articles of Organization or Operating Agreement, the the following statutory provisions apply:

How Can I Protect the Look and Feel of My Website?

U.S. Patent and Trademark Office Seal, symbolizing trade dress and design patent protection of website look and feel

This post discusses whether and how you can protect your website’s “look and feel.

The reason you would want such protection: Your website has particularly effective visual and interactive elements that help promote your business. You would not want another website to copy those elements, thus make your website and your business less special.

Look and Feel as Trade Dress

Look and feel falls in the category of trade dress, i.e., visual appearance that signifies the source of a product or service. You may be able to obtain a federal trademark registration for the non-functional elements of the website’s look and feel and bring suit against infringers based on that registration. (more…)

Do I Need a Separate Corporation/LLC for My New Business?

Finger Pressing Start Button

Recently I have received questions from entrepreneurs who are starting a second line of business. They want to know whether the new business should be under the same legal entity – perhaps with a separate fictitious business name (FBN – or DBA for “doing business as”) – or under a separate corporation/LLC.

This is not really a legal issue: Either approach can work just fine. The differences between the two approaches are business-oriented.

(more…)

How the UDRP can Defeat a Cybersquatter

Logo of ICANN, which promulgated the UDRP

Someone has obtained a domain name that is the same as, or confusingly similar to, a trademark or service mark that you own. How can you take the domain name from this “cybersquatter”? The UDRP (explained below) may come to the rescue!

When he registered the domain name, the cybersquatter (the Registrant) agreed to ICANN’s Uniform Domain Name Dispute Resolution Policy (UDRP).

Under the UDRP, you (the Complainant) will be required to prove all of the following:

(i) The domain name is identical or confusingly similar to a trademark or service mark in which you have rights.
(ii) The Registrant has no rights or legitimate interests in respect of the domain name.
(iii) The domain name has been registered and is being used in bad faith.

(more…)

Where Do I Get a Business License?

Reduced image of San Jose business license applicationYou’ve started a new business. Don’t forget to apply for (and next year, renew) your business license!

Most cities (in some instances, counties) require that businesses located within their borders obtain what is commonly called a business license. In reality, this is an application to pay business taxes.

Here are links to the business license applications for several of California’s largest cities:

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.

Protecting Software: Keeping Trade Secrets while Registering Copyrights

Many software companies rely on a combination of copyright and trade secret protection for their products. There is a potential problem, however: The requirement to submit source code with a copyright registration is somewhat at odds with the confidentiality requirements of a trade secret.

Fortunately, the U.S Copyright Office offers some flexibility in its deposit requirements for software containing trade secrets. The applicant may deposit any of the following: (more…)

Every Partnership Needs an EIN

I recently met two individuals who formed a business partnership. They were pretty informal about the process: They had no written partnership agreement. More surprisingly, they had not obtained an employer identification number (EIN) from the Internal Revenue Service.

Failure to obtain an EIN was a legal mistake. The IRS’s Do You Need an EIN? page states that when a business is operated as a partnership, it must obtain an EIN. (more…)

Don’t Steal Your Former Employer’s Customers (Unless You’re Confident…)

Photo of a man with a finger blicking his lips, symbolizing that an employer's customers may be a trade secretMany people know that, when one leaves a job in California, the former employer typically cannot stop the former employee from working for a competitor. However, some people mistakenly believe that the right to compete includes the right to steal the former employer’s customers!

According to Civil Code Section 3426.1(d), a trade secret is “information…that [d]erives independent economic value…from not being generally known to the public…and [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” For many employers, a customer list is an important trade secret.

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Trade Secret Protection of Software has Limits

Developers of proprietary software typically rely copyright and trade secret protection of their works. A recent California case (Silvaco Data Systems v. Intel Corporation) illustrates how far trade secret protection does, and does not, go.

Silvaco develops and markets electronic circuit design software. Silvaco won a suit against Circuit Semantics, Inc., claiming that CSI, with the help of two former Silvaco employees, misappropriated Silvaco trade secrets, in the form of source code, by incorporating them into CSI’s software. Silvaco obtained an injunction against continued use of the technology incorporating its trade secrets.

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Foreign Parent + U.S. Sub = Legal Firewall

I have helped dozens of foreign companies establish subsidiaries here. Sometimes, the foreign company asks, “Do we really need to form a separate company in the U.S.? Can’t we just hire some people in the U.S. to work for our existing overseas entity?”

In responding, I make the following points: (more…)

Who Can Sign Contracts for a Corporation?

Photo of hand with pen on paper, symbolizing who can sign contracts for a corporationA couple of weeks ago, I answered a question on Avvo about who can sign contracts 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. (more…)

Professors Confirm Limits on Startup Interest in Patents

Last November, I wrote You Can Have a Successful Business Even if You Don?t Have a Patent. Many of the points that I made in that post are reiterated in an article that will be published this summer in the Berkeley Technology Law Journal.

The article, “High Technology Entrepreneurs and the Patent System”, is available as a Free Download on the Downloads page. Among the findings presented in the article:

  • Whereas life sciences companies see patents as critical, software and Internet companies rely more on copyrights and trademarks.
  • Patents are used to reduce competition and to attract capital; they do not provide strong incentives to innovate.
  • The major reason why companies do not apply for patents is that they are expensive to obtain and to enforce.
  • Many companies find it is more important to be the “first mover” than to obtain patents.

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.

WSJ: Startups can Pitch to Angels for Free

In an article published today (Start-Ups Get Free Chance to Pitch to Angel Investors), the Wall Street Journal discusses ways that startups can pitch to angel investors without having to pay a fee.

Thrust of the article: Some angel investment groups require that entrepreneurs who need funding pay for the right to present their businesses for consideration. Organizations fighting the “pay-to-pitch” approach include Open Angel Forum and AngelList.

Check out all posts about angel investors.

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.

Implied Copyright License: A Life-and-Death Example

Seal of the US Court of Appeals for the First Circuit, which decided an implied copyright license caseSeveral months ago, I wrote about the circumstances under which courts will find an implied copyright license if there has not been an assignment of copyright. (If You Don’t Set the Terms of a Copyright License, a Court Will) In a recent case (Estate of Hevia v. Portrio Corp.), the U.S. Court of Appeals for the First Circuit held that there was an implied copyright license in a partnership context.

The decedent, Roberto Hevia-Acosta, was an architect. Following his death, his estate and heirs waged an intensive legal battle against his business partner over copyrights in the decedent’s architectural designs.

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Should I Initial Every Page when I Sign an Agreement?

Photo of hand holding a pen, symbolizing the decision to initial every page of an agreementWhen my European clients execute agreements, they routinely initial every page, usually at the bottom, 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. [September 2013 update: Link to question no longer available because LinkedIn removed its Q&A feature.] Here are some of the insights that I gained from my colleagues:

Top Ten Intellectual Property Mistakes of Startup Entrepreneurs

The document Top Ten Intellectual Property Mistakes of Startup Entrepreneurs is available as a Free Download on the Downloads page.

Here are the ten mistakes that are discussed:

  1. Failing to use employee invention agreements
  2. Assuming that the company owns contractors’ work product
  3. Using another company’s license agreement
  4. Thinking that patents are the only IP that matters
  5. Filing a for provisional patent before the scope of the invention is clear
  6. Treating the federal government like non-governmental infringers
  7. Neglecting to identify and protect trade secrets
  8. Believing that “open source” means “no restrictions”
  9. Giving the “family jewels” to an overseas supplier
  10. Registering the wrong entity as the owner of IP

Related post: The Top Ten Legal Mistakes of Startup and Early-stage Companies

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.

Angels and Convertible Notes: Whether, When and Why

Don Dodge, a Developer Advocate at Google, wrote an informative post about the pros and cons of convertible notes for angel investments (What you should know about Angel Investors and Convertible Notes).

A convertible note is a debt instrument that can be converted into equity. The pros of convertible notes are well-known:

  • The hassle of valuing an early-stage company is avoided – the angel can convert to equity when the Series A venture financing takes place.
  • The terms of the note are straightforward – the principal amount and accrued interest can be converted into shares at a discount from (or with warrants applicable to) the Series A share price.
  • As a result, legal fees for a convertible note tend to be far lower than those for a Series A financing.

The con is that the angel might not receive an adequate return if the Series A is delayed or never takes place (for example, if the company is acquired). Dodge suggests that these scenarios can be addressed by building into the note a specified valuation that will apply (or will establish a minimum) if one of these events occurs.

The bottom line: Angels, like other investors, should think about how to protect their investments if events to not proceed as initially anticipated.

Related post: Realistic Financing Options for Startup Companies

Photo credit: Marina Garcia vis 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.

If You See a Contract Like This, DON’T SIGN IT!

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]: (more…)

Can Personal Creditors Threaten My LLC?

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.] (more…)

Why does our Operating Agreement have a Spousal Consent?

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.

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Fair Use, Trash Talk, and the DMCA

Over the weekend, I answered a LinkedIn question [no longer available there because LinkedIn ended its Q&A feature] about whether posting a copyrighted photo of another company’s product with disparaging comments about that product might be protected by the “fair use” defense to copyright infringement. I am reproducing the question and answer, in edited form, below.

Q. My website is copyrighted and the newest product is trademark and patent pending. The image was “clipped/copied” by an individual and placed on a website without my permission to do so. Am I right that this is not “fair use” of my work?

A. The “Fair Use” Defense: One Term, Two Different Meanings discusses the four elements of copyright fair use. The analysis always is highly fact-specific, so it is difficult to say whether use on cpaptalk.com qualifies for that defense, but I think there is a reasonable argument that it does.

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Funding Your LLC: Avoiding Mistakes

I recently answered an Avvo question about capital contributions and loans to an LLC. The question and answer are reproduced, in somewhat edited form, below.

Q: I am the sole member of an LLC. What is the best way to make capital contributions? Can I do this in the form of a loan? (more…)

Where to File Your Patent Case? Probably NOT Where You Think

Stanford Law School Professor Mark A. Lemley has published a draft paper, Where to File Your Patent Case.

Lemley started with the assumption that plaintiffs frequently look for forums that favor patentees, where cases go to trial (summary judgments strongly tending to favor defendants), and that move cases along quickly. Defendants are likely to want the opposite, a forum that is unlikely to send cases to jury trial, that regularly rules for defendants, and that takes a long time to do both.

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Doing Business in CA? Be Sure to Register

Seal of the California Secretary of State, which provides a registration form for a foerign entity doing business in CaliforniaSometimes California-based entrepreneurs think that they can avoid CA registration fees and taxes by forming their business entities in another state. Usually, that belief is incorrect. If the entity is doing business in CA, then it must register with the CA Secretary of State, even if the entity was formed elsewhere.

Section references and content below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014). (more…)

Should We Issue LLC Membership Certificates?

Picture of LLC membership certificatesA friend recently asked whether his limited liability company, which was seeking investors, should issue LLC membership certificates.

The Section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Here are the points that I made in my response. (more…)

SBIR: Federal Money for Small Technology Companies

SBIR logo

If your small technology company provides products or processes that might interest the U.S. government, you should know about the Small Business Innovation Research (SBIR) program.

The objective of SBIR is to provide qualified small businesses with opportunities to propose innovative ideas that meet the specific research and development needs of the federal government. (more…)

Why (not) form an S corporation?

Some companies are formed as S corporations to avoid “double taxation”: The corporation does not pay federal income tax. Instead, income flows through to the shareholders, who pay income taxes (as in a partnership).

This potential tax benefit is available, however, only if stringent requirements are met. Most notably:

  • There must not be more than 100 shareholders.
  • Permissible shareholders are limited to individuals (other than non-resident aliens), estates, tax-exempt organizations, and certain qualified trusts.
  • Only one class of stock is permitted.

Failure to meet a requirement, even if inadvertent, results in loss of S corporation status.

Entrepreneurs should think carefully about whether S corporation status is appropriate for the long term. Here’s why.

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Legal Fees: Avoiding Sticker Shock

I just got off the phone with the founder of a website that caters to small businesses. He commented that small-business owners routinely suffer sticker shock when they receive invoices from their attorneys. I responded that lawyers can do three things to reduce the likelihood that the amounts of their fees will be a surprise. (more…)

How Many Shares Should My Corporation Authorize and Issue?

Sample certificate showing number of shares owned by a corporation's shareholderThis post discusses the number of shares that a corporation should authorize, and the number of authorized shares that a corporation should issue.

On a couple of occasions, I have worked with founders whose corporations (prior to retaining me) issued a small number of their authorized shares.

In one instance, four founders formed a corporation that was authorized to issue 50,000 shares, but had issued (to themselves) fewer than 400. They asked me to help reallocate shares among them because, as time had passed, they saw that their respective contributions to the business differed from what they initially had expected.

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IP Indemnification: Who Will Be There to Satisfy the Obligation?

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.

Watch Out for “You Don’t Own It until You Pay”

A start-up entrepreneur recently told me about the agreement he signed with the developer of his website. The agreement has what I consider, from the entrepreneur’s perspective, a most pernicious provision: Ownership of the website, and its intellectual property rights, does not pass from the developer to his client until the fee is paid in full.

I understand why developers like this type of provision: It gives them extra leverage to ensure that they are paid. (more…)

WSJ: Specialty Lenders are Lending

In an article published today (Entrepreneurs Find Success With Specialty Lenders), the Wall Street Journal reported that some entrepreneurs who otherwise cannot obtain loans have been able to borrow from banks that specialize in niche industries.

As an example, the article cites Silicon Valley Bank, which caters to high-growth technology and life sciences firms.

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.

Cumulative Voting: Board Representation for Minority Shareholders

Photo of a ballot, symbolizing cumulative votingCumulative voting for corporate directors is a process by which each shareholder’s voting power is multiplied by the number of directors to be elected. The objective: By allocating all of their votes to one or a small number of directors, minority shareholders can ensure that their interests are represented on the board. (I.e., a majority shareholder will not automatically control all board seats.) (more…)

A Member can Withdraw from an LLC, Despite the Operating Agreement

Photo of an exit sign, symbolizing the right of a member to withdraw from an LLCFrom time to time, I am asked how a member of a limited liability company (LLC) can stop being a member. In legal terms, this is referred to as a member wishing to withdraw from an LLC.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Under this new law, the term “withdraw from a limited liability company” was changed to “dissociate as a member” or “withdraw as a member”.

A well-written Operating Agreement will address this question directly. It will specify the circumstances under which members may withdraw from an LLC, and the consequences of withdrawal.

(more…)

Court Says Tech Startups Special re Works Made for Hire

In a recently-decided case (JustMed v. Byce), the U.S. Court of Appeals for the Ninth Circuit decided that a software developer was an employee, rather than an independent contractor, even though the parties had completed almost no employment-related paperwork.

Byce took over development of JustMed’s software from an employee who had moved out of state. Byce’s compensation – the same as his predecessor’s – was 15,000 shares of JustMed stock (valued at $0.50 per share) per month.

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“Tea Party” Activists Seek Government Help re Trademarks

Protesters at the Philadelphia Tea Party on April 18, 2009

This is just too delicious: One group of “Tea Party” activists – known for opposing federal government intrusiveness – has brought suit against the registered Tea Party political party in the U.S. District Court for the Southern District of Florida (South Florida Tea Party, Inc. v. Tea Party). (more…)

Back to the Future? No, Back to the Past – Ancient NDA Discovered

A client recently was given, and asked me to review, a nondisclosure agreement that made me chuckle because it looked like something left over from decades ago. I was especially surprised because this NDA came from a well-known computer-products company.

Some of the document’s more endearing qualities: (more…)

Statements of Information: Easy is Good

Logo for CA Secretary of State for post about filing Statements of Incorpation

This post discusses Statements of Information, which corporations and limited liability companies need to file with the California Secretary of State.

When you form your corporation or LLC, the Secretary of State’s welcome letter will tell you to file a Statement of Information within 90 days.

You need to update a corporation’s Statement of Information every year. For an LLC, you need to update every two years every two years.

(more…)

If You Lose a Judgment and Don’t Pay, Your Domain Names Can be Seized

Office Depot won a judgment against John Zuccarini under the Anticybersquatting Consumer Protection Act of 1999 (15 U.S.C. Section 1125(d)) based on Zuccarini’s bad-faith registration of the domain name <offic-depot.com>, which was confusingly similar to <officedepot.com>.

Office Depot was unable to collect on its monetary judgment against Zuccarini, so it assigned that judgment to DS Holdings (“DSH”). DSH sought to levy against 190 <.com> domain names owned by Zuccarini and for which VeriSign controls the registry (a receiver having been assigned to auction off the domain names). Zuccarini (representing himself!) argued that DSH should be required to levy upon the domain names where their respective registrars are located, rather than at VeriSign’s single location. (more…)

Lawyers and Social Media: Ten Tips for Online Marketing Success

This post is off-topic – nothing to do with startup or early-stage companies – but that is one of the privileges of having my own blog! (I think of this as a treat for my lawyer friends.)

Next Wednesday evening (April 14), I will participate in a panel discussion on Effective Electronic Marketing for Lawyers sponsored by the Congressman Don Edwards Inn of Court.

My two handouts for the event are available as Free Downloads on the Downloads page:

  • Lawyers and Social Media: Ten Tips for Online Marketing Success
  • Lawyers, Social Media and Disclaimers: What, Where, When and Why

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.

Avoiding “Alter Ego” Problems: A To-Do List

Last year, I wrote (Beware Your Alter Ego) about how entrepreneurs sometimes lose the protection against personal liability supposedly offered by their corporations (or, similarly, their LLCs). This post – adapted from Counseling California Corporations by Continuing Education of the Bar (CEB) – provides detailed recommendations about what should be done to avoid “alter ego” problems.

Recommendations:

Independent Contractors: How to Assign Copyrights

After reading If You Don’t Set the Terms of a Copyright License, a Court Will, a (non-lawyer) friend wrote: “I work with subcontractors on a regular basis in the creative area (photographers, graphic artists, website designers, etc.).? Do you know where I can find a sample [copyright assignment provision]?”

(more…)

WSJ: More Funds for Startups, but Still Hard to Get

In an article yesterday, the Wall Street Journal reported that funding for startups is more plentiful than it was a year ago, but still is hard to come by (Start-Ups Chase Cash as Funds Trickle Back).

Among the phenomena discussed:

  • Angel investment groups that want to see profitability before they invest
  • Reduced availability of funds from home-equity and retirement-account loans because of lower? asset values
  • Dedication of additional money to protect existing investments rather than to start new investments
  • Availability of venture capital only if a company has a product or customers

Related post: Realistic Financing Options for Startup Companies

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.

Assessing Personal Liability – Read Formation Documents Carefully!

A client, majority shareholder in a California corporation, asked whether there was any way to make a minority shareholder pay part of the corporation’s losses to date. In this particular case, the answer was “no” – but the question got me thinking about when a corporate shareholder or LLC member might be have personal liability beyond the amount payable for the ownership interest.

The LLC section reference and content below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

A century ago, corporations routinely issued assessable shares, i.e., shares that carried an obligation for the shareholder to pay additional amounts to the corporation under certain circumstances, such as to cover losses or to buy property. Today, however, almost all shares are non-assessable.

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No, You Can’t Just Scrape Someone Else’s Website

The following question was posed recently on LinkedIn: Let’s say that I want to scrape amazon’s and ebay’s product reviews and use on another site? I want to understand the legal fall-out that may happen in doing so.

Here, slightly edited, is the answer that I provided:

  1. You would be committing copyright infringement.
  2. You would be breaching Amazon’s Conditions of Use, which expressly prohibit “any use of data mining, robots, or similar data gathering and extraction tools”.
  3. Similarly, you would be breaching ebay’s User Agreement, which says that “You agree that you will not use any robot, spider, scraper, or other automated means to access the sites for any purpose without our express handwritten permission.”
  4. Other companies’ sites with well-thought-out terms of use have similar prohibitions.

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.

Postal Service Stamp Infringes Copyright – Not Fair Use

Korean War Veterans Memorial - use of photo on postage stamp not fair use

Korean War Veterans Memorial

Several months ago, I wrote that the fair use” defense to copyright infringement often is poorly understood. The U.S. Postal Service illustrates this point. A recent court decision held that a postage stamp infringed the copyrights in certain sculptures and was not fair use thereof.

Frank Gaylord created, and registered the copyrights for, soldier sculptures in formation constituting part of the Korean War Veterans Memorial.Stamp with photo of Korean War Veterans memorial dtermined not fair use

John Alli took a photo of the Memorial. The Postal Service paid Alli $1,500 for the right to use that photo for a 37-cent stamp commemorating the 50th anniversary of the armistice of the Korean War. Alli told the Postal Service that it would need permission from the owner of the copyright in the sculptures; the Postal Service did not seek such permission. (more…)

Open Source Developer Prevails in Copyright Infringement Suit

Photo of model trains, subject of open source software involved in copyright infringement litigationA federal court of appeals held in 2008 that an open source developer case sue for copyright infringement despite the breadth of the open source license. The closely-watched case recently settled, meaning that the opinion may well be cited for many years to come.

Plaintiff Robert Jacobsen holds a copyright to certain computer programming code that he makes available for public download for free pursuant to the Artistic License, an open source license.

Defendants Matthew Katzer and Kamind Associates, Inc. develop commercial software products for the model train industry and hobbyists. Defendants copied certain materials from Jacobsen’s website and incorporated them into one of their software packages without following the terms of the Artistic License. Jacobsen sued for copyright infringement and moved for a preliminary injunction.

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Do VCs care where my company is incorporated?

Several weeks ago, a first-time entrepreneur called. He had read that venture capitalists prefer investing in Delaware corporations, and he sought my input on the subject.

I replied that, in my experience, incorporation either here in California or in Delaware is fine. Then I started wondering why what the entrepreneur read differed from what I had experienced.

I did some research and conducted an informal survey of a few VCs. Here are my tentative conclusions:

  • California-based VCs are comfortable investing in corporations that are formed in either CA or DE (thus my experience, because the vast majority of the VCs whom I know are here in the Bay Area).
  • VCs outside California have a preference for investing in Delaware-based corporations, though that preference can be weak or strong, depending on the VC. Even with a strong preference, however, a Delaware-preferring VC will invest in a corporation in another state if it is the right deal

Related posts:

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.

Should My Corporation Provide Stock Certificates to Shareholders?

Image of a stock certificate for a post about stock certificatesLet’s assume that you are one of the founders of a new corporation. Should the corporation provide stock certificates to shareholders when their shares are issued?

For most startups formed in California, the answer is “yes” – and not merely because the founders will feel good having tangible evidence of their ownership interests. (more…)

If You Don’t Set the Terms of a Copyright License, a Court Will

Picture of a pen sitting on a contract sighature line, symbolizing an implied copyright licenseAlmost a year ago, I wrote about why independent contractors (as contrasted to employees) own the copyrights in works that they create. As a result, a prudent customer will ensure that the contractor assigns its copyrights to the customer (Work Made for Hire – a Term Made for Confusion). This post discusses the implied copyright license that is granted in the absence of an assignment.

If there is no assignment provision, a court will determine that there is an implied license under the copyright. The rationale is that it would be unfair to deprive the customer of all rights in a work for which the customer has paid. The issue, then, will be the terms of the implied license. (more…)

Can I compete with my own LLC?

I recently had a Q-and-A dialogue on Avvo with an LLC member-manager who had a falling out with the other (50%) member and wanted to know whether he could form a separate business that would compete with the existing LLC. An edited version of our exchange appears below.

Q. I have an LLC with a partner. We each own 50% of the business (its an e-commerce store) and we’re member-managers. I’d like to buy him out, but his price is higher than I’m willing to pay. I have been pondering starting another e-commerce store selling kind of the same thing. Question is a) Would an e-commerce business out there competing for new customers constitute a breach of fiduciary duty? b) Would it be possible to rescind title as manager in the LLC which would eliminate that non compete fiduciary duty of a manager?

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SaaS Use of Open-source Software is not Distribution (Who GNU?)

GNU logo

I recently answered a LinkedIn question about whether providing Software as a Service (SaaS) is considered a “distribution” under the open-source GNU General Public License. The question and answer (no longer available on LinkedIn) are reproduced, in slightly edited form, below.

Q. Is hosting a software as a SaaS offering considered as “distribution” under GPL / LGPL open source licenses?

A. I believe that SaaS hosting is not intended to be considered distribution.

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Forming a Corporation in California? Get Ready to Wait

California Secretary of State logo

July 2013 update: California Secretary of State Reduces Turnaround Times!

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California’s budget crisis is affecting how quickly entrepreneurs can form their business entities: Standard turnaround time for hand-delivered Articles of Incorporation now is close to four weeks. (The situation for limited liability companies [LLCs] is better at two weeks, though still much longer than it was just half a year ago – see LLC Formation in Record Time.)

Update as of February 6, 2013: LLC filing time now is approximately six weeks, and corporation filing time is more than seven weeks!

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Online Terms can be Binding, even if You don’t have to Click!

This past December, a Missouri Court of Appeals held that a user was bound by a website’s terms and conditions, even though she was not obligated to click to signify assent to those terms (Major v. ServiceMagic, Inc.).

The court noted that where a user is obligated to click to signify agreement to terms, such “clickwrap” agreements are routinely enforced. Where clicking is not required, a site’s “browsewrap” agreement usually will be upheld if the user has actual or constructive knowledge of the terms and conditions before using the site.

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When should I apply for a DBA?

Form used in San Francisco to apply for a DBAThis post continues the last post’s discussion of the fictitious business name (FBN – or, colloquially, the DBA for “doing business as”). I am writing this because of a client’s question as to when his company should apply for a DBA / fictitious business name.

California Business & Professions Code Section 17910(a) states that a Fictitious Business Name Statement must be filed within 40 days of the time when the registrant first used the FBN to conduct business in the state. (more…)

Can I assign a DBA to my new LLC?

Articles of Organization for an LLC, to which the founder wished to assign a DBAThis post is based on an answer that I provided on Avvo. The user wanted to know whether he could assign a fictitious business name (FBN) – or, colloquially, assign a DBA, short for “doing business as” – from his sole-proprietor business to a limited liability company (LLC) that he was about to form.

He probably would assign all of the sole-proprietor assets (and liabilities) to the new LLC. However, there are special considerations if one wants to assign a DBA / FBN. (more…)

California doesn’t *always* prohibit non-compete provisions

Photo pf a bike race symbolizing this blog post about non-compete provisionsCalifornia is well-known for refusing to enforce non-compete provisions, especially in the post-employment context (see Choice-of-Law and Non-Compete Provisions), so individuals will not be deprived of gainful employment. But provisions limiting competition aren’t always taboo. (more…)

Contractors as a Tax Dodge – NYT Reports U.S. to Crack Down

Logo for New York Times, which published an article about independent contractors as a tax dodgeFour months ago, I wrote about a Wall Street Journal report. According to that report, the Internal Revenue Service planned to audit 6,000 randomly-selected U.S. companies to determine the extent to which companies misclassify employees as independent contractors. (See The “Independent Contractor” Trap Becomes More Dangerous.) Today The New York Times reported that both federal and state officials are cracking down on misclassification (U.S. Cracks Down on Contractors as a Tax Dodge). The incentive: To reduce record budget deficits.

By misclassifying personnel, companies avoid paying Social Security, Medicare and unemployment insurance taxes. The article goes on to say that, on average, misclassified personnel do not report 30% of their income. The 2010 federal budget projects that the crackdown will net at least $7 billion over ten years.

Implication of contractors as a tax dodge for companies of all sizes:

If you have been lax in classifying workers, now would be a good time to start doing things correctly. Avoiding the “Independent Contractor” Trap may help you determine how to improve your classification procedures.

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.

So how important is this legal stuff, anyway?

Two recently-acquired clients had similar situations that brought up the importance of complying with legal requirements.

Each company is a multi-founder startup where one founder became non-productive, and even somewhat detrimental to the business. The other founders wanted to move the problem founder off to the side, where he could cause no more trouble, in a manner that would be fair to everyone involved.

Unfortunately, each company had failed to comply with some of the most basic legal requirements: Holding annual shareholder meetings to elect directors, annual board of director meetings to appoint officers, etc. As a result, in each instance we had to spend time and money taking corporate actions, and recording those actions appropriately in meeting minutes, before the real problem could be solved.

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Failure to Encrypt Passwords Leads to Class Action Lawsuit

On December 28, 2009, RockYou, Inc., a developer of applications for Facebook and other social networks, was sued in the U.S. District Court for the Northern District of California. The class action complaint alleges failure to encrypt users’ e-mail addresses and passwords and was filed shortly after a hacker copied that information for 32 million RockYou users. (more…)

Which state’s law matters for employment contract questions?

I recently learned that one of my LinkedIn answers in Employment and Labor Law [no longer available at LinkedIn because this feature was discontinued] was selected as the Best Answer. The question and my answer are reproduced below.

Question: Which state law matters for employment contract questions (for the CEO of a firm), the law of the state of incorporation or the law of the state where the headquarters are located? (more…)

Beware the Unintended Franchise

We all are familiar with well-known? franchises, such as McDonald’s restaurants. What many people do not realize, however, is that a trademark license agreement, if it has certain characteristics, can be considered a franchise agreement under state or federal law, creating huge potential liabilities for the unwary licensor.

In California, Corporations Code Section 31005(a) says that a franchise exists if three elements are satisfied:

  1. A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and
  2. The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and
  3. The franchisee is required to pay, directly or indirectly, a franchise fee.

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Can I Abandon a Copyright?

Copyright protects works of authorship and, in the U.S., subsists from the time the work is created in fixed form (see Copyright Protection in One Easy Lesson).

Demonstration in Sweden in support of file sharing, 2006

Demonstration in Sweden in support of file sharing, 2006

In certain circles, however, there is fervent opposition to copyright (see the Wikipedia entry for Anti-copyright).

Suppose that an anti-copyright author wants to abandon the copyrights in his works. (Sometimes this also is called dedicating work to the public domain.) Can he do so under U.S. law?

Although there is no statutory basis for abandonment, there is widely-accepted case law stating that a copyright owner may abandon his copyright by an overt act that manifests a purpose to surrender his rights to the work and let the public copy it.

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Asset-Based Lending on the Rise according to WSJ

Logo for WSJ.com, which published an article about asset-based lendingIn an article yesterday (Asset-Based Lending Grows in Popularity), the Wall Street Journal reported that asset-based lending – loans secured by the borrower’s assets as collateral – surged during 2008 and 2009.

The reason: Businesses that lack the credit rating, track record, or patience to seek traditional sources of capital can get loans by pledging their equipment, inventory, accounts receivable, or other liquid assets as collateral.

Downsides: Asset-based lending comes with a relatively high interest rate. If a payment is missed, the collateral may be seized by the lender.

Related post: Realistic Financing Options for Startup Companies

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.

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

Several months ago (Copyright Registration: Whether, When and Why), I wrote about the benefits of registering a copyright. A recent case in the U.S. District Court for the Northern District of California (Dongxiao Yue, et al., v. Chordiant Software, Inc., et al.) shows that if you are going to register a copyright, you should register it right away.

Plaintiffs accused defendants of copyright infringement with respect to two pieces of software that were covered by registered copyrights. The defendants moved for a summary judgment that plaintiffs were not entitled to statutory damages and attorney fees because the alleged infringement began before the plaintiffs registered their copyrights.

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How High an Interest Rate Can I Charge?

I recently had a conversation with an attorney in Louisiana, who mentioned that in that state, the annual interest rate on a promissory note was limited to 12%. I told him that in California story is much different.

Article 15 (Usury) of the California Constitution states (simplifying a bit) that the annual interest rate on a loan or forbearance (refraining from requiring payment for a period of time) is limited as follows:

  • If arising from money or goods supplied for personal, family or household purposes, the maximum interest rate is 10%.
  • If arising from money or goods supplied other than for personal, family or household purposes, the maximum interest rate is the greater of (a) 10% or (b) 5% plus the rate charged by the Federal Reserve Bank of San Francisco on advances to its member banks.
  • If the agreement between the parties does not specify an interest rate, it will be 7%.

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“Finding Rin Tin Tin” Sniffs Out Trademark Fair Use Defense

Cover of the DVD "Finding Rin Tin Tin", a movie in a lawsuit won based on the trademark fair use defense

Cover from “Finding Rin Tin Tin” DVD

Those of a certain age will recall watching “Rin Tin Tin” on TV as kids. The venerable canine recently was the subject of a trademark infringement suit (Rin Tin Tin, Inc., et al. v. First Look Studios, Inc., et al.). The defendants prevailed because of the trademark fair use defense.

Rin Tin Tin was a German Shepherd dog found in France during World War I. He became famous through movies and remains well-known to this day.

Plaintiffs breed German Shepherds descended from the original Rin Tin Tin and manage related business endeavors. Rin Tin Tin, Inc. obtained federal trademark registrations for “Rin Tin Tin” pertaining to puppies and dogs of the Rin Tin Tin lineage. (more…)

Top Ten Legal Tips for Independent Contractors (Presentation)

This evening I will present “Top Ten Legal Tips for Current and Would-be Independent Independent Contractors” at The Society for Technical Communication Silicon Valley Chapter.

If you are interested in the topics that I will be covering, please check out “Top Ten Legal Tips for Independent Contractors” by signing up for this blog’s Downloads page using the drop-down list in the sidebar.

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.

Can we kick one of the members out of our LLC?

I recently ran across a situation where several members of a limited liability company wanted to get rid of a fellow member whose disruptive behavior was harming the LLC, but they did not know whether or how they could kick him out.

The section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

California Corporations Code Sections 17706.02(b) and (c) say that an LLC operating agreement may provide for dissociation of a member. Upon dissociation, the member loses the right to participate in the LLC’s activities and holds any transferable interest in the LLC as a transferee. (more…)

Gay Marriage Fight Leads to Trademark Smackdown

ProtectMarriage.com (left) and Courage Campaign Logos

It appears that at least some gay marriage foes need to learn a thing or two about trademark law.

On January 12, ProtectMarriage.com sent Courage Campaign a cease and desist letter, alleging that Courage Campaign’s Prop 8 Trial Tracker logo infringes ProjectMarriage.com’s trademark and copyright in its logo.

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Educate Employees about Online Endorsements – the FTC is Watching!

A few months ago, I posted Does your Employee Handbook address social media? This post discusses a specific social-media issue that is of great importance to every employer: Online endorsements of products or services by employees.

The Federal Trade Commission has published Guides Concerning the Use of Endorsements and Testimonials in Advertising. Actions that are inconsistent with the Guides may result in an FTC enforcement action.

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Licensing Trademarks? Think about Domain Names, Too

The December 2009 issue of les Nouvelles, a publication of Licensing Executives Society International, has an interesting article about the interplay between domain name disputes and trademark licensing.

“WIPO Domain Name Cases Offer Trademark Licensing Lessons,” by Hee-Eun Kim, an LLM student in Munich, Germany, starts by describing the Uniform Domain Name Dispute Resolution Policy (UDRP) and the role of the World Intellectual Property Organization (WIPO) in resolving disputes under the UDRP. (more…)

Rewarding Key Personnel: Restricted Stock or Options?

Sotck price graph, symbolizing restricted stockAs I write this post, I am in the process of helping an early-stage client develop a stock-based compensation plan for a key officer. The principal choice was between a stock option and restricted stock.

A stock option is the right to purchase a specified number of shares at a specified price at some point in the future. The option typically “vests” over a period of years. The longer the individual stays with the company, the greater the portion of the option s/he has the right to exercise. At the end of the vesting period, the individual has the right to purchase all of the shares specified in the option. (more…)

Sramana Mitra: Bootstrapping – Weapon of Mass Reconstruction

Photo of Sramana MitraLast evening I attended a meeting of eBig’s Startups / VCs SIG. Sramana Mitra presented “Bootstrapping – Weapon of Mass Reconstruction.” It was highly informative for the entrepreneurs in attendance.

Her first comment was one with which I agree completely: There is too much emphasis on on venture capital funding – few businesses qualify, and other forms of financing allow the entrepreneur to retain greater control and a larger share of the business. (See Realistic Financing Options for Startup Companies.)

Sramana then proceeded to expose a large number of myths about entrepreneurship, and she finished by answering attendees’ questions.

The Entrepreneur Journeys page of Sramana’s blog provides a large number of informative interviews with entrepreneurs from around the world.

Photo credit: Blog Business World

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.

Contracts with Minors can Lead to Major Problems

Photo of a child pringing "A", symbolizing contracts with minorsI recently was consulted concerning contracts with minors. In the first case, a teenager wanted to start a business. In the second, a father wanted his child to become a member of his limited liability company (LLC).

Here is an overview of California law concerning contracts with minors.

A minor is an individual who is under 18 years of age. An adult is an individual who is 18 years of age or older. Family Code Sections 6500-6501

Subject to certain exceptions (some of which are far-reaching, such as those precluding contracts related to real property or personal property not in the minor’s immediate possession or control), minors may enter into agreements. Family Code Sections 6700-6701

However, the minor generally may disaffirm (reject) the agreement before reaching majority, or during a reasonable time thereafter. Family Code Sections 6710-6713

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Copyright Infringement Twofer: Website Designer and Customer Jointly Liable

Nick Starr, doing business as Master Maintenance, hired West Central Ohio Internet Link, Ltd. to redesign and host the website for Master Maintenance’s janitorial services.

The redesigned website included four photos owned by, but not properly licensed from, Corbis Corporation.

In Fall 2006, Corbis discovered Master Maintenance’s unauthorized use of its pictures. On November 17, 2006, Corbis sent Master Maintenance a letter informing it of the infringement. Master Maintenance directed West Central to remove the pictures, which West Central did. On December 7, 2007, Corbis filed suit for copyright infringement against Master Maintenance and West Central (Corbis Corporation v. Nick Starr).

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WSJ: Startups Will Keep Struggling in 2010

In an article published yesterday (Start-Ups Will Keep Struggling in 2010), the Wall Street Journal reported that startup funding will remain tough to find in 2010.

The major problems:

  • Most entrepreneurs use personal savings or contributions from friends and family, but personal wealth – often tied to the value of homes or stock portfolios – has not bounced back from the economic downturn.
  • For both conventional bank loans and those insured by the Small Business Administration, entrepreneurs most show (a) that they have invested a significant amount of their own money and (b) solid cash-flow projections.
  • During the first half of 2009, the total value of angel investments fell 30% compared to 2008; 2010 is expected to continue at the 2009 level.
  • While venture capitalists are continuing to invest, they typically have been protecting later-stage companies already in their portfolios rather than funding startups.

The minor bits of good news:

  • While angels are investing less per deal, the total number of deals increased during the first half of 2009 over 2008.
  • Stimulus-related measures may increase SBA loans from 1% of all small-business lending to between 5% and 10%.

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Related posts:

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.

What You Need to Know about Angel Investment Groups

Burton Lee, Director and Engineering Lecturer at Stanford University, recently posted informative slides from a presentation by Laurie Lumenti Garty of SVB Capital and Marianne Hudson of the Angel Capital Association.

The subject: Angel investment groups in the U.S.

Here is some of the most important information presented in the slides:

  • There are more than 300 angel investment groups in the U.S.
  • They tend to invest in companies that are in product development or are already shipping product.
  • Major investment sectors include IT, health care, and business financial services.
  • The vast majority of the investments are $500,000 or less.
  • Groups tend to co-invest with, or look for follow-on investments from, other angel groups, individual angels, and early-stage venture capitalists.

If you are seeking angel funding, you should look at the entire slide deck.

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Related post: Realistic Financing Options for Startup Companies

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.

Can I prepare a website Privacy Policy without a lawyer?

Photo of shredded paper, symbolizing a website privacy policy

Startup entrepreneurs always are looking for ways to save money. A question that I receive from time to time: Is it possible to prepare a website Privacy Policy without a lawyer’s help?

Simply copying another company’s Privacy Policy is a mistake, because two companies rarely want to handle all privacy matters exactly the same way. However, there are quite a few website Privacy Policy Generators (PPGs) online. Just do a Google search for “privacy policy generator”.

The user provides answers to a series of questions. Based on the user’s answers, the PPG provides recommended text for a website Privacy Policy.

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