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:
- There is no requirement that a separate U.S. entity be formed.
- However, starting a new U.S. business is risky. There certainly will be financial obligations, and unexpected legal liabilities can arise. (Regrettably, anyone can sue anyone else for any reason at any time – and even if you win, there is a substantial likelihood you will have to pay your own legal fees.) So long as the U.S. entity complies with applicable formalities (please see Beware Your Alter Ego), it will act as a legal firewall to separate those obligations and liabilities from the foreign parent.
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Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
A couple of weeks ago, I answered a question on Avvo about who can sign a contract on behalf of a corporation. This issue comes up from time to time, so I will discuss it at some length in this post.
Authorization to sign contracts is addressed in the corporation’s bylaws and / or in resolutions of the board of directors.
If specific authorizations are set forth in the bylaws, changing those authorizations can be a bit of a hassle, because the bylaws must be amended. As a result, I prefer to have specific authorizations established by the board, with the board’s powers being established by the bylaws. Here is a typical such bylaws provision:
Executing Corporate Contracts. Except as otherwise provided in the articles or in these bylaws, the board of directors by resolution may authorize any officer, officers, agent, or agents to enter into any contract or to execute any instrument in the name of and on behalf of the corporation. This authority may be general or it may be confined to one or more specific matters. No officer, agent, employee, or other person purporting to act on behalf of the corporation shall have any power or authority to bind the corporation in any way, to pledge the corporation’s credit, or to render the corporation liable for any purpose or in any amount, unless that person was acting with authority duly granted by the board of directors as provided in these bylaws, or unless an unauthorized act was later ratified by the corporation.
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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 using the Sign Up button in the sidebar. 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.
In an article published today (Start-Ups Get Free Chance to Pitch to Angel Investors), the Wall Street Journal discusses ways that startups cal 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.
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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.
Several months ago, I wrote about the circumstances under which courts will find implied copyright licenses 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 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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When my European clients execute agreements, they routinely initial the bottom of each page, in addition to signing at the signature blocks. Here in the U.S., I see that approach rarely; it is customary merely to sign at the signature blocks.
Several weeks ago I posted a LinkedIn question about this difference. Here are some of the insights that I gained from my colleagues:
- The obvious reason for initialing each page is make it difficult for a party to change the content of an agreement once it is signed. However, with widespread exchange of agreements as e-mail attachments and indefinite storage those e-mails, it usually is easy to reconstruct the final version of an agreement in just a few minutes.
- In the U.S., real property agreements and estate planning documents often are initialed – perhaps because the likelihood of a dispute years later is relatively high.
- Conversely, attorneys with securities or mergers and acquisitions practices, or other commercial practices with lengthy agreements, rely solely on signatures because clients do not want to waste time initialing dozens of pages.
- Nowadays, some agreements are signed digitally, i.e., there is no human signature at all, let alone initials, on the document.
My conclusion: There are some types of agreements that should be initialed. However, in most business transactions, initialing each page is a waste of time.
Related post: How detailed should a legal document be?
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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.
The evening of Wednesday, June 16, I will moderate “Your Capital-raising Roadmap: Angel and VC Perspectives”, part of the Silicon Valley Association of Startup Entrepreneurs’ East Bay Series at the beautiful Crow Canyon Country Club (buffet dinner included).
Description of this event:
You dream of venture capital to turn your great idea into a huge entrepreneurial success. But even if venture capital is appropriate, other types of funding – such as bootstrapping, personal loans, friends and family, or angel investment – usually come first.
Our panel of VCs and angel investors will explain which types of funding are appropriate at each stage and and how those types of funding can be combined, over time, to maximize returns for both entrepreneurs and 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.
The document Top Ten Intellectual Property Mistakes of Startup Entrepreneurs is available as a Free Download using the Sign Up button in the sidebar.
Here are the ten mistakes that are discussed:
- Failing to use employee invention agreements
- Assuming that the company owns contractors’ work product
- Using another company’s license agreement
- Thinking that patents are the only IP that matters
- Filing a for provisional patent before the scope of the invention is clear
- Treating the federal government like non-governmental infringers
- Neglecting to identify and protect trade secrets
- Believing that “open source” means “no restrictions”
- Giving the “family jewels” to an overseas supplier
- Registering the wrong entity as the owner of IP
Related post: The Top Ten Legal Mistakes of Startup and Early-stage 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.
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
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This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
An acquaintance recently showed be one of the worst contracts I have ever seen – one of the worst in the sense of unfair and unbalanced, and perhaps even unconscionable.
The company in question provides contract personnel for IT projects. Here is the agreement that candidates have to sign to be proposed for a client’s project [emphasis added]:
- In Consideration of the time, effort and expenses to be borne by _______________ (hereinafter referred to as Company) for submitting & interviewing you/your resume for a possible [position] assignment, you give the Company an exclusive authorization to submit you as a candidate to the client for such assignment.
- During the term whereof you will not permit or authorize any other agency or individual to submit you as a candidate for this assignment and agree that you will not offer your services directly or indirectly to the client/clients introduced by the Company to you.
- In addition, it us understood that you will be available exclusively to the Company for 3 business days from the time of Interview and agree to join the project if selected. You may also be required to travel to other locations as per client’s instructions.
- Further it is to affirm that you will not back out from starting the project after you candidature has been confirmed by the Company’s client.
- In the event that you breach the provisions of this Agreement, you agree to pay the Company as liquidated damages and not as a penalty a further sum of US Dollars Ten Thousand. You acknowledge that liquidated damages in such amount is reasonable under the circumstances in light of the fact that significant damages and expenses will be suffered or incurred by the Company and in recognition of the difficulty and further expense of proving the exact amount thereof.
- It is understood that this is not an offer or a contract of employment. If you are engaged for the above assignment, it will be pursuant to a separate written agreement with the Company.
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Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.