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

New Feature: Ridiculous Contract Provisions

Dana — Sat, 04 Feb 2012 00:47:01 +0000

With this post I am inaugurating a new feature that I expect will appear from time to time: Ridiculous contract provisions that I have run across. Today’s post is based on an agreement that I recently reviewed for a client.

The agreement provides standard terms and conditions by which a large utility in the Eastern United States works with its suppliers of products and services. The sentence in question says:

No change, amendment or modification of any of the provisions of this Contract will be binding unless in writing that identifies itself as an amendment to this Contract and that is issued by Company.

In other words, the Company apparently believes that the only requirement for an amendment should be that the Company issued it – irrespective of whether the supplier agrees to the change! Enough said….

Photo credit: iStockphoto

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.

California Officers Need to Be More Careful than Directors

Dana — Thu, 26 Jan 2012 01:42:23 +0000

In California, corporate directors are protected by the so-called Business Judgment Rule (“BJR“): They are not responsible for honest mistakes of business judgment. A recent case revealed that in California the BJR does not protect corporate officers.

During 2007, Indymac Bank bought more than $10 billion in risky residential loans, ultimately generating losses of more than $600 million. Indymac closed, and the Federal Deposit Insurance Corporation was appointed receiver.

The FDIC brought suit against Matthew Perry, Indymac’s former CEO, alleging negligence in continuing to generate and purchase loans. Perry moved to dismiss the complaint, claiming that he was protected by the BJR.

The U.S. District Court for the Central District of California denied Perry’s motion (FDIC v. Perry). The court noted that the statute setting forth the BJR (Corporations Code Section 309) expressly applies only to directors, not to officers.

Bottom line: If you are acting in your capacity as an officer – even if you also are a director – you have an obligation to be aware of corporate affairs and not to act negligently.

How Can I Have Reverse Vesting in an LLC?

Dana — Mon, 16 Jan 2012 16:51:13 +0000

I recently received, via Quora, a private question about setting up an LLC membership interest (rather than shares of a corporation) with reverse vesting (see Rewarding Key Personnel: Restricted Stock or Options?). That question, and my answer, are reproduced below with minor editing.

Q. I am starting a company and forming as an LLC. My co-founder will received a reverse-vested membership percentage. I’ve found plenty of sample restricted stock agreements, but nothing for LLCs and memberships. Do you have any suggestions where I can find a sample agreement?

A. Sorry, I know of no such document. I believe there are two somewhat-related reasons why this is the case:

Reverse vesting is common in a corporation, rare in an LLC.
Whereas corporations have well-defined structures, LLCs can wander far afield in their Operating Agreements, meaning that one cannot expect to find and rely upon supposedly-standard language.

Please pardon my directness: You cannot do this properly on your own. If your objective in choosing an LLC is to save money, given the reverse-vesting requirement you probably will be better off with a corporation.

Gingrich Domain is Newtered – But the UDRP Probably Won’t Help

Dana — Tue, 10 Jan 2012 00:41:22 +0000

In How to Defeat a Cybersquatter, I wrote about using ICANN’s comparatively quick and inexpensive Uniform Domain Name Dispute Resolution Policy (UDRP) to defeat cybersquatters. The domain name NewtGingrich.com recently was squatted upon – but I doubt that Newt will be able to use the UDRP successfully to recover that domain.

Gingrich Communications had owned NewtGingrich.com since 2004, but apparently forgot to renew the domain name in August 2011. By December 2011, it was owned by American Bridge 21st Century, a progressive Political Action Committee. (In the interim, it was owned by entities in Chihuahua, Mexico.)

If Gingrich Communications tried to recover NewtGingrich.com, I believe it would have at least two serious problems:

It would have to show that “Newt Gingrich” is a trademark or service mark. I have seen no evidence to support such a proposition. There is a registered trademark for Gingrich Productions, but not for Newt Gingrich. More fundamentally, I believe that “Newt Gingrich” does not constitute the name by which any products or services have become known to the public.
It would have to show that American Bridge is using the domain in bad faith – which would be difficult to do, given that American Bridge redirects NewtGingrich.com to a variety of sites that poke fun at Newt (such as Tiffany’s where he had a $500,000 line of credit) and other Republicans, rather than taking advantage of his name for financial gain.

The morals of this story:

Don’t forget to renew your domain name before it expires.
The UDRP won’t necessarily help everyone whose domain has been cybersquatted.

Photo credit: Wikipedia

Is there Any Reason to Form a General Partnership?

Dana — Sat, 17 Dec 2011 03:34:51 +0000

A short while ago, I answered a Quora question about whether and why a startup might want to form a general partnership. The question and my answer are reproduced, with emphasis added, below.

Q. What are some of the reasons a business might organize itself as a general partnership? Considering all the liability risk that general partners might potentially face, why not organize as a limited liability company? Was there an era when the general partnership was an attractive form and, if so, why?

A. The LLC is a fairly recent invention – ~20-30 years old, depending on the state (assuming you are asking in the U.S.).

Pre-LLC, the attraction of the general partnership was simplicity and lack of formal requirements in comparison to the corporation – though, as you note, at the price of unlimited personal liability.

The LLC was invented to carry through (most of) the simplicity of the partnership, adding the limited liability of a corporation – if you will, a hybrid of the two.

In my practice, I have formed many corporations and LLCs for clients; I have never formed a general partnership.

WSJ: Angel Investors are Getting Harder to Sell

Dana — Thu, 15 Dec 2011 22:18:01 +0000

In an article published today (Chasing the New Angel Investors), the Wall Street Journal discusses why entrepreneurs must work ever-harder to persuade angel investors to invest.

According to the article, although seed and startup angel investment has increased, there are several reasons why that money is more difficult to attract:

Since the recession, many angels have become more demanding, looking for proof of marketplace acceptance rather than a hunch that it exists.
Angel groups, which syndicate deals among their members, have a more-formal review process that may involve discussions by dozens of potential investors.
With less venture capital available, angels are more concerned about whether a company can grow to profitability or a successful exit.

The article’s advice for entrepreneurs: Have something to show, know your business thoroughly, and polish your pitch.

I’m One of Several Inventors – Who Owns the Patent?

Dana — Mon, 05 Dec 2011 23:18:18 +0000

A recently-acquired client is one of three inventors of a device that received a U.S. patent. She asked me whether she can freely license to an LLC owned by two of the inventors the right to manufacture products covered by the license. I replied “yes” – here’s why.

35 U.S.C. Section 262 says:

In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners.

In other words, each of the co-inventors, who jointly own the patent, can exploit the patent as she sees fit - and she need not share any profits with the other patent owners.

Furthermore, each inventor can assign or license to third parties her right to exploit the patent, thus my client can grant to her LLC a license to manufacture products covered by the patent without financial obligation to the other inventors.

Please note that this is different from situations involving jointly-owned copyrights, where profits earned by one owner must be shared with the others (see I’m One of Several Authors – Who Owns the Copyright?).

SVASE East Bay Series 11/16/11: What’s Hot – What VCs Like and Why

Dana — Thu, 10 Nov 2011 19:06:49 +0000

The evening of Wednesday, November 16, the Silicon Valley Academy of Startup Entrepreneurs (SVASE) will present “What’s Hot – What VCs Like and Why” as part of its East Bay Series. Here is the event description:

To build a fundable company, you need to know the areas that investors are focusing on. Venture capitalists specialize in identifying important and lucrative opportunities before they become trends. So, what are VCs intrigued by today? Where will their money be invested? What is the effect of recent economic conditions? Learn what you will need to build a company that capitalizes on the latest developments.

Panel members will include:

Brent Ahrens, Canaan Partners
Cindy Padnos, Illuminate Ventures
Randy Hawks, Claremont Creek Ventures

The event will take place at the beautiful Crow Canyon Country Club and will include a tasty buffet dinner.

When the Other Side Negotiates Too Aggressively….

Dana — Sat, 05 Nov 2011 01:43:21 +0000

Several days ago, a Quora question and answer caught may attention. The question asked about things some lawyers do that break, rather than make, deals. I was intrigued by the response “[s]ending over very aggressive opening terms as a negotiating ploy”.

That is a situation I have faced only rarely – most of the time, my clients’ counterparties are pretty reasonable. When excessively unreasonable terms do appear, however, there is a simple response: I refuse to negotiate. Instead, I reply along the line of the following:

Unfortunately, the proposed terms are so one-sided and unreasonable that they are not a suitable starting point for negotiations. If you would like to provide an agreement that is more appropriately balanced, my client will be pleased to consider it.

So far, this approach has had the desired effect every time: The other side provided a more reasonable starting point, and the parties ultimately reached agreement.

Looking back, I see that this post’s message is a corollary of the post I wrote two days ago (Negotiating Successfully: The #1 Thing You Need to Know): If you want to negotiate successfully, you have to be willing to walk away.

Photo credit: Philip Niewold via stock.xchng

Negotiating Successfully: The #1 Thing You Need to Know

Dana — Wed, 02 Nov 2011 22:17:55 +0000

Several years ago, a friend lamented that he was not very good at negotiating on behalf of his professional-services business. He felt that clients were better at “bluffing” and other negotiating techniques than he was, so he often was paid less than he should have been. I told him the single most important thing he needed to know if he wanted to negotiate successfully:

You have to be willing to walk away.

If you determine your minimum requirements (pay, performance requirements, schedule, etc.), then the only way you will feel that a deal is fair is if the minimum requirements are met. If the other party won’t meet your minimum requirements, then you need to say “no, thank you” and “good-bye”. If, instead, you grovel or beg, the other party will tighten the screws and make you whimper even more.

My friend understood right away. Bluffing is irrelevant; making sure your own needs are met is what matters.

This principle recently came up in a conversation with the CEO of a client, which provides security-related open-source software and had received an acquisition offer from a huge Internet company. When the CEO told the co-founder CTO the minimum bid the CEO would accept, the CTO said, incredulously, “You would walk away from __________?!”

The CEO said “yes”. He understood that there is no need to sell a valuable asset for less than it really is worth. (Since then, the client also has turned down term sheets from two VCs because the terms were inadequate. The longer the company waits, the greater its value and the value of the founders’ investment.)

Of course, there is much more to negotiating successfully: One should always aim for more than the bare minimum. But the willingness to walk away is the foundation on which successful negotiations are built.

Check out all posts about negotiation.

Photo credit: Ella Devil via stock.xchng