Legal Knowledge for Entrepreneurs Glen Caplan – November 22, 2008

“ Starting companies is like having babies – fun to conceive but hell to deliver.” ~ Anonymous

Overview Corporate Formation and Capitalization Why should I form a corporation? How do I form a corporation? What should I be thinking about if I am going to do so? Intellectual Property What is intellectual property? How do I protect it?

Corporate Formation and Capitalization

Why should I form a corporation?

How do I form a corporation?

What should I be thinking about if I am going to do so?

Intellectual Property

What is intellectual property?

How do I protect it?

Choice of Entity Limited liability Transfer of ownership Tax issues Governance Continuity of existence Capital requirements

Limited liability

Transfer of ownership

Tax issues

Governance

Continuity of existence

Capital requirements

Sole Proprietorships and Partnerships Sole proprietorship Simplest (Individual and business treated and taxed as one) Maximum control Unlimited personal liability Difficult to sell; no continuity beyond life of owner Partnerships Pass-through taxation Less continuity of existence Unlimited personal liability of general partner(s)

Sole proprietorship

Simplest (Individual and business treated and taxed as one)

Maximum control

Unlimited personal liability

Difficult to sell; no continuity beyond life of owner

Partnerships

Pass-through taxation

Less continuity of existence

Unlimited personal liability of general partner(s)

Corporations and LLCs Corporations Limited liability for stockholders Continuity of existence Ease of transfer of ownership Centralized management Tax favored employee benefits Easier to raise capital Double taxation LLCs Limited liability for members Pass through taxation to owners Fewer maintenance requirements Flexibility as to ownership and management rights Tax issues regarding sale/exit events Investors more comfortable with corporate form

Corporations

Limited liability for stockholders

Continuity of existence

Ease of transfer of ownership

Centralized management

Tax favored employee benefits

Easier to raise capital

Double taxation

LLCs

Limited liability for members

Pass through taxation to owners

Fewer maintenance requirements

Flexibility as to ownership and management rights

Tax issues regarding sale/exit events

Investors more comfortable with corporate form

Jurisdiction of Incorporation Delaware Most common state of incorporation (over ½ of Fortune 500) Well established, detailed case law = Legal Certainty Generally flexible corporate code North Carolina Corporate Code modeled after Delaware Reincorporation likely as company matures

Delaware

Most common state of incorporation (over ½ of Fortune 500)

Well established, detailed case law = Legal Certainty

Generally flexible corporate code

North Carolina

Corporate Code modeled after Delaware

Reincorporation likely as company matures

Charter Documents Certificate of Incorporation Filed with Secretary of State of the state of incorporation Governing document Bylaws Sets forth rules and procedures

Certificate of Incorporation

Filed with Secretary of State of the state of incorporation

Governing document

Bylaws

Sets forth rules and procedures

Corporate Governance in a Nutshell Board Approval Amendments to Charter Fundamental transactions (Sale of assets, merger, etc.) Appointment of Officers Anything affecting capitalization Material contracts Approve compensation / arrangements with officers Stockholder Approval Amendments to Charter Fundamental transactions (Sale of assets, merger, etc.) Election of Directors (though vacancies can often be filled by Board) Stock Incentive Plans and amendments thereto Interested director transactions

Board Approval

Amendments to Charter

Fundamental transactions (Sale of assets, merger, etc.)

Appointment of Officers

Anything affecting capitalization

Material contracts

Approve compensation / arrangements with officers

Stockholder Approval

Amendments to Charter

Fundamental transactions (Sale of assets, merger, etc.)

Election of Directors (though vacancies can often be filled by Board)

Stock Incentive Plans and amendments thereto

Interested director transactions

Typical Capital Structure Founders Common stock (vesting over time) Employees Common stock/options (vesting over time) Investors Convertible preferred stock

Founders

Common stock (vesting over time)

Employees

Common stock/options (vesting over time)

Investors

Convertible preferred stock

Key Early Issues - Founders Transfer of intellectual property to the company Allocation issues Equity ownership, responsibilities and rights Vesting of stock Rights of first refusal Initial funding

Transfer of intellectual property to the company

Allocation issues

Equity ownership, responsibilities and rights

Vesting of stock

Rights of first refusal

Initial funding

Key Early Issues - Personnel Employees and consultants Importance of agreements Equity compensation Stock vs. options Vesting Stock option/incentive plan

Employees and consultants

Importance of agreements

Equity compensation

Stock vs. options

Vesting

Stock option/incentive plan

What is Intellectual Property? Intangible property rights associated with inventions and innovations Limited to specific country/territory

Intangible property rights associated with inventions and innovations

Limited to specific country/territory

Why Does IP Matter? “ Intellectual property is the life blood of almost all life science companies. In many cases, it is the only true value a young company owns and the only thing that can protect against larger competitors. Understanding the breadth and strength of the patent estate is an important criterion for investment.” ~ Garheng Kong

“ Intellectual property is the life blood of almost all life science companies. In many cases, it is the only true value a young company owns and the only thing that can protect against larger competitors. Understanding the breadth and strength of the patent estate is an important criterion for investment.”

~ Garheng Kong

Types of IP Trade Secrets/Know-how Patents Copyrights Trademarks

Trade Secrets/Know-how

Patents

Copyrights

Trademarks

Trade Secrets

What can be a Trade Secret? Formulas Compilations of information Patterns Methods Devices Techniques Programs Processes Project launch dates for new products Marketing plans Computer programs Negotiated price lists in a contract Customer lists

Formulas

Compilations of information

Patterns

Methods

Devices

Techniques

Programs

Processes

Project launch dates for new products

Marketing plans

Computer programs

Negotiated price lists in a contract

Customer lists

Not a Trade Secret

Maintaining Secrecy Take affirmative steps to maintain secrecy Mark important and sensitive documents confidential Enter into Confidentiality Agreements Restrict access to offices, labs, and computers (including PDA’s and laptops!) Regularly conduct employee exit interviews (reminder of obligations; whereabouts of information)

Take affirmative steps to maintain secrecy

Mark important and sensitive documents confidential

Enter into Confidentiality Agreements

Restrict access to offices, labs, and computers (including PDA’s and laptops!)

Regularly conduct employee exit interviews (reminder of obligations; whereabouts of information)

Rights Conferred by a Patent Exclude others from making, using, offering for sale, selling, or importing the claimed invention Limited monopoly granted by the government in exchange for disclosure of invention 20 years from earliest U.S. nonprovisional filing date (i.e. patent application filing date) Remedies Damages Injunction

Exclude others from making, using, offering for sale, selling, or importing the claimed invention

Limited monopoly granted by the government in exchange for disclosure of invention

20 years from earliest U.S. nonprovisional filing date (i.e. patent application filing date)

Remedies

Damages

Injunction

Rights Not Conferred by a Patent Patent does not give you the right to practice the invention claimed in your patent There may be other patents that affect your freedom to operate (patentability v. freedom to operate)

Patent does not give you the right to practice the invention claimed in your patent

There may be other patents that affect your freedom to operate

(patentability v. freedom to operate)

Copyrights Original works of authorship Fixed in a tangible medium of expression Perceived, reproduced or otherwise communicated Directly or with use of a machine Protectable for limited term

Original works of authorship

Fixed in a tangible medium of expression

Perceived, reproduced or otherwise communicated

Directly or with use of a machine

Protectable for limited term

Types of Copyrightable Works Text-based Books, magazines, plays, brochures, software Visual Works Photographs, paintings, icons, graphics Sound Sound recordings, song words and music Motion Pictures Films, videos Others Mask works, blueprints, etc.

Text-based

Books, magazines, plays, brochures, software

Visual Works

Photographs, paintings, icons, graphics

Sound

Sound recordings, song words and music

Motion Pictures

Films, videos

Others

Mask works, blueprints, etc.

Not Copyrightable Idea Procedure Process System Method of operation Concept Principle Discovery (e.g. mere facts) Lists Names, slogans, short phrases (do not have sufficient “authorship” of “original expression”)

Idea

Procedure

Process

System

Method of operation

Concept

Principle

Discovery (e.g. mere facts)

Lists

Names, slogans, short phrases (do not have sufficient “authorship” of “original expression”)

Trademarks and Service Marks Used to identify and distinguish the goods of one person from the goods manufactured or sold by others to indicate the source of the goods Provide the relevant consumer with information on quality of product Establishes good will and loyalty Prevents unfair competition or business practices

Used to identify and distinguish the goods of one person from the goods manufactured or sold by others to indicate the source of the goods

Provide the relevant consumer with information on quality of product

Establishes good will and loyalty

Prevents unfair competition or business practices

What can be Trademarked Word Logo Sound Color Fragrance

Word

Logo

Sound

Color

Fragrance

Types of Trademarks Generic No TM significance Unprotectable Generic Example: ASPIRIN Describes the goods and services Secondary meaning required Weak Descriptive Example: ATMVERIFY Suggests some feature of goods and services Secondary meaning may be required Somewhat weak Suggestive Example: ULTRACATH Little or no relationship to goods and services No secondary meaning required Strong Arbitrary or Fanciful Example: EXXON, KODAK Characteristics Levels of Distinctiveness

Trademark Tips Summary Choose arbitrary or suggestive trademarks Consider more than just product names Obtain full trademark searches before beginning trademark use Register important trademarks with the US Patent and Trademark office (and internationally) Monitor and enforce trademark rights Use trademarks appropriately

Choose arbitrary or suggestive trademarks

Consider more than just product names

Obtain full trademark searches before beginning trademark use

Register important trademarks with the US Patent and Trademark office (and internationally)

Monitor and enforce trademark rights

Use trademarks appropriately

Guidelines for the Start-Up Ten Ways to Avoid Losing Intellectual Property Assets Maintain confidentiality Avoid loss of trade secret rights Preserve patent filing rights Keep good records Protects evolving knowledge base Defense mechanism in the event of trade secret infringement or misappropriate claims Proof of conception in first to invent filings Secure consultant rights Protect against restriction on development rights or claims for additional payments

Maintain confidentiality

Avoid loss of trade secret rights

Preserve patent filing rights

Keep good records

Protects evolving knowledge base

Defense mechanism in the event of trade secret infringement or misappropriate claims

Proof of conception in first to invent filings

Secure consultant rights

Protect against restriction on development rights or claims for additional payments

Guidelines for the Start-Up Ten Ways to Avoid Losing Intellectual Property Assets Consider noncompetes Forestall inappropriate use of information retained by employees Restrict incoming trade secrets Protect against claims of misappropriation Protects against corruption of product line Analyze freedom to operate Blocking patents Necessary licenses

Consider noncompetes

Forestall inappropriate use of information retained by employees

Restrict incoming trade secrets

Protect against claims of misappropriation

Protects against corruption of product line

Analyze freedom to operate

Blocking patents

Necessary licenses

Guidelines for the Start-Up Ten Ways to Avoid Losing Intellectual Property Assets Understand contracts and grant of rights Keep sales people in check Loss of trade secrets On sale bars Educate employees IP policies Conduct IP audits

Understand contracts and grant of rights

Keep sales people in check

Loss of trade secrets

On sale bars

Educate employees

IP policies

Conduct IP audits

Questions & (Hopefully) Answers Glen Caplan Hutchison Law Group Tel: 919.829.4303 [email_address] Driven by Our Clients’ Success SM A

Glen Caplan

Hutchison Law Group

Tel: 919.829.4303

[email_address]