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2019 Greek Tech Finance Network Presentation on US Entity Structures: Legal, Tax & IP Considerations

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Our fast-growing startup community has oftentimes seen companies that start from Greece expand overseas to the point where most of their revenue originates from the United States.
Marathon hosted the Greek Tech Finance Network event with an agenda devoted to Greek startups entering the US, offering practical insights on US incorporation, tax and intellectual property matters.

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2019 Greek Tech Finance Network Presentation on US Entity Structures: Legal, Tax & IP Considerations

  1. 1. Emerging Growth Companies Entering the U.S. October 10, 2019
  2. 2. Foley Attorneys 1 Dave Kantaros Partner, Boston – Business Law, Private Equity, Venture Capital, M&A, Venture & Growth, Technology 617.342.4068 Email: Dkantaros@foley.com Bio: https://www.foley.com/en/people/k/kantaros-david-w Chris McKenna Partner, Boston – Intellectual Property, Electronics, Venture & Growth, Cannabis, Technology 617.342.4057 Email: cmckenna@foley.com Bio: https://www.foley.com/en/people/m/mckenna-christopher-j Ashley May Associate, Los Angeles – Business Law, Tax, Benefits & Estate Planning, Investment Management 213.972.4565 Email: Amay@foley.com Bio: https://www.foley.com/en/people/m/may-ashley-e
  3. 3. Table of Contents Structures for Foreign Companies with U.S. Presence 3 Setting up in the U.S.: General Considerations 14 Raising Capital: Options 24 Intellectual Property Considerations 29 About Foley 48 2
  4. 4. Structures for Foreign Companies with U.S. Presence
  5. 5. Structures for Foreign Companies with U.S. Presence  First, need to know: – Tax issues need to be considered – Choice of entity involves interplay between tax laws of the countries – U.S. asserts jurisdiction over all trade or business income derived from sources in its borders 4  Common corporate structures: – Foreign Parent – U.S. Subsidiary – Foreign Company – U.S. Company (brother/sister) – U.S. Parent – Foreign Subsidiary – Direct U.S. (DE) incorporation (no foreign affiliate) – U.S. Branch or Rep Office of Foreign Corporation
  6. 6. Structures for Foreign Companies with U.S. Presence (cont.)  Foreign Parent – U.S. Subsidiary – A separate U.S. entity is created as a separate C corporation owned by the foreign parent – U.S. Sub. incurs corporate income tax, which under the newly revised tax laws is 21% – Certain income tax rates may be reduced if treaty benefits are available. Under the current US-Greece treaty,* the following rates apply:  Dividends: 10%  Interest: 0% – Reporting Issues: Form 5472, Intercompany Agreements, Loans 5 * Convention Between the United States of America and the Kingdom of Greece for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on February 20, 1950, as amended by protocol. Foreign Parent Company U.S. Subsidiary C-Corporation
  7. 7. Structures for Foreign Companies with U.S. Presence (cont.)  Brother – Sister Structure – Establish a new U.S. corporation, generally mirroring the same capitalization (shareholders and ownership percentages) as in the ForeignCo – USCo is neither a subsidiary of nor parent to the ForeignCo – As a result of a complex tax regime, the ForeignCo may be considered a “controlled foreign corporation” of the USCo  The USCo would be required to include in its gross income its share of certain earnings and profits of the ForeignCo  However, under recent proposed US Treasury Regulations, this “deemed attribution” of ownership to the USCo may be mitigated – Reporting Issues: Forms 5472, Intercompany Agreements, Loans 6 Foreign Shareholders Foreign Corporation U.S.“Shell” Corporation
  8. 8. Structures for Foreign Companies with U.S. Presence (cont.)  U.S. Parent – Foreign Sub. (“Flip”) – A U.S. parent is created as a separate C corporation from foreign Sub. Corporation; U.S. Parent is owned by the foreign entrepreneurs/shareholders, and Foreign Sub is owned by U.S. Parent – Treaty benefits may also be available for lower tax rates – U.S. parent is taxed on its U.S.–sourced income, which under the newly revised tax laws is 21%  However, Foreign Sub will be a “CFC” of the U.S. Parent; certain types of income of CFCs, though undistributed, must be included in the gross income of the U.S. shareholder in the year the income is earned by the CFC – Reporting Issues: Forms 5471, 926, FinCEN (Form 114), Intercompany Agreements, Loans, Pricings 7 U.S. Parent Company Foreign Subsidiary C-Corporation
  9. 9. Structures for Foreign Companies with U.S. Presence (cont.)  Direct U.S. (DE) corporation formation (no foreign entity) – A U.S. C corporation is organized at the inception of the startup’s business and owned directly by the foreign entrepreneurs/shareholders – There is no separate foreign entity formed – Advantages - corporate simplicity, ideally situated for US investment, etc. – Disadvantages - not ideal if significant foreign source income, issues with US founder visas, unsure of US market entry 8 Foreign Shareholders U.S. Entity C-Corporation
  10. 10. Structures for Foreign Companies with U.S. Presence (cont.)  U.S. Branch or Representative Office of a Foreign Parent – An extension of a foreign corporation, as opposed to a separate legal entity, so advantage of not having to establish a new US company…however… – As such, a branch…  Subjects the foreign company directly to filing US tax returns, opening up liability of the foreign company to US Federal, state and even local taxes and exposure to scrutiny from such US tax authorities.  As a non-corporate entity, the branch cannot deduct payments for royalties, management fees, or interest to the foreign corporation, and  It also means that the foreign company can be a direct target of claims and lawsuits with no limited liability and litigation exposure in the US is typically much greater than the foreign company may be accustomed in its home or even other non-US jurisdictions. 9 Foreign Company U.S. Extension Branch or Representative Office
  11. 11. Structures for Foreign Companies with U.S. Presence (cont.)  U.S. Branch or Representative Office of a Foreign Parent cont… – If the branch is “U.S. trade, business or permanent establishment”,  U.S. branch income is still taxable as if it were an independent enterprise,  Branch Profits Tax – net after tax profits (after taxing profits at 35%) are again taxed at 30% subject to Treaty reduction, if at all. Branches can be very bad.  Passive activities (dividends, interest, rent, etc.) can be subject to U.S. withholding tax if the income is not connected to the U.S. business  Capital gains on income not connected to U.S. business are generally not subject to tax – A rep office, also means no separate legal entity formed in the US and no taxable presence in the US, so long as very limited activities in the US such as ancillary and support activities such as advertising and promotional activities, market research (but Tax Treaty is required). If no Treaty, then US presence will likely create automatic tax nexus. 10
  12. 12. Structures for Foreign Companies with U.S. Presence (cont.)  Must establish contractual relationship b/t Foreign company and U.S. entity (if other than branch)…an “intercompany” agreement  Two basic models: – Sales rep model – Re-seller/Licensing model Where is decision making authority? US or Foreign? Also, follow the customer dollars to understand which model best applies…  An evolving model for SaaS/Cloud companies… – Services model: Where are the “services” actually being provided? On a server outside of the US? Jurisdiction in which services deemed provided applies tax.  “Transfer pricing” study (properly document relationship b/t affiliates are on “arms length” to minimize risk of penalties on audit by tax authorities)  Capitalizing the U.S. entity (equity vs. debt capital) 11
  13. 13. USCo - “C” Corporation or LLC? “C” Corporation – Most public companies are C Corps – A business (and management) that is legally separate from its owners such that the personal assets of owners are safe from the liabilities of the corporation – C Corp pays income taxes on its profits; subject to “Subpart F” US tax rules, shareholders are only taxed to extent the corporation distributes out any profits as dividends – Can have a single or unlimited shareholders – LLCs may be easily converted (but typically should do that well in advance of IPO or other capital event to ensure tax-free conversion). 12
  14. 14. Limited Liability Corporation (LLC) – As a default, start-up losses flow through to owners – No limits to number of owners – Similar to corporation in that owners not liable for debts of LLC – So, why not an LLC?  An LLC defaults to being a “pass through” tax entity, meaning that it does not pay US taxes, its owners do (although it does still need to file a US and applicable state [income/informational] tax returns).  A foreign owner of an LLC with a US based operating business will be directly liable for US tax compliance obligations and tax, including Branch Profits Tax.  As a general rule, foreign companies desire to avoid having to file US tax returns so that IRS won’t have ability to review/audit the foreign company’s worldwide income, as explained in more detail below. 13
  15. 15. Setting up in the U.S.: General Considerations
  16. 16. Delaware: The State of Choice  Most companies incorporate in Delaware – Less than 1/3 of 1% of U.S. population resides in Delaware – It is the legal home of more than 50% of all publicly-traded corporations, and 64% of the Fortune 500 companies – Comprehensive and stable corporate law – Venture funds and foreign companies usually choose Delaware 15
  17. 17. Compliance  Incorporation of the entity  Appointment of the Board of Directors  Appointment of Officers  Opening a Bank Account  Sale of Stock  “Back-Office” Administration: Payroll, Insurance, Tax withholding, etc.  Note (intercompany)  Employment or contractor agreements (W-8 BEN or equivalent)  Intercompany agreements (described earlier) 16 Mechanics of Incorporation  Business License (city)  Corporate tax return filings (Federal & state – due 3.15 for calendar year)  Delaware annual report  Estimated tax payments (e.g., MA $456 minimum - )  Foreign information reporting (Forms 5471, 5472, FinCEN 114 (FBAR), 1120-F, 3520…)  Sales and Use tax  Business property tax returns
  18. 18. Ownership and Business Affairs of a Corporation  Board of Directors – The business and affairs of the company are managed by the board of directors – Must appoint a board of directors, but can be just one individual, and need not be a US citizen or even US resident; the shareholder(s) elect the board member(s); for a wholly owned subsidiary, commonly do this pursuant to a written consent of the stockholder(s); the business and affairs of a corporation are managed by its board of directors, but only as the entire constituted and by action of the entire board; individual board members, if more than one, do not typically have any authority to act or bind the corporation as individual board members. – Each director has a fiduciary duty to protect the interests of the corporation and to act in the best interests of the corporation’s stockholders. – Directors can be held liable for breach of fiduciary duty, but typically NOT issue in Foreign parent - US Sub structure b/c liability to shareholders and shareholder is foreign co and often only a single director.  Officers – Manage the day to day operations of the company – The directors designate officers to manage day-to-day operations. Must appoint certain officer positions including a [President, Treasurer and Secretary], depending on Bylaws adopted; officers are appointed by the Board and need not be US citizens or residents. Common for US startups and tech companies to have other officer positions as well, but not required, such as a Chief Executive Officer, one or more Vice Presidents (Sales, Finance, Technology, Information, etc.), Chief Technology Officer, Chief Financial Officer, etc. – A single individual can be the sole director (member of the Board) and also hold all required officer positions. 17
  19. 19. Ownership and Business Affairs of a Corporation (continued)  Shareholders – Owners of the company – Note that a corporation is not legally active until it has issued shares of stock! – Unless the certificate of incorporation specifies otherwise, stockholders do not manage the corporation (as opposed to an LLC, where members can often manage the company). Stockholders elect directors annually and have the power to decide whether or not to approve major corporate actions such as amendments to the certificate of incorporation (to create a new class of preferred stock to raise money for instance), sales of all or substantially all of the corporation’s assets, mergers and winding up of the company. Typically, stockholders decide by a majority approval, unless a higher voting requirement is specified in the certificate of incorporation (which may be implemented in a preferred stock financing). – Issuances of stock must comply with federal and state securities laws. If a wholly owned sub (i.e., single stockholder) or only a few stockholders, the issuance typically qualifies for an exemption to registration under the federal securities laws. The issuance of stock is also regulated at the state level by each state's securities laws (commonly referred to as blue sky laws). US legal counsel will review the securities statutes and regulations of each state in which the stock will be offered or sold and comply with all applicable filing and fee requirements.  With typical, US sub - foreign parent structure, this is not much of an issue. Corporation issues stock to its stockholders after, or at, the first meeting, or typically with unanimous written consent of the board of directors. 18
  20. 20. Other Considerations at Incorporation  Engaging U.S. Employees or Contractors / Immigration  Naming the Company  Intellectual Property  Export / Import  Other - FDA, etc. 19
  21. 21. Applicable law…  Federal, state and local laws regulate employment matters. Employment contract matters are regulated at the state level.  A written employment agreement is not required unless the employee is represented by a union. For unionized employers, collective bargaining agreements are written. Other terms may be imposed by statute.  Many states are “at-will” employment jurisdictions meaning that an employee based in such a state may be terminated at any time for no reason, subject to any employment or similar agreement providing for contractual rights and to certain anti- discrimination laws and regulations and payment of owed wages, etc.  Companies entering the U.S. often desire to engage their first “workers” here as independent contractors, instead of employees.  Independent contractors are self-employed individuals, not company employees.  Benefit is that many complications and costs associated with employees (for example, payroll taxes, workers' compensation insurance and employee benefits costs) are avoided.  However, because independent contractor arrangements avoid many of the tax and other employment law requirements of an employment relationship, the Internal Revenue Service (IRS), state government agencies and courts construe independent contractor status narrowly and impose large penalties for improper classification. Penalties can include back payment of wages (including overtime), Benefits, Unpaid taxes and other significant monetary penalties. 20 Employee or contractor? Engaging (as) U.S. employees or consultants
  22. 22.  B-1 Visitors for Business (gainful employment NOT permitted and can’t receive salary from US source; ok for setting up US office, meeting potential customers/investors, startup accelerator program)  E-1 Treaty Trader (demonstrate substantial investment [e.g., a sizable and continuing volume of trade (exchange of goods, services & tech)]; majority of stock must be held by nationals of treaty country so US investor dilution can be a problem; spouse can work)  EB-5 Investor Visa for Permanent Residence ($1mm,* new biz, ≥ 10 US Citz, involved day to day)  F-1 Student (OPT – 12 months post grad, related to your degree, can extend up to 24 months if STEM; equity only ok)  H-1B Specialty (temporary) Worker (must be able to support employee and numbers limitations; annual cap of 65k; exemption if had H-1B in last 6 years or get job with US university)  L-1– Intra company Transfer (foreign company abroad with affiliation with US company; 1 year employment as manager, exec or specialized skill employee; spouse can work)  O-1 Extraordinary ability (very top of your field in the world; regs list 10 examples and must generally meet at least 3) 21 Immigration – Common Non-Immigrant U.S. Visas * Increased to $1.8mm if petition filing date is on or after 11/21/2019
  23. 23. Nonimmigrant Visa Options 22 E1– Treaty Trader Visa EB-5 – Investor Visa H-1B – Specialty Occupation Worker L1 - Company Transfer L Blanket – Co. Transfer (pre-approved) O – Extraordinary Ability B1 – Temporary Visitor F – Student DualIntentNonimmigrantVisas TemporaryNonimmigrantVisas
  24. 24. Employment-Based Nonimmigrant Visa Types 23 • National of a treaty country • Engage in substantial trade with a U.S. enterprise • At least 50% ownership or managerial control • Available to Principals & Essential Employees • Renewable in 2 year increments • Spouse employment authorized E1 Visa • Available to Manager, Executive or Specialized Employee • Relationship exists between foreign entity & U.S. company • Must have been employed by the foreign entity for 1 year in last 3 yrs • Valid for 5-7 years (depending on role) • Spouse employment authorized • Dependent children may study in U.S. L1A/L1B or L Blanket
  25. 25. Raising Capital: Options
  26. 26. Sources of Investment Capital  Inter-company funding (debt or equity? Don’t’ forget “thin cap” rules)  Friends and Family (be careful, in the US, still must be “accredited” if they are US residents)  Angel Money – High Net-Worth Individuals (can be unsophisticated or “super angels”) – Angel Groups – Incubators; Accelerators  Institutional Capital – Micro/seed funds – Venture capital funds – Corporate (strategic) investors (may also include customer advance; grew tremendously in 2014 with nearly 18% of all venture deals (strongest since 2000 ) and strong performance continued in 2015)  Crowdfunding platform? – Equity crowdfunding (e.g., angelist) – Product development (e.g., kickstarter)  Issue: US/3P investors considering investing in USCo (vs. ForeignCo) rightly reluctant to do so in USCo if “flip” has not been effected or USCo is not otherwise owning, directly or indirectly, the business assets (IP, customers/revenue, etc.). 25
  27. 27. Types/Structure of Investment  Foreign lenders need special provisions in their loan documents to avoid interest withholding tax  Straight loan – Intercompany loan: Typically just simple loan (term or revolver) if just an inter-company investment from ForeignCo, but must not all be debt; “thin cap” rules) – Commercial bank loan: very unlikely to obtain, as will require substantial collateral – corporate assets, more likely AR, or perhaps personal guarantee(s) – “Venture debt”: Loans made by “venture debt” funds, but typically only invest alongside tier 1 equity venture investors  Convertible loan* – Convertible debt: convertible note that converts the investment initially structured as a loan into preferred stock at a later “qualified financing” …still popular with U.S. startups, but a US investor won’t provide convertible debt to USCo if it’s not the parent or otherwise owns the business – *Convertible security: Not debt, so no interest accruing or maturity date, but not considered outstanding stock until “if and when” converted at a qualified financing into preferred stock; see e.g., “SAFE” investment (Y Combinator)  Preferred stock – Seed preferred – Traditional venture preferred (Series A, Series B, etc.) 26
  28. 28. 27 Raising Capital: Trends 2019 (first half): • 1H 2019 total US VC deal value reached $66 bn across 4,868 deals. • VC funds closed on $20.6 bn in total commitments in 1H 2019. • 123 Mega-deals closed, accounting for 44.6% of total VC investment. However stabilization may follow the period of heightened VC activity: Deal sizes and valuations in aggregate have plateaued for the first half of 2019. • Impact of global market forces on the US VC industry; new CFIUS regulations could complicate the deal making process and have a damaging effect on IPOs: The expanded authority of the Committee on Foreign Investment in the United States (CFIUS) on foreign investment into the startup ecosystem continues to be an area of policy focus. The new CFIUS regulations are in early days, however investors from trading partners in Europe and elsewhere are now getting pulled into the CFIUS process, which convolutes deal making and poses a variety of major hurdles, especially for life sciences companies. 2018 US VC activity (full year): • Unicorns raised an aggregate of $44.5 billion in funding, which accounted for 33.9% of total VC investment in 2018. • Capital invested into life sciences companies reached a decade high: US VC investments reached $23.3 bn across 1,308 deals. US life sciences represented 14.6% of US VC deal value in 2018, up from 13.4% in 2017. • 85 IPOs were completed in 2018, up from 58 IPOs in 2017 and the highest count since 2014. In 2018, IPOs represented greater than 50% of exit value for the second straight year. • 2018 VC reached $130.9 billion invested across 8,948 US venture deals, the first time annual capital investment eclipsed the $100 billion watermark set at the height of the dot-com boom in 2000. The year closed with a ~5.5% decline in completed financings, despite the record aggregate capital invested figure. • 61.9% of total capital invested originated from deals sized $50 million or larger. Large round sizes and high valuations dominated the deal-making environment in 2018.
  29. 29. 28 Raising Capital: Trends (continued) 2018 US VC activity (full year) continued: • Venture funds closed on $55.5 billion across 256 vehicles, the fifth consecutive year that at least $34 billion was raised. The fundraising dollar amount in 2018 was fueled by the continued rise of VC mega-funds as vehicles raising at least $500 million accounted for 57.0% of all capital raised last year. • $7.5 bn invested in angel & seed funding in 2018, setting a near decade high. Strong activity in Q4 18 helped mitigate a downward trend; lower activity in angel & seed funding is anticipated as investors continue to focus on fewer, larger deals. See also line graph on p9, angel & seed pre-money valuations climbed 11.1% in 2018. • $41.1 bn was invested in early stage VC across 700 transactions. Nearly half of US early-stage deals were sized at least $5M. • $82.5 bn was invested in late stage VC across 500 transactions (this includes the $12.8bn funding of Juul in Q4 18). • Mega-deals had unprecedented investment levels in 2018, with nearly $62 bn invested across 200 mega- transactions (i.e. value of $100 mn and up). Mega-deals reflected an 81.7% YoY increase over the previous record set in 2015. See also bar chart on mega-round counts on p5. • Corporate and PE investors continued to have significant participation in venture deals: in 2018, corporate venture capital was involved in 1,443 deals and PE participation in 792 deals. • The West Coast continued to dominate as a VC hub, contributing 61.7% of 2018 deal value and 39.5% of 2018 deal count. The next largest contributor was the Mid-Atlantic region, contributing 14.9% of 2018 deal value and 20.1% of 2018 deal count. • Pharma & biotech and software continued to dominate VC deals in 2018; software had record levels of capital investment with software deals accounting for 41.8% of US VC deals and 35.8% of capital investment in 2018 (per bar charts).
  30. 30. Intellectual Property Considerations 29
  31. 31. IP Considerations and the US  Agenda – Protection Strategies – Best Practices and Operational Considerations – Investor/M&A Due Diligence Perspective  US General Perspective – Bigger and Denser IP landscape – Higher volume of IP related activity  Investment, M&A, Litigation – Higher IP Expectations, Scrutiny and Risk 30
  32. 32. What is Intellectual Property?  Every company has it, even if not registered n Confidential/Proprietary Information – Know-how and unregistered ideas – Trade Secrets – Processes, methods and algorithms – Technology Infrastructure/Computer Programs – Functional/Technical specifications – Designs, drawings – Analysis, research – Licenses – Business information n Sales and marketing research, materials, plans, customer lists n Registered IP – Patents and patent applications – Copyrights – Trademarks and trademark applications – Service marks – Trade names – Domain NamesIntentional
  33. 33. Patent Copyright Trademark Trade Secret Contracts Right to exclude others Right to make copies Right to use mark in commerce Right to be free from industrial espionage Right to enforce an obligation Protects new and useful ideas Protects creative expressions Protects source indicators Protects secrets Protects transactions/ relationships Requires disclosure Requires originality Requires mental connection to manufacturer Requires secrecy Requires consideration and agreement 20 years Lifetime plus 70 years Forever, as long as there’s a mental connection Forever, as long as it’s a secret Depends on the contract $$$$ Free-¢ $$ Free…? Depends on the contract 32 IP Protection Tools
  34. 34. Different Types of IP Can Overlap Can Use All IP Protection Types For Same Product/Service – Can have overlapping IP protection –Can protect same product via copyright, patent protection, trade marks, contract (licensing) Trade Secrets Mutually Exclusive with Patenting –In order to get patent, need to disclose details of the invention – cannot keep a secret –May block out trade secrets from copyright registration –Be careful: is it really a trade secret?
  35. 35. Patents versus Trade Secret Strategy Maintain as Trade Secret Consider Patent Protection Competitors will independently create feature LessLikely MoreLikely Feature is determinable from use of product Infringement of patent would be detectable
  36. 36. Patentability Legal Framework New functionality And features Existing Building Blocks (Prior Art/Known) IPandValue New Implementation On Top of Existing Stack New hardware and firmware New Interfaces and integration Useful Minimal demonstration of some utility Novelty (“New”) Not already described or patented elsewhere, or known, used or available to others in the US Non-obvious/Inventive Even if combined two or more prior art references would not suggest the invention Existing technologies, products and software can license, buy off the shell or open source but still does not provide the functionality of the product or service you are selling
  37. 37. Strategic Patentability Approach New Do not know of any competitors who have such features Do not know of any products with these functions Competitive Differentiator (“Value”) Strategic value Would not want “copy-cat” companies copying such features  Develop Innovation Strategy to Protect Existing technologies, products and software can license, buy off the shell or open source but still does not provide the functionality of the product or service you are selling Existing Application and Hardware Stack IPandValue “Your White Space” The new functionality that the Company implemented on top of the existing stack to meet the desired and Designed functionality, capabilities and behavior of product or service, including any Competitive Differentiators
  38. 38. Data : New Form of IP Currency First Data Layer Second Data Layer Third Data Layer Operation Data Digital Exhaust Aggregate Data System Generated Data Scalable Infrastructure Actionable Insights Analytics and Report Data App Generated Data Customer Data Who owns the originating data? Device mfg. vs Device owner Customer Data Use License: - Limitations? - Derivatives? Who owns the aggregate data? Is it explicit? Can system operator monetize data? Can operator monetize data generated from app resulting from customer data? Multiple Data Flows: Data Merging, Aggregating and Changing
  39. 39. IP Strategy 38  First: Have one! –Making IP decisions intentional –Make it part of corporate resume: Tie to competitive differentiators and align with business strategy and increase value  Developing an IP Strategy –Understand the “toolbox” of tools that may be used to protect IP –Gain a perspective on how to identify innovations that may be patent protectable  Continuously Review Product Roadmap –Consider primary/core features – Intentionally determine if and how going to protect
  40. 40. Best Practices and Operational Considerations 39  Ownership of IP  Joint development/partnerships  Bar dates for patents  NDA Practice  IP Related Agreements  Make IP Intentional
  41. 41. IP Ownership 40  Key Issue For Company, Investors and M&A – Want all IP in company and to avoid IP leakage – US investors want IP in primary/US company they are investing in – Requires written assignment of IP rights from individual/3rd parties to company  Employees: – Proprietary Information and Inventions Agreement (PIIA): assign IP  Contractors/Service Providers: – Work for hire: if not explicitly assigned in writing, contractor owns IP  Customers: – Service related work to be owned by Company – How about customer feedback or product/enhancement requests?
  42. 42. Partnerships/Joint Efforts 41  Company looking for 3rd party resources (money, market, sales channels etc.) to further develop products and services – IP will play significant role  Issues: – Joint IP is Bad! – Partner investing considerable amount of resources will want to treat you as work for hire: they paid for development and get IP – As product company, you will want to own your entire product regardless of how and who paid for it – Future partners, investors, M&A will want to make sure no else has use of product in competitive way or way that dilutes value  Solution: Careful strategy and license terms in term sheet, definitive agreements
  43. 43. Important Patent Dates (“Bar Dates”) n Date of first public use n Date of first sale or offer for sale n Date of first publication – 1 year grace period if derived from inventor n Now First to File n March 16, 2012 Switch from First to Conceive to First to File – Filing date is constructive priority date but can swear behind reference or gain rights over same invention but made by another via conception date InternationalUnited States n Date of first public use n Date of first sale or offer for sale n Date of first publication – No grace period, but trigger only occurs upon divulging invention – Exception: Some countries like Canada have a 12 months grace period also; others may have 6 months n First to File
  44. 44. Non-Disclosure Agreements (NDA)  Good Practice with 3rd Parties – No license to IP and no disclosure of confidential information and trade secrets – Balance of when to execute in relationship: always need to have dialogue with 3rd party before getting to NDA stage – Even under NDA, should still be careful of what you share and when your share it  Avoid IP Public Disclosure – NDA should prevent public disclosure bar date – Large Beta release under NDA may not  Does not protect collaborative inventorship – Working Under NDA with another company – Will keep inventions confidential – But does not stop other company employees from being inventors
  45. 45. Commercialization of IP  IP integrated into many commercial agreements  Software license and SaaS license agreements  Terms of Use/Service Agreements  Proof of Concepts, beta, demo agreements  Services and Solution agreements  Product/Purchase Order  Reseller/Distributor agreements  Term Considerations – Scope of license (contractually control use of IP)  Scope of use, field of use, exclusivity, sublicenseable, assignable, etc. – Respective Parties’ Background IP – get license to extent incorporated – Service or Feedback Related IP back going back into the product – Data governance and use, privacy and security – Indemnification for infringement 44
  46. 46. Making IP Intentional Reduce IP Leakage –Written agreements, NDAs, etc. to make clear ownership –Public disclosure dates for patentability Review commercial agreements with IP focus –Consider scope, use and down stream implications –Controlling access and us of IP to intended ways Approach strategic and partner relationships with IP strategy formed –Know what is important before negotiations/term sheet –Consider company’s future paths and exit strategies 45
  47. 47. IP Due Diligence for Funding/Exit  Investor Side/M&A Due Diligence Perspective on target company – Identify/Status of IP Assets • Does Company have registered IP in good standing? • Does Company own IP? • Appropriate IP Assignment clauses in Agreements? – Analyze Scope and Strength of IP • What is Company’s IP Strategy? • What is the scope of coverage of protection to current product? • Contractual strength (Confidentiality, non-compete, licenses, etc.) – Asses Third Party IP Risk • Risk from competitive patent/IP landscape • Competitive patent benchmarking • Freedom to operate considerations 46
  48. 48. IP Diligence Readiness  Top 5 IP Considerations 1. What is your IP Strategy?  Do you even have one? 2. Do you own your IP?  Employees or contractors? What about interns?  Also consider your data, which may be the new IP currency 3. What are your product/service functional differentiators and how well does your IP strategy protect them?  Is your IP strategy tied to and protecting your core differentiators 4. Who are your competitors and how are you differentiated in an IP defensible way?  Why are you not a “copy-cat” company and how can you protect against “companies doing what you do? 5. Are there any 3rd party/landscape IP risks?  Will investment deployment be at risk from potential expensive IP litigation? 47
  49. 49. About Foley
  50. 50. Who We Are… 49 Foley & Lardner lawyers are business advisors combining legal knowledge with market experience. We are dedicated to operating in an inclusive environment. National Coverage Global Experience Austin Boston Brussels Chicago Dallas Denver Detroit Houston Jacksonville Los Angeles Madison Miami . Foley & Lardner LLP is dedicated to fostering an environment that embraces differences, promotes equality, and engenders mutual respect, thereby creating a culture of inclusion where everyone has the opportunity to excel. We are committed to recruiting, retaining and promoting diverse attorneys, thereby resulting in a diversity of perspectives that benefits the firm, our clients and the communities in which we practice. Mexico City Milwaukee New York Orlando Sacramento San Diego San Francisco Silicon Valley Tallahassee Tampa Tokyo Washington, D.C
  51. 51. Industry Focus to Deliver Legal Solutions… 50 Antitrust Appellate Bankruptcy Business Reorganizations Capital Markets Class Action Construction Consumer Law Corporate Governance Cybersecurity Distribution & Franchise Employee Benefits & Executive Compensation Environmental Regulation Estates & Trusts Export Controls Finance & Financial Institutions Government & Public Policy Government Enforcement & Compliance Insurance Intellectual Property Labor & Employment Litigation Mergers & Acquisitions Outsourcing Privacy, Security & Information Management Private Equity Private Office Real Estate Securities & Corporate Finance Securities Enforcement & Litigation Taxation Technology Transactions Venture Capital White Collar Defense Foley looks beyond the law to focus on the constantly evolving demands facing our clients and their industries. 60 Practice groups providing business solutions including...
  52. 52. 51 More than just lawyers, we leverage the knowledge earned from time spent working in senior positions in both business and government. For clients, the benefit is our legal guidance has the unique perspective gained from being on both sides of the matter and the result is unparalleled counsel, driving toward the best outcome. By the Numbers
  53. 53. ATTORNEY ADVERTISEMENT. The contents of this document, current at the date of publication, are for reference purposes only and do not constitute legal advice. Where previous cases are included, prior results do not guarantee a similar outcome. Images of people may not be Foley personnel. © 2019 Foley & Lardner LLP CLIENTS FIRST Our clients are our first priority. When we provide quality work, value and superior service to our clients, our own success inevitablyfollows. DIVERSITY We embrace diversity and are committed to the inclusion of our diverse attorneys and staff and to the success of all ourpeople. INTEGRITY We will adhere to high standards of ethics, professionalism and integrity and safeguard the reputation of the firm at all times. TRUST AND RESPECT The success of our partnership stands on a foundation of trust,mutual respect, collegiality, communication and teamwork. STEWARDSHIP AND ACCOUNTABILITY As stewards of the firm, we are accountable to one another and will commit our time, talent and energy to the firm’s success, growth and long-termprosperity. CITIZENSHIP We embrace our responsibilities to our communities and profession and will lead by example through civic, pro bono, professional and charitable service. PROFESSIONAL SATISFACTION Our work should be professionally satisfying and provide competitive financial rewards while affording the opportunity to achieve a reasonable balance between professional demands and personalcommitments. OUR PEOPLE Our people are our most valuable asset and their quality, creativityand dedication are indispensable to oursuccess. Our Core Values

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