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LEGAL ISSUES & NEW VENTURES: Some Basics. Protecting Your Reputation, Your Assets, Your Ideas. Do you know this man?. Robert Kearns: A Life Spent in…Litigation!. Most famous example of an entrepreneur who had to protect his intellectual property
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LEGAL ISSUES & NEW VENTURES:Some Basics Protecting Your Reputation, Your Assets, Your Ideas
Robert Kearns: A Life Spent in…Litigation! • Most famous example of an entrepreneur who had to protect his intellectual property • Wedding night accident—idea for intermittent windshield wipers • Brought it to “Big Three”—and they promptly stole it! • He spent the next twenty-plus years trying to get compensated for his invention • Was it worth it? He won $30 million, but as his son said: “He wasted his life on this law suit…”
Bottom Line: • Patents are not perfect and can be • They can be violated— “Sue me!” • Or, they can be ‘invented around’ • In either case, they don’t give you total protection • Also international patents???
Entrepreneurs are Not Attorneys.. But they do need to know something about the laws governing: • The legal form of a business • Intellectual Property • Non-compete agreements and other arrangements with employers
Intellectual property… • Why? What is the relevance to entrepreneurship? • Answer: Do you like trouble?! • Do you want to focus on your business or appear in court? • Do you like angryconfrontations? • If not, pay attention!
What happens if you don’t consider legal issues carefully? How much did Cameron and Tyler Winkelvoss receive? Answer: $65 million How much is Mark Zuckerberg worth today? Billions!
No intellectual property protection = disaster $86 on Amazon; one brightness
Why? They had only a design patent to start with They later received a utility patent They don’t have the resources to protect their product/invention And price is far too high! So, lots of luck Next stop: bankruptcy?
Design vs. Utility Patent • A utility patent” protects the way an article is used and works • A “design patent” protects only the way an item looks • This can shape/configuration or surface ornamentation applied to the article, or both. • You can get both on the same article of object--if invention resides both in its utility and ornamentalappearance. • Here are some items that received design patents
Have you ever seen any of these? • Yes for some—i-Pod, clothes hanger with notches • But no, for others! • So, just as is true for utility patents, receiving a design patent does not mean that the item in question will be produced or sold—or that anyone will want it!!!
Non-compete Agreements and Nondisclosure Agreements • Non-compete Agreements Most companies have these: “I won’t compete with my employer for….” or “within….miles….” • Limited term • Geographic regions • Nondisclosure agreements: employees pledge they will not disclose trade secrets to others • Failure to comply with them can have financial repercussions—and damage personal reputations
Who Signs Them? • These days, almost all employees who will learn trade secrets • So, if you learn something at work that you want to use in starting your own business.. • WATCH OUT! If you do start a business, and your former employer can prove that you based it on “trade secrets,” you will lose it—and all your profits!
An example • You work for a company that makes something millions of older people buy: an alarm they can use if they fall and are hurt • While working on designing these devices, you realize that there is great way to build in another feature--buttons that will indicate whether they are hurt or just fell and can’t get up • You decide to start a company to make this product— Can you do it??? • NO, 1,000 times NO!
Watch Out… • How can I get "out" of a non-compete agreement? You can’t, unless employer agrees • What would happen to me if I violated the non-compete agreement? “See you in court.” • Can my employer assign the non-compete agreement to another employer? Yes—you can’t escape easily
Non-compete Agreements in ActionDo You Have a Right to Start Your Own Business? • Think long and hard before signing a non-compete agreement. • Among the flood of forms you get when you’re first hired, a non-compete clause or agreement may be lurking. If you sign it—that’s it! • Such legal documents can prevent you from going to work for a competitor or even keep you from starting a business in a similar industry. • So, do you have a right to start a new business? Yes—if you didn’t sign such an agreement
He Is the Founder of Chesapeake Energy Company • Chesapeake is a very large and valuable company • He was “fired” from his job as CEO because he was taking huge risks and diversifying into----real estate! • Now, he (his new company) is being sued by the company he founded for…”stealing sensitive documents to start a new, rival company.”
So, the Bottom Line • Be careful what you sign! • And be careful about what you do—if your former employer is ‘out to get you,’ they can—if you signed a non-compete agreement • And there have been many examples of throughout business history
And… • If you sign a non-compete agreement, take it seriously • If you ignore it, you can end up in deep, deep trouble • And if you start a company in violation of a non-compete agreement, you can lose it all! • And not be able to start it again…
Non-Disclosure Agreements • Two people or companies want to share information, but don’t want to share it with others • Common between companies; but also between companies and employees • Some employment agreements will include a clause restricting employees' use and dissemination of company-owned confidential information • So—if you learn something at work, you can’t tell it to others…and if you do, you will be sued!
Non-Disclosure Agreements—the Basics • Companies use them to avoid losing trade secrets etc. to other companies • A non-disclosure agreement is a formal arrangement that is used to prevent employees from divulging important information, usually classified business information. • For example, if a company is developing a new product, they may ask their employees to sign a non-disclosure agreement, or NDA. In this way, the company will have legal options if any of their employees violate the terms of the NDA. • Information about how long the agreement is to remain valid • Anyone who signs a non-disclosure agreement is officially agreeing to abide by its terms. Violating the terms of the agreement can legally be considered a breach of the contract.
More… • For example, if a company is developing a new product, they may ask their employees to sign a non-disclosure agreement, or NDA. In this way, the company will have legal options if any of their employees violate the terms of the NDA. • An agreement not to divulge certain information • Protection of intellectual property rights or patent rights • A specific description of the information that is to remain confidential • Information about how long the agreement is to remain valid • Anyone who signs a non-disclosure agreement is officially agreeing to abide by its terms. Violating the terms of the agreement can legally be considered a breach of the contract.
Examples…. • Employee receives a bribe to reveal secret information • Secret information is stolen directly from a company • A computer hacker breaks into a company’s secret files • An employees…gets drunk!
Ownership of New Ventures • Who owns the new venture? Do you know? • Make this explicit for your own good, and do it before you see an attorney • Founders’ agreement: how much of the new venture each founder owns • Also: buyback clause (founder who leaves must sell shares to remaining founders) • “Trust everybody—but cut the cards.”
What are the Legal Forms of New Ventures? • Sole Proprietorship: One Company, One Owner • Partnership • Partnership agreements are documents with help of an attorney which specify: • Name of business • Purpose • Location • Names of partners • Duration of partnership • Contributions of each partner • How profits/losses will be distributed • Salaries and drawing rights • Procedures for expansion, dissolution • How each partner can sell his/her share • What happens if open of the partners is disabled or absent • How agreement can be modified.
Limited Partnerships • General Partners run the show • Limited partners—supply capital • Get tax advantages and limited liability for partnership debts, etc. • General partners: have unlimited liability—if you can find them! • Limited liability Partnerships: Liability is limited, as in a corporation
Corporations: Limited Liability • Separate legal entities apart from their owners • Advantages: no personal liability, can sell shares to raise capital; continue beyond lives of founders ; shares are transferable • Disadvantages: attorneys’ fees, must pay taxes, subject to many legal and financial requirements—board of directors, articles of incorporation, etc.
The S-Corporation • Avoids double taxation (company and individuals) • But must meet stringent requirements • Domestic; can’t have non-resident alien as a shareholder • One type of common stock; can’t have more than 100 shareholders • Tax advantages: profits/losses flow through the individuals
Limited Liability Company (LLC) • Cross between corporation and partnership—benefits of both • As in S corporations and partnerships, income flows through to owners (members) • Not subject to so many government restrictions—can have more than 75 shareholders, several classes of stock, foreign shareholders • But can offer only two of the following characteristics of corporations: limited liability, continuity of life, free transferability of interests in them, centralized management
Professional Corporation • PC (versus LLP)—many professionals—physicians, attorneys, accountants • Some advantages: limited liability because it is a corporation, members are not limited partners • Can sell shares and raise capital easily
Legal Basics—What You Need to Know--Continued Business Contracts Basic Elements of a Contract—what makes a contract a contract • Legality: must have a legal purpose • Agreement—must include a legitimate offer and legitimate acceptance • Consideration— something of value must be exchanged • Capacity: only persons who have the capacity to enter into it
Franchising—Starting a New Venture Without Some of the Risks • Thousands of franchisers—for anything and everything you can imagine! • If you can imagine it, someone is, or will soon, franchise it Types: • Trademark franchising— franchisees have right to sell products under franchisor’s brand name and trademark—e.g., automobile dealers • Business format franchising: provide franchisees with complete business—turn-key operations • E.g., McDonald’s
Benefits of Franchising • Training and support • Standardized products and services • National Advertising • Buying power • Financial assistance • Suite selection and territorial protection • A business model that works
Drawbacks • Franchise fees and royalties; these can be substantial • Enforced standardization • Restricted freedom with respect to purchasing and products • Poor training programs • Market Saturation • Franchisors will “dump” you if you are not meeting their expectations and guidelines—and you will lose everything—all your franchise fees, etc.
Franchise Fees… • How much does it cost to open a McDonald's Franchise? • Total Investment: $950,200-$1,800,000Initial Franchise Fee: $45,000Royalty Fee: 12.5%+Advertising Fee: N/ATerm of Agreement: 20 yearsRenewal Fee: $45K
Less Known Companies… • How much does it cost to open a Mr. Handyman Franchise? • Total Investment: $91,500-$132,000Initial Franchise Fee: $9,900Royalty Fee: 7%Advertising Fee: N/ATerm of Agreement: 10 years
