As the proliferation of Web-based start-ups continues and existing companies expand marketing efforts by utilizing the Web, there are several legal issues to consider.
1. Move at your own pace. The Internet moves at light speed, but that does not mean your business should. Take the time to understand your business and what is happening within it. Surround yourself with employees, consultants and professionals with proven track records in your businesss area of expertise and the Internet.
2. Choice of entity. Start-ups quickly form an entity to begin doing business and often decide based upon tax considerations, with the preference usually an S corporation or limited liability company. But if a business will be looking for venture capital within a year, there may be a benefit to forming a Delaware C corporation or limited liability company to satisfy investors.
3. Domain name registration. Search Network Solutions Inc., the U.S. Patent and Trademark Office and the applicable secretary of state office to determine whether a name is available. Use a professional search firm, covering state and federal registrations, common law (unregistered) usage and URL registrations. Register the domain name (plus derivatives, and under the various domains of .com, .net, .org, .cc, etc.), register the domain name as a federal trademark and reserve the trademark name with the secretary of state. A registered trademark holder may challenge a domain name covering its trademark.
4. Ownership of intellectual property. The Web provides access to volumes of information and makes commercial exploitation of products, logos and slogans easier. Once a product or company name hits the market, it has brand name, brand recognition and an associated monetary value. Protect anything that is instrumental to your business.
Generally speaking, copyrights protect an expression of an idea, such as text, artwork and software. Patents protect processes and compositions, methods (including methods of doing business), software and articles of manufacture. Trademarks protect any word, term, name, symbol or device used to designate the source or origin of goods or services.
5. Privacy. Many Web sites post privacy policies to inform a visitor how certain data may be collected and used based upon their visit to the site. Polices should be drafted in a click through fashion, so a visitor must consent to the terms (by clicking on the accept button) before gaining access to a site.
Information about consumers accumulated as a result of their visits to a Web site and their purchases online have value to third parties.
6. Confidentiality. Any business needs to keep confidential any information that goes to the heart of its operations. Identify trade secrets, which may include codes, strategies, customer lists, formulae, manufacturing methods and e-commerce methods. Have employees and consultants with access to confidential information execute a confidentiality agreement. Access to confidential information should be restricted to those who require it to do their jobs.
7. Stock options. Stock options can be used to attract and retain qualified employees and consultants. Remember that stock options are securities and must comply with applicable federal and state securities regulations. In addition, the granting of stock options can present tax and investment capital issues.
8. Noncompetition. Generally, noncompetition agreements that protect a legitimate business interest must contain a time limitation, a geographic limitation and evidence of adequate consideration. The time limitation must be no more than is necessary to protect the legitimate business interest.
This type of agreement can be used to restrict an employee or consultant from competing against your company. It can also be used to limit a consultants ability to do similar work for a competitor. Be careful if employees relocate California and Texas do not look favorably upon noncompetition agreements.
9. Regulations. General federal regulations to keep in mind include the Uniform Electronic Transfer Act, the Uniform Computer Information Transaction Act and Federal Trade Commission rules.
10. Contract issues. Any form of business has numerous contract issues which, depending upon the nature of the business, may determine whether it will need to deal with issues including outsourcing of Web-related services (always maintain control); Most Favored Nations clauses (covers exclusive business relationships); click-through policies; and licensing issues such as royalties.
Joel Heiser is an attorney at Arter & Hadden LLP and is a member of the E-Group, a multidisciplinary group of attorneys who focus their practice on entrepreneurs, Internet, e-commerce and emerging growth companies. He can be reached at (216) 696-1100.
Over the past year, I have received numerous telephone calls from clients and participated in discussions with colleagues on whether a third party may collect a finder's fee for introducing potential investors to corporations seeking venture and/or other forms of capital financing.
These situations typically involve third parties who seek an ownership interest in the corporation, shares of the corporation's stock or cash fees for bringing investors and their money to a corporation.
Some may attempt to rationalize what such providers or finders do by using an improper analogy: If people pay fees to accountants and lawyers for their valuable professional services, what's wrong with giving up a piece of equity in a corporation or paying a cash fee to a third party who provides such a valuable professional service as bringing equity investors to the corporation?
The answer is simple. When corporations or individuals hire accountants or attorneys, these professionals are licensed and regulated by governing bodies that set educational, training and ethical standards. Individuals who act as promoters and/or finders and who seek finder's fees should be held to similar standards.
Generally speaking, federal and Ohio securities laws effectively prohibit finders or promoters from engaging or professing to engage, directly or indirectly, in the purchase or sale of securities with the expectation of receiving a commission, fee or other compensation unless they are licensed.
If a promoter or finder who is not properly licensed introduces a corporation to individuals willing to make an investment, and the corporation provides that with a fee, then that individual may be subject to civil liability and/or criminal prosecution under the law. Civil damages may include fees paid for advice, any loss due to such advice, court costs and any income derived as a result of such advice.
In Ohio, an afflicted individual may bring an action for civil liability for such a violation within four years after the investment advice is rendered or two years after discovery of facts which constituted such violation, whichever is shorter.
If the promoter or finder is subject to criminal prosecution, such individual may be subject to felony charges and/or criminal fines that vary depending upon the value of the funds or securities involved.
In addition, any sale made in violation of Ohio securities laws is voidable in its entirety by the purchaser (the new equity investor). Also, the corporation, as seller of its shares of stock, and any participants involved in the sale of stock are jointly liable for the full amount paid by the investor to the corporation, along with any court costs the investor has incurred.
There are individuals who are properly licensed as securities brokers or dealers who can provide the same services as a finder or promoter. By using properly licensed individuals or entities, a corporation looking for capital can eliminate its liability.
Joel S. Heiser (firstname.lastname@example.org) is an attorney at Arter & Hadden LLP and is a member of the firm's E-Group, a multidisciplinary group of attorneys who focus their practice on entrepreneurs, Internet, e-commerce and emerging growth companies. He can be reached at (216) 696-5665.