Identifying the intrinsic value of your company is an extraordinarily beneficial exercise, especially when business owners are looking to maximize the sale of their company, says Joshua Geffon, a shareholder at Stradling Yocca Carlson & Rauth.

“The crown jewel of an enterprise may be intellectual property (IP), the management team, key customers or brand recognition, and/or any combination of these ingredients. The key for an entrepreneur is to recognize, exploit and promote these attributes to gain maximum value for the enterprise during the acquisition process,” Geffon says.

Smart Business spoke with Geffon about what business owners should know before engaging in the acquisition process.

What are some mistakes owners make that jeopardize the sale of their companies?

A fairly common mistake is not doing enough to secure the company’s IP. Confidentiality and IP assignment agreements, patent filings and related IP protection should be in place to have clear and strong IP ownership and title.

Broad indemnification by the seller on contracts creates risk that buyers of companies don’t like. Material contracts that allow customers, suppliers, service providers or other partners to easily terminate can significantly undermine a seller’s value proposition.

Also, tax and planning is critical. Overlooking tax-related filings often leads to significant turmoil and financial hardship. Inversely, proactive corporate and personal tax planning for founders and executives also can create real economic benefits.

What’s important to have in order before initiating the acquisition process?

Be sure you are prepared to provide copies of well-organized and complete corporate, capitalization and financial records, as well as material contracts, as part of a due diligence review by the buyer. Being well organized on these matters ahead of time will buy a lot of credibility with the buyer. Messy or inaccurate records will cast doubt on the value of your company.

What legal pitfalls often trip up the sale?

Buyers are always concerned about risk. Risk comes from inside your company in the form of personnel — employees, consultants and others — and outside from lawsuits, warranty and return claims, supplier terminations and limits on business operations.

Employees are often the company’s greatest asset and typically a company’s largest expense. Sellers usually engage in pre-emptive measures to entice employees to stay by offering equity, cash and other incentives that require personnel to work as diligently for the buyer as they did prior to the transaction.

Your company’s value proposition may be significantly weakened, and deals have died, if buyers identify agreements that limit rights to develop, manufacture, assemble, distribute, market or sell products.

How do you determine a realistic price?

Depending on the stage of your business and the industry, there are a few methodologies available. The most common are discounted cash flows and price to sales, but this relies upon a history of revenues and costs and/or sales. Early stage companies have a harder time utilizing these valuation methods.

When traditional valuation models are inapplicable, recent transactions in the sector or the valuation of similar public companies can be used. Gauging your value proposition with board members, advisers and strategic partners can help you solidify an approximate value.

Remember that buyers are valuing your business on your financial statements, projections, business plan and opportunities in your industry, along with synergistic opportunities with the buyer.

Who should help a business owner in a sale?

Secure competent, experienced service providers. These people will help you get a better sense of the market, your company’s value and your risk exposures. Get them involved well before the sale to ensure the process runs as efficiently as possible.

A good merger and acquisitions attorney will lead you through the process, identify and mitigate risks, and explore potential resolutions to issues ahead of the transaction. An independent accountant who can review and audit your financial statements also may be needed.

Joshua Geffon is a shareholder at Stradling Yocca Carlson & Rauth. Reach him at (424) 214-7000 or jgeffon@sycr.com.

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Published in Los Angeles

The high-profile arrest of computer programmer Aaron Swartz for illegally downloading millions of academic journal articles resulted in federal charges against him for violations of the Computer Fraud and Abuse Act (CFAA), which highlighted its use as a broad tool to combat hacking. However, varied interpretations of the CFAA have left businesses guessing when it comes to deciding how best to pursue employees who have used their access to steal and misuse confidential information.

“Currently, the law can be applied differently depending on your location. A decision in the U.S. Circuit Court of Appeals for the 9th Circuit makes it more difficult to use the law against current employees who have used their access to obtain information for the purpose of misuse. In contrast, courts in other parts of the country have adopted relatively broad readings of the statute, making it a more viable tool in those jurisdictions,” says Travis P. Brennan, a litigation attorney with Stradling Yocca Carlson & Rauth.

Smart Business spoke with Brennan about the CFAA and protecting sensitive information.

What is the CFAA and how is it applied by businesses?

The CFAA is a federal, primarily criminal, statute, though it does provide for civil remedies for private plaintiffs when someone accesses a computer without authorization or exceeds authorized access to obtain information. One of the questions presented in several cases involving the statute is: If an individual is authorized to access a company’s computer network, does that person exceed authorized access by obtaining information to use for unauthorized or competitive purposes? Some courts have said yes, which turns the statute into a tool to help police improper use of company information, in addition to a tool to help protect against outside hacking.

What are the benefits and limitations of this act?

Filing a claim under the CFAA gets the case into federal court, which is more often better equipped to handle complex disputes. Plaintiffs also aren’t required to prove the information accessed rises to the level of a trade secret. However, the remedies under the CFAA are limited. A private plaintiff has to show it suffered a loss of more than $5,000, and in most instances the recoverable loss is limited to the cost of investigating the unauthorized computer access and fixing related data disruption. That’s important to think about when considering if this is a tool that would bring a tangible benefit.

How does United States v. Nosal affect the use of the CFAA?

That case makes it more difficult to use the CFAA against current employees. The 9th Circuit affirmed a narrower interpretation, in April 2012, when it dismissed criminal counts against employees who accessed information through company-issued passwords while still employed. The court reasoned that the phrase ‘exceeds authorized access’ is limited to violations of access, not restrictions on use.

Other counts in the case dealt with access by outsiders using stolen passwords to obtain information. Some of those counts proceeded to trial and resulted in a recent conviction.

What other tools can companies use to protect their sensitive information?

State law governs the protection of trade secrets and other sensitive information. Most states have adopted some form of the Uniform Trade Secrets Act through which companies can get damages and other relief if they can show information taken contained trade secrets.

Ultimately, it behooves companies to limit or segregate access to sensitive information and have employees sign clear, written policies. If the agreements are violated, there are contractual remedies, as long as you can show harm from the breach.

While the CFAA is worth keeping an eye on, particularly in light of divergent court rulings, in instances where companies have information misappropriated, the first place to look for a remedy is through state law, such as those that govern trade secrets or the relationship between employers and employees.

Travis P. Brennan is a litigation attorney at Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4271 or tbrennan@sycr.com.

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Published in National

Enforcement of the Foreign Corrupt Practices Act (FCPA), which addresses the bribing of foreign officials, has increased significantly against both large multinational companies and small, private, domestic companies.

“If you’ve been hearing about the FCPA but haven’t addressed it fully, there is a reason to take the concern seriously from a reputational risk perspective and because you could face serious criminal and civil consequences if there is a breach,” says Jason de Bretteville, a shareholder at Stradling Yocca Carlson & Rauth.

There is also reason to be familiar with foreign laws. U.S. legislation, he says, only regulates bribes to foreign officials, which can include any employee of a government-owned or controlled entity. Foreign legislation, including the U.K. Bribery Act, doesn’t maintain this distinction and prohibits potentially corrupt payments to both foreign officials and private counterparties, highlighting the need for due diligence.

Smart Business spoke to de Bretteville about ways to limit FCPA exposure.

What are the highest areas of risk U.S. companies may tend to neglect?

One area businesses often discount is the risk posed by foreign distributors. Companies tend to mistakenly assume that if their title transfers to a foreign distributor, there is no risk posed to them if the distributor engages in corrupt payments, and that’s not the case.

The lack of understanding of a counterparty’s ownership structure is another risk. For example, in China and former Soviet-bloc countries, there is government ownership of what Westerners may assume are purely commercial entities. You may think you’re engaging — having a dinner or entertaining — a private party but, in the view of U.S. regulators, you’re entertaining a foreign official.

One evolving risk area is engaging in cooperative research with academics. They may hold dual positions and privileges at foreign academic institutions that could render them a foreign official.

What else is affecting the need to pay greater attention to FCPA?

The merger and acquisition market is heating up, including more acquisitions of foreign companies. These foreign businesses may not have a compliance culture or the same policies as many U.S. companies. The acquirer may face difficult questions of whether to go through with the transaction, and when or whether to disclose any pre- or post-acquisition conduct to U.S. regulators.

Further, reconciling U.S. policy with those in foreign jurisdictions can be difficult. For instance, the U.K. Bribery Act addresses not only foreign officials but also corrupt payments to private counterparties and does not allow an exemption for minor ‘grease’ or facilitation payments. It has more expansive jurisdictional limits and would appear to allow for the prosecution of U.S. entities with a relatively small footprint in the U.K.

How can companies best address this risk?

First, conduct meaningful due diligence on all business partners. Determine their potential to be viewed as a foreign official, understand who they are, their ownership structure and their shareholders.

Second, determine an efficient and practical means of mitigating risk. Have the party commit to comply with your code of ethics and restrictions on corrupt payments, and have as much transparency as possible regarding what work they’re doing on your behalf that may involve foreign officials. Also, any payments to any officials made on your behalf need to be used for wholly legitimate purposes, and not to facilitate sales to government customers or obtain government approvals — permits, licenses, customs clearances — in inappropriate ways.

How might compliance policies fail?

Too often, companies implement overly complex or one-size-fits-all compliance procedures that don’t address specific risks in a way that allows for meaningful risk mitigation. Policies not designed in a way that is intelligible or useful to people in the field can invite non-compliance.

An effective policy provides for simple ways to deal with concerns that may arise in the field and encourages people to find effective business solutions. Having an overly cumbersome policy on the shelf doesn’t help anyone. In fact, it can hurt.

Jason de Bretteville is a shareholder at Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4094 or jdebretteville@sycr.com.

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Published in National

There are more than 900 million active users on Facebook, the equivalent of nearly three times the population of the U.S.

“The challenge with social media is that employees are constantly posting comments regarding their work and personal lives on their own time as well as during work hours,” says Laura Fleming, Shareholder with Stradling Yocca Carlson & Rauth. The line between public and private life often is blurred, which complicates the situation for employers.

Smart Business spoke with Fleming about the lawful use of social media in hiring, firing and other workplace situations.

Can employees be fired for using social media?

Most employees are ‘at-will,’ meaning they can be fired for any reason as long as it’s not discriminatory. As of now, there’s no law that explicitly prohibits firing an employee for behavior on social media sites.

However, some social media activity is legally protected. For example, civil rights laws protect employees based on their race, religion, disability, gender, sexual orientation, etc., so it could be unlawful to fire an employee for writing about religion on Facebook.

In addition, the National Labor Relations Board (NLRB) recently has targeted employers for firing employees who criticize working conditions on Facebook. The National Labor Relations Act (NLRA) was established to protect employees’ rights to engage in group activities to improve working conditions, especially through unionization. The NLRB has taken the position that employees complaining about working conditions on social media could be protected as if they were engaging in union activities. While a single employee on Facebook grumbling about an employer is not protected, if other co-workers join in — two or more, whether virtual or in real life — they may be protected under the NLRA.

Should employers conduct Internet searches to discover more about job applicants?

It’s prudent for employers to know who they are hiring and a social media background check can give you useful information. The problem is that embedded in this information are details irrelevant to the position and potentially protected. It can be a challenge to ensure that protected information doesn’t bleed into the hiring decision.

If you conduct an Internet search on an applicant be careful not to base any of your hiring decisions on information protected by civil rights law. In fact, some background check agencies will perform social media checks for you and screen out protected information so you don’t see it. You want to avoid creating any record that would show protected information was used in a hiring decision. In general, employers should avoid discussing any protected-category information during an interview and definitely avoid emailing such information to colleagues. Otherwise the applicant, having been denied the position, could claim that he or she was unlawfully passed over based on protected-category information discovered on a Facebook page or other social media site.

Can employers ask applicants and employees for social media passwords?

Right now, there are no laws specifically prohibiting employers from requesting personal social media passwords. However, Facebook has come out strongly against this practice, claiming it is a violation of its statement of rights and responsibilities to share or solicit a Facebook password. Also, in several jurisdictions, including Illinois, Maryland and California, there are movements to get laws passed to protect social media privacy. Regardless, any company that requests personal social media passwords risks lowering employee morale.

In addition, if an employer is trying to hack into an employee’s personal account without that person’s knowledge or coerce an employee to give up his or her password that could be a violation of the employee’s privacy rights or the Stored Communications Act.

Can an employer claim ownership of an employee’s Twitter followers?

In one high-profile case, an employee amassed some 17,000 Twitter followers and then tried to take the account with him upon his departure. There is an ongoing lawsuit to determine the rightful owner of the account, as well as the monetary value of the followers.

Because it takes time for the law to catch up to technology, there is not much legal guidance on how to determine ownership of social media accounts that are used for blended — work and personal — purposes. Thus, employers that engage in social media marketing should be careful to document their ownership of social media accounts. The employer should maintain and pay for the accounts, and prohibit personal use of the accounts.

How can employers protect themselves from social media-related claims?

All employers should have a social media policy, which safeguards several important interests. First, the policy should limit personal social media activities during work time or on work equipment. A recent survey found 64 percent of employees admitted visiting websites unrelated to work during work hours. Although it may be unrealistic to attempt to eliminate this activity entirely, to maintain a productive workforce employees must keep personal social media activity to a minimum. Second, the policy should prohibit employees from disclosing confidential and proprietary information online. The policy also should prohibit the use of social media to engage in any type of harassment of other employees.

Also, if a company is engaging in social media marketing, its marketing guidelines should comply with Federal Trade Commission regulations. For example, if employees are posting reviews of their employer’s products, they must disclose their relationship, among other requirements. Highly regulated industries, such as financial services and pharmaceutical/medical device, have additional restrictions on online advertising.

Laura Fleming is a Shareholder in Stradling Yocca Carlson & Rauth’s Labor and Employment Practice Group. Reach her at (949) 725-4231 or lfleming@sycr.com.

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Published in Orange County

While it may be uncomfortable for founders of a new business to talk about issues that may lead to disputes between them in the future, it’s important to address, resolve and document those issues before they start the company. Otherwise, disputes can often lead to litigation.

“Having a written agreement is crucial. It’s one thing to agree upon various issues up front, it’s another to have the agreement in writing so the founders have something to refer to when questions or issues arise,” says Jeremy Suiter, Shareholder and Chair of the Business and Commercial Litigation Practice Group at Stradling Yocca Carlson & Rauth.

“Founders may operate on a handshake, but it can be hard to recall exactly what the terms are later on down the road. It’s important to have something in writing that sets out in detail how you’re going to deal with various scenarios,” he says.

Smart Business spoke with Suiter about what company co-founders should do before forming a company to prevent the often-disastrous results of litigation later on.

What are some common reasons company co-founders might sue each other?

The most common reason involves a fight for company control. A failure to address equity and management rights up front may lead to an impasse down the road. This is particularly common when co-founders reach a stalemate, and there’s no provision for a tiebreaker.

What issues should founders discuss up front?

Prior to forming the startup, founders should discuss their goals and vision. These may include services or products the company will provide, the company’s growth plan and the role of each founder. For example, one founder may see the company as his long-term employer, while another may see the company as a shorter-term investment in anticipation of a liquidity event. Goals are going to change, but founders who discuss issues ahead of time and develop a plan to resolve differences are better positioned to avoid the types of stumbles that can lead to litigation.

What specifically should they iron out?

They’ll want to determine how ownership interests will be divided; how decisions will be made; whether the company will employ founders; and the exit plan if a founder dies or wants to leave the company. It’s also important to have a plan for dealing with events that may change the company or how it operates. There are myriad possibilities, but the most common include selling the company, acquiring another company, taking on new partners, raising money or going public.

What provisions should they include in their written agreements?

Once founders decide which type of business entity they want to form, they should enter into an appropriate written agreement that outlines their ownership interests and explains how the company will operate. The agreement should explain how decisions will be made, who will make them and what to do if founders disagree. For example, the agreement may provide that material decisions, such as selling the company may not be made unless both founders agree, while other decisions, such as the day-to-day operations of the company or expenditures of less than $10,000 may be made by a single founder. There also should be procedures in place for the exit of a founder — voluntary or not — and an explanation of each founder’s responsibilities.

The agreement should specify what happens if one of the founders isn’t living up to their responsibilities, and how to resolve disputes that may arise. Dispute resolution procedures should include provisions requiring founders to mediate disputes before pursuing litigation, and if mediation is unsuccessful, the forum for litigation — court vs. arbitration; litigation location; and which state’s law, or any other rules that the parties may choose, will apply. This final provision is particularly important if founders reside in different states.

What methods can resolve disputes prior to litigation?

The best way for founders to resolve disputes is to be upfront with each other. Maintain a good relationship with your co-founder and try to talk through and resolve issues. Agree there will be times when you’re not going to agree, but for the betterment of the business you’ll try to resolve your disputes.

If this doesn’t work, founders should ask a neutral party to mediate. It doesn’t have to be a formal mediation service; it could be a trusted third party whose recommendation each founder trusts.

What damage can result if litigation occurs?

The time and expense of litigation can be substantial. Litigation often impacts not just the founders, but also company personnel and resources, which can ultimately hurt the business. In extreme cases the company may be dissolved if the founders are unable to resolve their dispute. Under California law, that’s the nuclear resolution where the court dissolves the company and divvies up its assets.

How can founders think of everything they’ll need in a contract up front?

Retaining qualified counsel is a good first step. While every business venture starts off with good intentions, disputes arise and that should be recognized. Qualified business counsel can raise potential disputes and incorporate terms into a written agreement for the founders to resolve up front.

Having industry specific counsel doesn’t hurt but isn’t required. Instead, look for a firm that has experienced corporate counsel involved in company formation and litigation counsel familiar with the disputes that typically arise. They can help formulate an agreement to address the real issues that come up and offer advice on how to prevent those issues from becoming disputes in the future.

Jeremy Suiter is a Shareholder and Chair of the Business and Commercial Litigation Practice Group of Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4000 and jsuiter@sycr.com.

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Published in Orange County