Founders often run into similar questions and curiosities. Below is a log of frequently asked questions addressed by our lawyers, many of whom have been in your shoes.
- How can companies obtain Board approval?
Board approvals may be accomplished in one of two ways:
- At a duly called meeting in person or by phone/videoconference. The process for calling a meeting is typically included in the corporation’s bylaws, which describe who is allowed to call a meeting, the allowable methods for providing notice (e.g., in person or by email) and how far in advance of the meeting notice must be delivered.
- Through unanimous written consent (approved and delivered by all directors) or through the written consent of the sole director (if the corporation only has one director)
For more on the best practices for obtaining board approval see When is Board Approval Required?
- What are the keys to an effective board meeting?
Time, organization and information are the three keys to an effective meeting. A successful board meeting is the result of coordinated teamwork across the organization, and company management’s involvement and attention is imperative. As a best practice, companies should institute board meeting processes ahead of time. Advanced planning helps to avoid last-minute scrambles and incomplete or, worse, incorrect information going to the board for deliberation. For more on running an effective board meeting see How to Run an Effective Board Meeting.
- As startups stay private longer, should changes to equity compensation be considered?
Compensation packages for early employees in startups are typically weighted heavily toward equity, and equity awards are generally set up to vest monthly over four years, with “cliff” vesting during the first year. However, with the trend toward companies staying private longer, companies need to examine carefully whether the conventional four-year formula should be adjusted, as well. For example, companies may determine that equity grants with vesting schedules longer in duration or tied to significant performance goals may establish better incentives for achieving key corporate milestones. For more on changes to equity compensation see How to Grow a Successful Startup in a Skeptical Market: 3 Considerations.
- Should company contracts be in writing?
Oral contracts might suffice in limited circumstances, however, in most cases a company should have at least a simple written agreement in place to reduce both ambiguity and the potential for disputes. In addition, certain kinds of contracts must be in writing. For more on written contracts see Written Contracts: When to Use them, What to Include.
- What are the key provisions that should be included in a written contract?
A few examples of key provisions that should be included in a written contract are:
- Price and payment information
- Time of performance
- Waiver and amendment
- Governing law
- Entire agreement
For more on what to include in a written contract see Written Contracts: When to Use them, What to Include.
- What factors determine if someone is an employee or a contractor?
The United States Internal Revenue Service (IRS) views any person who works for a startup as either an employee or an independent contractor for tax purposes. Correctly classifying workers as one or the other is not easy, and misclassifying an employee as a contactor comes with a hefty price tag. Companies must evaluate the economic realities of the company’s relationship with a worker to determine if that worker is “economically dependent on the employer, and thus an employee.” In particular, companies should consider the following six factors:
- Is the work performed integral to the employer’s business?
- Does the worker’s managerial skill create opportunities for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skills and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
For more on classifying employees or contractors see 6 Factors to Consider When Determining If Someone Is an Employee or a Contractor
- What factors should a company consider when designing non-compete and non-solicitation provisions?
Many startups use non-compete and non-solicitation provisions, which are types of restrictive covenants, to protect their legitimate business interests. Every company should consider the following five factors when designing non-compete and non-solicitation provisions:
- Understand the impact of state employment laws
- Focus on the company’s “legitimate business interests”
- Provide adequate consideration
- Narrow the geographic scope of the provision
- Set reasonable time restrictions
For more on designing non-compete and non-solicitation provisions see 5 Tips for Designing Non-Compete and Non-Solicitation Provisions
- What factors should a founder consider when engaging advisors?
While many factors may go into a founder’s decision-making process when seeking an advisor, founders should pay close attention to the following three considerations when making this all-important decision:
- Choosing the right advisor for the founder and the company
- Assessing the appropriate compensation and incentives
- Papering the relationship with relevant and robust terms.
For more on the factors to consider when engaging advisors see 3 Considerations for Founders Engaging Advisors.
- What are the responsibilities of the board of directors?
The board oversees the general management of the company’s business (for the benefit of the stockholders) and — except for certain matters reserved for stockholders — has decision-making authority over the company’s affairs. Directors, in turn, delegate much of the day-to-day operational matters of running the business to officers of the company. Boards must approve most major corporate actions that involve significant financial, legal or tax consequences. For more on the role of the board see Everyone on Board? What Companies and Directors Can Expect of Each Other.
- What duties do directors have?
Directors have both a duty of loyalty and a duty of care. The duty of loyalty requires a director to act in the best interests of the corporation, which means putting stockholder interests above the director’s own personal interests when making decisions on behalf of the company. The duty of loyalty also encompasses a duty of good faith, which requires directors to act with the intent to further stockholder interests and to act in what directors honestly believe to be the best interest of the corporation. The duty of care requires that directors exercise the same degree of care that an ordinarily reasonable person would use when faced with similar circumstances. This proactive duty requires that directors obtain all material information available to them before making a decision. For more on a director’s duties see Everyone on Board? What Companies and Directors Can Expect of Each Other.
- How should directors conduct their duties?
- Proactively take certain steps to fulfill their role and satisfy their duties
- Be educated about the business and should understand the company’s strategies and corporate plans
- Perform diligence as necessary when making board decisions, including engaging experts and advisors and insisting upon adequate information from management. The board should hold regular meetings and be involved in and approve all major corporate decisions, such as deciding whether to enter into a significant transaction.
- Spend time considering and deliberating on all important issues involved in any major decision.
- Ensure the board maintains full and complete minutes
For more on director conduct see Everyone on Board? What Companies and Directors Can Expect of Each Other.
- How does a company determine when board approval is required?
A single, comprehensive list of decisions or transactions that require Board approval does not exist, so some companies use signing authority schedules to help provide guidelines for when contracts or other actions require Board approval. In addition, Board approval is always required for a number of actions. The following list includes several common actions and transactions contemplated by startups that generally require Board approval, either under Delaware law, the corporation’s governing documents and/or by market practice. In certain cases, these actions also require stockholder approval. These common actions and transactions include:
- Amending the Certificate of Incorporation or Bylaws
- Granting or transferring equity (this includes all issuances of securities, including stock, stock options, convertible promissory notes and warrants)
- Adopting or amending employee equity and benefit plans
- Hiring or firing senior officers
- Entering into employment agreements, or amending the terms of employment, for senior officers
- Borrowing or lending money
- Adopting an annual budget
- Entering into agreements of material importance to the corporation (e.g., financing agreements, material license agreements and leases)
If a company is unsure whether a planned action requires Board approval, the company should consult with a lawyer. For more on when board approval is required see When is Board Approval Required?
- What should a company consider when determining whether to have an unpaid internship program?
The most important factor with an unpaid internship program is the classification of individuals as unpaid interns, and not employees. If the individual is functioning as an employee, a company will be required to pay the individual at least minimum wage, and will need to follow all other employment laws (including overtime, paid rest breaks and unpaid meal periods). For more on this classification issue see Advice for Startups Hiring Unpaid Interns.
- What factors go into determining whether someone can be classified as an unpaid intern versus an employee?
Both US federal and state laws and regulations govern the classification of employees. In order to avoid the employee classification, federal employment law requires the work should focus on the education of the intern, not the benefit of the company, and that both the employer and the intern are clear that the internship is unpaid and does not guarantee employment at the conclusion of the internship. For more on the federal and state laws and regulations governing whether someone can be classified as an unpaid intern see Advice for Startups Hiring Unpaid Interns.
- What are intellectual property rights?
Intellectual property rights can be divided into the following categories:
- A trademark protects a name, brand and/or logo (e.g., COCA-COLA®), and must be used in connection with particular goods and/or services.
- A patent or trade secret protects a method or process for doing something (g., Coke’s secret recipe or a proprietary formulation).
- A copyright protects the contents of a company’s creations (g., its website, any software or source code, manuals, brochures, etc.).
- IP rights can also include trade dress, domain names, and use of name and likeness, among others.
For more on these intellectual property rights see Trademarks for Emerging Companies; FAQs on Trademarks; How Should Emerging Companies Protect Domain Names; and Copyrights for Emerging Companies.
- What are trademarks and service marks?
A trademark is usually a word, phrase, symbol, logo or design that identifies and distinguishes the source of the goods of one entity from those of another.
A service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than a product.
For more on trademarks and service marks see FAQs on Trademarks.
- What do the symbols TM, SM and ® mean, and when can a company use each symbol?
The symbol ™ represents an unregistered trademark, whereas the symbol SM represents an unregistered service mark.
Three common ways to give notice that a mark is registered with the USPTO include:
- Use of the ® symbol
- Use of the legend: Registered, U.S. Patent and Trademark Office
- Use of the abbreviation: Reg. U.S. Pat. & Tm. Off
For more on how to use these symbols correctly see FAQs on Trademarks.
- How does one properly use a trademark in writing or speaking about a product?
A trademark should be used as a proper adjective or adverb, not as a noun or verb. In other words, a trademark should be used to modify a generic, or common descriptive term. A trademark or service mark should be used distinctively and consistently. Companies should always use the proper form of notice to identify the trademark or service mark as registered or unregistered.
For more on how to use a trademark properly see FAQs on Trademarks.
- What are the consequences of the improper use of a trademark?
The major consequence of the improper use of a trademark is the risk that the mark will become generic. When a mark becomes generic, it no longer functions as a trademark and therefore loses its rights as a trademark. For more on what happens if a trademark becomes generic see FAQs on Trademarks.
- How long does the trademark registration process generally take?
If no major obstacles arise, the complete registration process generally takes about one to three years, depending on how soon a company begins using the mark. This timeframe may be shorter or longer depending upon the issues encountered during the prosecution of the application. For more on Trademarks see Trademarks for Emerging Companies.
- How long does a trademark registration last?
A trademark registration generally lasts for 10 years, at which time it can be renewed. In the US, proof of use must be submitted along with the renewal, and must also be submitted at the six-year mark. Thus, continual use of a mark is required in order to maintain rights. However, as long as a company continues to use the mark and renew its registration, the mark can last indefinitely. For more on Trademarks see Trademarks for Emerging Companies.
- When is the best time to conduct a trademark search and file for registration?
A startup company, should generally conduct a search and/or file an application as soon as possible for its primary brand (i.e., name and/or logo). As a company grows, it company can then file additional applications for additional marks (e.g., product names, taglines and slogans, etc.) to cover additional goods or services, or file in additional countries as a company expands geographically. For more on Trademarks see Trademarks for Emerging Companies.
- What are domain names and what types are available?
Domain names are a distinct form of intellectual property. They are inexpensive, very easy to register and are renewed each year. Generic top-level domains (gTLDs) such as .com, .net, .biz, etc. are the most common domain names. Country-level domains (ccTLDs) — such as .ca, .co.uk, .eu, .com.au, .kr and .co.jp — are another type. The requirements for domain names differ by country.
For more on domain names see How Should Emerging Companies Protect Domain Names.
- How are domain names registered?
A number of registrars (e.g., GoDaddy, Network Solutions) register domain names. Companies can go to the registrar’s website, create an account, and register domain names directly with them.
For more on registering and acquiring domain names see How Should Emerging Companies Protect Domain Names.
- Should a company register its copyright?
Since copyright ownership automatically rests with the creator, registration is not necessary. However, a copyright registration can help prevent disputes down the road and serves as bona fide proof of ownership in the content. A registration is required in order to bring an infringement action in court.
For more on copyright registration see Copyrights for Emerging Companies.
- How long does a copyright registration last?
A copyright registration for a work made for hire that is owned by a company lasts for 120 years from the time the work was originally created; or 95 years from publication, if copies of the work are distributed. No mechanism for renewal exists, so the work will become part of the public domain at the end of the protection period.
For more on copyright registration see Copyrights for Emerging Companies.
- What should a company include in board meeting minutes?
The basic features of meeting minutes are the date, time, location and attendees, followed by a record of the board’s actions, including: brief descriptions of any presentations or topics discussed, specific resolutions adopted, and finally, general resolutions. For more on what a company should keep in mind when drafting and reviewing board meeting minutes see 8 Things to Know About Board Meeting Minutes.
- When should a company execute an NDA?
In general, a company should execute an NDA before sharing any information the company would not want to become public or used, except for the limited purpose for which that information has been disclosed. For more on what an NDA is and when a company needs one see What is an NDA and When is it Necessary.
- What are common areas where employment issues can arise?
The following are three common areas where employment issues can arise: (1) during the hiring/firing process, (2) in regard to employer obligations, such as compliance with minimum wage and withholding obligations, insurance obligations and safety obligations, and (3) in regard to the classification of team members as employees or independent contractors. For more on these potential employment issues see Three Common Causes of Employment Issues.
- What actions should a startup take when an employee leaves the company?
While parting ways with an existing employee should mark the endpoint of a relationship, failing to follow the proper procedures can mark the beginning of protracted and expensive litigation. The following are six actions startups should take when an employee leaves:
1) Document the reasons why the employee is leaving the company
2) Communicate the employment decision to the employee
3) Protect the company’s intellectual property
4) Keep your company’s team together
5) Deliver to the employee all unpaid compensation
6) Keep track of the company’s equity
For more on these factors see 6 Issues Emerging Companies Should Consider When an Employee Leaves.
- What is an online terms of service?
Online Terms of Service (a ToS) is the legal contract between a business and its users that set the terms and conditions the users of a website or app agree to follow in order to use the website or app. Although implementing a ToS is not a legal requirement, the benefits of implementing a high-quality ToS far outweigh the time and expense involved in creating one. For more on ToS see 5 Benefits of Implementing a Good Online Terms of Service.
- What are the benefits of implementing a good ToS?
Five benefits of implementing a good ToS include:
- Defining user misuse and abuse
- Disclaiming warranties regarding certain functionality or outcomes
- Protecting IP against claims regarding infringement of others’ IP
- Protecting the ability to terminate any part of an online service or any user accounts
- Setting terms of a dispute
For more on the benefits of implementing a good ToS see 5 Benefits of Implementing a Good Online Terms of Service.
- Why might an online terms of service be unenforceable?
Posting terms of service (TOS) with provisions that protect a company is only part of the equation. A company must also make sure its TOS are enforceable if challenged in court. Here are four pitfalls under US law that may make some or all of the provisions of TOS unenforceable:
1) A company does not clearly present its TOS to users of the website or app.
2) A website or app does not require affirmative consent from a user that the user agrees to a company’s TOS.
3) An arbitration clause in TOS omits a 30-day opt-out.
4) A company modifies the TOS without appropriate notice.
For more on these pitfalls see 4 Reasons Why Online Terms of Service May be Unenforceable.