Early Legal Issues For Start-ups

Heather Harper Supervising Attorney, Entrepreneurial Law Clinic Clinical Professor Chicago-Kent College of Law
2012 Chicago-Kent Entrepreneurial Law Clinic

Legal issues on the agenda today

What to know while still employed

Owning your idea

Choosing a name Agreements among owners Distinctions between employees, independent contractors and interns The protection of intellectual property Keeping it legally simple and choosing a lawyer
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Employees may be restricted by contracts

Assignment of intellectual property -Document effecting the transfer of ownership of intellectual property from the worker to the employer. -Exception: Illinois Employee Patent Act 765 ILCS 1060 Confidentiality agreement/non-disclosure agreement -A legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish to restrict access to or by third parties. Non-compete agreement -The employee agrees not to pursue a similar profession or trade in competition against the employer. No moonlighting policies -Prohibits the employee from working a second job while employed. Non-solicitation agreement -Restricts the former worker from soliciting either employees or customers of a business after leaving that business.
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Employees may be restricted even without a contract

Does employee owe duty of loyalty?
Key = an employee with a major ownership and/or decision-making role in the business

Is the employee skilled or key? Yes Does employee plan to start competing business? Yes
Employee may only prepare to start business. If employee actually starts a competing business while still employed, the duty has been breached.
Source: Barron and Reed, Chapter 2: The Transition from Employee to Entrepreneur. 2012 Chicago-Kent Entrepreneurial Law Clinic

No
No duty exists

Skilled = an employee possessing certain skills usually attained through training

No
Employee may start business, but should take precautions (e.g., should not use employers equipment in doing so).
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Owning your idea is important

Employee creates IP Agreement assigning IP?

Yes Is the agreement valid/does it cover the IP in question? Yes Employer has a right in the IP

No Related to employment/used employer resources?

No

Yes No May implicate: Work for hire Hired to invent Shop right Trade Secrets Trademark Advice: SEE AN ATTORNEY 5
2012 Chicago-Kent Entrepreneurial Law Clinic

Employer has no interest in IP

Sources: http://www.ilga.gov/legislation/ilcs/ilcs3 .asp?ActID=2238&ChapterID=62; www.copyright.gov/civics/circ09.pdf

Choose a name that is protectable

Corporate AvailabilityCheck if the name is available on Secretary of States website InfringementCheck to see if the name infringes on someone elses trademark

ProtectabilityDoesnt have to be your corporate name Should not be purely descriptive Arbitrary and Fanciful is a stronger choice

Source: http://www.uspto.gov/products/library/ptdl/services/tmsearch.jsp

2012 Chicago-Kent Entrepreneurial Law Clinic

How to pick a name that you can more easily protect

Fanciful Arbitrary

Zynga Amazon.com

Suggestive Coppertone

Descriptive Ice Cold Beer Generic

Source: http://us.practicallaw.com/4-5072834?q=trademarks#a1053768 2012 Chicago-Kent Entrepreneurial Law Clinic 7

Beer

Why founders need agreements among themselves

With an Agreement
Defines relationships- opens communication and defines management decisions Defines business structure

Without an Agreement
Unclear ownership structure- instances of death and divorce may result in partners added as an operation of law Uncertain business relations

Clarifies of ownership

People leave- potential for disastrous exit and to muddy your capitalization table
Can increase the time and money needed to sort out issues

Transfers, i.e. death, divorce or quitting

Saves time and avoids nasty legal entanglements

Predictable upfront legal cost

You could find yourself with a partner you didnt approve

2012 Chicago-Kent Entrepreneurial Law Clinic

Properly categorize your workers

Employee Employee benefits Type of Relationship No benefits Independent Contractor

Performs key services to business

Permanency of relationship Written contract offer letter or employment agreement Subject to regular supervision and control; does not have control or autonomy with respect to the manner and means of performance. Works hours set by employer.

Written contract independent contractor agreement defining scope & expectations of work

Controls the means and manner of achieving the agreed upon work product. Offers services to the entire public, not just one business. Sets his or her own hours.

Behavioral Control

Receives compensation via payroll; relies on business for steady income. Financial Control

Paid according to terms of contract. Incurs the costs associated with performing the job.

Source: Independent Contractor (Self-Employed) or Employee? Available at http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

2012 Chicago-Kent Entrepreneurial Law Clinic

How to know if someone is an intern

Fair Labor Standards Six Part Intern Test

1. 2. 3. 4. 5. 6.

The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment; The internship experience is for the benefit of the intern; The intern does not displace regular employees, but works under close supervision of existing staff; The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded; The intern is not necessarily entitled to a job at the conclusion of the internship; and The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Source: http://www.dol.gov/whd/regs/complian ce/whdfs71.htm 2012 Chicago-Kent Entrepreneurial Law Clinic 10

Know your intellectual property and take steps to protect it

Type Trademark
15 USC 1501-1141

Definition
Any word, name, symbol, figure, letter or device used by a manufacturer or merchant to identify its products from those manufactured or sold by others

Copyright
17 USC 101 et. seq.

The legal right of an author to control the reproduction, adaptation, distribution, performance, and display of an original work of authorship. This right exists upon creation of the work, and extends only to the expression of the idea rather than the idea itself. Any secret formula, pattern, device, or compilation of information which is used in one's business which grants an advantage over competitors who do not know or use it. A document and corresponding set of rights granted to an inventor in exchange for disclosing an invention to the public.
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Trade Secret
765 ILCS 1065

Patent
35 USC 101 et. seq.

2012 Chicago-Kent Entrepreneurial Law Clinic

Know your intellectual property and take steps to protect it

Trademar k

Copyright

Trade Secret

Patent

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Your legal needs develop with your company

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Choosing a lawyer

Choose a lawyer: Who you are comfortable with Who is knowledgeable about start-ups

Who understands the risks or starting a new business

Who is the right attorney for the right phase of your business

Who is aware of the financial constraints of your company

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Thank You. Any Questions?

Chicago-Kent Entrepreneurial Law Office

Heather Harper, Clinical Assistant Professor & Supervising Attorney

Email Address: hharper@kentlaw.edu The Law Offices of ChicagoKent College of Law 565 W. Adams St., Suite 600 Chicago, IL 60661 312.906.5038

2012 Chicago-Kent Entrepreneurial Law Clinic

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