Startup Toolbox

Jay Parkhill January 29th, 2008

At least once a year since I started practicing law I have gotten a question about and copy of an official-looking letter entitled “Annual Corporate Minutes Compliance” or something similar. It’s a total scam and it has been a pet peeve of mine for years.

There are a number of companies that bilk unsuspecting corporations in this way. These companies ask for $100-$200 and in most cases will send a rote form of “shareholder meeting minutes” that won’t be valid because they will refer to an annual meeting that likely never happened on a date arbitrarily picked by the scammer.

I was pleased to learn recently that the California Attorney General has sued some of the more egregious participants in this obnoxious practice.

For the sake of getting the facts out, here are the legal requirements in California:

1) California corporations are required to submit a list of officers and directors along with the address of the company and agent for service of process every year. The fee for this is $25, and the California Secretary of State sends a form that looks like this to do it:

Corporations can also e-file here: https://businessfilings.sos.ca.gov/. Bottom line- if it doesn’t say it is from the California Secretary of State, suspect a scam.

2) Corporations in California are required to maintain minutes of Board and shareholder actions. Corporations are also required to hold annual shareholder meetings, but no agency will suspend a corporation’s right to do business for failure to hold the meeting or adequately document it so don’t fall for that scare tactic (NB: shareholders and potentially even third parties might have claims against a corporation if it fails to keep good records and respect the rights of its constituents, but that is a completely different kettle of fish).

3) If a corporation fails to file the statement described in #1 its right to do business will be suspended. I strongly recommend staying current with filings, but if the corporation is suspended, it can be reinstated in almost all cases merely by filing the delinquent report and paying the $25 fee (for each overdue year).

This is the kind of thing no one should have to remember or think about, and it drives me crazy. So to all the business owners out there- next time you get a letter asking for money to prepare your annual minutes, check it carefully to be sure it comes from- and the check is payable to- the California Secretary of State, or ask your lawyer to take a quick look.

• Governance , legal

Jay Parkhill January 14th, 2008

I just stumbled across this great quote from VC Matt Trevithick at Venrock. It is part of an interesting interview on Earth2Tech in which (in part) Trevithick wonders aloud whether the VC model is going to work well in the alternative energy sector.

The quote about the internal combustion engine is brilliant, though. He must mean that in the same way that people talk about Microsoft products not being very good- it hasn’t stopped Microsoft from massive success, and internal combustion’s flaws haven’t stopped it from being about the most successful single product ever (not counting sliced bread).

For the record, I think Trevithick’s point was to compare the relative efficiencies of gasoline and electric motors with their fuel sources. Gasoline packs a huge amount of energy into its volume, but the engine doesn’t extract it very well and creates lots of waste. Electric motors are very efficient by comparison, but batteries are lousy.

The real gem in the interview, though, is where Trevithick starts to break down the alt-energy field into IT-based businesses like demand-response company EnerNOC that make easy VC investments and “pure energy” ideas like solar and biofuels that may not be good places for venture capitalists to play. I’ve wondered about this too. The latter category requires so much infrastructure development that it seems like a tough job for all but governments and corporate giants.

• Cleantech , legal

Jay Parkhill January 11th, 2008

The flap over Oscar Pistorius is fascinating on several levels. It seems totally absurd on first blush that a double below-the-knee amputee who runs on carbon fiber “blades” is likely to hear a ruling from the international governing body of track & field (the IAAF) that he can’t compete in the Olympics because his prosthetics give him an “unfair advantage”. As a lawyer I can imagine being the guy who has to present the argument with a straight face in front of an IAAF panel- the quote in the heading is me imagining how that would go.

A gut reaction to the case says “if the man is fast enough to qualify then let him run”. A moment’s more thought leads me to wonder why the IAAF really cares that much. How many amputees are there who can compete at an international level with able-bodied athletes? I have to think there is a fear in the back of someone’s head that if Pistorius is allowed to run using his blades, then someone else is going to use some other kind of device and it’s a slippery slope straight downhill to full-cyborg competitions. Someday.

Especially in a week when Marion Jones was sentenced to six months in prison for lying about taking steriods, it is understandable that governing bodies want to draw deep, dark lines in the sand wherever they can on performance-enhancers.

At the same time, it sounds like the IAAF is relying on a mechanical analysis of the blades compared to human legs to reach its conclusion. Does this suggest that the blades might be redesigned not to offer any (alleged) performance advantages? Oops, where’d that line just go?

Final note: the NY Times article says that Pistorius was born without femurs and his lower legs were amputated when he was 11 months old. As a parent I can scarcely imagine what a tough decision that was for his parents. Yikes.

• legal , sports

Jay Parkhill December 21st, 2007

Apple announced that it has settled two-year old litigation over Apple rumor blog Think Secret’s publication of information about the then-pending release of the Mac Mini computer. Some pundits have expressed concern that the settlement involves closing down Think Secret’s site, and that this may set an unhappy precedent for other blogs.

That worry seems a bit overblown to me- being put out of business by a big-guy litigant is an ever-present risk for little guys everywhere. Just because it happened once doesn’t make it any more or less likely to keep happening.

What I found interesting in the case, in light of my earlier post about trade secrets, is that Apple initially brought suit claiming trade secret infringement. I.e. that the existence of and Apple’s plans for the Mac Mini were not-generally-known information with economic value that Apple had taken steps to keep secret. The court disagreed and held that the information did not constitute a trade secret.

Here’s another difference between trade secrets and other types of IP, then- a party has to prove to the court first that it owns a trade secret, and then that the secret has been improperly disclosed. Patents and trademarks are registered through processes in front of Patent and Trademark Office attorneys, not by a judge or jury.

It isn’t immediately clear to me if this is a positive or negative attribute of trade secrets. It may be as simple as pay now (for patent or trademark registration) or pay later (when trade secret litigation comes up). Depending on how complex the topic is, I can see a USPTO examining attorney reaching a different conclusion from a judicial factfinder (judge or jury) about whether certain information is proprietary. At the least USPTO precedents and procedures are a bit better mapped so the outcome may be a little more predictable. Banking on a court to uphold a trade secret requires an extra roll of the dice.

• Apple , Intellectual Property , legal

Jay Parkhill December 20th, 2007

Trade secrets are a deceptively simple idea: like the fabled Coca-Cola formula, they are proprietary ideas that have never been shared. Because they are “secret” they are entitled to intellectual property protection.

But what does that really mean, and how does one keep something “secret”? Clients ask me this with some frequency (hm- $30k to obtain a patent that I then need to spend more money to enforce, or $0 to keep a secret?) and I’d like to share some of the basic concepts. There are some excellent “deep” resources out there, so I will focus on the common questions I get from clients.

What is a Trade Secret?
Under California law, a trade secret is (i) information that (ii) has economic value, (iii) is not generally known, and (iv) is subject to reasonable efforts to keep secret. It can be an idea, a process, software, knowledge of ideas that don’t work, and many other things. Essentially it needs to provide an economic advantage to the holder, and steps need to be taken to protect the secrecy. Since efforts to protect secrecy can easily lead down a slippery slope, it is worth noting that extreme, expensive measures to prevent industrial sabotage are not required.

How Can I Lose My Trade Secret?
The one word answer is “disclosure”. Inadvertent or intentional disclosure will both blow the protection. In the latter case damages may be available for breach of secrecy obligations, but accidental disclosure will do the job as well. Workers should be told the information they are handling is confidential, steps should be taken to recover records from departed workers and reasonable measures should be taken to make sure that information is maintained on a “need to know” basis if the secret is a critical one.

It is also worth noting that independent development of the information will terminate trade secret rights. Reverse engineering does not violate trade secret protection laws, and a “hot” idea that is not generally known when developed can become known later and lose protection as a secret.

How Do I Know I am Not Infringing Someone Else’s Secret?
This is tricky. Patents and (registered) trademarks require public filings, so a company can find it if there is existing protected IP in a given area. Trade secrets are secret by nature, so it is entirely possible that one could develop technology that inadvertently duplicates someone else’s trade secret right.

The answer is, again, that independent development by itself does not infringe a trade secret. The key here is to have enough notes, research records and other facts to back up the argument that one developed one’s information independently and without reference to the competitor’s secret information. In a small field where the players know one another well this may be easier said than done.

Talk to Your Lawyer
These ideas scratch the surface of trade secret law and probably beg more questions than they answer, like “what do I do if someone discloses my secret”, “how can I make sure my employees protect my secrets” and “what are the remedies for theft of a trade secret?” Anyone asking these questions should definitely talk to a lawyer- the answers are too complex and likely depend on specific facts. Still, I hope this gets some people pointed in the right direction with regard to what trade secrets can and can’t do, or at least helps figure out what further questions need to be asked.

• Intellectual Property , legal

Jay Parkhill December 7th, 2007

It has been an established principle since the U.S. Constitution was adopted in 1789 that the U.S. government can’t be sued. It’s an old rule called sovereign immunity that predates the U.S. by a long shot. It means, though, that if you don’t like something the government does and believe it is violating your rights, you have no legal recourse.

In many countries that would be the end of the story (and historically was). Fortunately some intrepid lawyers figured out how to get around that. Instead of suing the U.S. government itself, people decided to sue the person holding the job. The government indemnifies the person against claims, so there is no actual personal responsibility, but seeing one’s name frequently in the court docket is part and parcel of top-level federal government jobs.

Michael Mukasey was sworn in as U.S. Attorney General on November 8 of this year. I get a summary of significant court decisions every day, and in the last week or two I have started to see a bunch of cases reported under the headings “____ v. Mukasey”.

That didn’t take long, and I suppose points out what an elaborate fiction the whole thing is. The cases probably started years ago as “___ v. Ashcroft” or “_____ v. Gonzalez”, but got changed as the Attorney General position changed hands.

I am sure Mukasey was ready for it, and that kind of attention probably seemed ok compared to the scrutiny around his confirmation hearings. Still, it doesn’t seem like much fun to be sued 200 times a year.

• legal

Jay Parkhill November 10th, 2007

Attorney/entrepreneur D C Toedt posted a thought-provoking piece on his blog called the “Pathclearer” approach to commercial contracts. The premise, as articulated by an attorney at English brewer Scottish & Newcastle, is that commercial agreements and one-time transactions are different beasts, but lawyers erroneously tend to treat them the same.

An M&A transaction, for example, is a one-time occurrence. Details are tremendously important because if something goes wrong the only practical recourse may be litigation.

A commercial agreement, on the other hand, is the start of a relationship. For the most part, both sides will perform happily so long as it benefits them, and poorly or not at all if it doesn’t- i.e. there is no way in the real world to force a relationship to work if one side doesn’t want to be in it.

That being the case, Pathclearer asks if simpler and shorter agreements might work better in many cases. Start with a bare agreement to work together and add in only what is necessary to make the parameters clear.

I love this approach, and for many reasons. The Pathclearer article points to a great example of a relationship bound up with such a complex set of documents that even after both sides agreed the relationship wasn’t working they couldn’t change it because they couldn’t figure out with certainty what the terms of the deal actually were.

Even more to the point, this sort of “blank slate” approach might (we hope) let people think about the issues that are actually important rather than wordsmithing the fine points (such as the example of hours spent by the lawyers trying to define “beer” precisely).

At the same time, would a company (or a lawyer- such as me, perhaps) look hopelessly naive trying to put this idea into practice? I can see the Pathfinder idea working very well in certain situations and causing enormous consternation in others where the experiences of the opposite side lead it to feel that every detail matters (as I have found to be the case with many large organizations).

Rather than a specific plan of action, then, I take the Pathclearer approach to heart as a philosophy. I believed in the idea before I saw the article, or I probably wouldn’t have paid much attention. Still, it is useful to think about the purposes of the Pathclearer concept, and approach commercial agreements with those thoughts in mind:

*Identify the business concerns before reviewing the agreement
*Focus on the key issues. Remove or ignore stuff that doesn’t matter
*Avoid tinkering with the language that isn’t critical
*Reduce and simplify as much as possible

• contracts , lawyering , legal

Jay Parkhill November 9th, 2007

A few weeks ago Dave Winer posted a screed about the complexity of the VC financing process. One of his points was that legal transactions rely on the fax machine- that unglamorous item of 1980s technology- to an inordinate degree.

He’s right. It is a cumbersome process: email documents, open attachment, print, fax, (sometimes mail originals) repeat.

There has been a law on the books in the U.S. since 1999 called E-SIGN that says electronic signatures are just as valid as manual ones, provided a few simple requirements are met. So why are people still using fax? Are lawyers simply luddites?

Perhaps, but I decided to try out some digital signature services- if nothing else to see why few people ever talk about them. Since I really don’t like reviewing products I am not going to name the services I tried, but instead to make some general observations based on the handful of transactions I have used them for.

People aren’t Ready for “Pure Digital” Signatures
Under E-SIGN a “signature” can consist of a digital stamp in the footer of a document with the date and some identifying information (such as an email address). A sample is below.

In practice this does not work for humans. I used this format in one transaction and the exact words of the opposing counsel were “I’m sure it is legally binding but I don’t have time to look it up”. This format isn’t required by E-SIGN, of course- one of the other services uses a font style that looks like a signature and puts it in the “right” spot in the signature block on the document (see below).

This is a seemingly small thing that makes a world of difference.

Fax “Just Works”
One of the services let me add nifty “stickies” to the signature blocks in my documents and when it worked scrolled signatories through the documents to just the right spots and collected all of the needed information beautifully. The problem was that it didn’t work reliably. One signatory couldn’t open the “digital envelope” containing the file at all and I had to resort to paper and fax. The whole thing also only works in Windows and requires a desktop download, so I could only use it from one computer (and that with Parallels installed).

Fax, on the other hand, uses tried-and-true technology and only needs to be compatible with the phone line. Low tech and the darn headers are ugly, but the process is effective and doesn’t require much thought. I like to think, but not about how to send my signature pages out.

I Still Want a Digital Signature Facility
I said previously that I would very much like a digital signature facility that I can route documents through as an adjunct to- and probably eventually as a replacement for- the manual pen/paper/fax. I still do. The systems need some tuning, but they will get there. The founder of one of the services in particular has been endlessly helpful to me in my experimentation and I hope he keeps at it until he gets the system down. It will work eventually, it’s just going to take some time and iteration to get it to “just work” as smoothly as fax does at its best.

• Tech , Web , legal

Jay Parkhill September 14th, 2007

Cumulative voting is one of those theoretical legal concepts I’ve generally tried to avoid- it involves math, the archnemesis of attorneys everywhere.

Math matters, though, and so does cumulative voting. It can give small shareholders a voice on a company’s Board of Directors, or even swing the balance of power in certain situations.

In as few words as possible, then, here is what you need to know about cumulative voting:

What it means. Cumulative voting means that instead of voting shares for each director on a slate, shareholders can throw all of their potential votes behind one candidate. In other words, if there are 3 directors and I own 1 share, instead of voting my one share for each director, I can put all 3 behind a single candidate.

Not all states have it. Delaware allows it, but corporations must specifically provide the right in Certificate of Incorporation. In California, cumulative voting is an “inalienable” right of shareholders of private companies- it can’t be written out of the Articles of Incorporation or bylaws. Public California companies listed on NASDAQ, the NYSE or ASE are allowed to eliminate it. Other states vary.

It must be actively exercised. In California a shareholder must notify the corporation before voting of his/her intent to vote cumulatively, and then the entire election runs cumulatively.

How it is calculated. This is the math part. The formula for calculating how many votes are needed to elect a director is:

where

X = the number of shares needed to elect a given number of directors

S = the total number of shares represented at the meeting

D = the total number of directors to be elected

Even simpler is this online calculator.

Cumulative voting can be an important right for minority shareholders. Even if it doesn’t allow a shareholder group to control the Board, it can provide visibility into Board discussions and that can sometimes make all the difference. Wikipedia has a longer explanation with history, for those interested in reading further.

• Governance , legal

Jay Parkhill September 5th, 2007

Sometimes napkins make good visualization tools too. No animation in this one, but patent lawyer Erik J. Heels did a bang-up job simplifying a complex topic to a single sheet of paper (it might not have actually been a napkin).

Erik explains it all here.

• Copyright , Intellectual Property , legal