By: Andrew Costa, IP Co-op Intern from Drexel University’s Thomas R. Kline School of Law
Despite how conventional wisdom generally tells us not to mix our business and personal lives, many times, for aspiring entrepreneurs, the people best suited to help us realize our dreams are the people we’re told to avoid: our friends and family. We don’t like to think about it, but many of us have seen “The Social Network” (the Facebook origin film) or heard the horror stories of best friends or families suing one another. Failing to foresee conflict or assuming we needn’t contract against it is more common when our loved ones are involved precisely because they’re our closet connections.
It’s not ideal to think about writing a contract with a parent or sibling, but in business we need to do so, because being in business with loved ones can easily become our worst nightmares should circumstances change. Knowing how to successfully navigate these eventualities preemptively is crucial to avoiding costly disputes when we need our favorite people involved in our businesses. As the son of a successful entrepreneurial couple and an entrepreneur myself who founded a now dissolved software start-up with my best friends, I know firsthand the importance of establishing prudent legal and operational safeguards against risk and disagreement. In this article I explore some business and IP insights I have learned through my time observing and participating in business arrangements between friends and families that can help keep things running smoothly. Though our families may question the necessity of such legal formalities, the old adage “an ounce of prevention is worth a pound of cure” holds equally true in business as in medicine
Intellectual Property – It is never too early to safeguard your ideas, their expression and your brand.
Like many entrepreneurs, my start-up began as a collaboration between myself and two of my best-friends from university – one a programmer, the other an illustrator. At the inception, we were not thinking about intellectual property law. But intellectual property is a key business asset whose protection and existence can be easily thwarted by poor contracting or planning. So as the operations side of my business, it fell to me to force the conversation early concerning contracting between both my friends as creative business partners, and those we hired to work with us as independent contractors. Here are some key considerations:
- Always Consider Contracting Confidentiality – Solidifying confidentiality and non-disclosure expectations is extremely important among business partners, especially when they are artists who brainstorm collectively, or individuals who are deeply involved in the intricacies of a business. To benefit from the protections afforded by trade secret law, the owner of a trade secret must use reasonable safeguards to protect the secrecy of her information. An NDA or confidentiality agreement is the most basic way you can protect these assets, before investing in more complex business infrastructure to guard confidential information. Although NDA’s are just the floor of protection, having them signed up front helps to set the expectation of confidentiality, and can help prove reasonable means were used to maintain secrecy if trouble arises in the future. Trade secrets are becoming more and more crucial in business IP portfolios and are valuable assets worth protecting. By insisting upon having these simple agreements early in the process, you can avoid costly litigation if a partner splits and tries to steal the secret ideas or processes from the original venture, or an artist attempts to commandeer an idea from your team’s brainstorm session.
- Clearly Assign Copyright Rights Contractually – You have a great software project and incredible UI design, but you don’t want to go through the logistics of hiring a regular employee, so you contract with an artist or programmer as an independent contractor. Your contract clearly states the work your contractor creates is “work made for hire” but you did not expressly state that the rights to the underlying work are assigned wholly to you, or the business – surprise, the copyrighted work is now owned by your independent contractor and not you. And although you may hold a non-exclusive license, the contractor controls the right to make derivative works – not an ideal situation. Section 101 of the Copyright Act stipulates that a “work made for hire,” even when contracted properly, only exists in either: (1) a work made within the scope of an employee’s employment (pursuant to Agency Law); or (2) one of nine enumerated types of works specifically ordered or commissioned for use. This definition holds true for all work performed by independent contractors, and problems are so common that the Copyright Office’s Circular 30 discusses these scenarios at length. Contractor copyright problems can be remedied preemptively by using contract language that properly articulates the type of work being created and contains an agreement to assign the work in the future. A later memorialization of the assignment can further help avoid disputes. For me, this meant every programmer and artist who was independently contracted with my business had a specifically outlined “scope of work” provision, a copyright clause expressly stipulating the work was a “work made for hire,” and an assignment of all rights to the company. This may sound tedious, but Hollywood is very familiar with the litigation consequences of poor draftsmanship; make sure your contractors can’t come back and sue you for royalties when your business takes off.
- Trademark Protection and Intent to Use – Sometimes the perfect branding idea strikes, but as a corporation, you are not yet ready to begin using the idea/mark you’ve designed in commerce. For my business, we knew our branding idea but had not finished the underlying software product, let alone sold it in interstate commerce as required to satisfy the USPTO’s “use in commerce” requirement for registration. Here is where “Intent to Use” comes in. You may file an Intent to Use application for a trademark with the USPTO and immediately begin your trademark ownership clock, allowing you to cite protection from that date, should a competitor attempt to infringe against you. Thus, your brand is protected during development and the early stages of launching the product in the market. You have at least 6 months to commence “use” as that is required by the USPTO, but this time period may be extended up to 3 years if you can provide the requisite justification for the delay. This does come with a filing cost, but as a business it may be an important consideration as you prepare for a launch or tool up production.
- Business Organization – Whether we like it or not, disagreement is unavoidable. So whether it’s in your company’s Operating Agreement, By-Laws, or Shareholders’ Agreement always define the procedures for dispute resolution if the leadership of your business becomes deadlocked. This can be structural, like making sure your Board is always comprised of an odd voting number (like the Supreme Court) or by assigning different percentages to members in an LLC. Minority shareholder protections like preemptive rights to purchase shares, rights of first refusal, and buy-out provisions can further provide serious incentives to compromise, and a definitive way out of disagreement. Many small businesses are run by boards of husbands and wives, or friends and family members – defining these processes is critical when the relationship alone cannot remedy the disagreement, and oftentimes reliance upon these procedures, instead of the relationship itself, can be the reason it endures beyond the conflict.
- Planning for the End Game – Lastly, it’s hard to think about the end at the beginning, but sometimes the quality of the end depends on the prudence exercised at beginning. This does not mean knowing exactly how you can capitalize yourself out of a business at its peak or sell, but this does mean knowing how to remove yourself from the entity should you want to do so with your liability protected, or knowing how to get rid of someone who is becoming problematic. The only real mistake in this category is failing to define the basic contours of departure, and leaving those processes to be defined on a future date. Operating agreements and by-laws can be amended and/or separation agreements be entered into, but if you intend to leave, making such changes at that time you want to depart will generally not go over well with your partners, nor guarantee you leave on satisfactory terms. Don’t get stuck without a door to float on like Jack in the Titanic – make sure these basic provisions exist in your agreements with business partners.
Working with family and friends can make the process of entrepreneurship very rewarding because it’s these individuals that usually believe in our visions the most and will go above and beyond to see our dreams become realities. But having these formalities – which are necessary for any business, regardless of whether your partners are people you know well or new acquaintances – are very important. Clear expectations help you preserve your personal relationships even if the business does not continue, and they reduce the amount of friction and disagreements along the way.