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Early Legal Issues For Start-ups

2012 Chicago-Kent Entrepreneurial Law Clinic

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Heather Harper

Supervising Attorney, Entrepreneurial Law Clinic

Clinical Professor

Chicago-Kent College of Law

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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 alawyer

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Employees may be restricted by contracts

2012 Chicago-Kent Entrepreneurial Law Clinic 3

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 a

t least two parties that outlines confidential material,

knowledge, or information that the parties wish to share with one another for certainpurposes, 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

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Does employee owe duty of loyalty?

Is the employee skilled or

key?

Does employee plan to start

competing business?

Employee may only prepare to start business. If

employee actually starts a competing business

while still employed, the duty has been

breached.

No duty

exists

Yes No

Yes No

Key = an employee

with a major

ownership and/or

decision-making role

in the business

Skilled = an

employeepossessing certain

skills usually

attained through

training

Employee may start

business, but should take

precautions (e.g., should

not use employers

equipment in doing so).Source: Barron and Reed, Chapter 2: The Transition from Employee to

Entrepreneur.

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Choose a name that is protectable

Corporate Availability-

Check if the name is

available on Secretary of

States website

Infringement-

Check to see if the

name infringes on

someone elses

trademark

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Protectability-

Doesnt 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

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How to pick a name that you can more easily protect

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ZyngaFanciful

Amazon.comArbitrary

CoppertoneSuggestive

Ice Cold BeerDescriptive

BeerGenericSource: http://us.practicallaw.com/4-507-

2834?q=trademarks#a1053768

http://us.practicallaw.com/4-507-2834?q=trademarkshttp://us.practicallaw.com/4-507-2834?q=trademarkshttp://us.practicallaw.com/4-507-2834?q=trademarkshttp://us.practicallaw.com/4-507-2834?q=trademarkshttp://us.practicallaw.com/4-507-2834?q=trademarkshttp://us.practicallaw.com/4-507-2834?q=trademarkshttp://us.practicallaw.com/4-507-2834?q=trademarks

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Why founders need agreements among themselves

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With an Agreement Without an Agreement

Defines relationships- opens

communication and defines management

decisions

Unclear ownership structure- instances of death and

divorce may result in partners added as an operation of

law

Defines business structure Uncertain business relations

Clarifies of ownership People leave- potential for disastrous exit and to muddy

your capitalization table

Transfers, i.e. death, divorce or quitting Can increase the time and money needed to sort out

issues

Saves time and avoids nasty legal

entanglements

You could find yourself with a partner you didnt

approve

Predictable upfront legal cost

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Properly categorize your workers

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Employee Independent Contractor

Type of

Relationship

Employee benefits

Performs key services to business

Permanency of relationship

Written contract offer letter or employment agreement

No benefits

Written contract independent contractor

agreement defining scope & expectations of work

Behavioral

Control

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.

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.

Financial Control

Receives compensation via payroll; relies on business for

steady income.

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

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How to know if someone is an intern

Fair Labor Standards Six Part Intern Test

1. The internship, even though it includes actual operation of the facilities of the employer, is similarto training which would be given in an educational environment;

2. The internship experience is for the benefit of the intern;

3. The intern does not displace regular employees, but works under close supervision of existing staff;

4. The employer that provides the training derives no immediate advantage from the activities of theintern; and on occasion its operations may actually be impeded;

5. The intern is not necessarily entitled to a job at the conclusion of the internship; and

6. The employer and the intern understand that the intern is not entitled to wages for the time spentin the internship.

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Source:

http://www.dol.gov/whd/regs/complian

ce/whdfs71.htm

http://www.dol.gov/whd/regs/compliance/whdfs71.htmhttp://www.dol.gov/whd/regs/compliance/whdfs71.htmhttp://www.dol.gov/whd/regs/compliance/whdfs71.htmhttp://www.dol.gov/whd/regs/compliance/whdfs71.htm

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Know your intellectual property and take steps to protect it

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Type Definition

Trademark

15 USC 1501-1141

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.

Trade Secret

765 ILCS 1065

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 knowor use it.

A document and corresponding set of rights granted to an inventor in

exchange for disclosing an invention to the public.Patent

35 USC 101 et. seq.

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Know your intellectual property and take steps to

protect it

Trademar

k

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Copyright Trade Secret Patent

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Your legal needs develop with your company

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Choosing 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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Choose a lawyer:

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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 Chicago-Kent College of Law

565 W. Adams St., Suite 600

Chicago, IL 60661

312.906.5038

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