According to the expert panel of patent law attorneys that GAO surveyed, small businesses that are considering whether to seek patent protection abroad should identify and assess the full “cradle-to-grave” costs of acquiring, maintaining, and enforcing foreign patents. Other considerations should include the locations where small businesses intend to sell or manufacture their invention and whether the range of benefits obtained from foreign patents, such as increased sales or higher company value, is sufficient to justify their cost. Furthermore, small businesses should try to
understand foreign patent laws and systems and the quality of foreign patent enforcement, the expert panelists said. The small businesses that GAO surveyed agreed that foreign patent costs, benefits, and potential locations were important factors in their decisions to patent abroad. However, some small businesses did not properly evaluate long-term costs and could not determine whether foreign patent benefits outweighed the costs.
The most important step that small businesses could take to improve their foreign patent efforts, according to GAO’s survey of patent law experts, is to avoid disclosing information publicly about an invention before filing a U.S. patent application. The United States permits such disclosure, but doing so can invalidate an applicant’s right to patent protection abroad. The second most important step is to be aware of filing deadlines, which are specified in foreign laws and international patent treaties. Other important steps included integrating foreign patents into long-range business planning and seeking patents in countries where meaningful protection is available and a return on investment is likely.
More info HERE.
27 Haziran 2012 Çarşamba
Experts’ Advice for Small Businesses Seeking Foreign Patents
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Everybody needs both Pinterest and LinkedIn
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Or so says online marketing expert Tim Peter:
"A few days ago, Mike Moran noted "nobody needs both Pinterest and LinkedIn." And, generally, Mike's absolutely right. Too many guys in black turtlenecks and very cool eyeglasses try to fit their standard portfolio of tricks and tips to your business, without really considering how to various social channels fit your brand's needs. But…Why don't you need both Pinterest and LinkedIn? Actually, you might. Read on to find out why."
Since I don't even have a Pinterest account, I'm behind the curve...again.
Doing business in China without getting ripped off
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There is a great blog I came across called China Law Blog, which anyone wanting to export items to China. For instance, I discovered in this article that there are Fake China Law Firms...where companies "thought they were paying money to a Chinese law firm for something like registering a trademark in China or drafting a manufacturing agreement. Instead, they paid money to somebody that had set up a temporary website with the sole intention of bilking the unwary."
Also check out Protecting Your China IP. Me Thinks Thou Dost Worry Too Much.
A most useful site.
Why and How to Beef Up Your Business Credit Score
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From SBA:
Do you know your business credit score? Feel unnerved about relying on your personal credit score for business transactions? As a business owner, taking steps to separate your personal and business finances is a smart strategy. Obviously, this means implementing a strategy to build good credit in your company’s name.
What is Business Credit?
Business credit is much like your own personal credit score – it’s a proxy for your business’ ability to repay its debts. When you start a business, this type of credit may not be at the top of your agenda. But as you plan to expand and grow, establishing good business credit will be helpful if you decide to apply for a business loan.
Who Monitors Your Credit?
Business credit, also known as trade credit, is the single largest source of lending and is monitored by business credit bureaus. These bureaus gather data on trade credit transactions and produce business credit reports for the benefit of credit issuers. Credit is measured on a scale of 0-100, with a score of 75 or more being the ideal range.
Good Business Credit Can Open Doors and Bring Many Benefits
Establishing business credit is about so much more than trying to improve your chances of securing a loan.
TAM, SAM and SOM
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Here is a great article from the Up and Coming Blog by Bplans. Having viewed several business plans over the years, a common (and very important) item missing from most plans is a breakdown of the company’s TAM, SAM and SOM in the marketing section of their plan. Wondering what these acronyms mean? Well you’re not alone – many entrepreneurs are not familiar with these terms. Here’s a quick explanation of what they mean, followed by an example:
TAM, SAM and SOM - huh??
25 Haziran 2012 Pazartesi
Things To Do Before Signing That Franchise Agreement
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Even if the economy continues its limpid trends though this year, someone ssomehwere will be looking at a franchise opportunity. Franchising offers wonderful opportunites to both the franchisor and franchisee. Unfortunately, franchises also offer achance for a fleeching by the unscrupulous and the criminal minded. Business Opportunities Weblog'sFranchise Contract Time Bombs does a fine job of setting out what can wrong.
If you need a lawyer to review a franchise agreement, please contact me for an appointment.
* Do the numbers smell a little fishy to you? It is almost unheard of to have a franchise contract that supplies a full income statement. Watch out for exceptionally high and “pretty” looking expected income numbers.I have my own bit of advice: take the francise offering circular and the agreement to a lawyer before you pay a penny.
* Take a look at what they want you to pay up front. Some franchisors make money right off the bat with a one time franchise fee. However, if the contract seems to show that you have a lot of costs up front then you should run in the opposite direction. This may mean trouble for you later when your having a tough time and they have already made their money off of you earlier on, recently stated on Forbes.com.
* Make sure your royalty payments are not going to cost you an arm and a leg. Not all franchises charge these but if they do they shouldn’t break the bank to the point where it’s impossible for you to turn a profit.
* How Easy Is It To Get Out Of Your Contract? Franchise agreements can last for 10 years, and many franchisers make it difficult for franchisees to cut and run. Breach the contract and you’ll pay “liquidation damages.” Every UFOC contains (or should contain) a section devoted to rules governing termination, renewal and transfer of contracts. Read it–closely.
If you need a lawyer to review a franchise agreement, please contact me for an appointment.
Attorney Fees and Services
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Think About What You Are Getting.
That is what I read as the point in 3 Geeks and a Law Blog's Cost Recovery…Such a deal:
More importantly, the article touches on what every client should know and what every lawyer should provde: what the clients are getting for their money.
That is what I read as the point in 3 Geeks and a Law Blog's Cost Recovery…Such a deal:
You can see it in recent news items discussing the attitudes of General Counsels at large corporations as they struggle with reducing costs with major law firms. They are negotiating hourly rates aggressively and questioning every item that appears on their bill. The question of whether or not the hourly billing model has gone the way of the dodo has been debating extensively, including by 3Geeks’ own Toby Brown on this page. I think the hourly rate issue should be separate from the online research charges that appear on the bill. As you can see in my analysis below, these charges actually reflect the efficiencies these services provide.I no linger favor the hourly rate in my practice, preferring flat fees, but I have to admit that this is a good argument for those using an hourly rate.
More importantly, the article touches on what every client should know and what every lawyer should provde: what the clients are getting for their money.
Tweeting? Facebook? Be Careful What You Say and Do
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Twitter may not seem related to business. Think again, what I am seeing as marketing advice is to join Twitter (I have and you can follow me, if you like).
Therefore, in the hope of preventing litigation, let me suggest reading To Avoid Libel Litigation, Lawyer Advises, Don’t Tank Up and Tweet
Therefore, in the hope of preventing litigation, let me suggest reading To Avoid Libel Litigation, Lawyer Advises, Don’t Tank Up and Tweet
Following recent news that a woman is being sued by an Illinois landlord over a tweet she posted on Twitter about her apartment, a California lawyer is offering 10 suggestions to help other users of the popular micro-blog avoid being a defendant in defamation litigation.Remember that other social media sites exist to worry the business owner. See Social media permeate the employment life cycle for a whole range of pitfalls for the business owner.At least some of the 10 tips offered by attorney Adrianos Fachetti in a TwiTip post may seem like common sense. For example, tanking up on alcohol and posting a tweet is not a good idea.
However, for those who don't pay sufficient attention to this issue and other potential litigation pitfalls, a horrible fate may await, the lawyer writes—losing the privilege of posting on Twitter
Preventive Law and Trade Secrets
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It is a relief to have others repeat my points about preventive law. I wonder how much of it is passed off as being self-serving. It is not. What most do not realize is that cleaning up the mess - litigation - creates more difficulties for us lawyers than does preventive law. Which explains what I like Protecting business model can be costly about from The Wichita Eagle
Attorneys say that although taking legal action is lengthy and expensive, and the outcome uncertain, it's often the only way businesses can protect their intellectual property rights. And interest in protecting intellectual property interests has grown with the shift from a manufacturing to a service economy.
"Legal protection for inventions, patents and so on has become more important," said Herbert Wamsley, executive director of the Washington-based Intellectual Property Owners Association. "Because in the information age, intangible assets such as technology are more important relative to the traditional kinds of wealth, such as land and labor and capital."
***
Attorneys say the best way to protect company secrets and ideas is to take measures early on to avoid their falling into the hands of competitors.If you want your business to be safe, give me a call.
That includes filing for patents on inventions, registering trademarks and preventing leaks of sensitive information — either by restricting the number of people who know it, or requiring insiders to sign non-compete or confidentiality agreements.
More On Limited Liability Companies' Fiduciary Duty
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Now that we have an Indiana Court of Appeals decision describing the fiduciary duty of an LLC to its members, I almost thought to scratch this post. However, Chicago Business Litigation Lawyer Blog's Respected Law Professor's Insights on Corporate Freeze-Out Litigation may still have some benefit to you.
"In Fairness and Good Faith as a Precept in the Law of Corporations and Other Business Organizations, 36 Loy.U.Chi. L.J. 551 (2005), Murdock addresses the fiduciary duty of good faith and fairness that controlling interests of a business owe to minority interests. Noting that this internal duty is a fairly recent legal phenomenon, he surveys caselaw on the subject from around the country that applies to closely held corporations, public corporations and LLCs. Noting that the Uniform Limited Liability Company Act (ULLCA), a model law adopted by several states, doesn't include language that gives members of an LLC fiduciary duties to one another, he praises Illinois for modifying that language to protect members in the updated Limited Liability Company Act."
24 Haziran 2012 Pazar
Venture Capital Terms: A Primer
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Before you get involved with venture capital financing, whether as a company looking to raise financing, or as a potential investor, make sure you understand important terms and concepts that you will invariably be confronted with in a venture capital transaction. Even if your business is not at the juncture of raising financing, understanding the key terms in now as they relate to a private equity transaction will help you start to position company for an eventual financing round down the road. Accordingly, this discussion provides an overview of some of the important terms in a venture deal.
1. Venture Capital: You have heard the term thrown about, but what does it mean? Simply put, venture capital is a broad term used to describe financing provided to startups and early stage businesses as well as turn around situations. However, the manner in which the financing is provided to a company is where the many variations on potential deal structures arise. The financing can be raised through debt (i.e., a loan), equity (i.e., shares) or a combination of the two (such as a convertible loan or a loan with stock options).
2. Private Equity: Equity securities of a company that are not listed on a public market are referred to as private equity. However, the term is also liberally used to refer to any venture capital deal where the financing does not involve any purchase of shares listed, or any listing of any shares, on a public exchange (i.e., stock market).
3. Valuation: The value of the company. A simple statement, but that is the only thing simple about it. Valuation is usually one of the most important issues in any venture deal, with the company arguing for a high valuation and the investor looking to push valuation as low as possible. As an investor, you may receive a term sheet with a stated valuation for the company, however, any valuation decision should be based on your independent assessment. Further, the valuation should adjust based on information you may learn in the due diligence process.
a. Post-Money Valuation: The valuation of a company immediately after the most recent round of financing. If an investor provides $1 million in a company valued at $3 million "pre-money" (before the investment was made), the post-money valuation of the company is $4 million.
b. Pre-Money Valuation: The valuation of a company prior to the investment. This amount is determined by using various possible formulas (book value, discounted cash flow, multiple of future earnings etc.).
c. Fully Diluted Basis: All securities, including preferred stock, options and warrants, that result in additional common shares on a converted basis, are counted in calculating the total amount of shares outstanding for determining ownership or valuation.4. Common Stock: A security (stock) that evidences proportionate ownership in the company and gives the owner voting rights and proportionate right in the assets and income of the company (after all obligations of the company).
5. Preferred Stock: Like common stock, preferred stock represents proportionate ownership in the company, but stands a higher position (preferred) to common stock with respect the claims on the asserts and earnings. Preferred shares may or may not have voting rights depending on what the parties negotiate. Preferred shares generally will have a number of additional rights that common stockholders do not have, including a dividend preference and liquidation preference. There are different types of preferred stock, including:
a. Participating Preferred: giving the owner the right to additional dividends if a certain predetermined financial event occurs
b. Convertible Preferred: which convert into common stock either at the option or can occur upon an event requiring mandatory conversion to common stock
c. Cumulative Preferred/Dividend Preference: Preferred shares have a dividend preference giving the holder the right to dividends before common stock holders. Cumulative Preferred Stock gives the holder a right to dividends at a fixed rate of return, and that dividend accumulates each year until paid (before common dividends, if any). Non-cumulative preferred means if no dividends declared, then the dividend is lost (rather than accumulates until declared).
6. Liquidation Preference: Preferred shareholders will have a right to receive a payment upon a triggering event, such as the winding down of the company or a merger or acquisition. The question is what is the nature of the preference: (a) how much is paid, (b) what is the priority among different classes (common vs. preferred) and series (like Series A vs. Series B, and (c) the right, if any, of the preferred to share in any remaining amounts (i.e., along side the common shareholders).
7. Series A, etc.: Stock of a company can be divided into different series, which will occur when there is more than one round of financing. For example, if preferred (Series A) shares were already issued, and the company does another round it can call the new preferreds Series B. The other important aspect is that each Series can have different dividend, liquidation, voting and other rights.
8. Convertible Stock: Most people are aware of convertible stock or convertible rights which gives the holder of preferred shares to convert them into common stock upon a triggering event. However, the real issue is negotiating the conversion ratio/formula, for example will it be 1:1 meaning one common for one preferred or another formula where the preferred gets more than one share of common for each preferred share.
9. Anti-Dilution Protection: One of the biggest concerns of any investor in a company is that it will be diluted if the company subsequently issues more shares at a lower price. As a result, investors often demand an antidilution right, and then the question is what is the nature of that right:
a. Full Ratchet gives the shareholder the right to always retain its percentage of ownership in the company. Therefore, the shareholder is given a right to a number of shares necessary to maintain its ownership percentage in the company. While this term is very favorable for the investor, it has the effect of substantially diluting other shareholders without the right and thus the full-ratchet provision is less common.
b. Broad-Based Weighted Average results in dilution of the holder of the right, the percentage decline is tempered so as to not result in the full dilution that other shareholders will experience. The issuance of new shares at a lower price will result in a re-weighting of the average share price, and the investor with the anti-dilution protection will have a right to additional shares to lessen the effect of the new round (however, the investor will still see a reduction in its ownership percentage).
10. Tag Along/Co-Sale: The Tag Along right gives a minority shareholder the right to sell its shares upon the sale by a majority shareholder on a percentage basis. If you are a minority shareholder, this is an important right because you do not want the founders or majority to be able to exit the company without giving you a right to exit in part as well.
11. Drag Along: Means that if a set percentage of shareholders wish to sell the company's share to a third party, the other shareholders must agree and are dragged along into accepting the deal and the negotiated terms.
12. Right of First Refusal/Preemptive Right: This right can work to the benefit of the shareholder, giving it a right to buy shares on the same terms offered to a third party. It also can benefit the company, providing the company a right to purchase its shares rather than allowing a third party to buy them from an existing shareholder.
13. Right of Redemption: A right of redemption gives the holder the right to demand that the company repurchase its shares at a specified price upon the occurrence of a triggering event.
14. Registration Right: Investors with registration rights are given the right to require the company to register its restricted shares either on demand (subject to certain terms) or a piggyback right (when the company files a registration statement). For a company, allowing the demand right is not generally favored
because registration is expensive, complex and the timing may not be right for a registration.
15. Board Seats: A company seeking to raise funds should be aware that an investor may seek one or more seats on the company's board of directors.
16. Restrictive Covenants: It is common place for loans to include restrictive covenants limiting certain the company from taking certain actions while the loan is outstanding, but an investor may also ask for such rights, including limitations on spending, sale of important assets, issuing additional shares, increases in salaries and other major business decisions.
17. Non-Compete Clause: A company may want to require an investor to sign a non-compete, especially a large investor. The investor will likely push back arguing as a passive investor it is not necessary.
Above are some of the more important terms you will need to address in a venture financing transaction. Of course, the investor will take a markedly different position regarding some of the rights as the company. Therefore, as your company is moving toward the financing stage, begin considering how you will address the important rights that the investor will likely demand.
Disclaimer: The discussions in this blog do not constitute legal advise nor create any attorney-client relationship. You are urged to seek the advice of an experienced lawyer who can provide counsel with respect to your corporate/business law matters.
1. Venture Capital: You have heard the term thrown about, but what does it mean? Simply put, venture capital is a broad term used to describe financing provided to startups and early stage businesses as well as turn around situations. However, the manner in which the financing is provided to a company is where the many variations on potential deal structures arise. The financing can be raised through debt (i.e., a loan), equity (i.e., shares) or a combination of the two (such as a convertible loan or a loan with stock options).
2. Private Equity: Equity securities of a company that are not listed on a public market are referred to as private equity. However, the term is also liberally used to refer to any venture capital deal where the financing does not involve any purchase of shares listed, or any listing of any shares, on a public exchange (i.e., stock market).
3. Valuation: The value of the company. A simple statement, but that is the only thing simple about it. Valuation is usually one of the most important issues in any venture deal, with the company arguing for a high valuation and the investor looking to push valuation as low as possible. As an investor, you may receive a term sheet with a stated valuation for the company, however, any valuation decision should be based on your independent assessment. Further, the valuation should adjust based on information you may learn in the due diligence process.
a. Post-Money Valuation: The valuation of a company immediately after the most recent round of financing. If an investor provides $1 million in a company valued at $3 million "pre-money" (before the investment was made), the post-money valuation of the company is $4 million.
b. Pre-Money Valuation: The valuation of a company prior to the investment. This amount is determined by using various possible formulas (book value, discounted cash flow, multiple of future earnings etc.).
c. Fully Diluted Basis: All securities, including preferred stock, options and warrants, that result in additional common shares on a converted basis, are counted in calculating the total amount of shares outstanding for determining ownership or valuation.4. Common Stock: A security (stock) that evidences proportionate ownership in the company and gives the owner voting rights and proportionate right in the assets and income of the company (after all obligations of the company).
5. Preferred Stock: Like common stock, preferred stock represents proportionate ownership in the company, but stands a higher position (preferred) to common stock with respect the claims on the asserts and earnings. Preferred shares may or may not have voting rights depending on what the parties negotiate. Preferred shares generally will have a number of additional rights that common stockholders do not have, including a dividend preference and liquidation preference. There are different types of preferred stock, including:
a. Participating Preferred: giving the owner the right to additional dividends if a certain predetermined financial event occurs
b. Convertible Preferred: which convert into common stock either at the option or can occur upon an event requiring mandatory conversion to common stock
c. Cumulative Preferred/Dividend Preference: Preferred shares have a dividend preference giving the holder the right to dividends before common stock holders. Cumulative Preferred Stock gives the holder a right to dividends at a fixed rate of return, and that dividend accumulates each year until paid (before common dividends, if any). Non-cumulative preferred means if no dividends declared, then the dividend is lost (rather than accumulates until declared).
6. Liquidation Preference: Preferred shareholders will have a right to receive a payment upon a triggering event, such as the winding down of the company or a merger or acquisition. The question is what is the nature of the preference: (a) how much is paid, (b) what is the priority among different classes (common vs. preferred) and series (like Series A vs. Series B, and (c) the right, if any, of the preferred to share in any remaining amounts (i.e., along side the common shareholders).
7. Series A, etc.: Stock of a company can be divided into different series, which will occur when there is more than one round of financing. For example, if preferred (Series A) shares were already issued, and the company does another round it can call the new preferreds Series B. The other important aspect is that each Series can have different dividend, liquidation, voting and other rights.
8. Convertible Stock: Most people are aware of convertible stock or convertible rights which gives the holder of preferred shares to convert them into common stock upon a triggering event. However, the real issue is negotiating the conversion ratio/formula, for example will it be 1:1 meaning one common for one preferred or another formula where the preferred gets more than one share of common for each preferred share.
9. Anti-Dilution Protection: One of the biggest concerns of any investor in a company is that it will be diluted if the company subsequently issues more shares at a lower price. As a result, investors often demand an antidilution right, and then the question is what is the nature of that right:
a. Full Ratchet gives the shareholder the right to always retain its percentage of ownership in the company. Therefore, the shareholder is given a right to a number of shares necessary to maintain its ownership percentage in the company. While this term is very favorable for the investor, it has the effect of substantially diluting other shareholders without the right and thus the full-ratchet provision is less common.
b. Broad-Based Weighted Average results in dilution of the holder of the right, the percentage decline is tempered so as to not result in the full dilution that other shareholders will experience. The issuance of new shares at a lower price will result in a re-weighting of the average share price, and the investor with the anti-dilution protection will have a right to additional shares to lessen the effect of the new round (however, the investor will still see a reduction in its ownership percentage).
10. Tag Along/Co-Sale: The Tag Along right gives a minority shareholder the right to sell its shares upon the sale by a majority shareholder on a percentage basis. If you are a minority shareholder, this is an important right because you do not want the founders or majority to be able to exit the company without giving you a right to exit in part as well.
11. Drag Along: Means that if a set percentage of shareholders wish to sell the company's share to a third party, the other shareholders must agree and are dragged along into accepting the deal and the negotiated terms.
12. Right of First Refusal/Preemptive Right: This right can work to the benefit of the shareholder, giving it a right to buy shares on the same terms offered to a third party. It also can benefit the company, providing the company a right to purchase its shares rather than allowing a third party to buy them from an existing shareholder.
13. Right of Redemption: A right of redemption gives the holder the right to demand that the company repurchase its shares at a specified price upon the occurrence of a triggering event.
14. Registration Right: Investors with registration rights are given the right to require the company to register its restricted shares either on demand (subject to certain terms) or a piggyback right (when the company files a registration statement). For a company, allowing the demand right is not generally favored
because registration is expensive, complex and the timing may not be right for a registration.
15. Board Seats: A company seeking to raise funds should be aware that an investor may seek one or more seats on the company's board of directors.
16. Restrictive Covenants: It is common place for loans to include restrictive covenants limiting certain the company from taking certain actions while the loan is outstanding, but an investor may also ask for such rights, including limitations on spending, sale of important assets, issuing additional shares, increases in salaries and other major business decisions.
17. Non-Compete Clause: A company may want to require an investor to sign a non-compete, especially a large investor. The investor will likely push back arguing as a passive investor it is not necessary.
Above are some of the more important terms you will need to address in a venture financing transaction. Of course, the investor will take a markedly different position regarding some of the rights as the company. Therefore, as your company is moving toward the financing stage, begin considering how you will address the important rights that the investor will likely demand.
Disclaimer: The discussions in this blog do not constitute legal advise nor create any attorney-client relationship. You are urged to seek the advice of an experienced lawyer who can provide counsel with respect to your corporate/business law matters.
The Miscellaneous Contract Terms: They Aren't Boiler Plate
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A prior post discussed the concept that notwithstanding the fact that the governing law and forum selection clauses are usually at the end of a contract they should be reviewed and negotiated with the same emphasis as the business terms. In the same vein, there are several provisions that will often fall under the "Miscellaneous" section or article of a contract, and therefore you may (erroneously) believe they contain boiler plate language not requiring much attention. To be clear, do not ignore or give little attention to these miscellaneous contractual provisions simply because they come at the end of the agreement. This two-part discussion reviews the meaning and importance of the "Miscellaneous" sections of a contract. In this instalment, the (1) Severability, (2) Notice, (3) Amendments and Waiver and (4) Counterparts, and (5) Construction/Headings clauses are discussed, and the next installment reviews the (6) Remedies, (7) Third Party Beneficiaries, (8) Assignment, and (9) Integration provisions of an agreement.
1. Severability. What happens to the contract if the parties included a provision that is later found unenforceable or invalid under law? If the agreement includes a Severability clause, in most cases the remainder of the contract will be saved. The provision is important to prevent the entire contract from being rendered void or unenforceable. The Severability provision will state that the remainder of the contract and the application of the deficient provision to other persons or circumstances shall not be affected and shall be enforced to the extent permitted by law so long as the economic or legal substance of the transactions is not affected in any manner materially adverse to any party. Further, if a term or other provision is invalid or unenforceable, make sure the Severability clause states that the parties will negotiate in good faith to modify the agreement to cause the original intent of the contract is fulfilled to the greatest extent possible.
2. Notice. The Notice clause defines the method(s) for providing notice to the parties. OK, that is obvious, but what you include in that provision can actually avoid the failure to provide or receive timely notice under terms of a contract.
Example: You enter into a contract with a printer for the printing a brochure. The contract includes a provision requiring you to give the printer ten days notice from the date of receipt of draft brochure of any defects. If you do not provide notice of any defects, the printer will then make 1000 copies. You receive the brochure by overnight delivery on December 12, 2011. You find a defect and send the printer an email on December 23, 2011. He calls and notifies you that it is too late, you need to take delivery of the 1000 brochures, and you owe the full fees under the contract. You call back and tell him you understood ten days to mean ten business days, and so your notice was timely. Problem: the contract does not say business days, and so you made the wrong assumption.
Issues like the above regularly occur, and so here are good ideas for the Notice provision:
(a) all notices must be in writing (not oral);
(b) when referring to days, state whether this means business or calendar days;
(c) if time periods run from delivery of a product, service or notice, define the permissible delivery methods (i.e., regular mail, certified with return receipt, fax, email, overnight, personal delivery) and when delivery is deemed to have taken place (regular mail: "x" days after mailing in the US or "y" days outside the US; fax: upon confirmation of successful transmission; overnight mail: upon proof of delivery; and personal delivery: upon proof of personal delivery);
(d) as a precaution, require that copies of all notices to be sent to your attorney; and
(e) expressly state the addresses for delivery, and that if the address changes that the party must notify the other parties to the agreement.
3. Amendments and Waiver. Contracts should include a provision addressing how (a) amendments to the contract can be made, and (b) provisions/rights in the agreement can be waived by a party.
(a) Amendment -- The contract should state that any amendments must be in writing signed by all the parties.
(b) Waiver -- The provision should state that that: No waiver by any party of any default, misrepresentation, or breach of warranty or covenant, whether intentional or not, shall extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant or affect any rights arising as a result of any prior or subsequent occurrence.
4. Counterparts. The section entitled "Counterparts" allows for the agreement to be signed separately by the parties on different copies of the signature page, and will generally include that delivery of the signature page can be accomplished by fax.
Sample clause: "This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument."
5. Construction/Headings.
(a) The "Construction" provision provides the rules of interpreting the contract in the event of the dispute, including an important concept that the parties have deemed the contract to have been jointly drafted and therefore no presumption or burden of proof should be deemed to arise favoring or disfavoring any party by reason of being labeled the drafter of the agreement. Why is this important? Without it, all the parties would either need to sit in a room and sign the document or the one, original signature page would need to be circulated to all parties, who would each be required to sign on the same page.
(b) The "Headings" clause precludes any party from giving any meaning to the headings, and therefore the headings are simply to facilitate organization of the document.
The next installment discusses the meaning and importance of several other Miscellaneous contract provisions, including the Remedies, Third Party Beneficiaries, Assignment, and the Integration provisions.Disclaimer: The information in this blog is for discussion only and does not constitute legal advice nor create any attorney client relationship. You are urged to consult with an experienced lawyer concerning your business/corporate law matters.
1. Severability. What happens to the contract if the parties included a provision that is later found unenforceable or invalid under law? If the agreement includes a Severability clause, in most cases the remainder of the contract will be saved. The provision is important to prevent the entire contract from being rendered void or unenforceable. The Severability provision will state that the remainder of the contract and the application of the deficient provision to other persons or circumstances shall not be affected and shall be enforced to the extent permitted by law so long as the economic or legal substance of the transactions is not affected in any manner materially adverse to any party. Further, if a term or other provision is invalid or unenforceable, make sure the Severability clause states that the parties will negotiate in good faith to modify the agreement to cause the original intent of the contract is fulfilled to the greatest extent possible.
2. Notice. The Notice clause defines the method(s) for providing notice to the parties. OK, that is obvious, but what you include in that provision can actually avoid the failure to provide or receive timely notice under terms of a contract.
Example: You enter into a contract with a printer for the printing a brochure. The contract includes a provision requiring you to give the printer ten days notice from the date of receipt of draft brochure of any defects. If you do not provide notice of any defects, the printer will then make 1000 copies. You receive the brochure by overnight delivery on December 12, 2011. You find a defect and send the printer an email on December 23, 2011. He calls and notifies you that it is too late, you need to take delivery of the 1000 brochures, and you owe the full fees under the contract. You call back and tell him you understood ten days to mean ten business days, and so your notice was timely. Problem: the contract does not say business days, and so you made the wrong assumption.
Issues like the above regularly occur, and so here are good ideas for the Notice provision:
(a) all notices must be in writing (not oral);
(b) when referring to days, state whether this means business or calendar days;
(c) if time periods run from delivery of a product, service or notice, define the permissible delivery methods (i.e., regular mail, certified with return receipt, fax, email, overnight, personal delivery) and when delivery is deemed to have taken place (regular mail: "x" days after mailing in the US or "y" days outside the US; fax: upon confirmation of successful transmission; overnight mail: upon proof of delivery; and personal delivery: upon proof of personal delivery);
(d) as a precaution, require that copies of all notices to be sent to your attorney; and
(e) expressly state the addresses for delivery, and that if the address changes that the party must notify the other parties to the agreement.
3. Amendments and Waiver. Contracts should include a provision addressing how (a) amendments to the contract can be made, and (b) provisions/rights in the agreement can be waived by a party.
(a) Amendment -- The contract should state that any amendments must be in writing signed by all the parties.
(b) Waiver -- The provision should state that that: No waiver by any party of any default, misrepresentation, or breach of warranty or covenant, whether intentional or not, shall extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant or affect any rights arising as a result of any prior or subsequent occurrence.
4. Counterparts. The section entitled "Counterparts" allows for the agreement to be signed separately by the parties on different copies of the signature page, and will generally include that delivery of the signature page can be accomplished by fax.
Sample clause: "This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument."
5. Construction/Headings.
(a) The "Construction" provision provides the rules of interpreting the contract in the event of the dispute, including an important concept that the parties have deemed the contract to have been jointly drafted and therefore no presumption or burden of proof should be deemed to arise favoring or disfavoring any party by reason of being labeled the drafter of the agreement. Why is this important? Without it, all the parties would either need to sit in a room and sign the document or the one, original signature page would need to be circulated to all parties, who would each be required to sign on the same page.
(b) The "Headings" clause precludes any party from giving any meaning to the headings, and therefore the headings are simply to facilitate organization of the document.
The next installment discusses the meaning and importance of several other Miscellaneous contract provisions, including the Remedies, Third Party Beneficiaries, Assignment, and the Integration provisions.Disclaimer: The information in this blog is for discussion only and does not constitute legal advice nor create any attorney client relationship. You are urged to consult with an experienced lawyer concerning your business/corporate law matters.
The Miscellaneous Contract Terms: They Aren't Boiler Plate (Part II)
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The previous installment discussing the terms generally relegated to the "Miscellaneous" article of the contract reviewed the meaning and importance of the (1) Severability, (2) Notice, (3) Amendments and Waiver, (4) Counterparts and (5) Construction and Headings sections. See the prior Installment http://mybizlawyer.blogspot.com/2011/12/miscellaneous-contract-terms-they-arent.html. This installment concludes the discussion of the common "Miscellaneous" provisions by reviewing the (6) Remedies, (7) Third Party Beneficiaries, (8) Assignment, and (9) Integration provisions of an agreement.
6. Remedies. Some contracts will include a separate section with respect to "Remedies" available to the parties in the event of a breach. The section requires particular attention because, to the extent not addressed elsewhere, it will set forth the remedies the parties can seek for breach and enforcement of the contract. The section may detail specific damages a party can seek in the event of a breach (for example, liquidated damages), but the other points to be on watch for include:
a. Specific Performance: Does the clause provide the parties the right to seek specific performance of the agreement. In some circumstances, a party may be equally or even more concerned with the other party actually performing the services or obligations under the agreement and not just obtaining damages for a failure to perform (i.e., breach). An obvious example might be a contract to purchase a home. If actual performance is important to you, then make sure the contract includes specific performance as a right in the "Remedies" section, if not in another section Without the specific performance remedy, a court may only be able to award damages, which may not be satisfactory in the mind of the person seeking performance.
b. Equitable Remedies: The contract may make reference to the right of the parties seek other equitable remedies, like an injunction, in the event of a breach. This is common, for example, in licensing agreements. In addition, the clause may state that the parties waive the obligation of posting a bond even if it would otherwise be required as a precondition to seeking the remedy. The bond provides security to the defendant and a means to obtain damages in the event of a false injunction. If you are the party against whom the remedy is more likely to be sought -- in the case of a licensing agreement that would be the licensee -- you may not want to agree to waive the necessity of posting the bond. Again, another reason why you need to read carefully all terms of the contract.
c. Cumulative Remedies: Some contracts state that the remedies are cumulative and do not require a party to seek one type of remedy before seeking alternative remedy. You will often see this provision in a promissory note, giving the lender the right to enforce the note in any manner without any precondition that one remedy be sought before another type of remedy.
7. Third Party Beneficiaries. Often the agreement will expressly state that there are no third party beneficiaries. The section means that no one other than the actual parties to the agreement can claim any rights or seek to enforce any obligations under the agreement. it may seem an obvious point that only the parties have rights under an contract, but there can be circumstances where a contract may appear to confer a benefit on a third party. The inclusion of the clause will make clear that the contract should not be read to offer any benefits to anyone else. Less frequently, the clause can be included for the the opposite purpose and actually confer the benefits of the contract on a third party where the parties desire such an effect.
8. Assignment/Successors and Assigns.
a. Assignment: There are some contracts that one or more of the parties may wish to be able to assign and there are others which may not be appropriate for assignment. If you are contracting for the services of a software developer, for example, you probably spent a great deal of time vetting the developer and therefore would be unhappy if the developer then assigned the contract to someone else. Thus, you can understand why it is important to set forth whether the contract is assignable or requires consent of the parties. Another context where assignment can be an issue is the event of a sale of the business where the absence of a right of an assignment can be an issue if the contract is important to the buyer: one typical example is a license. Bottom line: think about whether you would prefer to have a right to consent to the assignment of the contract.
b. Successors and Assigns: The "Successors and Assigns" clause determines whether the successors and assigns of a party or of the parties under the agreement are subject to the rights/benefits and obligations of the agreement. The clause may (i) bind the non-assigning party to perform the contractual obligations in the favor of the assignee, and (ii) bind the assignee to perform the contractual obligations in favor of the non-assigning party.
9. Integration/Entire Agreement.
The "Entire Agreement" or "Integration" clause essentially provides that unless set forth in the contract an obligation, right, or term is not considered part of the agreement. The clause incorporates the concept found in the parol evidence rule that the final agreement as made by the parties supercedes any terms that may have been discussed in prior negotiations. A party cannot make an argument that it negotiated for a right if it is not included in the contract because the parties (and courts) must look to the "four corners" of the contract -- of course there are exceptions to this rule but the Integration concept incorporates the parties' intention that the contract is the final expression of the terms agreed to by the parties.
While you should at least generally understand the meaning of these Miscelleaneous provisions, if there is just one take away it should be that they are not simply boiler plate just because they are found at the end of the contract. As with any section of a contract, the ultimate meaning and effect of each of these sections depends on how they are drafted, and therefore each clause should be read with the same scrutiny applied to the other terms of the agreement.
Disclaimer: This Article is intended for informational purposes and does not constitute legal advice nor create any attorney-client relationship.
6. Remedies. Some contracts will include a separate section with respect to "Remedies" available to the parties in the event of a breach. The section requires particular attention because, to the extent not addressed elsewhere, it will set forth the remedies the parties can seek for breach and enforcement of the contract. The section may detail specific damages a party can seek in the event of a breach (for example, liquidated damages), but the other points to be on watch for include:
a. Specific Performance: Does the clause provide the parties the right to seek specific performance of the agreement. In some circumstances, a party may be equally or even more concerned with the other party actually performing the services or obligations under the agreement and not just obtaining damages for a failure to perform (i.e., breach). An obvious example might be a contract to purchase a home. If actual performance is important to you, then make sure the contract includes specific performance as a right in the "Remedies" section, if not in another section Without the specific performance remedy, a court may only be able to award damages, which may not be satisfactory in the mind of the person seeking performance.
b. Equitable Remedies: The contract may make reference to the right of the parties seek other equitable remedies, like an injunction, in the event of a breach. This is common, for example, in licensing agreements. In addition, the clause may state that the parties waive the obligation of posting a bond even if it would otherwise be required as a precondition to seeking the remedy. The bond provides security to the defendant and a means to obtain damages in the event of a false injunction. If you are the party against whom the remedy is more likely to be sought -- in the case of a licensing agreement that would be the licensee -- you may not want to agree to waive the necessity of posting the bond. Again, another reason why you need to read carefully all terms of the contract.
c. Cumulative Remedies: Some contracts state that the remedies are cumulative and do not require a party to seek one type of remedy before seeking alternative remedy. You will often see this provision in a promissory note, giving the lender the right to enforce the note in any manner without any precondition that one remedy be sought before another type of remedy.
7. Third Party Beneficiaries. Often the agreement will expressly state that there are no third party beneficiaries. The section means that no one other than the actual parties to the agreement can claim any rights or seek to enforce any obligations under the agreement. it may seem an obvious point that only the parties have rights under an contract, but there can be circumstances where a contract may appear to confer a benefit on a third party. The inclusion of the clause will make clear that the contract should not be read to offer any benefits to anyone else. Less frequently, the clause can be included for the the opposite purpose and actually confer the benefits of the contract on a third party where the parties desire such an effect.
8. Assignment/Successors and Assigns.
a. Assignment: There are some contracts that one or more of the parties may wish to be able to assign and there are others which may not be appropriate for assignment. If you are contracting for the services of a software developer, for example, you probably spent a great deal of time vetting the developer and therefore would be unhappy if the developer then assigned the contract to someone else. Thus, you can understand why it is important to set forth whether the contract is assignable or requires consent of the parties. Another context where assignment can be an issue is the event of a sale of the business where the absence of a right of an assignment can be an issue if the contract is important to the buyer: one typical example is a license. Bottom line: think about whether you would prefer to have a right to consent to the assignment of the contract.
b. Successors and Assigns: The "Successors and Assigns" clause determines whether the successors and assigns of a party or of the parties under the agreement are subject to the rights/benefits and obligations of the agreement. The clause may (i) bind the non-assigning party to perform the contractual obligations in the favor of the assignee, and (ii) bind the assignee to perform the contractual obligations in favor of the non-assigning party.
9. Integration/Entire Agreement.
The "Entire Agreement" or "Integration" clause essentially provides that unless set forth in the contract an obligation, right, or term is not considered part of the agreement. The clause incorporates the concept found in the parol evidence rule that the final agreement as made by the parties supercedes any terms that may have been discussed in prior negotiations. A party cannot make an argument that it negotiated for a right if it is not included in the contract because the parties (and courts) must look to the "four corners" of the contract -- of course there are exceptions to this rule but the Integration concept incorporates the parties' intention that the contract is the final expression of the terms agreed to by the parties.
While you should at least generally understand the meaning of these Miscelleaneous provisions, if there is just one take away it should be that they are not simply boiler plate just because they are found at the end of the contract. As with any section of a contract, the ultimate meaning and effect of each of these sections depends on how they are drafted, and therefore each clause should be read with the same scrutiny applied to the other terms of the agreement.
Disclaimer: This Article is intended for informational purposes and does not constitute legal advice nor create any attorney-client relationship.
The Independent Contractor Trap: Don't Misclassify Your Employees
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Many start-up and expanding companies prefer to engage the services of a independent contractor rather than hire an employee because of the high costs relating to employment taxes, health insurance and other benefits. Recognizing the cost savings of hiring a contractor, businesses will often seek to classify a new hire as a independent contractor believing all that is needed is a few revisions to their standard contract that identifies the person as an "independent contractor" and just like that the company has saved thousands of dollars. In reality, the company may have created a huge red flag for a potential audit that could result in the obligation to pay susbtantial taxes plus penalties. To avoid the Employee/Independent Contractor trap, consider the below guidelines for determining whether in fact you have hired an employee rather than engaged an independent contractor.
I. Why do Businesses Often Prefer to Classify a Person as an Independent Contractor?
Whether because a company may be a start-up or an emerging or larger company is concerned about the difficult economic environment, businesses often prefer to classify a person as an independent contractor for the simple reason of cost. Hiring an “employee” means the company has to withhold taxes and pay social security, and will have to offer health insurance and possibly other benefits (i.e., vacation/maturity leave, etc.)
II. Can't I Just Label the Person an Independent Contractor?
No, it is a common misconception that employees/companies can avoid the "employee" label by simply stating the person is an independent contractor in a services agreement between the parties. Moreover, the fact that the person waived any rights as an employee, signed a statement asserting he/she is an independent contractor or is issued a 1099 instead of a W-2 does not give the employer any cover. The tax authorities (and courts) examine the nature of the relationship between the person and the company, look at the facts as to how the person provides the services, and does not care about labels or other efforts made to classify an employee as an independent consultant.
III. What Distinguishes an Employee from an Independent Contractor?
There is no single factor distinguishing an employee from an independent contractor. Instead, courts examine all the facts to determine the degree of supervision, direction and control the company exercises over the services. If the company controls the manner and means by which the person provides the services, the worker is likely an employee rather than an independent contractor.
A. An Employer-Employee Relationship May Exist if the Employer:
1. Controls when, where and how the services are to be performed
2. Provides the tools to perform the services (facilities, equipment, tools, supplies)
3. Engages and requires the person to work exclusively for the employer
4. Exercises supervision over the person, requiring reports, setting the work schedule, establishing the pay rate, retaining the right to review and approve the work product and/or evaluate the person's performance
5. Offers compensation in the form of a salary or an hourly rate, and/or reimburses expenses
6. Engages the persons who are unskilled or casual workers (therefore requiring supervision).
B. Independent Contractors Generally Supervise, Direct and Control the Performance of their Duties.
1. When performing the services, the independent contractor is not supervised or subject to the direction of the company, instead controlling its performance of the services.
2. The independent contractor generally offers his/her services to the public, operating their own business separate from the company engaging the services.
3. Indicia of independence include:
(a) Using own tools, equipment and supplies
(b) Operating under a business entity (has a business) that assumes risks
(c) Seting fees, project schedule, paying own expenses
(d) Offering services to other companies
(e) Marketing the services
(f) Engaging own employees or third parties to assist
For additional guidance, see the following IRS publications: http://www.irs.gov/pub/irs-pdf/fss8.pdf http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
IV. What if a Company Misclassified an Employee as an Independent Contractor?
If the IRS determines that your company has misclassified en employee as an independent contractor you need to be prepared to pay substantial taxes and potentially interest and penalties, especially if it was not an honest mistake.
Where the IRS finds that the misclassification was an honest mistake on the part of the employer, and the employer filed proper returns, the employer will be liable for (a) the employer FICA obligation that should have been paid in the first instance, (b) 20% of the employees FICA that should have been withheld, (c) 1.5% of the total compensation paid to the person, (d) any amounts due for unemployment tax, and (e) possibly interest and penalties.
If the employer fails to file proper returns and cannot demonstrate reasonable cause, the liability can be doubled.
But, if the misclassification is found to have been intentional, then look out because the above limits do not apply, and the exposure can run to the individual officers/directors of the company.
Now, on top this, add your state tax liability, and the fact that there may have been obligations under other laws (including relating to health care benefits) that the company violated by misclassifying the employee as an independent consultant.
The classification of an employee as independent contractor is carefully scrutinized by Federal and State tax authorities and is a common red flag giving rise to an audit. Do not let the potential savings lead you into the independent contractor trap as your company will pay dearly for misclassifying its employees.
Disclaimer: The discussions in this blog do not constitute legal advise nor create any attorney-client relationship. You are urged to seek the advice of an experienced lawyer who can provide counsel with respect to your corporate/business law matters.
I. Why do Businesses Often Prefer to Classify a Person as an Independent Contractor?
Whether because a company may be a start-up or an emerging or larger company is concerned about the difficult economic environment, businesses often prefer to classify a person as an independent contractor for the simple reason of cost. Hiring an “employee” means the company has to withhold taxes and pay social security, and will have to offer health insurance and possibly other benefits (i.e., vacation/maturity leave, etc.)
II. Can't I Just Label the Person an Independent Contractor?
No, it is a common misconception that employees/companies can avoid the "employee" label by simply stating the person is an independent contractor in a services agreement between the parties. Moreover, the fact that the person waived any rights as an employee, signed a statement asserting he/she is an independent contractor or is issued a 1099 instead of a W-2 does not give the employer any cover. The tax authorities (and courts) examine the nature of the relationship between the person and the company, look at the facts as to how the person provides the services, and does not care about labels or other efforts made to classify an employee as an independent consultant.
III. What Distinguishes an Employee from an Independent Contractor?
There is no single factor distinguishing an employee from an independent contractor. Instead, courts examine all the facts to determine the degree of supervision, direction and control the company exercises over the services. If the company controls the manner and means by which the person provides the services, the worker is likely an employee rather than an independent contractor.
A. An Employer-Employee Relationship May Exist if the Employer:
1. Controls when, where and how the services are to be performed
2. Provides the tools to perform the services (facilities, equipment, tools, supplies)
3. Engages and requires the person to work exclusively for the employer
4. Exercises supervision over the person, requiring reports, setting the work schedule, establishing the pay rate, retaining the right to review and approve the work product and/or evaluate the person's performance
5. Offers compensation in the form of a salary or an hourly rate, and/or reimburses expenses
6. Engages the persons who are unskilled or casual workers (therefore requiring supervision).
B. Independent Contractors Generally Supervise, Direct and Control the Performance of their Duties.
1. When performing the services, the independent contractor is not supervised or subject to the direction of the company, instead controlling its performance of the services.
2. The independent contractor generally offers his/her services to the public, operating their own business separate from the company engaging the services.
3. Indicia of independence include:
(a) Using own tools, equipment and supplies
(b) Operating under a business entity (has a business) that assumes risks
(c) Seting fees, project schedule, paying own expenses
(d) Offering services to other companies
(e) Marketing the services
(f) Engaging own employees or third parties to assist
For additional guidance, see the following IRS publications: http://www.irs.gov/pub/irs-pdf/fss8.pdf http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
IV. What if a Company Misclassified an Employee as an Independent Contractor?
If the IRS determines that your company has misclassified en employee as an independent contractor you need to be prepared to pay substantial taxes and potentially interest and penalties, especially if it was not an honest mistake.
Where the IRS finds that the misclassification was an honest mistake on the part of the employer, and the employer filed proper returns, the employer will be liable for (a) the employer FICA obligation that should have been paid in the first instance, (b) 20% of the employees FICA that should have been withheld, (c) 1.5% of the total compensation paid to the person, (d) any amounts due for unemployment tax, and (e) possibly interest and penalties.
If the employer fails to file proper returns and cannot demonstrate reasonable cause, the liability can be doubled.
But, if the misclassification is found to have been intentional, then look out because the above limits do not apply, and the exposure can run to the individual officers/directors of the company.
Now, on top this, add your state tax liability, and the fact that there may have been obligations under other laws (including relating to health care benefits) that the company violated by misclassifying the employee as an independent consultant.
The classification of an employee as independent contractor is carefully scrutinized by Federal and State tax authorities and is a common red flag giving rise to an audit. Do not let the potential savings lead you into the independent contractor trap as your company will pay dearly for misclassifying its employees.
Disclaimer: The discussions in this blog do not constitute legal advise nor create any attorney-client relationship. You are urged to seek the advice of an experienced lawyer who can provide counsel with respect to your corporate/business law matters.
A Word to Small Business Owners: Don't Be Afraid to Negotiate Contracts
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All too often small business owners readily accept the terms of a contract or are concerned about pushing back on both economic and legal terms because either they fear losing the deal or simply don't fully understand the terms. As a business owner, you need to recognize that in most circumstances there is an opportunity to negotiate terms of an agreement, and therefore you should not be afraid to seek the best deal possible even if the other party initially seems unwilling to consider your position on key aspects of the contract. So, here is the advice, Don't Be Afraid to Negotiate.
Negotiation skills are one of the most important tools a business owner should have in its toolbox. Therefore, if you receive a contract from a party, read it carefully, and then proactively respond in writing with your comments. One negotiating trick that vendors often try is to provide a form contract, creating the impression that the terms are non-negotiable -- indeed, if I am representing the vendor, I will often suggest creating a form agreement. Any contract, even a form, can be revised by an amendment, so do not automatically assume the agreement must be accepted "as is". The following are among the material terms that business owners should not only fully understand, but seek to negotiate.
1. Term. If you want a longer or shorter contact term, then ask for it. One alternative is to get an option to renew, which should be exercised within a certain number of days prior to expiration of the contract. The mechanics of the option and financial terms should be clearly spelled out as well.
2. Fees. There are many different ways to skin this cat, and you should consider what best works for your business over the term of the agreement. The financial terms can be based on (a) a set periodic payment, (b) an up front payment and then installments, (c) fees that scale up or even down over the life of the contract, (c) revenues, (d) milestones, or (e) a combination of several different fee structures. If the payments are based on revenues, then it is essential that the parties clearly define not just the percentage by the term "Revenue." For example, is it based on Gross or Net, and what is to be included in the Gross and what can be deducted as a legitimate expense when determining Net Revenues? A Net Revenue contract may refer to overhead expenses, like a businesses' borrowing costs, which can be a killer for a party who is being paid based on Net. Make sure you understand the definition, and if you don't ask for professional advice rather than assume the definitions are fair or standard.
3. Financial Reports/Audit. If the consideration under the contract is based on revenues or certain milestones, require periodic financial reports. In addition, you should have the opportunity to review and audit (i.e., challenge) such reports rather than simply accepting the information provided by the other contracting party. In addition, provide a dispute mechanism in the event of a challenge, such as CFO's meet and try to resolve, appointing independent third party, or even arbitration -- and if the audit reveals you were in the right, include a requirement that the other party pays your costs.
4. Termination of the Contract/Suspension. Of course the contract will expire at the end of its term, but include other events that will result in termination: (a) non-payment, (b) material breach, (c) bankruptcy, (d) failure to achieve defined milestones, including financial ones, (e) assignment/sale of the business (see below), (f) departure of personnel if the business relies on certain key employees, or (g) force majeure. Termination clauses will often allow the breaching party an opportunity to cure a default, provided it is one that can be cured. In the case of a force majeure event, the contract can be suspended pending passage of the event or terminated if the contract becomes impossible to continue due to the event.
5. Assignment/Sale of the Business. Do you want the contract to be assignable to a third party, including in the event of the sale of the business. This is an important issue for many types of agreements, such as licensing agreements or service contracts. You can require consent for the assignment, but if you want the contract to be assignable, as an alternative you can propose that it is assignable to an assignee with financial ability to meet the contractual obligations.
6. Warranties/Limitations on Liability. Suppliers/service providers will often provide a lengthy provisions denying all warranties and limiting their liability -- and if you are the vendor, you generally want to push for these provisions. If you are purchasing the the services of a large company, there may be no room to push back on any of the limitations, but whether the other contracting party is a small or large company, there is no harm in trying -- even if they send you the form or the "Master Service Agreement." For either party, it is all about the bargaining power, and how much the other party wants your business versus how much you need the agreement. Even if you cannot get the other party to budge, ask at least for an exception for gross negligence, and regardless a court may negate the limitation based on intentional misconduct or even gross negligence.
7. Dispute Resolution. Avoid an issues as to how disputes are to be resolved by negotiating the applicable (a) governing law, (b) venue for the dispute (meaning both the tribunal that will handle the matter, such as a court or arbitration/mediation, and the geographic location), (c) if there is to be mediation or arbitration, the procedures, and (d) will the parties impose legal fees and costs on the losing party.
8. Remedies. Among the remedies you can include are (a) specific performance, which is important if money cannot cure a default, (b) liquidated damages, if you prefer to define the damages to avoid disputes as to proof the proper compensation for a breach, and (c) equitable remedies (other than specific performance), like an injunction.
9. Non-Compete/Non-Solicitation. Simple vendor/supplier agreements generally won't include these terms, but many other contracts will, including licensing agreements, consulting/employment, certain service agreements, or more major transactions (like sale of a business) to name a few. Enforcement, especially as to non-competes, is a key legal issue, and it is highly advisable to have the provisions reviewed by counsel that understands the law in the applicable jurisdiction as it can vary greatly from state-to-state.
10. Other Terms/Conclusion. If there are other terms included or, for that matter, missing from the agreement, then make these part of the punch list of issues to be addressed with the other party. The reality is that the worse response you can receive is "no", and then you can decide how important the provision is from your perspective. A bad contract is NOT better than no contract. In a competitive economy, even larger/established businesses are often willing to negotiate and "the last and final", "take it or leave it" or "as is" response may be just a bargaining tactic.
The Lesson: Read the Contract, Understand Each Provisions and Don't Be Afraid to Negotiate the Terms.
Disclaimer: The discussions in this blog do not constitute legal advise nor create any attorney-client relationship. You are urged to seek the advice of an experienced lawyer who can provide counsel with respect to your corporate/business law matters.
Negotiation skills are one of the most important tools a business owner should have in its toolbox. Therefore, if you receive a contract from a party, read it carefully, and then proactively respond in writing with your comments. One negotiating trick that vendors often try is to provide a form contract, creating the impression that the terms are non-negotiable -- indeed, if I am representing the vendor, I will often suggest creating a form agreement. Any contract, even a form, can be revised by an amendment, so do not automatically assume the agreement must be accepted "as is". The following are among the material terms that business owners should not only fully understand, but seek to negotiate.
1. Term. If you want a longer or shorter contact term, then ask for it. One alternative is to get an option to renew, which should be exercised within a certain number of days prior to expiration of the contract. The mechanics of the option and financial terms should be clearly spelled out as well.
2. Fees. There are many different ways to skin this cat, and you should consider what best works for your business over the term of the agreement. The financial terms can be based on (a) a set periodic payment, (b) an up front payment and then installments, (c) fees that scale up or even down over the life of the contract, (c) revenues, (d) milestones, or (e) a combination of several different fee structures. If the payments are based on revenues, then it is essential that the parties clearly define not just the percentage by the term "Revenue." For example, is it based on Gross or Net, and what is to be included in the Gross and what can be deducted as a legitimate expense when determining Net Revenues? A Net Revenue contract may refer to overhead expenses, like a businesses' borrowing costs, which can be a killer for a party who is being paid based on Net. Make sure you understand the definition, and if you don't ask for professional advice rather than assume the definitions are fair or standard.
3. Financial Reports/Audit. If the consideration under the contract is based on revenues or certain milestones, require periodic financial reports. In addition, you should have the opportunity to review and audit (i.e., challenge) such reports rather than simply accepting the information provided by the other contracting party. In addition, provide a dispute mechanism in the event of a challenge, such as CFO's meet and try to resolve, appointing independent third party, or even arbitration -- and if the audit reveals you were in the right, include a requirement that the other party pays your costs.
4. Termination of the Contract/Suspension. Of course the contract will expire at the end of its term, but include other events that will result in termination: (a) non-payment, (b) material breach, (c) bankruptcy, (d) failure to achieve defined milestones, including financial ones, (e) assignment/sale of the business (see below), (f) departure of personnel if the business relies on certain key employees, or (g) force majeure. Termination clauses will often allow the breaching party an opportunity to cure a default, provided it is one that can be cured. In the case of a force majeure event, the contract can be suspended pending passage of the event or terminated if the contract becomes impossible to continue due to the event.
5. Assignment/Sale of the Business. Do you want the contract to be assignable to a third party, including in the event of the sale of the business. This is an important issue for many types of agreements, such as licensing agreements or service contracts. You can require consent for the assignment, but if you want the contract to be assignable, as an alternative you can propose that it is assignable to an assignee with financial ability to meet the contractual obligations.
6. Warranties/Limitations on Liability. Suppliers/service providers will often provide a lengthy provisions denying all warranties and limiting their liability -- and if you are the vendor, you generally want to push for these provisions. If you are purchasing the the services of a large company, there may be no room to push back on any of the limitations, but whether the other contracting party is a small or large company, there is no harm in trying -- even if they send you the form or the "Master Service Agreement." For either party, it is all about the bargaining power, and how much the other party wants your business versus how much you need the agreement. Even if you cannot get the other party to budge, ask at least for an exception for gross negligence, and regardless a court may negate the limitation based on intentional misconduct or even gross negligence.
7. Dispute Resolution. Avoid an issues as to how disputes are to be resolved by negotiating the applicable (a) governing law, (b) venue for the dispute (meaning both the tribunal that will handle the matter, such as a court or arbitration/mediation, and the geographic location), (c) if there is to be mediation or arbitration, the procedures, and (d) will the parties impose legal fees and costs on the losing party.
8. Remedies. Among the remedies you can include are (a) specific performance, which is important if money cannot cure a default, (b) liquidated damages, if you prefer to define the damages to avoid disputes as to proof the proper compensation for a breach, and (c) equitable remedies (other than specific performance), like an injunction.
9. Non-Compete/Non-Solicitation. Simple vendor/supplier agreements generally won't include these terms, but many other contracts will, including licensing agreements, consulting/employment, certain service agreements, or more major transactions (like sale of a business) to name a few. Enforcement, especially as to non-competes, is a key legal issue, and it is highly advisable to have the provisions reviewed by counsel that understands the law in the applicable jurisdiction as it can vary greatly from state-to-state.
10. Other Terms/Conclusion. If there are other terms included or, for that matter, missing from the agreement, then make these part of the punch list of issues to be addressed with the other party. The reality is that the worse response you can receive is "no", and then you can decide how important the provision is from your perspective. A bad contract is NOT better than no contract. In a competitive economy, even larger/established businesses are often willing to negotiate and "the last and final", "take it or leave it" or "as is" response may be just a bargaining tactic.
The Lesson: Read the Contract, Understand Each Provisions and Don't Be Afraid to Negotiate the Terms.
Disclaimer: The discussions in this blog do not constitute legal advise nor create any attorney-client relationship. You are urged to seek the advice of an experienced lawyer who can provide counsel with respect to your corporate/business law matters.
23 Haziran 2012 Cumartesi
What Is An Acceptable Business Risk For Your Business?
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Think you got an idea> Give Reading Word's The dark side of IP a read.
Do you have any ideas what legal woes your business may be sitting on? By the time you think you need a lawyer, the mess may be big enough to swallow the business whole. An ounce of prevention....
Business people often scoff at lawyers that "you have to take risks in business." True, but the risks should be valid risks: venturing the new product, entering the new market, changing up the marketing and ad campaign, leveraging up for growth tomorrow. Unacceptable risks should be those which introduce fines and penalties, complex litigation and jail time. Many businesses rarely think of the dark side, the flip side of their IP: On whom might you be infringing with what consequences? The reality is that if you do infringe, it will be expensive, time consuming and ruinous to your model. They can shut you down and take your profits. Don't consider this an acceptable business risk. Get the evaluations you need.
I know you don't like thinking about IP rights: they're complicated, uncertain and seem to cost you coming and going, for filing and defense. You tend to protect and defend what you can and leave the rest to fate, calling it risk. Don't. You have talked to the lawyers and have got a lesson in costs. A patent can cost $50,000 and up and may yet not issue or may may be invalidated, and the invention may yet infringe. After all the development costs for your goods and services, patents, and trademarks and copyrights are expensive to defend. Many businesses tread skeptically. Many choose to protect their inventions as trade secrets and close their eyes to much of the real world fate of their IP.
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Think about how quickly you can be shut down and your profits stripped should your product be ruled to infringe, even a seemingly old, obscure patent. Unless you examine your work honestly according to the reality of IP law, you too run the risk of high damages and costs and being shut down. You need to pay those few thousand dollars at the front end before you go out on a limb and have experts examine the real world for patents, trademarks and copyrights which your products and creations might infringe.
Do you have any ideas what legal woes your business may be sitting on? By the time you think you need a lawyer, the mess may be big enough to swallow the business whole. An ounce of prevention....
Contract Drafting As A Commodity?
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I cannot disagree with Contract Drafting for the 21st Century: A Conversation Between Ken Adams and Ron Friedmann from Strategic Legal Technology.
Nor it Mr. Adams.' views outside of current thinking. Richard Susskind has been predicting similar changes in how we provide legal services for quite some time.
Ron: It sounds like you think contract drafting should be a commodity.Writing contract ought not take second to the "deal strategy and taking part in negotiations" but this - in my humble, small town opinion - requires a long term relationship with the client.
Ken: Yes, in large measure. And that’s entirely achievable, given all the sophisticated information-technology tools now available to organizations that produce contracts. Companies that buy stuff or sell stuff generally use a few templates repeatedly. After a certain point, their contract volume will be big enough that it would be cost-effective for them to shift to drafting contracts by having their lawyers or, ideally, their businesspeople complete an online questionnaire. Once the questionnaire is completed, clicking “Done” would cause the system to pull together and adjust appropriately the pre-loaded and pre-approved contract language.
A rigorous document-assembly system for contract drafting would save time and money and would allow transactional lawyers to focus on tasks where they add real value—helping devise deal strategy and taking part in negotiations. But serious cultural obstacles remain. I suspect that people who buy into my view of things currently represent a small minority. Sure, you hear a lot of talk of change, but I’ve seen little in the way of action to back it up. So the vast silent majority perpetuates the current dysfunction.
Nor it Mr. Adams.' views outside of current thinking. Richard Susskind has been predicting similar changes in how we provide legal services for quite some time.
Prophet Richard Susskind Predicts the Future of Law; Internet is Key:
"Now that the ubiquity of e-mail is no longer seen as a wild prediction but an established fact, newer cutting-edge changes to what Susskind describes as the classic interface between lawyers and clients include services that allow clients of some major United Kingdom law firms to download standard contract documents and lawyers in British courts to download standard judicial orders.
Intellectual Property and Business Succession Planning
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I try to make the point that what has made Bill Gates all his money is his intellectual property: trademarks, patents and even copyrights. Pennsylvania Trusts and Estates Blog takes this a step further with Intellectual Property in Your Estate:
Forbes published a list of the 13 Top-Earning Dead Celebrities. The estates of these persons are making fortunes with the decedents' intellectual property. How much do they earn? The top-earning 13 decedents earned a combined $194 million over the last 12 months. It makes dying look like a good career move. Who are they? Elvis Presley, Charles M. Schulz, Heath Ledger, Albert Einstein, Aaron Spelling, Dr. Seuss (Theodor Geisel), John Lennon, Andy Warhol, Marilyn Monroe, Steve McQueen, Paul Newman, James Dean, Marvin Gaye.
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Any author or artist should consider choosing a an executor who is knowledgeable in his or her field to serve as a special executor after his or her death. For example, an author might appoint a family member as executor to take care of the estate in general, but name a literary executor to be responsible for and carry out certain duties with regard to the decedent's written works.What have you done to protect your heirs and your business when you die? What have you done to protect your business between now and your death? I do not suggest waiting - get yourself to a lawyer as soon as possible.
Intellectual property can be a valuable assets and it must be managed in your estate to maximize
income streams income, address infringements, protections, registrations and maintenance.
Indiana Funeral Home Law
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Notes from a project for my father that never seems to get very far. With some luck the following listing of Indiana sources might be of use:
- Indiana Code - Licensing Laws
- Indiana Administrative Code.
- PLA: State Board of Funeral & Cemetery Service
- PLA :: License Litigation.
More On Limited Liability Companies' Fiduciary Duty
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Now that we have an Indiana Court of Appeals decision describing the fiduciary duty of an LLC to its members, I almost thought to scratch this post. However, Chicago Business Litigation Lawyer Blog's Respected Law Professor's Insights on Corporate Freeze-Out Litigation may still have some benefit to you.
"In Fairness and Good Faith as a Precept in the Law of Corporations and Other Business Organizations, 36 Loy.U.Chi. L.J. 551 (2005), Murdock addresses the fiduciary duty of good faith and fairness that controlling interests of a business owe to minority interests. Noting that this internal duty is a fairly recent legal phenomenon, he surveys caselaw on the subject from around the country that applies to closely held corporations, public corporations and LLCs. Noting that the Uniform Limited Liability Company Act (ULLCA), a model law adopted by several states, doesn't include language that gives members of an LLC fiduciary duties to one another, he praises Illinois for modifying that language to protect members in the updated Limited Liability Company Act."
20 Haziran 2012 Çarşamba
What Do Employers Really Think About Social Media?
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"Are you tweeting in your meetings? Do you complain online about your co-workers’ annoying quirks? If so, your employer probably doesn’t appreciate you sharing proprietary or negative information about their company with the world. But can they do anything about it? Yes, if they have a social media policy.
"While employers adore social media for brand promotion and marketing, they don’t like it when an employee opens up a party popper of bad news about the company that can cover the world in seconds."
Read more HERE.
"While employers adore social media for brand promotion and marketing, they don’t like it when an employee opens up a party popper of bad news about the company that can cover the world in seconds."
Read more HERE.
Government Resources to Help With Difficult Financial Times
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The mission at SBA is to to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise, and to maintain and strengthen the overall economy of the nation.
USA.gov and GobiernoUSA.gov, the official web portals of the U.S. government, have put together helpful information on how to get help for difficult financial times.
If times are tough for you and your family, or your employees, sign up for the e-mail updates below:
• Sign up in one-click for information to get help with difficult financial times and to receive featured updates from USA.gov.
• En Español - SuscrÃbase con un clic para obtener información que lo puede ayudar a superar dificultades económicas y recibir actualizaciones de GobiernoUSA.gov.
USA.gov and GobiernoUSA.gov will highlight government resources that will help you with unemployment, jobs, training, housing, debt and credit, family issues, health care and insurance.
Exporting Commercial Items: ECCNs and EAR99
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Does my product have an ECCN? ; Where do I find my ECCN?; What is the ECCN used for?; What does EAR99 mean?; Source: Bureau of Industry and Security (BIS)
The Census Bureau serves as the leading source of quality data about the nation's people and economy. We honor privacy, protect confidentiality, share our expertise globally, and conduct our work openly. We are guided on this mission by our strong and capable workforce, our readiness to innovate, and our abiding commitment to our customers.
Does my product have an ECCN? ; Where do I find my ECCN?; What is the ECCN used for?; What does EAR99 mean?; Source: Bureau of Industry and Security (BIS)
The Census Bureau serves as the leading source of quality data about the nation's people and economy. We honor privacy, protect confidentiality, share our expertise globally, and conduct our work openly. We are guided on this mission by our strong and capable workforce, our readiness to innovate, and our abiding commitment to our customers.
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