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The Dangers of Copying Terms of Service and How to Avoid Them

It might be tempting to copy the Terms of Use from another website, but should you? Attribution: Cathy Olson.

It might be tempting to copy the Terms of Use from another website, but should you? Attribution: Cathy Olson.

Facebook has 1.55 billion users, and each of them has a contract with the company. At their scale, there are few documents more important than their Terms of Service (ToS). Understandably, many Internet entrepreneurs are and should be concerned about this critical part of their business, even if they don’t have the same reach as the Facebooks of the world. Unfortunately, many resort to simply reproducing an existing ToS from a comparable company, but such copying can be risky, in addition to painting companies as cheap knock-offs of their competitors.

Sometimes, another company’s ToS will be very attractive because it contains specific provisions that are relevant to your company as well. If you’ve built an application that tracks your users’ location, then it will be very tempting to copy Uber’s ToS, for example (or large parts of it). But would doing that be in the best interest of your company? Further, would it even be lawful?

Leaving You Vulnerable

The most significant downside of copying a ToS is that it will not contain the provisions tailored to your particular business. If a user or customer were to take legal action against your company, you would be missing the language that could make all the difference in settling or winning the dispute.

Competitors may be using a surprisingly different process to provide similar services. For example, if you’re providing a service based on wireless communication protocols, your competitor might be operating with a different technology, and the provisions of their ToS will very likely reflect that. There might be clauses arising specifically from the technology used, such as the reliability of connectivity, say over the RFID protocol (radio-frequency identification), that are irrelevant to your company, which might be using the NFC protocol (near-field communication). If for whatever reason a dispute arises that implicates the reliability clause, having a custom-tailored ToS is essential.

Governing Law

A ToS can in fact be protected by copyright, and entrepreneurs and their lawyers should take heed. At least one court has found a company liable for copyright infringement when they have copied important sections of public-facing contracts used by competitors.  In AFLAC of Columbus v. Assurant, Inc. et al (2006), a federal district court in Atlanta found that the non-boilerplate sections of AFLAC’s insurance policies were protected by copyright, and that competitors in the insurance market would be liable for infringement if a court found substantial copying. Since an insurance policy is a contract like any other, the same logic would hold for a ToS.

It may come as a surprise, since any practicing lawyer knows that the building blocks of most contracts are copied from others, but contracts that are sufficiently original and creative may be entitled to copyright protection. Accordingly, a contract containing many commonly used provisions can still be protected by copyright because the particular arrangement of provisions could constitute an “original” (and thus copyrighted) compilation.

Practical Risks

The risk of being sued for copyright infringement is small. However, there is a non-legal risk of others viewing the product or service as derivative and unoriginal, making competitors look like the first-mover and innovator in the relevant market. This is especially true for more sophisticated readers of the agreement, such as strategic customers or investors, who may look at the ToS more closely. This obviously doesn’t apply to the standard boilerplate provisions that can be found in almost all contracts, such as a force majeure clause, but in the areas of the Terms that are unique to that particular business, it will look bad.

Open Source Contracts

On the other hand, some companies have generously made their ToS available for the public to use, so long as they provide attribution. Automattic, the company behind the popular WordPress.com, recently open sourced their ToS (in the spirit of their own open source software). They’ve made it available under a Creative Commons Sharealike license, which enables others to copy and repurpose the document so long as internal references are relabeled and attribution is given to WordPress.com.

In conclusion, if you’re tempted to copy another company’s ToS, you may be infringing on their copyright if you take provisions that are unique or distinct from industry custom. If instead you copy just boilerplate or commonly accepted industry provisions, you should be in the clear.

The question then is, if you’re a lawyer, or even an entrepreneur who’s not afraid to draft a ToS, how should you draft solid language that is not a direct rip-off of your competitor’s? See Part 2 of our ToS series to find out!

Part 2: Drafting a Unique and Effective Terms of Service

Lawyers have an ethical obligation to provide fundamentally sound legal advice to their clients. This advice often includes work product that is memorialized, and in the case of a ToS, publicly displayed. This presents an interesting issue: How can the new ToS be distinguished from the original without sacrificing the client’s objective of superior work product? The original document  might be legally sound, comprehensive, well-organized, and narrowly tailored to your market. Yet, completely plagiarizing an existing document has ethical implications, as well as the issue of outside perception mentioned above.

To that end, it’s advisable to start with a series of strong sample documents from sources like CooleyGo, UpCounsel, or Docracy. These are released into the public domain and thus present no copyright concerns.

One process used at our Clinic allows practitioners to create effective ToS documents without plagiarizing. You begin by finding several samples. We found it helpful to begin with documents from the most successful technology companies. By comparing the ToS’s of Apple, Facebook, Google, Uber, and others, we were able to more readily identify boilerplate language common to software and Internet companies. We were able to identify how these companies dealt with specific risks, like server failure, data breach, and personal injury.

Armed with the knowledge of how the biggest and best tech companies minimize risk, we then looked for smaller companies that were in the same field as our clients and had more relevant language to reference. We identified the sections of these ToS’s that were not boilerplate and we stripped them of their legalese. Once we had a version in entirely laymen’s terms, we then translated back to legalese using our own verbiage and adding our own relevant language. This created an authentic ToS that was tailored perfectly to our client’s business.

Other Information

For other information on this topic:

http://newsroom.fb.com/company-info/

http://pub.bna.com/ptcj/1051462Jan11.pdf

https://www.quora.com/Does-copyright-apply-to-contracts

http://scholarship.law.umassd.edu/cgi/viewcontent.cgi?article=1083&context=fac_pubs

http://www.law360.com/articles/5247/insurance-policies-can-be-copyrighted-judge-rules

http://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/model_rules_of_professional_conduct_preamble_scope.html

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A Quick Primer on Title III Equity Crowdfunding: Drafting Your Term Sheet (Part 3 of 3)

Now that the SEC has passed its equity crowdfunding rules, it will be interesting to see if "market" terms emerge.

Now that the SEC has passed its equity crowdfunding rules, it will be interesting to see if “market” terms emerge.

While it remains to be seen how and to what extent crowdfunding will take off, here are a few things to keep in mind as you start thinking about possible deal terms on your first crowdfunding operation. I should note that ultimately, I anticipate that entrepreneurs will gravitate toward terms suggested by the most popular funding portals, and that these terms will become the market standard. Nonetheless, you’ll still have to come up with the economic and control terms of the deal yourself, and I hope this article helps you think critically about such terms as you do.

  • Valuation – Valuation is a function of the amount being raised and the percentage of the company being purchased. Current practices involve a negotiation between the investors and the entrepreneur, whereas crowdfunding will let the entrepreneur set the terms. In Venture Deals, Brad Feld and Jason Mendelson warn of setting your valuation too high due to the risk of not achieving a higher valuation at the time of your next round, causing dilution of your original supporters. While crowdfunding investors might not have the same anti-dilution protections as VC investors, there still might be risks from a subsequent down round due to the investors’ expectations going unmet. The takeaway here is to be reasonable in your valuation and have a solid plan on how you’re going to use your funds to build and create value in the business.
  • Number of Shares – Angel investing in seed rounds typically acquire between 20%-35% of the company—any more than that could hurt your ability to raise future rounds. Of course, with new types of companies entering the mix, common practices may not hold. Consider having your CFO use a <a href=”https://www.cooleygo.com/documents/sample-cap-table-pro-forma/”>pro forma cap table</a> to run through a few hypothetical future financing scenarios, and let where you hope to end up inform where you might start.
  • Protective Provisions – Freedman and Nutting anticipate a future in which funding portals may opt to allow investors to pool their funds into a single entity that could serve as an agent of the “CF class” and possibly negotiate a board seat. Until that becomes a reality in the U.S., you can expect investors to pay special attention to the veto rights they are given.In negotiated transactions, investors almost always have the right to vote when an issuer (1) alters the rights of the issued shares, (2) changes the authorized shares of common or preferred stock, (3) creates a new class of shares having rights, preferences or privileges senior to the issued shares, and (4) wants to merge or be acquired. I can’t imagine many investors signing up to invest without (1)–(3), but we’ll have to see how investors respond in a system in which the terms are set by entrepreneurs.Note that Section 4A(b)(1)(H) requires “a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered,” so failing to treat your investors fairly will likely negatively impact the economic terms of your offering.
  • Drag-Along/Tag-Along Rights – Drag-along rights ensure that if you want to sell the company, you can compel other shareholders to sell their shares on the same terms. Tag-along rights provide corresponding rights for investors and ensure that they have the option to sell their shares on the same terms if you sell the company.Drag-alongs tend to be more controversial when they are being requested by investors in a new round, in which case they could force an entrepreneur to sell her company even if she didn’t want to. When being imposed on crowdfunded investors, they simply allow you to capture the full value of your equity in the event of a sale. You’ll almost certainly want them given the large number of shareholders inherent in crowdfunding transactions. It’s tough to think of a reason why you wouldn’t want to offer investors tag-along rights—which is likely why both drag-alongs and tag-alongs appear in the suggested term sheet on UK crowdfunding site Seedrs.

Of course, no deal is the same, and you should always work with an attorney experienced in this field when creating a financial offering.

Part 1 of this series is here and Part 2 of this series is here.

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A Quick Primer on Title III Equity Crowdfunding: Is Equity Crowdfunding Right For Your Startup? (Part 2 of 3)

Even though equity-based crowdfunding is now legal, it might not be right for you.

Even though equity-based crowdfunding is now legal, it might not be right for you.

This is part 2 of our series on equity based crowdfunding.  Let’s take a step back from the brave new world of equity crowdfunding and think back to the existing model of getting early stage funding through networks of angels and VC’s. Hasn’t this system worked until now, and will startups be missing out if they stray from the beaten path?

We’d be remiss to forget that angels and VC’s provide more value than just capital. Experienced investors will challenge your assumptions and send you back to the whiteboard a few times before providing capital, which can ultimately improve your business outlook in the long run. Post-financing, these investors also serve as valuable mentors and advisors, providing expertise and a rolodex of people that can help your business blossom. And even though these investors are loathe to sign confidentiality agreements, you’re generally safe to meet with these folks with the understanding that your financials won’t wind up in the hands of a competitor. All this is to suggest that simply because you might no longer need the traditional conduits for seed capital, it doesn’t follow that they won’t be one of your better options.

But rather than compare crowdfunding to the traditional early-stage/seed model on the merits, it may be more accurate to think of it as opening up entrepreneurial finance to businesses that didn’t have much access before. In Equity Crowdfunding for Investors, David Freedman and Matthew Nutting predict that while crowdfunding will eventually attract all types of businesses, early adopters may be limited to certain types, such as consumer products businesses with a devoted fanbase, for-profit businesses supporting a social cause, community-based retailers with investors that have a direct connection to the business, and creative projects such as films, music, and games. Many of these might not quite qualify as a “homerun” to an angel or VC, but could still attract investment for a variety of reasons.

Here are a few questions to ask as you grapple with the question of whether to seek a Reg CF round:

  • How many rounds do you plan on raising in the future? Ideally, your first Reg CF round should be enough to get your project off the ground, and subsequent rounds will also be crowdfunded. I have personally heard one VC state that as of now, he would refuse to invest in a company with a large number of unaccredited investors. That’s not to say that this is a widely-held belief of VC’s or that the industry doesn’t stand to change; but if you anticipate seeking VC funding in the future, a crowdfunding round may be too much of a hindrance in the long term.
  • How competitive is your industry? Are you developing tech that will be the next big thing in virtual reality? The next cure for a heavily-researched disease? If confidentiality, trade secrets or other IP are a major concern, or the industry in which you operate is extremely fast-paced, you may want your investor profile to be as lean as your startup. While drag-along rights (discussed in Part 3) coupled with the founders maintaining control over the company may make receiving stockholder approval for major transactions less of an issue, you’ll want to think about how the disclosures mandated by Reg CF will affect your financing strategy.
  • How big do you plan on getting? Reg CF is overall, less burdensome. But if your company will someday be the size of Facebook (which it will be, of course), then the costs associated with other exemptions may not be a huge concern, all things considered. Of course, if the $1 million cap on Reg CF rounds simply won’t meet your needs, then you should certainly seek alternative exemptions rather than impede your business early on.

You can find Part 1 of this series here.

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A Quick Primer on Title III Equity Crowdfunding: Starting-Up as a VC (Part 1 of 3)

The SEC's equity-based crowdfunding rules went into effect on May 16, 2016.

The SEC’s equity-based crowdfunding rules went into effect on May 16, 2016.

In the same way technology empowered anyone to become an entrepreneur, so too will it enable anyone to step into the shoes of a venture capitalist. April 5 marked the 4th anniversary of the JOBS Act’s signing by President Obama, but the final rules which implement Title III, which pertains to equity crowdfunding, went into effect on May 16, 2016.

While the creation of a more legitimate crowdfunding industry can be seen as a major step in the democratization of capital markets, it’s not as if the barriers to entry are being completely leveled—entrepreneurs and investors alike will still have to be conscientious of the investment restrictions, disclosure requirements, and other limitations before determining whether equity crowdfunding is suited to finance their ventures.

In this first part of this three-part series, we clarify some terminology for those completely new to the concept of equity crowdfunding and give a quick overview of the regulations themselves. In Parts 2 and 3, we’ll help you use some of this information to determine whether crowdfunding is right for your business and some things to think about when you raise your first round.

Terminology

If you’re confused by the foregoing because you’ve been funding new ventures through Kickstarter for years, don’t feel bad; people often speak of “crowdfunding” generally without distinguishing between equity crowdfunding and other types.

Crowdfunding simply refers to the practice of funding a project through a large number of donors. In the past, people have initiated crowdfunding campaigns through platforms like IndieGoGo and Kickstarter in which donors typically receive certain perks or rewards for early presales or donations.

Equity crowdfunding involves the offering of equity securities to investors online. Investors purchase an actual ownership stake in the business entity with an intent to share in its financial returns and profits. It’s a close cousin of debt crowdfunding or peer-to-peer lending, which involves the offering of debt securities to groups of lenders online.  Debt crowdfunding sites like Lending Club and Upstart have already taken off.

In the U.S., the sale of securities implicates federal securities laws, as well as state “blue sky” laws. Issuers must either register their securities with the SEC or find an exemption (…or, face serious penalties).  Until recently, startups nearly always structured early stage offerings to fall under Reg D, a set of three rules—504, 505, and 506—which carve out exemptions to the registration requirements of the Securities Act of 1933, which we described in great detail in an earlier post. Because Reg D fails to provide startups a way to reach larger pools of investors, the SEC created another avenue by amending Regulation A (now referred to as Reg A+), as described in our prior post. Reg A+ allows companies to file a single, less costly registration with the SEC as opposed to one under each state’s blue sky laws, but given the need for audited financials (and a track record of legal, audit, and underwriting fees sometimes exceeding $1M), Reg A+ is not always suited to early/seed stage companies.

Enter Regulation CF

To fill the vacuum of ways for startups to raise seed capital from a large number of investors, Title III added Section 4(a)(6) to the Securities Act to create an exemption from registration for certain crowdfunding transactions.

Amounts Raised

Section 4(a)(6) sets a hard cap of $1M per 12-month period for any entity raising funds. This may seem low, considering that the median convertible note round last year was $1M, on the rise from years prior. However, it’s possible that the sort of crowdfunding enabled by Reg CF will itself change the way startups raise money by eliminating the need to pull together a syndicate of interested accredited investors and gather funding in a single transaction.

Investment Limits

The SEC doesn’t want you to get carried away as you start channeling your inner Mark Cuban. If you make less than $100,000, you can invest the greater of $2,000 or 5 percent of your annual income or net worth in a 12-month period. If you make over $100,000, you can invest up to 10% of your annual income or net worth (but in no cases greater than a total of $100,000) per 12-month period. Transactions must be done through an intermediary registered as a broker-dealer or a funding portal.

Entrepreneurs Who Can Stop Reading Now

Some companies aren’t eligible to use the Reg CF exemptions. These include:

  • Non-U.S. companies
  • Exchange Act reporting companies
  • Certain investment companies
  • Companies that are disqualified under Reg CF’s disqualification events (which include the conviction of crimes, court orders against engaging in the sale of securities, and other regulatory actions against the issuer)
  • Companies that have failed to comply with the annual reporting requirements under Reg CF during the two years immediately preceding the filing of the offering statement, and
  • Companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Resale Restrictions

Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year. Investors should consider themselves in it for the long haul.

Disclosure

How will investors know what they’re investing in? Issuers are going to have to disclose in their offering documents information that includes:

  • Information about officers, directors, and owners of 20 percent or more of the issuer
  • A description of the issuer’s business and the use of proceeds from the offering
  • The price to the public of the securities or the method for determining the price
  • The target offering amount
  • The deadline to reach the target offering amount
  • Whether the issuer will accept investments in excess of the target offering amount
  • Certain related-party transactions
  • A discussion of the issuer’s financial condition
  • Financial statements of the issuer that are accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.

An issuer relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless they’ve already had their financial statements audited. Issuers are also required to file an annual report with the SEC and provide it to investors.

Check out Part 2 of our series here.

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Rethinking Worker Classification in the Emerging On-Demand Economy

Corina Uber Blog.v2

Classifying workers may raise fundamental questions for on-demand economy startups.

The emerging on-demand and sharing economy has presented no shortage of legal issues for tech startups.  One of the key factors underlying the success and future of these companies lies in the way they harness and classify their workforce. Startups entering this space must be aware of the developments in employment law because worker misclassification can have drastic financial consequences on their business.  So critical is the classification of workers as independent contractors to the on-demand economy that many of these business models would crumble under an employee (as opposed to independent contractor) worker classification schema.

And there is no dispute that the class action litigators are gunning for companies whose cost structure relies on the 1099 workforce.  The pending Uber cases provide prime examples of this issue in the on-demand economy, but misclassification cases are by no means restricted to companies operating in this space. Starbucks, FedEx, Lyft, Homejoy, Postmates, and Caviar are all companies that have been on the receiving end of these attacks.

The Uber Class Action Lawsuits

Uber has been under legal fire for class action lawsuits filed by their drivers accusing the company of misclassifying them as independent contractors rather than employees.  Among other things, these workers claim that their services are central to Uber’s business and that Uber has the requisite level of control over them to place them in the employee bracket. We covered key factors that courts and the IRS consider in a previous post.  In essence, the drivers claim that they are Uber employees even though they benefit from a work environment that allows them complete flexibility of scheduling, no minimum required hours, and the freedom to work for competitors of Uber.  Ultimately, the drivers and their advocates want better protection and compensation packages for these workers, benefits that are typically reserved for employees as opposed to freelance independent contractors.

In response, Uber has asserted that there is no such thing as a single type of Uber driver.  All sorts of people are drawn to working for the company due to its flexible scheduling and the manner in which drivers can perform the services.  Uber continues to maintain that its core business is a platform that allows these drivers to use it as they wish.

But in 2015, U.S. District Judge Edward Chen stated in court that “The idea that Uber is simply a software platform, I don’t find that a very persuasive argument.”  It is not enough for a company merely to assert that they are a logistics company or a software platform to retain the benefits of a 1099 workforce. These cases will set significant precedent with regard to worker classification for companies operating in the on-demand economy.  Jury trial for the California Uber class action lawsuit is scheduled to commence in June 2016.

Consequences of Worker Misclassification

In a previous post, we also discussed strategies for defining the employer-worker relationship and avoiding worker misclassification.  But how much of a problem can worker misclassification really cause?  The short answer is that the ramifications can be substantial.  Companies may be liable for thousands, millions, or billions of dollars (if you’re Uber) in back wages and taxes, fines, penalties, insurance contributions, and workers compensation costs.  And it is important to remember that the company’s intentions regarding the misclassification are irrelevant – intentional or not, you’re still on the hook for misclassification damages.

The Proposed Third Category of Worker or a Revised Test

The sharing economy is powered by so-called “micro-entrepreneurs,” workers who want the flexibility of scheduling and use of personal resources to earn what they need when they want.  According to peers, the “future of work will include a portfolio of income streams” that enables workers to have the choice to “build their work around their life, not their life around their work.”  Arguably, it is a different breed of worker that calls for the jobs provided by companies operating in the on-demand economy.  But they cannot have it all.  And this goes for both sides of the coin – employers and workers alike.

If workers for companies such as Uber are classified as employees rather than independent contractors, the added costs might run the company into the ground, or at least cause it to raise its fares.  This is an undesirable situation for everyone, calling for new solutions in the field of employment law.  One such solution is the proposed third category of worker, the “dependent contractor.”  Under this category, dependent contractors would gain some (but not all) of the protections or benefits afforded to employees while retaining the flexibility and control over their work.  Similarly, it seems clear that the current standards used to evaluate worker classification need to be revised to address the features and needs of on-demand workers and companies operating in this sector.

It is difficult to imagine the crash of the on-demand economy, but only time will tell as to how these companies evolve in response to worker classification issues.

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The Diversity Problem in Tech

While America is becoming increasingly diverse, the tech industry is not and more work is needed.

While America is becoming increasingly diverse, the tech industry is not and more work is needed.

America has long prided itself on being a melting pot, made up of many different nationalities, ethnicities, and journeys to make it to the land of the free. Looking at current projections, we can expect our country to grow to be more diverse over time. By 2040, Hispanics alone will represent more than half of the American population, with Hispanics, Asian, Pacific Islanders, and Blacks combining to compose more than three-fourths of the population.

Though America is becoming increasingly diverse, issues regarding the lack of opportunity for our diverse populace remain. Over the past few years, one of the hot button issues pertaining to opportunity in the workforce has been the lack of diversity in Tech. According to the U.S. Bureau of Labor Statistics, the American labor force is 47% female, 16% Hispanic, 12% Black and 12% Asian. However, in 2011, Blacks represented only 6% of STEM workers and Hispanics 6%. Even more alarming, among 7 Silicon Valley companies that released their employment statistics in 2014, only 2% were Black of and 3% of were Hispanic.

For some Tech companies, the answer to this problem was that there are simply not enough qualified candidates in the applicant pool. However, data shows that this is simply not true. According to data from the Computing Research Association, 4.5% of all new recipients of bachelor’s degrees in computer science or computer engineering from prestigious research universities were African American and 6.5% were Hispanic. Essentially, the elite universities are churning out graduates in this field at twice the rate that top Tech companies are hiring them.

So if the issue here isn’t producing better applicants, then how can we fix the problem of diversity in Tech?

 1. Increase the Applicant Pool.

Although I agree that it isn’t an issue of having better Hispanic and Black applicants, simply creating a larger pool of these applicants will make it virtually impossible not to hire more Hispanic and Black candidates. There are a number of ways that we can work to enhance this pool, but some are already in motion.

One effort that we’ve seen to increase this pool is President Obama’s Educate to Innovate program, which is a nationwide effort that has raised over $700 million to hit major milestones in several priority areas, building a CEO-led coalition to leverage the unique capacities of the private sector, preparing 100,000 new and effective STEM teachers over the next decade, showcasing and bolstering federal investment in STEM, and broadening participation to inspire a more diverse STEM talent pool. The last milestone seems the most relevant to our purpose, but in actuality, these issues are all interconnected. Most obviously, training better STEM teachers and bolstering federal funding in the field should help to inspire a more diverse STEM talent pool, assuming that these resources will be distributed equally across different communities. Having the commitment of CEOs from major Tech companies would also demonstrate the industry’s commitment to improving diversity, which could result in a broader applicant pool. Although the President taking the lead on this initiative is highly influential, another way to advocate for change would be voicing these concerns to our respective Senators and Representatives. It is our duty to hold elected officials accountable for enacting the change that we, their constituents, desire to see.

In addition to the support of this initiative led by the President, the power of starting companies and organizations dedicated to increasing the pool of talent can not be emphasized enough. One example of a successful organization working in this field is CODE2040, which is a nonprofit that creates programs that increase the representation of Blacks and Latino/as in the innovation economy. Starting by selecting top Black and Latino students as fellows, the program inserts the fellows in a summer accelerator which includes a summer internship program and career building sessions. CODE2040 has been very successful, with their applicant pool increasing to over 1,000 students, and more than 200 companies expressing interest in hosting their fellows for summer internships. With many companies expressing an interest in improving on their diversity, organizations like this present a viable solution for them to easily identify some of the top talent. Having more organizations like this could only be more helpful when seeking to increase the applicant pool.

2. Changing the Narrative.

Although I believe that increasing the applicant pool is the biggest need, both the Tech industry and the underrepresented communities need to work together in order to change that narrative around minorities in Tech. One important way to do this is to increase the visibility of the Tech industry’s prominent minority figures.

In an article with the New York Times, Van Jones, CNN political commentator and founder of #YesWeCode, stated, “A lot of African-Americans want to grow up to be LeBron James, Jay Z or Barack Obama. They don’t hear about David Drummond at Google, who is at the center of one of the biggest companies in the world.” This statement certainly relies on some dangerous stereotypes and overgeneralizations regarding role models in the Black community, but I think that there is value in the basic assumption here. Jones is saying that the youth in these communities are unable to to visualize individuals in this industry that they can aspire to be, largely because the CEOs, CTOs, and General Counsels of color in these companies aren’t placed on the same platform as many of their counterparts. Young Black and Latino youth being able to see the stories of people like them could have an immeasurable impact on their own ambitions and dreams. Not only could they aspire to be the legal counsel of a company like Google, they could also visualize the individual that they hope to be.  

Along with his efforts to increase the talent pool, President Obama was also a driving force behind the “Let Everyone Dream” campaign, which is based on the documentary Underwater Dreams, depicting the story of a group of under-resourced Hispanic high school students taking on a MIT team in an underwater robotics competition. This is a multi- sector coalition that has launched with over $90 million. It focuses on inspiring more under-represented students to succeed in STEM subjects. Some of the commitments of the coalition include investing millions of dollars into a national campaign with the purpose of increasing visibility of Latinas in STEM, committing $15 million to STEM programs for women and underserved minorities, and partnering with top universities to support financial aid, internship, and career readiness programs for first-generation college students, women and minorities.

3. Encouraging Blind Hiring

One of the issues with hiring in Tech are the inherent biases that exist among those in the positions of power. Naturally, we tend to gravitate towards people who look like us, have similar backgrounds, or to whom we have a prior connection. Unfortunately, in an industry that is predominately white, this ultimately has a negative affect on minorities who don’t fall into one of these categories. In an industry that fancies itself as championing principles of a meritocracy, it seems odd that so much of the hiring depends on who you know, as opposed to your own qualifications.

One way to address this issue is encouraging blind hiring in the industry. One Black entrepreneur, Stephanie Lampkin, has already created a mobile app called Blendoor to help with this problem. According to a 2014 research study jointly conducted by Stanford University and the Paris School of Economics, a person’s foreign-sounding name on his or her resume can adversely affect that candidate’s chances of being called for an interview. Lampkin hopes to take the inherent bias out of the hiring process by using Blendoor to hide the candidate’s name and photo from the employer during the initial stages of the recruiting process. Lampkin has already made major headway with her application, being enlisted to help with the likes of Google, LinkedIn, and Microsoft to help with their hiring. There may be an unconscious bias working against minority candidates, but steps are being taken to further level the playing field and solve the issue of diversity in Tech.  

 

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University Trademarks and Leveraging the Brand

Many student entrepreneurs want to use their university's brand as part of their product.

Many student entrepreneurs want to use their university’s brand as part of their product.

It is a well-known fact that universities foster innovation and entrepreneurship. But what happens when you want to incorporate your university’s brand into your startup concept?

It is time to consider trademark law.

Trademark Basics

A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the product and seeks to prevent consumer confusion. Universities register trademarks in an effort to protect their brand, maximize revenue and maintain control over the way their trademarks are presented to the public.  Universities are some of the most diligent institutions when it comes to protecting their marks. They usually have significant resources dedicated to seeking out infringements. Therefore, before leveraging the brand of the university, it is especially important to take preventative measures and understand what is available for use.

Acquiring Trademark Rights

Trademark rights may be acquired in either of two ways:

  1. Common Law- rights are acquired through the use of the mark in commerce
  2. Registration- rights are acquired by registering with the USPTO

The following symbols may be used with trademarks, although they are not required for one to claim trademark protection:

™ symbol indicates an unregistered trademark

® symbol indicates a registered trademark

This prior post provides more information on the trademark registration process.

University Trademarks

A university can acquire rights to more than just its name and logo; colors are also protectable. Courts have decided that specific color schemes, whether registered or not, are so related to the university that they develop a “secondary meaning.” At which point, customers would likely identify the university as the source of the product. This, along with other factors including medium, sales, advertising and intent, determine if the university has trademark rights to its colors. Universities have recently gotten more creative with colors and trademarked the distinctive name of the colors or the colors in association with other objects.

Many schools will have a website that outlines their expectations regarding the use of their trademarks. Often, you will need to request permission from the university and include a detailed explanation of your plans for the mark. Approvals are granted depending on the applicant, often more favorable to students, alumni, and faculty. The university will also consider how the mark will be used (if it is commercial in nature) and the medium for its display.

Information regarding the use of the University of Michigan’s trademarks can be found here.

It is a good idea to consult your university before making decisions about using their brand as part of your startup product or service.

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Pitching Investors: Watch for General Solicitation Rules

Securities laws may restrict how you discuss how your startup plans to raise money.

Securities laws may restrict how you discuss how your startup plans to raise money.

Many people think securities laws are only relevant to big companies in their billion dollar public offerings. Securities laws, however, are also relevant to your startup.

The general rule in the Securities Act of 1933 prohibits selling securities other than by means of a registration statement. Fortunately, the statue also provides certain registration exemptions for transactions that are not public offerings.

One critical concept under Regulation D is the general solicitation rule. Failing to comply with the general solicitation rule may cause a start-up to lose the exemption status. Under some circumstances, pitching your company could be deemed a general solicitation. Therefore, it’s critical for founders to pay attention to the Regulation D and the general solicitation requirements before pitching your company.

Safe harbors in Regulation D

Most startups rely on Regulation D, promulgated by the SEC as the exemption from the registration requirements of the securities laws. There are three main safe harbors in Regulation D – Rule 504, 505, and 506. Rule 504 and Rule 505 are less popular because the issuers have to comply with the securities laws in each state where they are selling securities (see previous post for more information of Rule 504 and 505).

The most commonly used exemption is Rule 506, which allows a company to raise an unlimited amount of capital from an unlimited number of accredited investors (see previous post for information of accredited investors). Rule 506 has two separate but related exemptions—Rule 506(b) and Rule 506(c). Rule 506(b) prohibits general solicitation while the new Rule 506(c), subject to a variety of conditions, allows offering through public advertising and general solicitation.

What is General Solicitation?

Regulation D doesn’t define general solicitation, but gives some examples of prohibited solicitations, including any advertisement published in any media (e.g., television, newspapers, magazines, Internet, radio, public seminars, or cold calls), and any meeting whose attendees have been invited by a general advertising.

When is a solicitation not general? The SEC interpreted the prohibition as requiring that the issuer (or a person acting on its behalf) has a “pre-existing relationship” with each offeree. Examples of pre-existing relationship including:

  • Use an outside agent, such as a broker, to serve as an intermediary
  • Use questionnaire to request investors providing self-verification regarding their financial status
  • Use password protection to prevent general public from accessing investment information on the website

The New Rule 506(c) Under the JOBS Act

On July 10, 2013, the SEC revised Regulation D to remove prohibition on general solicitation and general advertising in offerings and sales under Rule 506(c), provided that all purchasers of the securities sold in these offerings are accredited investors. The major differences between Rule 506(b) and Rule 506(c) are summarized in the chart below.

Rule 506(b) Rule 506(c)
Limitation on amount of capital raising Unlimited Unlimited
Type of investors Accredited investors and up to 35 non-accredited sophisticated investors Only accredited investors.
General solicitation Prohibited Allowed
Accreditation process Allow Self-certification Take reasonable steps to verify accredited investor status

Although Rule 506(c) allows general solicitation, which seems to be a huge advantage, there are several reasons an issuer may prefer to rely on Rule 506(b).

First, Rule 506(c) requires an issuer to take “reasonable steps” to verify that all investors in the offering are accredited investors. According to the SEC guidance, self-certification by investors, for instance questionnaires in which investors self-report their income or net worth, does not satisfy Rule 506(c)’s standard. Instead, issuers must generally request investors to provide tax returns, bank statements, or credit reports to demonstrate their income or net worth. Not only will this requirement add an additional administrative burden on an issuer, it may also alienate some investors.

More importantly, Rule 506(b) is a non-exclusive safe harbor. This means that an issuer can still use the general Section 4(a)(2) exemption under the Security Act if the offering fails to satisfy Rule 506(b)’s requirements. However, an issuer using general solicitation in reliance on Rule 506(c) does not have this fall-back option as general solicitation is prohibited by the Section 4(a)(2) exemption.

Finally, the SEC has also proposed to add new disclosure requirements to Rule 506 and Form D, which may offset Rule 506(c)’s Advantages. For example, the proposed rule requires a Rule 506(c) issuer to file an advance Form D at least 15 days before any general solicitation (instead of the current requirement, 15 days after the first sale). The proposed rule also requires an issuer to file the general solicitation materials, which must have specific mandated legends, with the SEC on or before the date of the general solicitation. These requirements may be difficult or impossible to comply with in practice.

If you do decide to rely on Rule 506(b), here are some tips to help avoid running into the general solicitation trap.

  • Limit offers and solicitations to persons with whom you have a “preexisting substantive relationship.”
    • When attending a pitch event, make sure the attendees are limited to persons with whom the event organizer has a pre-existing relationship or who have been contacted through a network that the event organizer can rely upon to create that relationship.
  • Avoid making “offer” to people you do not have a preexisting relationship.
    • To avoid making offer, only provide factual business information and do not include projections.
  • Monitor the activities of any agents or representatives to ensure that they are not performing general solicitations.
  • Prepare a list of likely investor targets as early in the process as possible and stick to it.
  • Be very circumspect in any interactions with the press.
  • Keep strict control over the dissemination of offering materials.
  • Use password protection and online questionnaires to prevent nonaccredited investors from accessing investment information on a website.
  • Review your website content.

 

 

 

 

 

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Can I start a company if I’m in the US on a student F-1 visa?

Hands, 1

CPT or OPT programs may allow you to launch your startup while on a student visa.

America is great.

Because of the strength of the United States’ higher learning institutions it attracts a high number of international students a year, and the number is steadily increasing. Most students come from China and India, with the percentage of Brazilian students growing in sum each year.

According to a report by the Institute of International Education the U.S. was host to around 975,000 international students in the 2014-2015 academic year, up 10% from the previous year.

More students means more ideas, and of course more money. The Department of Commerce reports that international students added around $31 billion to the U.S. economy in the 2014-15 school year. One hundred and ninety-seven thousand of those students came to study business in the last academic year. At the University of Michigan students come from 114 different countries, with around two-thirds studying at the graduate level. Michigan Law is represented by 15 countries and full-time international MBA students at Ross make up 35% of the class total.

The F-1 Visa

F-1 visas are issued to international students if they are either attending an academic program or English Language Program at a U.S. university. There are varying requirements to hold this type of visa, but the gist is that you have to be taking a full course load and you can only stay in the U.S. 60 days after the completion of your program. The difficulty comes in the ability to work as an international student. Under this type of visa status students are not allowed to work off-campus during the academic year unless they face some sort of economic hardship and are authorized by their school to do so. However, they are allowed to work on-campus subject to certain conditions. After their first academic year F-1 students can engage in three different types of employment:

  • Curricular Practical Training (CPT)
  • Optional Practical Training (OPT) (pre-completion or post-completion)
  • Science, Technology, Engineering, and Mathematics (STEM) Optional Practical Training Extension (OPT)

Under these three categories F-1 students cannot work more than 20 hours per week, unless they are on break, then they are allowed to work up to 40 hours per week.

CPT

Curricular Practical Training (CPT) is a temporary authorization for employment. This means that the job has to be directly related to your major. CPT is a way for students to take part in internships and other modes of employment, including self-employment. CPT must be required by your degree program, or at the very least you must receive a number of credits for it. This type of employment must be done before graduation. If you accumulate more than 12 months of CPT authorization then you lose the ability to apply for OPT.

OPT

Optional Practical Training (OPT) is another type of work authorization that must be related to a F-1 student’s major. Whereas CPT is required by a student’s field of study, OPT is optional and you do not need to earn any credits in relation to it. OPT is not employer specific and may be done before or after graduation. According to the U.S. Department of Homeland Security “a student on OPT may start a business and be self-employed. The student must be able to prove that he or she has the proper business licenses and is actively engaged in a business related to the student’s degree program.” Students can generally do OPT for a period of 12 months.

The OPT STEM Extension

There is an exception under OPT for STEM students. However, the exception doesn’t apply to students who are self-employed or starting their own business.

Working vs. Owning

Poet and modern rap artist Jay-Z once crooned “I’m not a business man, I’m a business man!” And so I ask you, are you the owner or the employee? Let’s face it. No one wants to work for someone else anymore. Let’s call it the curse of Zuckerberg – and it’s as if every single millennial is affected by this curse. It’s likely why you’ve endeavored to build your own business.

There is a pretty important distinction to be made between working for and owning your own business in this discussion. If you are not part of the CPT or OPT programs then it is in fact illegal to work for an LLC, C-corp, or S-corp in the United States, even if it’s your own. I mean think about it. Why would the government see any difference between an F-1 student working for a large corporation like Coca-Cola and working for a 10 student strong start-up. Well, now that I’ve said it aloud there are an array of dissimilarities between the two, but that doesn’t change the fact that it’s still illegal. Although that doesn’t mean that an F-1 student cannot create an entity or hold shares in one. In fact, the U.S. does not require any founders in a (LLC or C-corp) company to be of American citizenship. S-corps do not allow for non-US citizen founders. So it all comes down to the type of work one does with the company and at what stage. If you are coming up with a name, filing trademarks, or forming an entity then you’ve done nothing illegal. However, once the entity is formed then things get a bit trickier. If you start to do any administrative tasks or employee like functions then you enter into a very gray area. Therefore, the best option (after entity formation) is for an F-1 student to enter into the CPT or OPT programs.

To Infinity & Beyond, the H1-B Visa

After graduation and after having been in the CPT and OPT programs students might want to consider obtaining an H1-B visa.

The H1-B visa allows employers to temporarily employ foreign professionals in specialty occupations within the United States. Specialty is defined as having a specialized knowledge in a certain sector or field. The most stringent requirement for a start-up is that one must have an employer-employee relationship with the petitioning U.S. employer.

According to the U.S. Department of Homeland Security “If you own your company you may be able to demonstrate that an employer-employee relationship exists if the control of your work is exercised by others.” This can be demonstrated by having a board of directors, preferred shareholders or investors – all of which show that your company controls the terms of your employment. Some evidence which demonstrates the distinction between your ownership interest and the right to control your employment includes:

  • Term Sheets
  • Capitalization Tables
  • Stock purchase Agreements
  • Investor rights Agreements
  • Voting Agreements, and
  • Organizational documents and operating agreements

The U.S. Government only gives 65,000 H1-B visas out each fiscal year. The first 20,000

petitions filed on behalf of beneficiaries with a U.S. master’s degree or higher are exempt from the cap. If your start-up is a nonprofit then you’re also exempt.

Good luck!

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How to Win the Name Game

Selecting a strong brand might be more difficult, yet more important, than you anticipate.

Selecting a strong brand might be more difficult, yet more important, than you anticipate.

What’s in a name? As Shakespeare once said, “That which we call a rose by any other name would smell as sweet.” And it is true that the success of a start-up is ultimately determined primarily by the quality of its value proposition and its ability to execute rather than its name. But names are still very important. If they weren’t, we wouldn’t have trademark law to protect names and creative firms wouldn’t be able to charge exorbitant fees to come up with great names.

While a start-up’s value proposition may be strong, if other start-ups have the same or a similar idea, whoever can get their name out there to the most people first often wins. If a start-up chooses a name someone already owns, they may need to change names late in the game, leading to potentially drastic setbacks, as they rebuild name recognition and combat customer confusion. Choosing a bad name can signal many things—not only to customers but also to potential investors. A bad name can signal a lack of self-awareness and diligence, and poor attention to detail, among other bad traits. Investors who hear a pitch for a start-up with a terrible name may have thoughts like, “If they didn’t realize their name was bad, what else won’t they realize? What else won’t they pay attention to? What else is wrong with this company besides the name?” These are thoughts you want to avoid. In short, the quality of a name can be a proxy for the quality of the team behind it.

Moreover, a solid, catchy name can create brand-building power. We often use the best names of companies as verbs. We Google things, we Facebook people, we blow our nose with a Kleenex, we Xerox things, we Uber to places, etc.   Every time someone uses a company name in this manner, the company gets free publicity. Having this universal recognition does not come without a good name. Below are some tips on how to brainstorm name ideas and then some rules of the road for what to do once you have your name.

Brainstorming

Often one of the hardest parts of starting a business is coming up with a name. It seems easy at first but after staring at a blank sheet of paper for hours, many entrepreneurs grow frustrated and either settle for a bad name or hire someone else at significant cost to come up with a name for them. A proper brainstorming process can solve these problems and help you come up with many strong name ideas.

  • Make a list of words/names that relate to your product or value proposition. Use a thesaurus to find related words.
    • Example: If your business is a financial services application, you might list words like coin, blue chip, money, cash, banking, finance, etc. Then, use a thesaurus to find less common, but more interesting or catchy words.
  • Use foreign words. Foreign words can evoke positive responses by lending an exotic, new, and fresh sound to your name. Take the list of words related to your business and try translating some of them into other languages.
  • Always be listening. Things may come up in daily life that inspire the perfect name. Jot down ideas as they come up in a simple journaling or note-taking mobile application.
    • Example: The company, Caterpillar, found its name when a photographer was taking a picture of a tractor and remarked that the tractor crawled like a caterpillar.
  • Make up Words. Using made up words can help your company stand out. Try combining words, changing the spelling of words, and simply creating words that sound catchy.
    • Example: The name Kinkos was created because the founder had very curly hair with lots of kinks.

Rules of the Road

 Coming up with a good name early on can save you a lot of headache down the road. Avoid the pitfalls of many entrepreneurs by following these rules:

  • Keep it short. Twitter, Facebook, Nike, Pixar, eBay, Google, Apple, Kinkos—what do these iconic names have in common? They are all two syllables long. Try to keep your name to two syllables or less. This will maximize its repeatability and memorability.
  • Keep it punchy. What else do the above names have in common? They make use of strong consonant sounds. This will help the name to stand out in conversation and stick.
  • Never make your move too soon. Once you have a list of names, spend at least a week mulling over the options. The best names will be remembered without you having to go back to the list. The proof is in the pudding.   The names that you remember are likely the better names. If it sticks in your mind, it will be more likely to stick in the minds of others and this “stickiness” is exactly what you should be after.
  • Get quality feedback. Try to do more than simply ask close family and friends for feedback. It will be hard for them, if not impossible, to avoid bias. Test the names out on random people and see how they react. Ask them questions to see what they think about the names and what responses the names evoke. Record your findings and analyze them.
  • Make sure the name is available. Cover your bases by conducting appropriate searches including trademark searches via the US Patent Office and company name searches via your state incorporation website.

A rose by any other name may smell as sweet. But what good is the rose if no one gets to smell it? A great name can help propel your business or product through the early stages and contribute to the likelihood of survival. After you’ve followed the above rules and found your name, it’s time to file a trademark.