Can a Pretzel Sandwich be a Trade Secret? – Part 1

Entrepreneurs often ask their lawyers for “bullet-proof” non-disclosure agreements (NDAs) that will prevent their business associates from stealing their great ideas.

The problem is, no such thing exists.

We discussed in this previous blog how an NDA won’t necessarily protect your ideas. The best way to protect an idea is to jump through the legal hoops that turn an idea into intellectual property– as we discuss in this blog.

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Making Money from Your Great Ideas – Part 3

This is part three of our three-part blog on making money from your great ideas.

In parts one and two we talked about the different ways of protecting ideas, with a focus on patents.

In this blog, we’ll be talking about how to turn intellectual property into cash.

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Making Money from Your Great Ideas – Part 2

This is part two of our three-part blog on making money from your great ideas.

As you might gather from the discussion in part 1, a patent is the form of IP that comes closest to protecting “ideas.”

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Making Money from Your Great Ideas – Part 1

*Note: this is part one of a three part blog. Check back or follow us for the next two parts.

“How can I make money from this great idea I have for a business/product/service/movie?”

People often post questions like that on Q&A boards such as Quora.

Unfortunately, there isn’t really much of a market for “bare” ideas – especially since they’re as common as dirt.

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Most Ridiculous Clauses in Your Contract

Signing a contract is serious business. Every word is important and a contract should not be signed without reading and understanding it. Contract clauses can bite!

If the contract presented to you contains a ridiculous clause and you sign it, you will be bound to it (no matter how ridiculous the clause is)!

We thought we’d share some examples of ridiculous clauses from actual contracts, hoping you’ll be careful about what you sign!

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Could Your Old Boss Own Your New Startup?

A Silicon Valley Horror Story

It’s a common dream: to leave the large high-tech company you work for and bring your brilliant startup idea to life. But what if your employment contract puts your new venture at risk?

In honor of Labor Day, we’re going to explore a clause in many employment agreements that might be problematic later on.

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Bedbugs and Broomsticks: Are These Clauses in Your Apartment Lease?

“When I was a kid my parents moved a lot, but I always found them.”
― Rodney Dangerfield

It’s August – a time when many people move into new apartments so they’ll be settled in before the new school (or college) year starts.

Most people HATE moving – especially in the summer. What could be worse than hauling a sofa up three flights of stairs in the SWELTERING HEAT?

Landlords from Hell

Whatever time of year a move happens, there’s also the stress of signing a new lease.

Most leases are pretty standard, and some people will (unwisely) sign them without even reading them – let alone understanding them.

BAD IDEA.

Even though your landlord seems friendly now, he or she could still turn out to be the landlord from hell.

Both common and uncommon lease clauses can cause major problems down the road, if you don’t realize what you’re agreeing to.

Here are some lease clauses you should look out for.

Bedbugs

Does your apartment lease have a “bedbug rider”?

No, that’s not a microscopic guy with an itty-bitty lasso who rounds up your bedroom vermin. It’s a clause that covers who’s responsible if your place is infested with the nasty little creatures.

If bedbugs are common in your area and your lease doesn’t have such a rider, you might want to add one.

Recently the New York Times received the following inquiry:

My wife and I recently signed a one-year lease for an apartment. It included a rider stating that all apartments in our building had been bedbug-free for at least one year before our move-in date. After we moved in, we learned from the superintendent that an apartment in our building had been infested by bedbugs and treated a few weeks before our move-in date. …

As we understand it, the landlord is responsible for the costs of fumigating. Who is responsible for other expenses, like replacing mattresses and furniture?

The answer, according to the Times, is that (at least in New York City):

Under normal circumstances, a landlord is required to treat the infestation and a tenant is responsible for cleaning personal belongings.

Good to know, right?

Broomsticks

Can a landlord evict someone for being a slob?

Maybe not an ordinary, dishes in the sink, pizza boxes on the coffee table, overflowing cat box-type slob, but a serious Hoarders-grade slob?

According to Landlordology,

Generally speaking, Landlords cannot dictate the cleaning behavior of a tenant unless they have reason to believe the tenant is violating health or fire codes, or causing damage to themselves, the property, or other people.  With that said, if your lease states that the tenant must hire a monthly maid service, then that is a contractual expense which should hold up in court.

So the answer is, it depends on just how grody your place is, and what your lease requires.

Lease Leverage

To learn about more lease clauses that can cause you problems, please check out our earlier blog, here.

When you’re negotiating a lease, you’ll have a lot more leverage if you know what’s standard and what’s not – and what additional clauses could protect you. When you’re potentially dealing with the landlord from hell, you want to come armed with knowledge.

LawGeex makes that easy — you can upload your lease and have it compared to thousands of others to see how yours stacks up.

Click here to learn how it works, or click the link on the right to upload your lease and get fast feedback… before the bed bugs bite.

The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice.

Can Your Lease Save Your Business from Getting Derailed?

This week, Tel Aviv started construction of the city’s first light rail. The long-delayed $4.23 billion project is slated for completion in 2021 and is expected to cause years of gridlock within the city and for miles around.

Some roads have been closed, some have been turned into one-way streets, and some have been closed to private vehicles. Nine-foot-high temporary walls will be set up about five feet from the entrances of many businesses, blocking them from view.

Fearing the Worst

The Jerusalem Post reported that Tel Aviv business are fearing the worst.

Our office is right in the middle of it, but being an online business we’re not as affected. The shops around us, our neighbors, who depend on foot traffic for survival, will be the ones most hit. We’ve been around to visit them and they really do fear the worst. Their livelihoods are on the line.

StorefrontThe 56-year-old owner of a hole-in-the-wall electronics store just around the corner from us even hung a noose by the entrance, with a sign reading “waiting for my death sentence.”

So, the big question is: can you get out of your commercial lease, or get your lease payments reduced, if a massive construction project disrupts your business?

The answer depends on where your business is located, and on what it says in your lease.

Understanding Your Lease

A few things to consider:

  • Does your lease give you the right to find an alternative tenant, or to sublet the premises?(This may not help much if no one wants to take over the location, but a different business – like an online one — might not be as dependent on foot traffic.)
  • Does your lease give you the right to terminate if the normal use of the premises becomes impossible?

Before You Sign

If you haven’t yet signed a lease, you might want to add clauses like those to protect yourself from similar dramas in the future.

Some other things you can do before you sign a lease are:

  • Research whether any major construction projects are scheduled for the area, and what impact they’re expected to have on traffic patterns, parking, etc.
  • Consider negotiating a shorter-term lease so you can get out of it earlier if something unexpected happens.(Of course, the tradeoff is that your landlord may be able to raise your rent more if you decide to extend the lease.)

If you want to understand your commercial or residential lease before you sign it, you can get fast feedback at www.lawgeex.com. We’ve created this service exactly for these situations – to help people understand their contracts before they sign them, reducing the risks down the road.

The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice. 

How a Finder’s Agreement Could Ruin Your Startup’s Chances of Getting Funded

Finding money is hard, so it’s common for a startup to use a “finder” to locate potential investors or partners.

Unfortunately, using the wrong kind of finder, or the wrong kind of finder’s agreement, could lead to disaster.

Doing it wrong could let your investors take back their money. Worse, your company could be prevented from EVER getting funded. Here’s why.

Finder’s Fees

Obviously, a finder will expect to be compensated for finding you money. An agreement between a company and a finder that deals with this compensation (and other issues) is called (duh) a “finder’s agreement.”

A typical compensation clause might go something like this:

Should an Investor invest in Client’s Company, then Client agrees to pay Consultant six percent (6 %) of the amounts invested by Investor.

Here’s what the compensation clause in a finder’s agreement looks like when highlighted by LawGeex:

Finder's Agreement

How much do you have to pay a finder?

One industry standard in the US (the Lehman Formula) uses the following scale:

  • 5% finder’s fee on the first $1 million raised
  • 4% on the second million
  • 3% on the third million
  • 2% of the fourth million
  • 1% for more than $4 million

Another common formula provides for a fee of 5% of the first million and 4% of the next $10 million.

These numbers are based on payments in cash. For payments in stock (equity), the percentages are often doubled. It’s also common to see a mix of cash and equity.

However, in the finder’s fee contracts we’ve reviewed, we’ve seen a big range in finder’s fees. The share can depend on things like:

  • Company status
  • The finder’s power
  • The specific industry
  • The company’s geographic location

So what’s the problem?

The problem is that some finders – especially “professional” finders – may be violating federal and state securities laws.

As this useful article notes:

It is a common misperception among entrepreneurs and finders that the payment of a fee in cash or equity is acceptable if the finder merely makes introductions. This is wrong. It is a myth perpetuated by entrepreneurs and finders who have not been caught.

It’s forbidden to pay a finder a fee based on the amount of capital the finder brings to the company.

But didn’t we just talk about percentage fees and the Lehman Formula? So how can it be forbidden to base fees on the amount of money raised?

The problem is that some kinds of “finding” are regulated by securities laws. And if you use a finder who’s not a registered broker, you need to be extra careful about how you do it.

What’s the worst that can happen?

Unless a finder is licensed as a broker-dealer under US and state securities laws, a finder’s agreement could be illegal and unenforceable.

That might not sound so bad. In fact, it might sound like a great deal — the startup gets to keep the investors’ money but doesn’t have to pay the finder? Sweet!

Sorry. Doesn’t work that way.

If you fail to disclose that you’re using an unlicensed broker as a finder, you may be giving the investors the right to take back their investment.

As a useful blog notes:

Numerous securities laws, both state and federal, give investors rights to recover their investments if anyone who sold the investments materially misled the investors or omitted any information that makes the provided information materially misleading. An investor could argue that both the finder and the issuer misled the investor by not informing the investor about the protections that broker-dealer licensing is intended to provide, and omitting the fact that the finder is not licensed.

Some investors may decide to stick with the deal, but others may use this revelation as an excuse to get out.

But it gets worse….

As this article notes,

A common sanction sought by the SEC against issuers utilizing unregistered finders is to bar the issuer from conducting Regulation D offerings in the future. This, of course, could have a lethal effect on a start-up company dependent on private capital.

(Regulation D includes the rules that allow some companies to offer and sell their securities without needing to register the securities with the SEC. This makes access to capital markets possible for smaller companies that couldn’t afford SEC registration.)

In addition, a company that improperly uses a finder could be liable for aiding and abetting securities laws violations.

A Finder’s Agreement That Won’t Blow Up in Your Face

With so much at stake, it’s not a good idea to sign some random finder’s agreement you pull off the internet and don’t really understand.

You can consider options like:

  • Making sure your finder is, in fact, a registered broker-dealer
  • Making sure your finder will only do things that don’t require registration as a broker
  • Paying a finder a fixed-fee regardless of the outcome of the finder’s introductions

Get Your Finder’s Agreement Reviewed Fast

If you’ve already got a draft finder’s agreement and want to understand it better and see if it includes any non-standard clauses, you can get it reviewed fast with LawGeex.

The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice. 

Does your startup’s investor term sheet have a “no shop” trap?

Five Ways to Reduce Your Risk

The first time your startup’s presented with an investor term sheet, you may feel like you’ve won. OK, maybe you don’t have the trophy (i.e., check) in hand, but you’re on the home stretch with the wind at your back.

Right?

Maybe not.

Getting Engaged

A term sheet is like a marriage proposal. It shows that an investor is seriously interested in your company. But it’s a proposal that comes with more terms and conditions than a Christian Grey NDA.

One potentially problematic term is the “no-shop” clause. It might read something like this:

From the signing date hereof until 5:00 P.M. on the date 30 days following the signing of this document (the “Exclusivity Period”), the Company agrees that it will not directly or indirectly pursue, solicit or participate in the negotiations, or enter into any agreement or commitments regarding investment by any other potential equity investors in the Company or any merger or sale of all or substantially all of the assets or stock of the Company…

(A “no-shop” can also be called an “exclusivity” clause.)

Here’s what a no-shop clause looks like when flagged by LawGeex:

termscreen

Basically, this clause means you won’t date anyone else while you’re engaged – as a start-up founder, you won’t shop the company around to other potential investors after you sign the term sheet.

This makes sense from the perspective of an investor who’s about to conduct due diligence – confirming that you’re worth investing in. If you’re just going to use the first term sheet as “bait” to attract a better offer, then you’re wasting the first investor’s time and money.

That sounds reasonable, right? It’s also very common. No-shop clauses show up in almost all of the term sheets in our database.

So what’s the problem?

Off the Market

The problem is that if this first investor doesn’t close the deal, you’ve taken your company off the market for X number of days.

The bigger the “X,” the bigger the problem.

If multiple investors are vying for your deal (a good problem to have!) one or more may push you to sign a term sheet before they even know much about your company. The no-shop clause gets the others out of the way while the first investor checks you out.

That first investor may be serious, or may just have a bad case of FOMO. Either way, once you sign that no-shop you’re vulnerable.

While the clock’s ticking, you may be running out of money. Any other investors who were circling may move on to fresher meat. Whatever “heat” you had may dissipate.

Meanwhile, due diligence is proceeding. The investor’s kicking your tires and checking under your hood.

If your tread’s worn or you’ve got an oil leak (for example, your IP ownership is iffy or your cash-flow projections don’t check out), the investor may want to renegotiate the company value or other terms.

But wait, you say. We had a deal – the valuation’s stated in the term sheet!

But a term sheet usually isn’t a firm commitment to invest on those terms. The investor can just walk away. You, on the other hand, are bound by the no-shop — and breaching it can get you sued.

Reducing the Risk

If the deal doesn’t go through, even if there’s nothing really “wrong” with your company you could be seen as “damaged goods” that an investor has passed over. So you want to maximize the chances that the first deal will go through, while minimizing the harm if it doesn’t.

If you have to sign a no-shop, what can you do to reduce your risks?

Here are some ideas:

  1. Make the no-shop term as short as possible. Try to negotiate it down to two-to-four weeks, rather than six weeks or longer. Our research has shown the typical no-shop period is between 45 and 60 days.
  2. Have the no-shop period start (or only sign the term sheet) after the investor has started legal and accounting due diligence by hiring a law firm and/or accounting firm. An investor with skin in the game is less likely to waste your time.
  3. Have a clause that says the no-shop period will end if the investor stops negotiating or conducting due diligence for a specified period. You don’t want to be off the market if the investor isn’t moving the deal forward.
  4. Only agree to pay the investor’s legal fees if the deal actually goes through. Otherwise, you’re triply screwed if it fails: a) you don’t have the investor’s money, b) other investors have gone away, and c) you’re stuck with a big legal bill. (Note that this applies whether or not you have a no-shop clause.)
  5. Do your own due diligence on the investors before signing the term sheet. Make sure they actually have the money and don’t have a history of “fishing expeditions” and walking away from deals.

Understand Your Term Sheet

You probably don’t want to negotiate (or sign) a term sheet without the help of a lawyer – there’s too much at stake. But with fast feedback at www.lawgeex.com you can:

  • Understand the term sheet better
  • Get legal terms explained in plain English
  • See which terms are standard – or not
  • Compare your term sheet to our database of many others

Just click the link on the right and upload your term sheet now.

The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice.