The idea stage: legal considerations
April 2024: Last week I spoke at Raleigh Durham Startup Week, in the “idea track.” Here are the highlights of my talk.
First, there are three tips for the idea stage:
Make sure you own your side hustle
Beware of pre-incorporation claims and
Make sure everyone assigns their intellectual property (created in connection with the business) to the company.
Side Hustle: The design for the first apple computer could have been owned by Hewlett Packard. In his book, iWoz, Steve Wozniak describes how he, Steve Jobs and Ron Wayne set up a partnership with their interests at 45%, 45% and 10% respectively, in Apple Computers. Unfortunately, Woz was working as a full time employee for HP and, according to his agreements with the company, anything he designed during the term of his employment belonged to HP. Fortunately, Woz read his agreements (always a good idea!) and so he asked HP if they were interested. Fortunate for him, and for all of us, HP wasn’t interested, and the legal department said that HP claimed no right to his design (I expect they waived their rights).
Woz got lucky. What could he have done? He could have negotiated the terms of his HP contract, used good “side hustle hygiene” (worked on Apple after hours, not using HP assets or data) and carved out his work on Apple Computers.
Pre-Incorporation Claims: Sandra Lerner, co-founder of Cisco Systems, started a business with her horse trainer friend, Patricia Holmes, that became the 1990s nail polish sensation: Urban Decay. When the entity was formed as an LLC, Holmes was offered a 1% interest. In Holmes v. Lerner, the California court of appeals said that their “oral partnership agreement” was sufficiently definite to be enforceable and the judgment that Lerner pay Holmes was affirmed. In a related example, the Winklevoss twins alleged that they hired Zuckerberg to write code for their ConnectU business (which does not appear to have been formed as an entity) and he stole their idea. Like Lerner/Holmes, there was not a written agreement and the parties to that lawsuit ended up settling. What could they have done? Holmes and the Winklevoss twins could have had written agreements documenting roles, percentages, IP ownership.
Everyone Assigns their Intellectual Property: I joked with the audience that if there were a test on these three points, this last one would account for 80% of the grade. Here, I told a story about an inventor who created a product and hired an artist to create drawings for the packaging. Years later, when the company was successful, it was about to be acquired by a large company (for $$) when the artist came back and said “those drawings are mine.” Lo and behold, the company had hired her as an independent contractor and did not have a written agreement where she assigned the copyright in the drawings to the company. With a lucrative deal on the line, the company paid her for the copyright—-likely at a price that was substantially higher than what she otherwise would have been paid at the time she originally did the work. What could the company have done? It could have made sure that everyone working with or for the company assigns their rights to the intellectual property created for the company—-to the company. Indeed, this is applicable at the idea stage and beyond. Before pursuing a significant transaction, it’s prudent to get your “ducks in a row” and clean up any of these issues.