Category Archives: Legal & Accounting

How to Read a Patent – It’s All In the Claims

How to Read a Patent - It's All In the Claims from The Startup Garage

How to Read a Patent – It’s All In the Claims

It may seem simple, but reading a patent and fully understanding what the patent actually covers can be rather difficult.  Let’s begin by reviewing the main sections of the patent.  First, we have the patent identification information: the patent number, title, patent holder’s name, owner of the patent (if different), the filing date, the issue date and cited references.  Next, we have an abstract which outlines the type of the invention and its basic functions.  We then have the patent specifications which explain how to develop and use the invention.  We then have drawings of the invention.  Lastly, and most importantly, we have the claims, or the legal limitations that the patent covers. 

While the specification will cover the invention in general, it does not represent the patent’s legal coverage.  Claims are usually very specific and do not cover many of the key functions of the invention as described in the specification.  Claims come in two primary classifications, independent claims and dependent claims.  Dependent claims incorporate an earlier claim and an additional element making a new, slightly different claim.

Constructing your claim can be very difficult and will likely include several rounds of modifications during the patent prosecution process.  Saving money on your startup by claiming a patent on your own and avoiding the cost of patent and I.P. lawyers, may sound like a good idea.  However, if you are not familiar with the claims process, you will likely find that the process will be difficult and time consuming.  Even worse, your start-up’s patent may not cover key claims that will protect your invention down the road.

Whether you have a question about Reading Patents or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Trademarks, Copyrights, and Patents

Trademarks, Copyrights, and Patents from The Startup Garage

Trademarks, Copyrights, and Patents

When starting a business, one thing to think about is security. Not just the security of your business in general, but security of your ideas and what you have created. This is where things such as trademarks, copyrights, and patents come in to play. These are ways to assure that your business is safe from plagiarism and knockoffs. Trademarks are used to protect things such as business logos, names or anything that is put on your product to distinguish it from other products. A copyright protects things that are written such as any literature, books, music, or visual and performing art. A patent is the protective right against anything that is a physical invention.

Most startup companies will want to trademark their businesses to ensure that no other company has or uses the same name or logo. Trademarking can be done simply online at the United States patent and trademarking website www.uspto.gov. An attorney is usually not required for trademarking, but it may help things go a lot smoother. The average cost for trademarking is between $200 and $500.

 

Theoretically, a completed work is copyrighted, but sometimes it is important to file a copyright to avoid infringement. If your new startup company needs a copyright, whether it is for a book, or significant document, it can be easily done online as well. First you must visit www.copyright.com, and then choose the type of work you are copyrighting, and fill out the application. It is that simple, and it will only cost $35 online or $50 if you would like to file the physical papers by sending them through the mail.

Patents are the most important protection devices for inventions. A patent will ensure that your invention can not be copied by anyone else to make profit. This is why the patent process is a little bit longer and more difficult. First, you must ensure that your product has not already been invented. You can find this information by looking at www.uspto.gov. Now you must decide which category your invention falls under; utility, design or plant. A utility patent is for an invention of a machine or article of manufacture. A design patent is for an invention of a new and original design of an article of manufacture. A plant patent is exactly what it sounds like, a patent for an original plant that was created and reproduced.

Next you must fill out the correct application at Uspto.gov. In most cases an attorney is highly recommended. This is important to make sure that your patent is filed and protected correctly. Patents are not cheap so it is important to make sure that everything is done correctly and uniformly. A patent runs anywhere from $1,500 to $15,000 depending on the type.

A business is important to protect, and so are your ideas and inventions. The use of trademarks, copyrights, and patents is imperative to providing the protection needed against infringement, plagiarism, and stealing.

Whether you have a question about Trademarks, Copyrights, and Patents or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Top 5 Benefits of Creating Financial Projections

Top 5 Benefits of Creating Financial Projections from The Startup Garage

Top 5 Benefits of Creating Financial Projections

An old Woody Allen joke resonates with financial modelers and forecasters: “If you want to make God laugh, tell him your future plans.” We all know that financials projections are based on assumptions that likely never come true.  Yet, putting together the financial information for your startup might be one of the most important and eye opening experiences before the launch date. Sales projections for an existing business are derived based on past sales figures and reports as well as statistics regarding other known pertinent internal and external factors. Yet when projecting for a startup, all previous sales history is non-existent and therefore, there are some arbitrary fundamental assumptions that need to be made. Almost every experienced entrepreneur will tell you that financial projections are absolutely necessary for any launch process. Below are 5 of the major benefits that novice entrepreneurs will enjoy simply by spending time projecting hypothetical financial projections for their business plan.

  1. You will be able to show potential stakeholders that you have a levelheaded grip of reality and your expectations are practical. Possible creditors or investors are most certainly looking for realistic financial expectations in your business plan.  Creating financials that are not too optimistic or too pessimistic will earn the respect of potential investors and give them confidence in what you are presenting.
  2. You will be able to price goods and services more accurately and competitively. Lining up costs with revenues will provide you with an idea of your Break Even Point. This knowledge will be essential when it comes down to setting up an appropriate price to charge. If you charge too little you will make an inadequate profit, or if you charge too much you will end up alienating and losing customers.
  3. You will be able to trim costs strategically. Once you have categorized your projected expenses you will see emerging spending habits associated with your business. Noticing excessive spending before it has occurred will force you to create innovative money saving strategies to create value with less capital. Paying attention to areas that you are overspending can improve your bottom line. For example, if you anticipate spending money on outsourcing, you might notice that this expense could be eliminated by adding the duties to some of your employees. If you considered business lunches, those might have to be transformed into coffee meetings instead. In other words, consider if each expense category is sufficiently helping your business to generate income. Depending on your answer, you may need to take preventative actions.
  4. You will be able to pace your growth more effectively. At the startup point you will not have any idea of when you might need to hire more employees, find suppliers on a bigger scale or extend your services to other markets. In reality, you will consider expansion when sales and profits are growing consistently for a several month period. At startup you need to be prepared for that possible expansion and be able to recognize and respond to it accordingly.  Creating a cash flow statement will allow you to consider corresponding income to expenses and will not leave your business grasping for cash during a crucial point of early development.
  5. You might be able to reduce taxes. Often startup businesses don’t know how to take advantage of controlling their tax spending. If your projections predict that you will be making profits by the end of the year that means that you will be paying taxes. So, if you plan on spending for a company vehicle, the best time would be exactly before the end of the tax year, so you can take advantage of the tax deductions. Businesses that are sloppy about predicting their expenses are willing to miss dollar saving tax opportunities. Financial projections and following up on actual bookkeeping will help you decrease the tax spending of your business.

Lastly but probably most importantly your financial projections are a way for your business to set goals and to try to reach them. Your employees are all working towards a clearly outlined financial goal and reaching it will only provide satisfaction for all involved.
 

Whether you have a question about Financial Projections or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

The Structures of Social Enterprise

The Structures of Social Enterprise from The Startup Garage

The Structures of Social Enterprise

We are beginning to see more and more companies begin to blend their traditional corporate structures with a more modern obligation to philanthropy and social awareness. Social Entrepreneurism is on the rise and suddenly profit isn’t the only driving force behind big business. Across the nation, various legislations have passed to establish new corporate structures that aid the social entrepreneur in improving environmental, educational, social, and economic conditions.

 

The Benefit Corporation

Legal state entities that mandate corporations focus on public benefits alongside their for-profit enterprise. Shifts mainstream thought away from maximizing shareholder value towards maximizing stakeholder value by placing an emphasis on social issues. Required annual reports provide transparency to the public and accountability toward the company. These reports are not required to be assessed by third-parties; however, this will change under California law in January 2012. (Read more about the difference between Benefit and B-Corporations in the blog below)

Available in: Maryland, Vermont, Virginia, New Jersey, Hawaii, California

The L3C

Formally known as a Low Profit Limited Liability Company, L3Cs are legal forms of business corporations that blend non-profit and for-profit investment efforts with a socially beneficial structure. With reduced regulations granted from the IRS, an L3C is classified organization that sets to attain social goals first, with profit second.

Available in: Vermont, Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine, Rhode Island

Flexible-Purpose Corporation

A Flexible-Purpose Corporation is a socially conscious enterprise that allows for extreme flexibility in their structure and processes. These corporations specify a “special purpose”, either with a social cause or charitable activity, in addition to their pursuit of seeking profit. While most business corporations focus mostly on maximizing shareholder value, the goal of Flexible-Purpose Corps is to have a structured legal organization where profit is pursued alongside social aims.

Available in: California

Main Differences:

  • Company profit is still an expressed purpose of a Flexible-Purpose and Benefit Corporation, with neither profit nor social issue outweighing the other. With an L3C, the public benefit comes first, profit second.
  • Flexible-Purpose and Benefit Corporations both produce annual reports on their purposes and objectives. Only in California, do Benefit Corporations require third-party assessment on the reports.
  • On a scale from a fully functioning Business Corporation to a Non-Profit, Flexible-Purpose Corps would tilt towards Business Corporations, while Benefit Corporations tilted towards Non-Profits. L3Cs would be the mark directly before a full Non-Profit.

 

Whether you have a question about Starting a Social Enterprise or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 5

Solidify Relationships from The Startup Garage

Stock Option Plan Rule of Thumb No. 5

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.

Try Not To Jeopardize Relationships

Up-front communication of a director or advisor’s term of service and duties helps to foster a healthy relationship and facilitate a potential termination without jeopardizing relationships. For start-ups, relationships can be an incredibly valuable asset, and although a businessperson’s term of service to the company ends, he/she may remain a resource for years to come.  Importantly, the director or advisor’s tenure should be productive and the rapport built with one another should remain productive in the future.

Assigning duties can be tricky. Because directors have fiduciary duties, additional explicit duties do not normally need to be defined, although some companies have explicit director agreements. For advisors, I recommended that companies avoid too much specificity, but nail down the length of service and the option terms, include an indemnification provision, and provide for confidentiality in a written advisor agreement, the term of which may be terminated at any time. When expectations are clear, everyone is happier.

Conclusion

Ultimately, equity-based compensation should motivate independent directors and advisors by offering them a favorable, but fair, vehicle through which they can profit. Favorable conditions, such as a short vesting schedule and an extended post-termination exercise period, promotes director and advisor interest and keeps them driven. If used properly, a stock option or other equity incentive plan solves a number of problems at once: it helps preserve cash, it serves as a powerful tool for recruiting talent, and it offers a compensation structure that aligns incentives with interests and promotes dedication to growth and success. Establishing and administering a plan is not always easy, but with these five rules of thumb and a solid compensation strategy, everyone can succeed.

Stock Option Plan Rule of Thumb No. 4

Stock Option Planning from The Startup Garage

Stock Option Plan Rule of Thumb No. 4

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Set a Lenient Post-Termination Exercise Period When Possible

If a director or advisor’s term is discontinued, a lenient post-termination exercise period may be very valuable to an option holder. I advise clients to draft the option grant to permit exercise up to ten years after termination, depending on when the option was granted in relation to when the option plan was adopted. This is because most small companies do not have quick and easy exits, it is onerous to require directors and advisors to pay cash for shares in a company that is far from a liquidity event.

My argument for this method is that subjecting a director or advisor to the typical 30-day to 90-day post-termination exercise period used for an employee optionee holding Incentive Stock Options (ISOs) would be unduly harsh on directors and advisors. Employee optionees holding ISOs receive other forms of compensation, while directors and advisors of start-ups typically do not.

Check back Wednesday, October 3, for Rule of Thumb No. 5: Try Not To Jeopardize Relationships.

 

Whether you have a question about Stock Options, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 3

Advisor and Director Share Schedule from The Startup Garage

Stock Option Plan Rule of Thumb No. 3

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Subject Director And Advisor Shares To A Two-Year Vesting Schedule

Directors assume general corporate law fiduciary duties and potential liability from the very first day they serve on a company’s board. For this reason, independent directors expect to be compensated beginning day one. Highly sought after advisors expect similar rewards. Gradually vesting a director’s and advisor’s options align their compensation with their actual service while protecting the company in the event that they are prematurely removed from the board. In this circumstance, vesting only allows a short-lived director or advisor to receive the fraction of the option package that corresponds with the director’s or officer’s actual term of service.

Subjecting a director’s shares to a two-year vesting schedule also creates added performance incentive. By default, corporate directors are normally on a one-year term of service. Using a two-year vesting schedule encourages a director to perform well so that he or she is retained for a second term. Moreover, the two-year vesting schedule—as opposed to the four-year schedule typical of employee options—is preferred for directors because it magnifies the incentives for these influential individuals.  Options issued to advisors are typically treated the same, so long as the advisor is not otherwise being compensated by the company.

Vesting should be accelerated in the event of a change of control. Many directors and advisors will not serve on a board if this provision is not included. If the board determines that it is in the best interests of the shareholders to sell the company, the directors and advisors should not be restricted from sharing in the value of the acquisition merely because their shares have not yet vested.

Check back Monday, October 1, for Rule of Thumb No. 4: Set a Lenient Post-Termination Exercise Period When Possible.

 

Whether you have a question about Stock Options No. 3, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 2

Stock Option Rule of Thumb from The Startup Garage

Stock Option Plan Rule of Thumb No. 2

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Issue Options According To Value Added And Risk Taken

Options are often issued as a reward, either for services rendered or risk assumed by the recipient. Thus, the number of shares and ownership percentage covered by the award to a director or advisor should depend on the value added and risk assumed.

It can be difficult to assess the intangible value of certain directors or advisors, and although a high profile individual is generally awarded a larger option package, the industry credibility and networking opportunities a director or advisor offers are not easily appraised.

However, one can approach this problem from a different angle. Instead of searching for the right percentage, an alternative is to focus on the expected payout. Most true outside directors are looking for an opportunity to make a million dollars over a five year period. Therefore, instead of thinking about the number of shares or percentage ownership, start with the end figure and issue accordingly. As far as advisors are concerned, the same technique is used with a lower payout.

Compensation also depends on the prospects of the company, how far along the company is, and the track record of the founders. This all goes to the company’s likelihood of success—the higher the likelihood of success, the less risk there is to compensate for.

In any event, a director’s take typically falls between one-half of a percent and two percent, and an advisor’s between one quarter of a percent and one percent. In each case, the company’s needs and the qualities of the prospective director or advisor drive the analysis.

Check back Wednesday, September 26, for Rule of Thumb No.3: Subject Director And Advisor Shares To A Two-Year Vesting Schedule.

 

Whether you have a question about Stock Option No. 2, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 1

Stock Option Rule of Thumb from The Startup Garage

Stock Option Plan Rule of Thumb No. 1

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan

Equity incentives are a major form of compensation for most emerging growth and technology companies. Without them, most start-ups cannot afford critical labor, let alone a board of directors or advisors. It is critical for a start-up to consider this reality and reserve 10-20% of its outstanding equity for a stock option plan. The exact percentage is often determined on a case-by case basis. The final figure will depend on the client’s situation, including the number of employees of the company and the amount of capital that it hopes to eventually raise.

Whatever the percentage, it pays to plan ahead. Most sophisticated investors will require a stock option pool upon investment, and a company that fails to reserve a sufficient amount of equity up-front runs the risk of being forced to establish a pool at a later date that may dilute the founders’ ownership.

Check back next Monday, September 24, for Rule of Thumb No. 2: Issue Options According To Value Added And Risk Taken.

 

Whether you have a question about Equity Incentives, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Equity Options to Attract Directors and Advisors

Equity Options to Attract Advisors and Directors from The Startup Garage

Equity Options to Attract Directors and Advisors

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  William Eigner’s bio is available at http://www.procopio.com/attorneys/william-w-eigner and his LinkedIn is available at http://www.linkedin.com/profile/view?id=616218&trk=tab_pro.

A properly selected Board of Directors and Board of Advisors can be an invaluable asset to an emerging company. Building these boards is an early opportunity for a start-up company to gain credibility, industry contacts, experienced counseling and even access to cash. However, the right board members do not always come easily, and although some companies may have their pick of top industry players, many start-ups struggle to recruit board members that are the right fit for their company.

Nearly every start-up has limited cash. This does not, however, have to limit their ability to recruit directors and advisors. A stock option or other equity incentive plan can allow a start-up company to offer prospective independent directors and advisors a financial upside beyond what the company’s cash account can currently afford. Additionally, option-based compensation creates powerful incentives for directors and advisors to work diligently to help drive company growth and success. A stock option plan should be established early, and if administered properly, it can become a company’s top board recruitment tool.

In counseling hundreds of emerging companies through this process, rules of thumb emerge that help provide guideposts for entrepreneurial companies. In the following five-part blog series, built from a series of interviews with attorneys who counsel start-ups in their issuance of stock options, will discuss five of these rules of thumb.

Check back on Wednesday, September 19, for Rule of Thumb No.1: Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan.

 

Whether you have a question about Equity Options that Attract, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!