I’m a software developer and big fan of goulash, gumbo, and bouillabaisse. A colleague and I were sitting around the other day and came up with an awesome idea for a new startup: a social networking site for the slow-cooker community! I 100% think we’re ready to be the next big tech/foodie success story! But we’ve never founded a business, and we’re a little nervous about the legal stuff. How should we set up our company? And what else do we need to be worried about? (Also, did you really have to paraphrase my question so much?)
Mirepoix-sed for Success
Dear Appalling Play on Words,
Congratulations, you’ve got a killer idea–huh, what d’ya know, it’s got a “social” in there–but let’s hold up just a second. There are a couple of very important questions to answer before you start connecting computing Crock-Pot® crazies, let alone pitch your first VC1 or get Goldman to roll out the money trucks for your IPO. So, using the lawyerly one-two punch of needlessly long words and crudely drawn MS Paint pictures, let’s walk through the initial phases of launching 2013’s hottest2 startup, “ste.ws – THE social site for stew enthusiasts.”
First, you describe your prospective co-founder as a colleague. Where and when you were “sitting around”–and what you were doing–may just be a crucial data point. Nowadays, most companies (your employer?) with the slightest lick of sense will require employees to sign some manner of assignment of inventions agreement, containing scary (here underlined) language like:
“To the fullest extent under applicable law, the Company shall own all right, title and interest in and to all Inventions (including all Intellectual Property Rights therein or related thereto) that are made, conceived or reduced to practice, in whole or in part, by me during the term of my employment with the Company and which arise out of any use of Company’s facilities or assets or any research or other activity conducted by, for or under the direction of the Company (whether or not (i) conducted at the Company’s facilities, (ii) during working hours or (iii) using Company assets), or which are useful with or relate directly or indirectly to any “Company Interest” (meaning any product, service, other Invention or Intellectual Property Right that is sold, leased, used, proposed, under consideration or under development by the Company).”3
As a general rule, copyright ownership means what you create you own, but the “work made for hire” doctrine4 is an enormous, fanged, rabid, slobbering exception to that rule, essentially providing that copyrightable creations of an employee within the scope of his or her employment belong to the employer.
Plain English: know what you sign. This is generally a good rule of thumb–for example, there are quite a few contractors out there who probably haven’t realized that my former company owns their life stories.5 Also, if you’re working on something that may be in the same line of business as your employer, or if you were using company resources to work on it (e.g., coding on your work computer), you miiiiight just be setting yourself up for trouble.
For our purposes, let’s assume that you and your co-founder work at an advertising agency, with no food-related clients or interest in promoting any sort of stew, that you came up with this idea while cooking up a carbonade flamande at home, and that you work on your new venture exclusively in your free time. After a few months, you’ve built a super-sleek site–responsive design, top-flight graphic work, those cute little button thingies to share stew recipes on Facebook, Pinterest, Friendster, CompuServe or whatever. Now you want to open it up to the hasenpfeffer-mad masses and watch that sweet, sweet ad revenue flow in by the tenths-of-cents. What better time6 to set up a company?
As far as choosing a corporate form, there are a few viable options. You could go with a corporation, because you’ve always wanted to have stock options like all the cool kids. You could forget to formally establish anything and wind up in a general partnership (hope you really trust your co-founder).
But you probably want to set up a limited liability company (“LLC” if you’re nasty). Forming an LLC is remarkably easy. File your “articles of organization” (you know what that is, right?) or “certificate of formation” (this, too?) with the state, pay some fees, maybe jump through another hoop or two depending on the state. An LLC combines the best parts (like liability protection) of a “traditional” corporation with the best parts (like pass-through tax treatment) of a partnership, so it’s pretty much exactly like a short ribs & red velvet cake stew.
I’m going to take a quick break here, because (a) I’m going to throw up thinking about that stew, and (b) you’ve probably stopped reading and there’s a lot more ground to cover. So stop back by in two weeks for some more time in the unlimited limited liability company’s company, wherein we get this enterprise on its feet.
Keep braising that chicken,
Li’l Tommy Hagen
1 Venture Capitalist, not Viet Cong. Easy mistake to make, though.
2 Fact: stew is served hot. Prominent examples of not-stew include gazpacho and vichyssoise.
3 From Gunderson Dettmer LLP’s form of “Employee Proprietary Information And Inventions Agreement,” as posted to Docracy.com.
4 For a more fulsome exploration of this doctrine, see Justice Thurgood Marshall’s opinion for the unanimous Supreme Court in Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989). Totally a gripping read, promise–my eyes glazed over only like 5 times.
5 Hopefully, they will enjoy our Lifetime Original Movie–Jason Priestly was available for a song.
6 Actually, consider doing this before building the site, as having intellectual property owned by your company from the start will solve some potential issues between you and your partner before they arise. But shuffling the steps now would screw up my narrative slightly more than this constant
Li’l Tommy Hagen is a German-Irish corporate attorney who’s practiced with a BigLaw firm, in a couple of in-house positions, and as a solo advising tech startups. Nowadays, he has a special practice; he handles one client, and by the way, admires your pictures very much.
Note: This column is titled “This Does Not Constitute Legal Advice” because it does not constitute legal advice. If you want that, see an attorney.