IVAN HOFFMAN, B.A., J.D.
So you’ve got an idea or an already established business, whether on or off line, and now you’re seeking the gold of venture funding. But before you start your search for money, it would be wise to take a look at the legal underpinnings of your business. If you do not own what you are purporting to sell, it stands to reason that you are not likely to get funded. Getting all your legal “ducks in a row” as it were may have the effect of giving you a more professional image to the potential money person and this can have significant benefits, not the least of which is that it may help set you apart from the many other businesses and seekers out there. Any advantage you can establish can work in your favor. You want to look “together” and “tight” for there is nothing that can turn off “money” than an unprofessional presentation.
So these are some of the legal and business issues that you should deal with now, before you show yourself to the venture community. As with any checklist, it is designed merely to highlight in your mind the various issues that are presented and which you are likely to face.
Intellectual Property Rights
Whether you are an online or offline business, if part of your asset mix includes any form of intellectual property, do you own rights to the same? Intellectual property can be books and/or magazines and the like if you are a publisher, songs and recordings if you are in the music industry, software and programming, and indeed even your own web site, among other forms of intellectual property. If you are not the sole creator of your intellectual property, if you have had any of it created by non-bona fide employees such as authors, songwriters, web designers or developers, you may be surprised to discover that you may not actually own the intellectual property in those assets or that your rights to the same are either clouded or restricted.
Without the appropriate, thorough, written and valid legal documents, you may find that your abilities to exploit the intellectual property may be adversely impacted. If these assets are the primary form of value that you have for your business, there may be little to sell.
Under United States copyright law, unless the creator was a bona fide employee of yours and created a copyrightable work during the course and scope of employment, that creator owns all rights to his or her creation unless there is a valid, signed agreement transferring exclusive rights to you. Non-exclusive rights are not only worth less but may in truth be worthless. Thus you must do an audit of your intellectual property assets to make a determination as to the status of your rights. You should read the extensive articles on my site including but not limited to “The Book Publisher’s Legal Check List” and “The Web Site Audit.”
Do you own registered copyrights and trademarks, especially trademarks to the products and services that form the core of your business?
Other Forms of Property
What other properties do you own or have contractual rights to? Do you own or have leases for real property? Do you own your equipment or are you leasing the same and if so, what are the terms of those leases? Often, having personal property leases can tie a company down to outdated technology.
Other Contract Issues
If you have employees you should be examining your employment agreements. What sort of rights do you have to a key employee? Do you have key man insurance? What sort of non-compete and confidentiality agreements do you have? Are your restrictive covenants valid (in some states they are either not or are severely restricted)? Have you entered into agreements with third parties to outsource work and if so, what are the terms of those agreements? Have you licensed or otherwise granted rights to any intellectual property and if so, what are the terms of those agreements? Do you have outstanding obligations to lenders, equipment vendors or others? This is related to the subhead “Other Forms of Property.”
Do you have joint venture, partnership, affiliate agreements and
if so, what are the terms of those agreements? How tied in are you
to these agreements and is that a good or a bad thing?
If you are a corporation or even a limited liability company, are you currently in good standing in your state? Have you issued stock if a corporation, even if privately, and if so, do you have all the necessary permits for those transactions? Are there parties that have rights to your stock such as in the form of options, warrants and the like? Are your minutes and by laws current reflective of all the appropriate transactions that may have occurred?
Do you have all the latest financial information for your business? Are you obligated as a borrower or guarantor on any notes? Do you have a plan for the out years and a budget for the current and near term? What sort of exit strategy have you developed? Have you broken out your gross and net income by category of product/service you provide and do you know all your margins?
There are clearly many other issues that must be faced that may vary with the particulars of your business. This article is not intended to be at all exhaustive. Rather, the purpose here is to point out that it is the wise entrepreneur who examines the foundation before trying to sell the house. If the seller does not do this, the seller can be certain a wise buyer will. Best uncover the defects before presenting the business to a potential investor.
© 2000 Ivan Hoffman