Pennywise Pound Foolish: Have a LAWYER draft LLC Documents (Part 1)

I realize start-ups and small businesses need to control costs, but failing to engage an experienced business/corporate lawyer is a serious mistake you will eventually regret   Let's take the example of the formation of the limited laibility company (LLC).  I agree, it is easy enough to form the entity yourself by filing a document you found online, but filing the Articles of Organization is only the beginning of the legal steps you need to take to ensure you properly set-up a multimember LLC.

In New York, a written Operating Agreement is required for an LLC.  In the absence of an Operating Agreement, the consensus is that the statutory provisions of New York's Limited Liability Company Law will govern your LLC.  See Limited Liability Company Law 417(a).  The problem is that many of the provisions LLC Law are not necessarily desirable, and often create more issues than solutions when you have disputes with the other members of the LLC.  Further, don't take any comfort in an Operating Agreement you purchased online as I have found that they don't address important matters the LLC members need to agree upon to avoid future disputes. 

In the next several posts I will cover several examples demonstrating that failing to have an experienced corporate lawyer draft your LLC Operating Agreement is Pennywise and Pound Foolish. 

           

NDAs: Pointers (Part 2 of 2)

When drafting an NDA, there are several points you should consider:

1.  Definition of Confidential Information:  While the definition of confidential information should be quite broad, make sure to include any information or types of materials that are particular to your company (for example, if your company receives third party information as part of its operations, it is important to include this information in the definition).

2.  Oral Disclosures:   Be sure to cover oral disclosure,  and it is important to address how orally disclosed information is to be identified and designated as confidential.

3.  No License/No Rights in IP:  The NDA should state that the disclosing party is not granting (a) any license in the dislcosed information or (b) rights in any of the intellectual property.

4.  Non-Solicitation:  Include a clause prohibiting the receiving party from soliciting your employees.

5.  Non-circumvention:  Prohibit the receiving party from using the confidential information to solicit clients/customers or other activities that would undermine your business.

6.  Non-Dislcosure:  Obviously, there needs to be an obligation not to disclose the information, but also define the employees/agents of the receiving party that will have a right to review the information and the obligations of the receiving party to prevent disclosure.

7.  No Warranty/No Obligation:  Make sure the NDA states that the disclosing party (a) is not making any warranties with respect to the information and (b) does not have any obligation to enter into a transaction with the receiving party.

8.  Choice of Law/Venue/Remedies:  As the disclosing party, you want to choose (a) the governing law applicable to the NDA, (b) the venue for any disputes, (c) the right to pursue an injunction (in addition to damages) and (d) the right to recover attorney's fees.

Preventing disclosure of confidential information in the context of business discussions with potential investors, business partners, consultants, manufacturers, distributors and other third parties is essential for protecting your business.  Before disclosing the information, make sure you have a well-drafted NDA.

NDAs: Pointers (Part 1 of 2)

I often get questions about drafting or reviewing a Non-Dislcousre Agreement, and so below is Part I of a two-part outline of key points relating to NDAs.

1.  There are two types of NDAs:  (a) Mutual Non-Dislcosure and (b) non-mutual NDAs.  If you are the disclosing company, you will want to draft the NDA and will want a non mutual NDA -- if you can get away with it. 

2.  Should I sign an NDA:   Most investors and party's receiving NDAs hate to sign them, but if you are the disclosing party you should insist.  If you are the receiving party, you can refuse, but don't be surprised if the potential disclosing party refuses to continue business discussions with you.

3.  When should I demand an NDA:  If you are going to negotiate any type of business arrangement (including, but limited to, investment, consulting, service, development, licensing, manufacturing, marketing, distribution agreements) you should demand the other party signs an NDA before you disclose any confidential information about your company or the project.

4.  Can't I use one I found on-line:  Do not just find an NDA online and use that one -- in Part 2 of this discussion, I will set forth some terms that you need to make sure are included in the NDA.

Website Policies: One Size Does Not Fit All (Part Three)

It has become standard practice to put a link to the Terms and Conditions below the fold on the website (i.e., at the bottom of the page).  However, following what everyone else does in posting website polices may be risky for your business.  Recently, a New York federal district court found that in certain circumstances where the Terms and Conditions are posted (i.e., how and when they are viewed by the website user) may give rise to an argument with respect to adequate notice of such terms.  In Hines v. Overstock.com, Inc., 2009 U.S. Dist LEXIS 81204 (E.D.N.Y. Sept. 4, 2009), the court found that notwithstanding that the Terms and Conditions included a clause requiring arbitration of dispute, a consumer who incurred a restocking fee for a product purchased on the website Overstock.com could proceed with a purported class action and would not be required to arbitrate the claim.  In a nutshell, the court determined that consumer did not have even constructive notice of, or assent to, the Terms and Conditions containing the arbitration clause even though the policy contained a phrase stating that, "Entering the Site will constitute acceptance of the Terms and Conditions."  The Court reasoned that Overstock could not show that the consumer had notice of the Terms because she could access the site and make a purchase without viewing the Terms and Conditions.  

This is just one court, but it suggests that placement and perhaps actual consent to the Terms and Conditions may be reuqired depending on the nature of the website.    

Website Policies: One Size Does Not Fit All (Part Two)

In my August 17 post, I explained the importance of crafting Terms of Conditions and a Privacy Policy that are consistent with your business, noting that it is a mistake to simply copy these policies from another website.  I want to use the next few posts to provide some specific considerations in preparing your website policies. 

As I previously noted, these policies are actually contracts you make with anyone accessing your website.  And, like any contract you prepare, you should have a choice of law clause stating that the agreement is governed by the law of the State of "x" (with "x" to be determined in consulation with your legal counsel).  If you simply cut and paste terms and conditions of another website, you could be consenting to application of the law of a state that has no connection to your business. 

Believe me, I have seen this mistake, and not only does it create legal issues, but it is embarrassing for a company to try to explain why New Mexico law should apply when your sole business is in New York.

    

Website Policies: One Size Does Not Fit All (Part One)

Most businesses today recognize that not having a website is akin to what it use to mean to not be listed in the telephone directory: a slow (or maybe even a quick) death.  Ok, your website developer created a dynamic website containing key terms to maximize search engine optimization, and you are very pleased with the traffic on the website.  However, either because you did not deem it important or you wanted to conserve financial resources, you likely put up Terms of Use and a Privacy Policy you "borrowed" from another website or terms supplied by your website developer.  Leaving aside other potential issues (think copyright), you have also missed the point that one size does not fit when it comes to website policies.  Understand that these policies are actually a contract between you and the user of your website, and thus the terms must be consistent with your company's business activities (example:  do you utilize customer information for marketing purposes).  Therefore, both the Terms of Use and the Privacy Policy need to be tailored to fit your (1) particular type of business -- for example, online retailer vs. online provider of a service, and (2) company's business policies.  

Bottom line:  The risk is tremendous if you do not include Terms of Use and a Privacy Policy appropriate for your business.  You should have them drafted, and if you have them already, then reviewed by a lawyer who is experienced in preparing these policies.

Note:  Since there are a number of important issues relating to website policies, consider the above the first installment of a multi-part discussion on the topic.

Welcome to My Biz Lawyer

Thank you for visiting My Biz Lawyer, a new blog intended to provide information in navigating the myriad legal issues often faced by start-ups and more established companies.  I have over 20 years legal experience that I am willing to share with you.  However, in exchange, you agree that this Blog is not a substitute for legal advice, and that you will contact an experienced business lawyer before making any decisions regarding the legal issues facing you as a business owner or investor.  If you would like more information about my practice, please visit http://www.berkmanlawfirm.com/ and http://www.businesslaw.li/  

Thank you, and feel free to send me your comments.   

Jeff Berkman  

Letters of Intent: Don't Sign Just Yet

 

 

OK, you have found the holy grail, an investor willing to finance your idea or company. After the initial euphoria, you are presented with a Letter of Intent or Term Sheet drafted by the investor's legal counsel. Don't let your excitement keep you from thinking clearly and signing without proper review. There are pitfalls to be concerned with, for example: (1) Even an LOI titled "Non-Binding" can have terms that are in fact binding (i.e., No-Shop Clause); (2) A non-binding LOI will be the roadmap for the investment documents, making it difficult to argue against certain unfavorable terms later on without jeopardizing the deal; and (3) There are many terms you should not accept without pushing back (valuation, investor vs. founder stock rights, conversion rights, Board seats, control/management of the company, right to transfer stock, and many more).

BOTTOM LINE: Don't sign a term sheet without review by a seasoned business lawyer.