Engel & Schultz, LLP » Consultants and Contractors

Entrepreneurship 101: Starting a Successful Business

admin — Thu, 27 Jan 2011 19:33:29 +0000

• What it takes to be an entrepreneur

• Steps to launch a product business

• Legal Aspects of startup companies

• Steps to launch a service business

• Consulting to get a job

• Joining a startup venture

By Robert A. Adelson, Esq.

Entrepreneurial Profile: Do you have what it takes?

1. Introduction

• High Rate of Startup Failures

• Hard to Succeed

• Don’t start for wrong reasons

2. Passion for your business

• Commitment, sacrifice, confidence

• Optimism, reasons why it will work

• Resilience

3. Knowledge of your market and place

• What is really unique about your business

• Need: Selling morphine, not vitamins

• Business Model

• Where are you playing: dominance over your market

• Recurrent Revenue-fixed cost leverage

• Competitive advantage

4. Working with others, Facing Change

• Sharing, fairness, team building

• Adapt and change-learn and grow from your mistakes

• Scaling the business-including when to fire yourself

5. Putting yourself out there, on the line

• Giving of yourself

• Networking

• Relationship building, nurturing

Launching a Successful Product Business

1. What is a Successful Business

• Producing good return to you and your stockholders

• More money coming in than you are putting out

2. Have a Plan: How will you create value for others

• Find a “pain” in the market – providing a solution

• You can’t create demand- you want to fill supply

• Establish your brand based on filling a compelling need

3. Know your customer, know your market

• Start local and build – small, fast, cheap

• Keep testing-figure out what works and doesn’t

• Keep your database, access it

• Develop a sellable model/market and test product

4. Build a company

• LLC a corporation- entity, limited liability, credibility

• Stock for others

5. Build a team

• Equity and fairness; share success

• Convince others to join you – seek good fit

• Build a Board of Advisors or Directors – Key resource for you

6. Build a prototype, sell something

• It doesn’t have to be perfect

• Selling-feedback and gets $ coming in

• Establish further proof points of viability, credibility

7. Develop and protect your IP

• What you can protect and what you can’t

• Strategize IP protection- IP assets

8. Bootstrapping and Commercial Contracts

Legal Aspects of Launching a Product Business

1. Choice and Formation of Business Entity

• Business Merits of Corporation (S or C), LLC, LLP

• State of Formation, Qualification of foreign entity

2. Taxation of Business

• Double v. Single Level taxation; payroll taxes

• Pass Through of losses / income; 1202 stock opportunity

• Complexity of capital structure

3. Intellectual Property and Proprietary Protection

• Patents – Provisional and full utility patent

• Trademarks – ITU and use based filings

• Copyrights and Trade Secrets

• Assignment of rights and NDAs

4. People – Contracts among Service providers and Owners

• Employees / Contractors, consultants, “Virtual Companies”

• Board of Advisors / Board of Directors

• Equity Participation – Options, Restricted, Phantom stock

• Shareholder Agreements – Share transfer, management, succession

5. Products and Markets

• Production Arrangements / Supply contracts

• Sales / Distribution – Dealer contracts, sales terms

• Product and IP licensing

6. Money: Raising Capital and Securities Law Compliance

• Bootstrapping, family and government grants

• Angel and Venture Capital Finance / Securities law compliance

• Loans, collateral, guarantees and debt finance

7. More: Other important legal aspects of your business

• Home; Office / facility and store leases

• Zoning and environment regulations

• Regulatory compliance for your products

• Business insurance

Launching a Service or Consulting Business

1. Your Market: Research and Determination

• Self Skill assessment (“looking in mirror”)

• Who are your customers? Finding them…

• Listening to customers/match skills to need

2. Selling Service and Selling Yourself

• Selling Payback you can deliver customer

• Promotions – articles, talks, advertising …

• Lead Generation, building your network

3. Building a Trade Name and Identification

• Name, Logo for Recognition / Distinction

• State, Federal trademarks as bus. Assets

4. Compensation, Pricing & Collection Planning

• Fees- By Rate, Commission, Lump sum

• Payment Installments – Periodic, Milestone

• Security – deposit, Security Interest, Penalty

• Reimbursement or Payment of Expenses

• Currency of Payment – Cash, Stock, Other

5. Production, Costs and Delivery of Services

• Quality Control; Repeat Bus, best marketing

• Cost Control, start small

6. Sales and Limitations on liability to customers

• Sales Terms to limit commitment, Forms Battle

• Upfront Liability Bar: Corp, LLC in operation

• Backend Liability protection via insurance

7. Staff, Subcontracting & Handling Overflow

• Staff & contractors to expand capacity, reach

• Subcontracting work Terms & Non-poaching

Consulting as Tool to Secure, Evaluate Full-time Jobs

1. Leave Firing Range (rejection bullets) to talk payback to CEO

2. Expanding your Window of Opportunity with cash from consulting: added staying power

3. Expansion to Deal Flow via added flexibility to take part-time or try-out situations (employer’s chance to sample the milk..)

4. Paid Due Diligence – your chance to learn more before you commit to full-time offer

5. Keeping offers open – delay for alternatives or sweeten offer; employer still gets work

6. Add to Skill-set; Keep current, sharpen skills

7. Something new to talk about – recent, current work experiences to relate in interviews

8. Fall Back – a consulting practice is your own to which you can return as jobs shift

9. While consulting is not for every executive or may be no substitute for a full-time job in many cases it can offer a stop-gap and add to your options as you seek that job.

Joining a Startup Company

1. Knowing the score

• Low odds of success

• Other Alternatives

• Valuing your Money & Time

• Non-Monetary Benefits

2. Picking a Winner

• Team: Knowledge, Experience, Contacts

• Marketing Plan: Addressing real Need

• Business Model / scalable

• Barrier to Entity

• Likelihood of Finance; Exit strategy

3. Doing your Homework

• Website & Marketing materials

• Resumes and Interviews

• Reference Checks

• IP Due Diligence

4. Protecting Any $ Investment you make

• Private Placement memorandum

• Financial Statements

• Preferred Stock position

• Investor Protective terms

5. Protecting Employment / the services you provide

• Signup Bonus

• Meaningful Equity

• Defined Responsibilities

• Coverage of your Expenses

• Severance Terms

ABOUT THE SPEAKER AND PRESENTATION

Blog: http://robadelson.wordpress.com/

Mr. Adelson is a graduate of Boston University, Phi Beta Kappa and Northwestern University Law School in Chicago where he was a member of Law Review. He also has an LL.M. degree in Taxation from New York University and is a member of the Massachusetts, New York and US Tax Court Bars.

Mr. Adelson’s law firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys in Boston. The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in litigation, real estate, family and probate matters.

Mr. Adelson is a frequent speaker at business forums and Chairman of IEEE Boston Entrepreneurs Network www.boston-enet.org and a Board member at 128 Innovation capital Group www.128icg.org . Further information on Mr. Adelson’s background and his past published articles is available at the Engel & Schultz LLP law firm website. To view many of Mr. Adelson’s past articles, see http://www.engelschultz.com/index.php/category/publications/

Mr. Adelson has been a member of Temple Shalom for 14 years. His son William and daughter Kathryn were bar and bat mitzvahed at the Temple. The speaker wishes to thank Allan Cole and the Brotherhood of Temple Shalom of Newton, MA for the opportunity to speak on “Entrepreneurship 101: Starting a Successful Business” at Temple Shalom, 175 Temple St., Newton, Massachusetts, on January 24, 2011.

The purpose of these materials is to offer an outlines on the subject matter of the Entrepreneurship for those considering forming or joining a startup company or advising others on that prospect. Thus, it is hoped these materials will be informative to those in attendance. These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

Consultants: How to make sure you get paid for your work

admin — Thu, 30 Sep 2010 18:02:19 +0000

Respecting Consultant needs & value of your services
Innovative Billing approaches for cash-strapped clients
Protective Methods to enhance Chances for payment
Legal Strategies for collection

By Robert A. Adelson, Esq.

Why you, as Consultant, are worse off If work unpaid, than if never done…

1. Business obligations of Independent Consultant exceed company employee – tasks beyond work

Marketing & Sales – finding your consultant work
Maintaining currency in your field
Producing work once assignment given
Delegation of work and development of Subcontracting relations with other consultants
Keeping home or rented office facilty and equipment
Billing and collection – assuring your revenues & payment

2. Time = $$$. Unpaid work steals time from other business tasks also essential to consultant business

3. Respecting the Value consultants bring to the client – value that should be timely paid for

Just in Time management – to fill need
No lingering obligation, termination when use ended
Hired for expertise & experience – no training cost
No pension, medical, vacation or other benefits
No permanent office or support
Self-insured, liability insurance typically required

4. Exception to rule – When you are not worse off… When you, as Consultant, can afford not to be paid

When cash is not only currency for your payment…for example…
Assignments in new field, little prior experience – learn on client
Access to technology or markets, back license of technology
Face time with valued contacts; “free” exposure for your work
Work in desired location, other “perks” or benefits for doing work

5. Though you benefit, client’s work shouldn’t be free

If your client is cash-strapped, and You want to do the work…

How to structure billing to get paid?

1. Installment payments – fixed time-table

2. Debt obligations – promissory note

Unconditional promise to pay sums owed
Interest on outstanding debt
Warrants in client stock – Equity “kicker”
Collateral security for debt
Perfection of security interests
Defining “events of default” & consequences
Collection costs & Attorneys fees

3. Payment of your out-of-pocket costs –

Separate from your consultant fees – Not income to you
Reimbursement /direct payment – so you’re not out of pocket

4. If cash pay unlikely…what else can you get?

5. Payment in Client’s Equity (a piece of the business)

Since you share risk… you deserve share of client’s upside
Get it now – if your work adds value… that shouldn’t penalize you
Types of Equity: Stock, Options, Phantom Stock
Different tax treatments – seek tax favored equity
Valuation – balancing debtor’s current status & the prospects
Vesting of stock & options
Exercise period of options – termination issues
Anti-dilution protections; Cash-out, reporting, retention rights

6. Non-cash benefits to Consultant from Client work

Be sure you’re timely obtaining these benefits in quality expected
When non-cash objectives achieved – be ready to terminate

What pro-active steps can you take? To improve chances of timely payment …

1. Get cash advance – especially from 1^st time clients

Eliminate “window shoppers” – establish payment expectation
Assure that client has “skin in the game” – stake in your work

2. Valid and Good Contract – before starting work

Real parties to agreement, addresses, personal guarantees
Mutual assent – signed agreements
Clear mission – defined scope, performance obligations
Clear conditions, variables, contingencies on performance
Enforcement terms – governing law, consent to jurisdiction
Once again, right to collection costs, attorney’s fees (often done that prevailing party get attorneys fees – need this provision)

3. Achieve value – meet your milestones

Show & evidence clear consideration – what you did for him
Potential case in equity – quantum meruit – value conferred
Defense to counterclaim – you didn’t perform and it cost client

4. Establish lien on work accomplished / deliverables

Contract should provide right to lien on unpaid amounts
Again, depends on value achieved
Fear rescission & action on lien potent weapon on bundled product

5. Dunning clients within Bounds of law

Calling clients in arrears – law’s latitude on commercial debtors
Threatening pre-litigation letters
Collection costs (collection agency) & attorneys fees

6. Exception to Rule – When oral contract enforced

Party seeking enforcement acted in reliance on clear oral contract
Party denying enforcement received benefits from oral deal
Doctrines in equity: “Implied Contract” & “Unjust Enrichment”

If pre-litigation actions fail, what’s next? Legal strategies to achieve bill collection…

1. What collection attorney needs before taking case?

Prerequisite #1: Enforceable legal case
Prerequisite #2: “Deep Pocket” to pay verdict for plaintiff
Different types of contingency fee cases
Size of case needed to merit contingency / or hourly legal work

2. What you need to do to have enforceable case

Evidence of contract – copy of signed contract or alternative
Evidence of work performed and debt owed
E-mails or conversations – reflecting defense to debt or its acknowledgement & collection efforts
Determine merits of client position vs. potential defense claims and defense counterclaims if any
Obtaining jurisdiction over debtor – address in state, ss# for skip-trace if needed

3. What you need to show a deep pocket to pay

Bona fide defendant – if early stage company, preferable to have personal guaranty, so person can be sued as well as company
Identify and quantify assets covered by lien or which may be reachable in pre-judgment attachment actions

4. Plan /Implementation: 1^st (asset) stage of legal action

Preparation of complaint, plaintiff affidavit & proper service
Coordinated action against assets (“low lying fruit): reach & apply
With event of default occurred & realization on any collateral

5. Plan /Implementation: 2^nd (motion) stage of action

Motion for summary judgment if appropriate
Motion for expedited discovery – interrogatories / depositions
Defense against same, if any from debtor
Settlement or trial – at each stage, both parties weighing costs

ABOUT THE SPEAKER AND PRESENTATION

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Boston, MA 02110, (617) 951-9980. Fax (617) 951-0048. E-mail: radelson@engelschultz.com Website: www.engelshultz.com Mr. Adelson is a graduate of Boston University, Phi Beta Kappa and Northwestern University Law School in Chicago where he was a member of Law Review. He also has an LL.M. degree in Taxation from New York University and is a member of the Massachusetts and New York and US Tax Court Bars.

Mr. Adelson is specialized in corporate, taxation, finance, commercial and technology contracting law. In those areas, he represents four main types of clients:

Startups, smaller companies and entrepreneurs in software, and other technology-based fields, including issues of building management team, IP protection, strategic and commercial contracts, shareholder issues, M&A and capital finance;
Consultants ad service providers in issues of client contracting and contract enforcement; subcontracting work; trademarks and trade identification, copyrights and trade secret protection; liability, regulatory issues, entity choice incorporation;
Executives and key employees in negotiation of employment terms, compensation, stock, options and phantom stock, termination, severance and relocation;
Family businesses including those in transition with issues of succession planning, recruitment and retention of non-family members and other issues of business. .

Mr. Adelson is a frequent speaker at business forums and author of numerous articles published in Boston Business Journal, Mass High Tech and elsewhere. He is Vice Chair of the Boston Entrepreneurs Network and a board member of 128 Innovation Capital Group. Further information is available at his law firm website www.engelschultz.com .

The speaker thanks Nathan Sokal (who delivered a presentation from the consultant’s viewpoint), for the chance to join him speaking on the legal viewpoint, on topic:“Consultants: How to make sure you get paid”, for the IEEE Consultants’ Network at Waltham, Massachusetts, on October 22, 2008. These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

Getting Paid in Stock, Options or Promissory Notes: Negotiating Terms

admin — Tue, 03 Aug 2010 16:02:32 +0000

By Robert A. Adelson, Esq.

EQUITY COMPENSATION ARRANGEMENTS FOR HIGH TECH CONSULTANTS

EXAMPLE (Hypothetical and Fictitious)

SuperpowerSoft Co.

Employees: 5 (3 being part-time)

Shares Sales: -0-; Developmental State

Edison Pres., CEO 40% Assets: 250k Liabilities: 10k

Kwertzberg, VP Operations 40 Cash: 50 A/P 10

Other Part-Time Employees 2 Equipment 50

Investor Stocks (FFF) 10 Technology 150 Sh/h Equity: 240k

Mansey, VP Mrktg (if vested) 8 P/L: (30k)

Part-Time Consulting for High Tech Start-Up Company

Tim Mansey was a senior officer at software giant, Zen Development Corp. in Cambridge until Zen’s acquisition by an even larger out of state computer corporation.

After leaving Zen, Mansey decided that, rather than job search for a full-time position, he would seek job assignments from different companies, selling his engineering, marketing skills from 15 years at Zen and other known companies on Mansey’s resume.

Over the last year, Mansey developed a consulting business for software companies under the name, “CEO Strategies”. He has an ongoing 1-day a week assignment and completed job assignments with large and smaller companies, including assistance in marketing , product design, technology validation and some software development work. One company has asked Mansey to join its board of directors.

Most clients have paid on time, and with one or two exceptions, the work of CEO Strategies has been very well received. Originally, Mansey’s assignments came from colleagues at established firms, but now he also approaches start-up and emerging companies, even though most cannot pay Tim’s daily consulting fees.

Recently, Tim discussed a part-time spot in one such startup: SuperpowerSoft Co., newly founded by Tom Edison who invented the SSC proprietary technology, and Mitch Kwertzburg, who was with Tom at DEC and with family, etc. contributed the cash capital.

Formed 6 months ago, SSC now has 3 other techies part-time, leases space in Burlington, and has a product nearing completion. SSc still has funds from investment by Mitch, family, friends, etc., but no one takes a salary. So, Tom and Mitch thought it time to recruit a “sales guy” to help market the product. Enter…Time and CEO Strategies.

Tim believes SSC has a breakthrough technology with ready markets. With his industry background, Tim believes that he can attract licensing & strategic alliance partners (he sees ChyBase as likely 1^st match) to speed SSC market entry but Tim needs authority.

Tom and Mitch like Tim, but don’t want him taking over and are not sure how much stock to give him. They have several questions on compensation, terms and pitfalls.

IS EQUITY FOR PAY A GOOD DEAL?

OPPORTUNITIES AND… PITFALL

QUESTIONS OF THE CONSULTANT:

When does taking equity as your pay make the most sense?
What are the types of equity? Stock options

Or other arrangements a client can offer you?

How do we value the stock or options you get?
What taxes does the Consultant pay?
How do you avoid dilution
What other structuring issues should you ask about to protect your equity stake?

QUESTIONS OF THE COMPANY:

When does offering equity make sense to a Company?
Can this equity be paid based on performance? Or loyalty? Can we measure performance? How much stock to give?
What if things don’t work out: Can we get the stock back? What if Consultant dies? Quits? What if we sell the Company?
Is stock (or options) paid deductible by the Company?
Will giving stock now hurt us later? In seeking financing? In morale with current staff? In recruiting new talent?

Equity Compensation for Services

Forms of Equity

Common Stock: voting or non-voting
Preferred Stock:

Preferences in liquidation

Dividends, cumulative or not, management

Warrants or Options
Convertible Debt
Phantom Stock/ other deferred comp

Vesting Schedule

Acceleration on change in control
Buy-back rights on Termination

Stock Purchase Agreement

Investment warranties by purchaser
Company disclosure, business plan
Anti-dilution protections, pre-emptive rights
Company covenants, reports
Registration rights
Cash-out Rights

Stock Option Agreement

Grant Date & Option Period
Exercise Price and Method
Company Plan, restrictions if qualified
Enhanced flexibility, if non-qualified.

Valuation of Company Equity

Current (Tax) Fair Market Value

Rev. Rul 59-60: Assets, Indus, History, Comps.

Discounts for Illiquidity, blockage, minority

Forward (Investor) Value from Business Plan

a. Product, Technology, Uniqueness, Edge

b. Market, Competitive Strategy, Penetration

c. Management Team, motivation, track record

d. Financial forecast, underlying assumptions

e. Capital Sought, financing stage, funds use

Blend Valuation with our without Services

- Entrepreneur’s investment, upside potential

-Present value of future using 35% ROI

Stockholder Agreements related to Equity

1. Goals: stabilize management, ownership, provide liquidity, valuation of shares

2. Means: share transfer restrictions, voting agreements

3. Involuntary transfers

4. Voluntary transfers – 1^st Refusal to Co., Shhs

5. Control Change Co-Sale: Drag & Tag-along

Taxation of Equity (in lieu of cash compensation)

1. Stock Issued – Purchase Plan

Not restrictive; open to Consultants
Tax Paid when no subst’l risk of forefeiture & stock has readily ascertainable FMV
§83 Ordinary Income Tax
§83(b) Election can accelerate the Tax

2. Stock Option – ISO (Incentive Stock Option)

Restrictive Plan – FMV, limits on amount, exercise
No Tax on Exercise; Capital gain on sale
Limited to current company employees

3. Stock Option – Non-Qualified Plan

Restrictive Plan NOT IRS Required

Tax Paid on Exercise of option

Capital gain on Later Apprec. Paid on Sale
Not limited to current employees

4. Equity Based Compensation Plans

Phantom Stock; Stock Apprec. Rights (SAR)
Tied to co. growth, no equity but payment rates
Not restrictive; open to Consultants
Taxed as Paid; All §83 Ordinary Income Tax

Payment by Promissory Note

1. Installment payments – fixed time-table

2. Debt obligations – promissory note

Unconditional promise to pay sums owed
Interest on outstanding debt
Warrants in client stock – Equity “kicker”
Defining “events default” & consequences
Collection of costs & Attorneys fees
Collateral security for debt
Perfection of security interests

3. Installment taxation on payments received

4. Benefits of note for enforcement

ABOUT THE SPEAKER AND PRESENTATION

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA 02110, (617) 951-9980, fax: (617) 951-0048, e-mail: radelson@engelschultz.com

Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, and Northwestern University Law School in Chicago where he was a member of Law Review. He has an LL.M. degree in Taxation from New York University, and is a member of the Massachusetts, New York and U.S. Tax Court Bars. He began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004.

Mr. Adelson is specialized in corporate, taxation, business and technology transactions. In those areas, he frequently represents (1) small companies with their various business needs, including shareholder and employee issues, financing, commercial contracts, intellectual property, joint ventures, mergers and acquisitions, succession planning (2) senior executives, in negotiations over severance, employment, relocation, stock options, compensation and stockholder arrangements, and (3) consultants – in liability protection, intellectual property protection, trade identification, vendor, client and subcontractor arrangements.

Mr. Adelson’s firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys in Boston’s Financial District. The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in family, probate, real estate and litigation matters.

Mr. Adelson is a frequent speaker at business forums and Chairman of IEEE Boston Entrepreneurs Network www.boston-enet.org . Further information on Mr. Adelson’s background and his past published articles is available at his law firm website. To view many of Mr. Adelson’s past articles, see http://www.engelschultz.com/index.php/category/publications/ or http://robadelson.wordpress.com/

The speaker thanks Ron Goodstein and Tom Vaughan for the invitation to speak for IEEE Consultants’ Network on the topic of “Getting Paid in Stock, Options or Promissory Notes: Negotiating the terms of on-Cash payment for Consulting Services” at the Emerging Enterprise Center, Waltham, Massachusetts on May 26, 2010.

The example on page 1 of these Materials are hypothetical and fictitious although the questions on page 2 are drawn from actual client questions. The purpose of the example is solely to illustrate contracts issues, strategy and planning concepts and stimulate meeting discussion. The remainder of these materials are to offer rough outlines of broad areas of major contracting situations for technology based business. It is hoped that these materials will inform discussion and be useful reminder of topics covered for the attendees. These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

Getting Paid In Stock, Options Or Promissory Notes: Negotiating Terms of Non-cash Payment for Consulting

admin — Fri, 04 Jun 2010 15:48:41 +0000

By Robert A. Adelson

As an engineer, marketer or senior executive, you may be offered stock or options or a promissory note to cover part or all of your pay.

1. Is Equity for Pay a Good Deal? Whether you are taking a new position or re-negotiating your current job, whether you work full-time or as part-time consultant, whether the company is early stage or well established, questions often come up -

● When does taking equity instead of cash make sense?

● What types of equity can a company offer you?

● How do you value the stock?

● What taxes are paid? How to avoid taxes?

● When does taking a promissory note make sense?

● What terms should a note include?

If you are an employer or starting your own company and thinking of paying stock, you ask – can we get the stock back, if things don’t work out?

2. Valuing Stock Received. If the stock is traded on an exchange or OTC, value is published in The Wall Street Journal. But where the company is not public, there is no set answer on how to judge stock value. What investors paid is the best barometer but your stock remains illiquid (who knows when, if ever, you can sell) and investor stock may be different than yours.

Often, taking stock makes the most sense when you believe in the management team and marketing/business plan, or when you have other motives. If this work gives you new contacts, or skills, or access to a new technology, the job may be worth it, even if the stock proves a bust.

3. Stock Choices and Taxes Due. Cash investors typically receive preferred shares and service providers common. This means if the company goes bankrupt, investors will have their money out first. However, even with just common shares, there are often choices, e.g. between S and C stock, or qualified and non-qualified options.

Stock choices can have important tax consequences to watch out for. If stock is issued below fair market value, that difference is taxable when the shares issue. Options are normally not taxed until you exercise the option (and ISOs not until you sell). Yet, obtaining stock also makes you eligible for lower capital gains tax on sale.

4. Vesting, Dilution, Contract Protection. When you receive stock or option documents you should also be careful to review the equity terms for such issues as -

► When do shares “vest” – when do you own the shares?

When can you exercise the options?

► What protections do you have against more shares being

given out? new shares diluting your share value?

► What happens if there is a change in control of the company?

► Do you have an ability to “cash out” your shares?

5. Promissory Note to Evidence Payment. Taking a promissory note is an alternative to stock that makes the most sense if there is a strong sense that payment will be made after a delay. Unlike stock, the promissory note is an unconditional promise to pay a sum certain either on demand on at a fixed time. The note should bear interest typically at the Wall Street Journal prime rate or one or more points above, can be secured or unsecured, include collection terms and might also include an equity “kicker” or stock or warrants added as part of the consideration.

The author and speaker is Robert A. Adelson, Esq., partner at the Boston law firm of Engel & Schultz LLP. Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, and Northwestern University in Chicago, where he was a member of Law Review. He has an advanced LL.M. degree in Taxation from New York University.

Mr. Adelson has been an attorney since 1977, specialized in business, tax and contract law. His work includes legal issues of executive compensation, incorporation and finance, trademarks, licensing and intellectual property. He represents startup and emerging corporations, and individual consultants and executives. His 6-attorney law firm offers full service in litigation, family law, probate and real estate. Engel & Schultz is located at 265 Franklin Street in Boston. Mr. Adelson may be reached at (617) 951-9980 ext 205 or radelson@engelschultz.com.

Negotiating Compensation, Employment and Severance Contracts

admin — Fri, 04 Jun 2010 15:24:00 +0000

Ø Is an Employment Contract Necessary?

Ø Platform, Position, Launching Pad

Ø Cash Compensation and Benefits

Ø Equity: Corporate/Tax Structure

Ø Termination, Severance, Non-Compete

Ø Good Vibrations

By Robert A. Adelson, Esq.
EXAMPLE (Hypothetical and Fictitious)

Engineer Bradee MicroscopicSoft, LLC

Employee Offer Sheet: Company Profile:

Salary: $225,000 plus bonus Bus: Software

Benefits: HMO Med/NoDent/ HQ: Eugene, OR

401K, Life/Dis insur Perqs: blackberry Assets: $2 mil net (12/31/09)

Term: At Will Sales: $10 mil FY ‘09

Severance: 3 mos P(L): ($0.5 mil)

Expns : Relocation Stock : 20 mil o/s LLC units

Pos: EVP COO Exchange: Private

Outside Bds: None Employees : 50

Equity : 100,000 units (NQ) Est.: 2002

Full-time Employment with Emerging Hi-Tech Company

Thomasina Bradee, PE of Wellesley, MA, is an executive considering a job move. She is now VP Sales with the Harris Graphics Division of ZEN Development Corp. a local software company recently acquired by giant Big Blue Machines, Inc. (BBM)

Bradee recruited the sales team and developed marketing and channel strategy for Footnotes, Zen’s top sales product, and has been offered the EVP & COO spot with MicroscopicSoft, LLC, a young Oregon software company. Founded by Gyl Bates, Microscopic focuses on products similar to Footnotes and has backing from Bates who head a large company also located in the Northwest with a similar name. Microscopic still has $3 million in assets (including a Company facility in Eugene) net of long term liabilities. It has experienced recent losses from operations this past year, its burn rate increasing, but it also believes itself well positioned for a possible liquidity event next year.

The package offered to Tom includes $225,000 salary (50k deferred) with 20% bonus, plus relocation expenses and options for 100,000 units vesting over 5 years. Fair market value is now estimated at $0.50 per unit which would be Tom’s strike price.

Bates is anxious for Tom to start. Bates particularly wants her to attend a big trade show for Microscopic in Chicago sponsored by Alex Blue, showcasing Microscopic among Blue software clients. As Tom packs for Chicago, she does have some concerns about uprooting her family and sale of her home purchased at the height of the market. She is also concerned about recent sales results, reception of Microscopic’s latest product offering, and some articles in trade literature mentioning Bates’ frustration and listing Microscopic as a potential takeover target for others in the footnotes market. But Tom is unsure of her position with Zen, now part of BBM, she likes the challenge, and with more information she thinks she can help Microscopic’s market position.

Tom just gave her current boss BBM’s Gertner Louis, notice of her plans. She never had an employment contract before, and it occurs to her, she ought to have someone look over the “term sheet”. Gyl e-mailed and asked her to sign and return. Hence, on a friend’s referral, we have received Tom’s car phone call on the way to the airport.

BEYOND THE HANDSHAKE . . .

IS AN EMPLOYMENT CONTRACT

REALLY NECESSARY?

QUESTIONS OF THE EXECUTIVE:

¨ When does asking for a contract make the most sense?

¨ How and When to ask for a contract if not offered?

¨ Will raising this now kill the job offer?

¨ How and When to uses a lawyer or advisor?
(Won’t a Lawyer kill the deal for sure?

¨ Who negotiates and how does it proceed?

¨ What documents are involved?

¨ What will this cost?

¨ What if the Company won’t change anything?

QUESTIONS OF THE COMPANY:

¨ When does offering a contract help the Company?

¨ Will a contract open the company to liability?
(Isn’t at-will employment best for all?)

¨ Will a contract’s terms cause Company problems -
with Existing Employees? . . . with Investors?

Besides Compensation . . . Other Key Terms in Negotiating Executive Employment Contracts

«Position, Platform and Launching Pad

1. Title and Position; Reporting

2. Board of Directors Membership

3. Duties and Responsibilities

4. Support; Budget

5. Outside Affiliations

6. Term of Agreement

7. Renewals; Exit (“rip-cord”)

«Relocation and Expense Reimbursement

1. Temporary Living and Travel

2. Permanent Relocation

3. Tax Gross-Up

4. Business and Professional Expenses

5. Licenses, memberships

6. Other costs including contract costs

«Termination and Severance

1. Early Termination by act of Company

2. Early Termination by act of Executive

3. Cause, Cure, Notice

4. Severance – relation to surviving covenants

«Change of Control

1. Form and Amount of Benefits

2. Parachute Exceptions, Caps, Tax gross-up

«Non-Competes and Restrictive Covenants

1. NDA/Confidentiality Agreements

2. Assignments of New Inventions

3. Non-Solicitation

4. Non-compete

«Good Vibrations

1. Good Contract can be very valuable, but it does not itself make a good job, nor is it a substitute for good intelligence.

2. If your informants and gut tell you it’s a winner be prepared to concede on contact issues.

HOW DO WE STRUCTURE EXECUTIVE

CASH AND EQUITY COMPENSATION

AS A WIN-WIN FOR BOTH SIDES?

QUESTIONS OF THE EXECUTIVE:

¨ The Big Boys get signing bonuses – can you get one here? Can you justify a large salary increase as well?

¨ If you want to avoid taxes, how do you structure deferred salary to avoid the tax hit and still get paid?

¨ How do you protect your bonus and assure it is paid?

¨ When does taking equity as your pay make the most sense?

¨ What types of stock or options can the company offer?�
What’s the value? How is this equity taxed?

¨ How do you avoid dilution? What other structuring issues do you need to protect your equity stake?

QUESTIONS OF THE COMPANY:

¨ When is a Company smart to offer equity or bonus pay?

¨ Can this equity be paid based on performance? or loyalty?
Can we measure performance? how much stock to give?

¨ What if things don’t work out: Can we get the stock back?
What if Executive dies? Quits? What if we sell the Company?

¨ Will giving stock now hurt us later? in seeking financing?
in morale with current staff? in recruiting new talent?

«Cash Compensation

1. Signing Bonus

Evidence Commitment by Employer
Replace lost benefits (golden key)
Payable in Cash, Equity, Other

2. Base Salary

3. Deferred Compensation

Funded or Unfunded
Convertible Debt
Rabbi Trust or Secular Trust

4. Bonus Income

Guaranteed or Discretionary
Performance Based

«Fringe Benefits

1. Medical, Dental and Health Benefits

2. 401(k), Pension, Profit Sharing Plans

3. Life and Disability Insurance

4. Vacation, leave; Company Perquisites

«Equity Incentives: Based on Tax Structuring

1. Restricted Stock Purchase Plan

IRC §83(b) Election

2. Stock Option – Qualified (§422) ISO

3. Stock Option – Non-Qualified

4. Equity Based Compensation Plans

Phantom Stock & Stock Apprec. Rts (SAR)
IRC 409A compliance

«Key Terms in Executive Equity Negotiations

1. Vesting and Change of Control

2. Valuation and Anti-dilution

3. Stock Option Terms and Exercise

4. Purchase Terms and Covenants

5. Transfer Restrictions & Shareholder Agreements

Negotiating Severance and The Separation Agreement

1. Severance Pay and Benefits

Amounts and timing
Allocations to Emotional Distress, Attorneys fees and medical expenses to save taxes
Payments for attorneys fees, outplacement and other specific costs to enhance severance
Medical coverage
Other Employee Benefits
Duration of severance

2. Job Search and reputation

Outplacement
Office Space
Inquiries from contacts and potential employers
References
Confidentiality
Mutual non-disparagement

3. Releases

Mutual release
Legal rights
Rights to enforce settlement

4. Enforcement
5. Cooperation

ABOUT THE SPEAKER AND PRESENTATION . . .

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801 Boston, MA 02110, (617) 951-9980, fax (617) 951-0048. His e-mail is radelson@engelschultz.com . Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, Northwestern University Law School in Chicago where he was a member of the Law Review, and New York University with an LL.M. in Taxation. He is a member of the Massachusetts, New York and U.S. Tax Court Bars.

Robert Adelson began his career in 1977 as an associate at major New York City firms before returning home to Boston in 1985 where he’s been a partner in smaller firms, joining his present firm as senior business attorney in 2004. Mr. Adelson is specialized in corporate, tax, employment, commercial contracting and intellectual property law. He frequently represents employees and executives negotiating their employment terms, stock, options, relocation, non-competes, termination and separation agreements. He also represents startup and smaller companies in software, medical device and other technology-based fields, independent consultants with compensation and stockholder arrangements, incorporation and liability protection, intellectual property protection, and in vendor, client and subcontractor contracting arrangements.

Mr. Adelson’s law firm, Engel & Schultz, LLP, has 6 attorneys based in Boston. The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in family, probate, real estate and litigation matters.

Mr. Adelson is a frequent speaker at business forums and Chairman of IEEE Boston Entrepreneurs Network www.boston-enet.org . Further information on Mr. Adelson’s background and his past published articles is available at his law firm website. To view articles, see http://www.engelschultz.com/index.php/category/publications/ or http://robadelson.wordpress.com/

The speaker wishes to thank Marg Balcom for the invitation to speak on the topic of “Negotiating Compensation and Employment Contracts” for the Boston Chapter of ExecuNet at Dedham Community Center, Dedham, Massachusetts, on April 12, 2010.

The example on page 2 is hypothetical and fictitious but the questions on page 3 and 6 are drawn from actual client questions. The purpose of the example and materials, as developed by Robert Adelson, is solely to illustrate planning concepts and stimulate meeting discussion. The purpose of the remainder of these materials is to illustrate and offer rough outlines of broad areas of corporate, tax, contracts and business law which affect executive employment contracts, stock and compensation in high technology and more traditional fields. Thus, it is hoped these materials will be informative to those in attendance. These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

Making Effective Contracts: To Advance Organizational Success in a Changing Competitive Marketplace

admin — Tue, 13 Apr 2010 16:18:36 +0000

¨ Selling Products or Services

¨ Developing Custom Software

¨ Licensing Technology

¨ Distribution of Products

¨ Subcontracting other Consultants

By Robert A. Adelson

EXAMPLE (Hypothetical and Fictitious)

DreamSoft Consultants – Making Effective Contracts

Suppliers (Buying) DREAMSOFT Customers (Selling)

CONSULTANT

-Service Subcontractor Licensg/ Software Dev

Waltham, MA

-Equipment Vendor Cambridge, MA VAR/ Distributor

The Team (Producing) – “Partners”

Stephanie “Steve” Sprielberg formed DreamSoft Consultants several years ago and now has offices in Waltham and Cambridge. Her software work has picked up lately and contracts questions have arisen.

To help work flow Sprielberg hired subcontractor Ford Harrison full time, but recently Sprielberg worries Ford might get a fulltime job with one of Ford’s top customers MCA or work for Sprielberg’s rival Georgia Lucas. Fortunately, Sprielberg got Ford to sign an NDA when he started, but Ford still says he can use what he knows however he wants. Dreamsoft cash flow problems also worsen their relations.

However, at least Ford does a good job. Sprielberg though is angry about poor performing AI and Minority Report equipment and a threatened infringement suit over the Coming to America program-all bought from shrewd vendor Tomasina Cruz. Problems have harmed Dreamsoft’s output and reputation. Tom offers to repair or replace defects or refund part of the purchase price paid, but…“Only if the fault isn’t from your misuse! Read your PO, Steve: it’s in BOLD face!”

Besides Cruz, Sprielberg has problems with the ever changing demands of MCA as DreamSoft develops Sprielberg’s Indy Jones4, adding first the Connery and now the Flockhart applications, claiming each covered by the original deal. Dreamsoft is paid against acceptance and MCA is a tough tester, and even threatens to make the changes needed itself (taking the source code from escrow) if Steve can’t meet deadline.

There are also problems with DreamSoft’s longstanding royalties from Jurassic PK program Sprielberg gave over to VAR Jackie Valenti years ago. Jackie gets 80% on her sales but she doesn’t sell or market much. Per their old handshake deal, the split is 50/50 on royalties from big reseller Paramout Jackie lined up but she threatens to pay Dreamsoft 20% if there’s not renewal of her contract (ends 3 years). Steve wants it over now.

One place Sprielberg is glad she has no contract is with her new “sort of” partner. Sprielberg talked with Jessie Katzenbarg who had a lucrative job with DizkneeSoft. Boss CEO Michelle Estner fired Jessie, who never saw her office again. Despite other offers, a 50-50 partnership with Sprielberg attracted Jessie. She put time and money into the Cambridge office, neglected since Sprielberg’s last partner Dave Griffin left (who programmed much of pioneer ET and Jaws programs still lucrative to Dreamsoft but Sprielberg dismisses his “work for hire” since nothing formal was signed). Now, Jessie’s drive, cash and contacts revived Cambridge and Sprielberg is glad they signed nothing. “OK Jess”, she recently said “I’ll get the lawyers to finish a buy-in for you. You’ve been doing great managing Cambridge – keep it up.” Jessie bristles being called a manager since she left Dizknee to be partner not employee, but Sprielberg is happy keeping it oral so if Jess makes trouble, she’ll fire her too.

Sprielberg’s lawyer charged plenty for a “draft” LLC and handled her divorce from hubbie Griffin. Steve seeks an IP lawyer who knows contracts to: put off/fire Jessie, stop Ford’s poaching, get damages from Cruz, better terms with MCA & speedy end with Valenti. She’s now arrived at Rob Adelson’s office.

What should I be looking for in my contracts?

What makes for a good and valid contract?

…And Other Questions to ask along with finally –

When is a good time to ask Rob Adelson’s help?

What makes a contract enforceable? Do I need a signature? Can we use fax or e-mail? Can we use click-though?
Are there times when I don’t want the contract to be enforceable? What should I say or do so not to be bound? Can an oral contract bind me?
What makes a good contract? What are you setting out to accomplish? Are you planning ahead? Are you relying upon any special facts or circumstances to occur? Was there something said you rely on?
Are you hiring a subcontractor? Is he or she 1099 or W2? Full-time or part-time? Who controls the work? Is risk of payment shared? Is the project “work for hire”? Are you concerned about contractor “poaching” clients?
Are you buying or selling equipment or products? What warranties offered on quality, service or performance? Against IP infringement? Remedies?
What are your compensation terms? Are you paid by hourly/day or the job? Do you get an advance/retainer? Are you paid/reimbursed expenses? Are non-cash considerations used? Do you get equity or debt? On what terms?
Are you hiring or offering services? What warranties exist on experience, standards compliance? Reports, deliverables? What restrictive covenants – confidentiality? nonsolicitation? Noncompete? Scope and Considerations?
Are you doing software development? Who owns IP? What specifications what payment milestones, what protections against changes asked?
Do you have a VAR/ Rep/ Distributor agreement? Is it exclusive? What territories, applications are covered? Royalties determination? What Quotas and what obligations, stocking, customer service? Rights on termination?

MAKING A VALID CONTRACT

►What makes them unenforceable?

Parties / Subject Matter
Consideration
Completion / Finality
Mutual Assent – normally signed assent
Electronic Agreement / Elements for valid E-contracts

►When to leave things unenforceable?

Due Diligence in process
Playing the field / Other offers in process
Need based on other factors – Hedge bets, see what happens
Financing and other contingencies

►Can Oral contracts be enforced too?

Enforceable elements (see above) need to be met orally
Party seeking enforcement acts in Reliance upon oral contract
Doctrine of Implied Contract despite absence of signed document
Party denying enforcement has received benefits from oral deal
Doctrine of Unjust Enrichment to force disgorgement of profits

MAKING A GOOD CONTRACT

►Mission – Define mission, Cover the scope of contract

What do you want to accomplish now? In next several years?
What else is effected by this service or product

►Conditions – State Variables, Contingencies to performance

What assumptions are made that would cause a back-out or change deal?
Hedging your bet on things turning out as you expect & need them to occur

MAKING GOOD ON CONTRACT (Continued)

►Reliance – State Warranties/representations made each side

Has there been “touting” some aspect or quality of product or service
Was there reliance so that if it did not occur you would not have agreed

►Consideration – What each contributes regardless of form

What are the motives for this deal – How are you being paid
Cash – if so what payment terms? Equity – recite all terms of equity
Non-cash considerations? Technology Back-license? Contacts? Experience?

►Mutuality - Requiring each party to contract to “ante up”

The considerations by both parties need to be recited
These need to be real considerations – new things each offers to other

►Commitment – Mutual vulnerability & Remedies to default

Bargaining positions dictate vulnerability in timing of contributions
Clarity in conditions, contingencies – penalties for breach /failure to close
Rights on termination of agreement including surviving covenants

SEEKING GOOD CONTRACT VALUE

►How to cut legal costs to enforce the contract

Greater the uncertainty – greater litigation risks
Legal $$ upfront for clear contract save $$$$ in dispute /litigation

►When should I seek Rob Adelson’s help?

When you think you have a deal – that terms important to you covered
Do a businessman’s term sheet – what you think you agree on
State non-binding – Each side to review – Attorney draft binding contract

Production/ Supply Contracts /Purchase Orders

Battle of Forms: Buyer PO, Seller Invoice, UCC
Price: changes, adjustments
Payment and Credit Terms
Conditional sales, security interest
Delivery, Orders, Risk of Loss
Second Source v. Requirements contract: Notice of Delay; Right to cover; Ramp-Up; forecasts
Inspection; Acceptance; Repair
Warranties: Copyright/ IP infringement, legal compliance, express or implied product warranties, damages
Liabilities, Remedies and Damages: Incidental (mitigation), Consequential loss, period of time to seek damages
Term; termination; Return Buyer’s Property:Information, trade secrets
Miscellaneous: Assignment, change orders, integration, arbitration, attorney fees, jurisdiction

Subcontractor / Service Provider Agreements

Specific Duties: Ongoing Responsibilities, Particular job, assignment, work excluded
Independent contractor status
Reports and Deliverables: reporting function
Fees/ Compensation: periodic (hr. wk., mo.) Cost plus overhead, project milestone payments
Personnel/ Staffing: qualifications, requirements
Manner of Performance: legal reqs., standards
Ownership of Proprietary Rights: copyrights, work for hire, inventions, new and existing trade sec.
Insurance Coverage/ Independent Contractor
Warranties etc.: Copyright/ IP infringement compliance with law; Express or implied product warranties; Incidental or consequential damages
Term; Termination; short notice period; return of client information, plans, materials
Confidentiality: proprietary info., exceptions
Surviving Restrictive Covenants: No assignments for competitors, no solicitation of client’s customers, no hiring of service provider personnel

Software Development Agreements

Design Specifications: Function, Response Time, Platform, system compatibility
Deliverables: Code, documentation, components, reports/ tests
Schedule and Performance Milestones
Payment: periodic, cost +, milestone
Ownership of IP Proprietary Rights
Facilities and Cooperation
Files Conversion: Training and Installation Support
Acceptance and Testing
Warranties etc.: no (known) copyright infringement, compliance with law, regulatory standards, no express or implied product warranties, no incidental or consequential damages
Indemnity on infringement
Maintenance after Initial Warranty
Source Code Escrow
Term; Termination; short notice period; return of client information, plans materials
Confidentiality: proprietary info., exceptions
Surviving Restrictive Covenants: No assignments for competitors, no hiring of service provider personnel
Miscellaneous: assignment, subcontracting work, force majeure
Other User Issues: Progress reports, response time warranties, staffing, most favored customer

Dealer and Distributor Agreements

Territory: Customers, market, geographic division
Exclusive or Non-Exclusive
Relationship/ Statutory Requirements
Sales levels: Minimum, inventory, staffing, best efforts, loss of exclusivity
Pricing: Discounts, volume discounts
Credit terms
Product Availability and Allocation
Parts, Supplies, Service
Marketing and Promotional Arrangements
Order Entry
Sales Contract Terms (same issues PO p.5 above)
Termination: Supplier Rights: Selling existing inventory , successor buy back
Termination: Return Buyer’s Property: information, trade secrets, tools, equipment, materials, no use of trademarks
Miscellaneous: Assignment, change orders, integration, arbitration, attorney fees, jurisdiction

Sales Representative Agreements

Alternative to direct sales – customized svcs/products
Installation, training and other services
Paid on commission or discount basis (if stocking rep) Not Agent, no authority to act for supplier

Value Added Reseller Agreements

Scope of License
Pricing and Payment Terms
Value Added contributions
Exclusivity; multiple channel issues
Product delivery; Source code
Protections of Proprietary Rights
Non-competition
Termination, Warranties and Other standard Supplier/Distributor issue

Product Licensing

Types: Use Manufacture, Distribution, Trademarks, Licenses, OEM, VAR Agreements
License Terms
1. Grant, Field of Use, Exclusivity
2. Improvement, Back Licenses
3. Royalties and Audit Reports
4. Intellectual Property Protection
5. Warranties, Liabilities, Expert Controls
Software Licensing Issues
1. Source Code, Object Code, Escrows
2. Manufacture limitations, Modifications
3. Shrinkwrap, Clickwrap licenses, Enhancements

ABOUT THE SPEAKER AND PRESENTATION

The speaker thanks Kenneth Glasser for the invitation to speak for APICS – The Educational Society for Resource Management, North Shore Chapter on the topic of “Making Good Contracts: To Advance Organizational Success in a Changing and Competitive Marketplace” at the Bickford’s Grille, Woburn, Massachusetts on April 13, 2010.

How To Maximize Your Return, As Owner, From Your Business

admin — Fri, 02 Apr 2010 17:39:01 +0000

How To Maximize Your Return, As Owner, From Your Business:

Techniques to allow owners of S and C Corporations to take profits out of the business for owner’s benefit; Merits of S and C Corporations and Change from C to S Corporation

By Robert A. Adelson, Esq.

1. Taking Money out of S Corporation

S Corp Distributions in lieu of CEO Salary

i. Single level taxation

ii. S Corp dividends not self-employmt earnings

iii. Avoidance of 15.3% payroll taxes

iv. IRS can re-characterize dividends

v. 9 Factors on reasonable compensation

vi. Cases and Treasury Study

vii. Documents to support determination and reasonableness

Pass-through gains on asset sales
Pass-through losses

2. Taking money out of C Corporation

Maximize salary/bonus compensation

i. Avoid double taxation of large profits (though not so severe)

ii. Same issues on unreasonable compensation

Pay dividends, if profit is small or retained

i. Utilize skinny graduation of Corp . rates

ii. Utilize retained earnings to payout dividends at current low capital gains rates

3. Taking money out of both S & C Corporations

Income splitting with family members

i. Utilize their low tax brackets

ii. Limited by Kiddie tax

Lease of business assets to corporation
Coordinate andmaximize entertainment, travel and conference expenses
Vehicle, home office and equipment reimbursement
Age weighted profit sharing plans
Other Employee Benefit or Fringe Benefits plans
Thinning new corporation by use of debt and corporate loans to owner
Stock redemptions of owners
Employee stock ownership plans
Tax free separations and divisions of the business
Charitable trusts on sale of stock

4. Avoidance Constructive Dividends Red Flags in Audits

Payment of benefits to owners
Payment of debts, personal expenses of owners
Bargain sales of property to owner
Bargain use of company property
IRS determined unreasonable compensation

5. Which is better: S Corp or C Corp?

Merits of S Corporation

i. Single level of taxation

ii. Pass through of tax gains/losses

iii. No accumulated earnings tax

iv. Avoidance pay roll tax

v. Single level tax on sale on liquidation of business

vi. Ability to allow future acquirer a favorable Section 338(h)(10) election

Merits of C Corporation

i. Accumulation of income without immediate shareholder tax

ii. Ability to have complex capital structure (i.e. preferred stock)

iii. Ability to have foreign shareholders

iv. Ability to be a public company (i.e. unlimited number of shareholders)

v. Ability to use fiscal year

vi. Ability to use Section 1202 stock

6. Change from C to S Corporation

BIG – Built In Gain Rule

i. Asset sales – tax gains on corporate level for 10 years after change

ii. Taxed at highest corporate rate

iii. Need for valuation in connection with change

LIFO inventory recapture tax
Excess Net Passive income tax

i. If accumulated E &P

ii. Over 25% gross receipts passive income

iii. Loss of S election if 3 consecutive years

About The Speaker

Mr. Adelson is specialized in corporate, taxation, business and technology transactions. In those areas, he frequently represents (1) small companies with their various business needs, including shareholder and employee issues, financing, commericial contracts, intellectual property, joint ventures, mergers and acquisitions, succession planning (2) senior executives, in negotiations over severance, employment, relocation, stock options, compensation and stockholder arrangements, and (3) consultants – in liability protection, intellectual property protection, trade identification, vendor, client and subcontractor arrangements.

The speaker thanks Bonnie Gorbaty for the invitation to speak to the CEO Forum program of The Commonwealth Institute on the topic of “How To Maximize Your Return, As Owner, From Your Business”, at the offices of corporate sponsor Citizen Bank, 53 State Street, Boston, MA, March 10, 2010.

Business Formation and Early Stage Tax and Legal Issues

admin — Wed, 03 Mar 2010 17:43:02 +0000

¨ Liability Risks and Protections in Business

¨ Choice of Entity – Tax /State law Structures

¨ Patents, Trademarks & Proprietary Rights

¨ Contracting for Employees, Subcontractors

¨ Product, Sales and Finance Arrangements

¨ Nonprofit Corps – Organization, Tax Status

By Robert A. Adelson, Esq.

EXAMPLE (Hypothetical and Fictitious)

FREEDOM TRAIL TECHNOLOGIES – ENTITY CHOICE /OTHER ISSUES

FREEDOM TRAIL TECHNOLOGIES

Waltham, MA

Founded 2008

Founders Financials

Paid in

P. Revere, d, Pres 10,000 P/L (FY 09 -Projected)*

J. Adams, d, VP/Sec 10,000 Revenue 500 Expenses 500

H. Knox, d,Treas 10,000 Balance Sheet (12/31/09)*

J. Hancock, director [10,000] Assets Liabilities

P. Henry – employee A/R, Equip, A/P, Loans – 275

F. Marion – employee Cash, Other Shareholders

T. Paine – employee Equity 40

Total – 8 – 6 employees 300 Accum Deficit (15)

2 contractors (*,ooo omitted)

Freedom Trail Technologies was founded in 2008 by techies P. Revere, J. Adams, and H. Knox, three former employees of giant Bay Colony Scientific Inc. Each contributed cash, equipment and know-how, and Knox also advanced additional funds as needed to fund the company. So far, most of revenues come from consulting often work bundled into big projects. The economy hasn’t helped. Lots of work they thought they’d get didn’t come in. They’ve retooled. They’ve lost assignments because they aren’t incorporated and had some collection problems. Most of the clients have been satisfied but there are two problem accounts which raise some concern with the founders. Though no suit has been filed, Knox is concerned about protecting his new home “Ft. Knox” in Weston. In any case, the group wants to spend more time developing e-Revolution™ a new product they feel can make an impact in B2B e-commerce.

A colleague of Revere, J. Hancock who led Tea Party Inc. and other successful companies in the past, has likewise expressed desire to see the group spend more time in development and has said he’d like to invest $10,000 to match contributions by the founders. Besides his own willingness to invest, Hancock introduced Revere to A. Hamilton the wealthy managing partner of Below-Zero Stage Investments, a Cambridge-based VC fund. Hancock also suggests meeting M. Gandhi, a US resident with key contacts in Banglapore India (Gandhi, Nehru & Mountbatten). Hancock says she may be helpful raising funds off-shore (and Revere thinks… in providing additional programmers if and as needed.)

In the meantime, Adams has interested G. Washington, CEO of First-In-War Co. a nationally known VAR out of Arlington, VA, in e-Revolution™, so much so that Washington asked for detailed product specifications, information on where it’s been marketed, revenues and prospects to this point. Adams is gathering information to send Washington who just sent his 20-page standard Exclusive License. Revere likes FIWC. It’s marketed other e-products and is well known, so he’s tempted to sign.

Both Adams and Knox have pushed Revere to form a corporation or LLC for financing reasons. He just wants to get the work out. Unfortunately, that’s gotten harder of late since B. Arnold, a valued employee since launch, quit FTT recently and joined the competition. Arnold felt he wasn’t appreciated enough. Meanwhile, other recruits, P. Henry, F. Marion & T. Paine have also asked for equity. Revere particularly doesn’t want to lose Patti or Frances or even vociferous Tom. Time has been short since the move to a bigger space in Waltham. However, the founders have decided it’s time to attend to paper work – to consider some form of business “entity”, whether to sign the VAR contract, whether to get a costly patent of e-Revolution and other “legal stuff”. Time and money are short. What will we recommend?

IS IT REALLY NECESSARY

TO INCORPORATE?

… and Other Questions to help you tell -

Is a Corporation the best choice for me?

¨ What are your motives? What are your goals and objectives in choosing an entity (new entity) under which to conduct business?

¨ Have you lost business because of concern over lack of incorporation, “continuity of existence” or lack of commitment to the enterprise?

¨ Are you selling products or services now? What potential liabilities do you face? Were you sued? What assets do you want to protect?

¨ Does your business have sufficient capital? Have you borrowed? offered loan guarantees? collateral? What are your expected capital needs in the near future? expected capital sources? Is any offshore?

¨ Is your business capital intensive? Does it involve substantial investment in real estate, oil, gas, cattle or other investment assets?

¨ Do you expect to encounter substantial losses? Is immediate pass-through of losses or differential pass-thru to investors important?

¨ Is your business people intensive? Is employee and executive recruitment important? Do you want to offer equity incentives?

¨ Is your business family held? Do you seek to keep in the family ownership? Management? What other family goals are sought?

¨ Are you a life-style company? If not, what is your exit or harvest strategy? Is planning for that important to you now?

¨ Do you have important concerns over timing /fiscal year? Cash basis vs. Accrual accounting? Fringe benefits? Deduction of expenses?

STATE LAW CHOICES OF BUSINESS ENTITY

(MASS. STATE LAW)

Organizational Legal Structures	Limited Liability	State Filing	State Tax
1) Sole Proprietorship	–	–	–

2) Partnership
►General	–	–	–
►Limited	GP— LP√	√	No ann Fee after orig filing
►Limited Liability Partnership (“LLP”)	√	√	ann.Fee $500/yr

3) Limited Liability Company (“LLC”)	√	√	ann. Fee $500/yr

4) Corporation (for Profit)
►Business or Professional	√ √	√ √	√ √
►Domestic or Foreign (Del.)	√ √	√ √	√ √
- ► “C Corporation”	√	√	√
► “S Corporation”	√	√	Minimum Frchise Tax $456/yr; Tax if>$6m GrossRcpts

ADVANTAGES of Incorporation over

Partnership or Sole Proprietorship

1) Limited Liability (without insurance)

exceptions: professional malpractice
limited partnership/LLC and LLP also provide limited liability
Single member limited liability in corp.

2) Ease of Transfer of Interests & Financing

Sale Securities/IPOs
Potential ease in liquidity to investors
Debt Financing – lender confidence however, personal guarantees may still be required

3) Continuity of Enterprise

Sale confidence, credibility in business dealings
Familiarity of corporations,
Rules established by case precedent & Structure to dealings
Security of structure and rights to employee recruits
Security of structure to strategic allies

DISADVANTAGES of Incorporation

1) Complexity and Paperwork

Organizational documents,
Minutes, annual meetings, notices, upkeep . . .
Tax returns, bank accounts, separate financial records
Corporate form – operating in corporate form

2) Cost

Professional Fees, Accts. Lawyers
State Taxes, Filing fees, Ann Reports
Separate Capital maintained for corporation/ no shell

3) Taxes

Profits and Capital Apprec. potentially Taxed Twice

- exceptions: S Corps and many offsetting issues (see Taxation)

TAXATION OF BUSINESS ENTERPRISE

Merits of Structure Entity Tax Issues	C Corp	S Corp	Pship	LLC
Second Level Tax	Yes	Mainly No	No	No
Profits over $50,000 Profits under $50,000	Bad Good	OK OK	OK OK	OK OK
Personal Service Co.	Bad	OK	OK	OK
Corp AMT	Bad	N/A	N/A	N/A
Accum Erngs Tax	Bad	N/A	N/A	N/A
Pers Holdg Co Tax	Bad	N/A	N/A	N/A
Pass Thru Losses Loss Carryovers	Bad Good	OK OK	Good OK	Good OK
Sale on Liquidation Assets sale	Bad	OK	Good	Good
Sale of Stock	OK	OK	OK	OK
Sale of §1202 Stock held 5 years Rollover on shares sale	Good Good	N/A N/A	N/A N/A	N/A N/A
Flexibility in Allocating income, loss, expense	Bad	OK	Good	Good
Social security taxes	OK	Good	Bad	Bad
Cash Method	Bad if > $5mil rev	Good	Good	Good
Fiscal Year	Good	N/A	N/A	N/A
Interest expense for auto, other bus. Items	Good	N/A	N/A	N/A

PATENTS, TRADEMARKS AND

PROPRIETARY PROTECTION

Patent - Strongest protection for proprietary technology but also hardest to attain

Subjects: Process, Machine, Manufacture of Composition, but not naturally occurring.
Patentable Only if New, Useful, Unobvious
Time Bars: U.S.: 1-Year from invention;Foreign: 1-Year from US filing if not disclosed
Prior Art@ search on novelty, publication
Patent Application required with US PTO, Claims (coverage)Review, approval or appeal
Inventorship, Documentation, Ownership

Advantages – Limited Monopoly, covers Ideas, upheld against innocent users, reengineering

Disadvantages – High Threshold to achieve, cost, time, claims may be limited/circumvented. Policing

Copyright - protection for expression, against reproduction of proprietary matter, easier to attain

Subjects: Original works of Authorship, Fixed and Tangible medium or expression
Copyright Coverage? Only if Expression, Reproduction or Derivative of the same Does not cover Ideas or concepts
Registration, deposit with Copyright Office, Notice (c Name Year) useful, not required

Advantages – Long Duration, low cost/threshold

Disadvantages – Not protect ideas, only copying, not against independent devlpt or innocent use

Trademark - word or symbol describing product or service protection available with use in commerce

Mark cannot be descriptive or generic Prior search advisable
“Likelihood of Confusion” test for registration or infringement
Common Law marks or Federal or State registration,
Proof of use in commerce (state or interstate) normally required in one or more of 42 international classes of goods or services
Federal filing allowed with Intent To Use in 6 months (extendable)
U.S. Priority based on First Use (or ITU filing date), Federal filing establishes use in all 50 states
Foreign priority generally based on 1^st to file; Paris convention Federal filing date gives 6 month window to foreign filing
Use of Ô (state or common law) or Ò (federal), other protections Affidavit of Use required after 5 years

Trade Secret – Broadest subject matter. Protection for business Competitive advantages, easy to gain, difficult to maintain

Covers: Information used in trade or business Giving advantage over Competition, and not generally known Can include customer lists, market info, sources of supply, as well as new inventions
Applies based on nature of secret, action to preserve it, no formal filing
Must show value or cost in development
Must show reasonable efforts to preserve

–Internal security – employee confidentiality

–External security – plant / computer security

–Document control, visitor non-disclosure agmts

Not lost due to disclosure in violation of confidentiality agreement; however, gives no protection against independent discovery

CONTRACTS FOR EMPLOYEES AND SUBCONTRACTORS

Employment Agreements – Executives and key Employee contacts

1. Founder and Key Employees, both for loyalty and to secure key human assets

2. Duties, Outside Affiliations, Board Control

3. Salary Compensation, Benefits

4. Confidentiality, New Inventions, Non-compete and restrictive covenants

Employee Manual – Employment terms of other salaried employees

Company policies including Confidentiality

Service Contacts – independent contractor

1. Description of Services, milestones, reports

2. Fees, flat, formula, segment; Expenses

3. Warranties, indemnification, Confidentiality, non-disclosure

4. Independent Contractor status

Cash Compensation and Benefits

Salary, Incentive Income (limited for start-up)
Deferred Compensation
Insurance/Benefits, Expense Reimbursement

Equity Incentives / Participation

Stock Purchase Plan
- Income Tax on Value over Amount pai Tax paid when no substantial risk of forfeiture,
Repurchase for Vesting / ’83(b) Election
Attraction for 93 Tax law & 97 law rollover
Stock Option – ISO, Incentive Stk. Option Plan
- Strike price is original FMV, limits on amount, exercise
- Capital Gain on sale of stock, subject to AMT
Stock Option – Non-Qualified
- No IRC limits on strike price, terms or exercise
- Income Tax on Value over Amount paid
- Tax paid when option is exercised – ordinary tax not CapGain
Equity Based Compensation
- Phantom Stock
- Stock appreciation Rights (SARs), Tax Gross-Ups

Shareholder / Share Purchase Agreements

Founders Buy-Sell Agreement
- Goals: stabilize management, ownership provide liquidity, valuation of share
- Means: restriction on share transfer
- Involuntary transfer – death, disability, by legal process (divorce) – redemption/ cross sale
- Funded Plans – via insurance – co-sale for step-up, avoid AMT
- Voluntary Transfers – right of 1st Refusal
Employee Stock Restriction
- Company Repurchase Rights
- IRC §83 election; standoff
Investor Stock Purchase
- Warranties and Information covenants
- Registration Rights or exemption
- Tag Along and Cash-out rights

CONTRACTS FOR PRODUCTS -MANUFACTURE & MARKETING

Production Contracting Arrangements

1. Supply contracts and Purchase Orders – Battle of Forms

Delivery, Risk of Loss
Warranties: patent, copyright infringement, express of implied product warranties
Remedies and Damages

2. Payment and Credit Terms

3. Equipment Leasing

4. Service Contracts

5. Manufacturing Arrangements

Delivery, Risk of Loss

Distribution of Products or Services

1. Identification of Company=s market niche,

2. Distributor and Dealer Agreements

a. Territory, Exclusive or Non-Exclusive

b. Sales levels, Pricing, Credit Terms

c. Product, Parts, Supplies, Service

3. Sales Agent / Representative

Agreements – where customized services / products

4. Sales Contract Terms

5. Marketing and Promotional Arrangements

Product Licensing

1. Types: Use, Manufacture, Distribution, Trademarks, Licenses, OEM, VAR, Agreements

2. License Terms

a. Grant, Exclusivity Back Licenses

b. Royalties and Audit Reports

c. Intellectual Property Protection

d. Warranties, Liabilities, Expert Controls

3. Software Licensing Issues

a. Source Code, Object Code, Escrows

b. Shrinkwrap

c. Boxtop licenses, Enhancements

Strategic Technology Alliances and Joint Venture Arrangements

Alliance of type listed above, contributions, mutual benefit
Can include formation of Joint Venture partnership or LLP

CONTRACTS FOR MONEY:

Raising Capital and Securities Law Compliance

Venture Capital Finance

1. Development of Financing Strategy

2. Business Plan

a. Product, Technology, Uniqueness, Edge

b. Market, Competitive Strategy, Penetration

c. Management Team, motivation, track record

d. Financial Forecast, underlying assumptions

e. Capital Sought, financing stage, funds use

3. Valuation – from Company’s pre-money worth

4. Presentation, negotiation, commitment, then Venture Capital Due Diligence

NONPROFIT CORPORATIONS:

PLANNING

Different Purpose of Nonprofit from Business Corporation

Civic, charitable or other public purposes
Not formed for personal, pecuniary gain
Can engage in limited commercial activity but profits used for organizational purpose and not distributed for private benefit
Funding largely from contributors, grants, dues, merchandise sales, admissions

Planning for Nonprofit entity

Goals and mission statement
Nature and number of participants
Operational weeds – employees, financing
Regulating requirements
Exposure to liability
Tax considerations

NONPROFIT CORPORATIONS:

ORGANIZATION

Articles of Organization (M.G.L. Ch: 180)

Filed with Secretary of State
Nonprofit purposes: civic, educational, charitable, religious, social clubs, chambers of commerce, business league
Limiting assets to qualify purpose and other terms for tax exempt status

By-Laws

Regulation and management of corporation
Management by Board of Directors or Board of Trustees
Meetings, treasurer, elections, committees
Include or not include members

Registration with Division of Public Charities

Office of Attorney General
Before engaging in charitable work or raising funds

Annual State Filings

Filed with Secretary of State

NONPROFIT CORPORATIONS:

TAX EXEMPT STATUS

Application for Federal Tax Exemption

IRS Form 1023
Enables tax deductible contributions to corporation
If filed within 27 months of incorporation (15 months plus 12 month extension) tax exempt shares retroactive to filing date of incorporation

Annual Tax Reports

IRS Form 990

Application to Mass. Department of Revenue (DOR)

Application for Original Registration as Exempt Purchaser
Exempt for State Sales taxes

ABOUT THE SPEAKER AND PRESENTATION . . .

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, Massachusetts 02110, (617) 951-9980, fax: (617) 951-0048. His e-mail addresses radelson@engelschultz.com. Mr. Adelson is a graduate of Boston University, Phi Beta Kappa and Northwestern University Law School in Chicago where he was a member of Law Review. He also has an LL.M. degree in Taxation from New York University and is a member of the Massachusetts, New York and US Tax Court Bars.

Robert Adelson began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2000. Mr. Adelson is specialized in corporate, taxation, finance, commercial and technology contracting law. In those areas, he frequently represents startup and smaller companies in software, and other technology-based fields. He also represents executives or consultants in executive compensation and stockholder arrangements, incorporation and liability protection, intellectual property protection, and in vendor, client and subcontractor contracting arrangements.

Mr. Adelson’s law firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys in Boston. The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in family, probate, real estate and litigation matters.

Mr. Adelson is a frequent speaker at business forums. Additional information on the subjects on which he speaks is shown at www.engelschultz.com/index.php/category/publications/ Further information on Mr. Adelson’s background and his past published articles is available at his law firm website www.engelschultz.com/index.php/attorneys/partners/robert-adelson/

The speaker thanks Artem Efremkin, for the invitation to speak to Young Entrepreneurs of Tufts (YET) on the topic of “Business Formation and Early Stage Tax and Legal Issues” at the YET meeting in Medford, Massachusetts, on March 3, 2010.

The examples on page 1 of these Materials are hypothetical and fictitious in their entirety (although the questions on page 2 are drawn from actual client questions). The purpose of the examples and materials, as developed by Robert Adelson, is solely to illustrate planning concepts and stimulate meeting discussion. The purpose of the remainder of these materials is to illustrate and offer rough outlines of broad areas of corporate, tax, contracts and business law which affect choice of business entity and issues in the structure of start-up and early stage businesses including issues of finance, executive and employee recruitment, stock and compensation in high technology and more traditional fields. Thus, it is hoped these materials will be informative to those in attendance. These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

Employment Temination And Severance Negotiations

admin — Fri, 25 Sep 2009 00:40:32 +0000

By Robert A. Adelson, Esq.

At Will Employment and Exceptions

1. Massachusetts is at will employment jurisdiction

Employee may resign or Employer may terminate employment at any time
With or without notice
For cause or reason or without cause or reason
With obligation to pay wages or accrued vacation pay and expenses through date of termination
No right to continued employment
No right to severance pay after termination
2. Presumption employment is At Will

If nothing said or written and if no exception applies employment is at will
3. Exceptions to At Will doctrine – Contract

Written Employment Agreement can supercede at will employment
Terms of agreement on term, severance will control

4. Exceptions to At Will doctrine – Implied contract

Offer letters
Employee handbooks
Policies
Practices
Oral promises
Promissory Estoppel – detrimental reliance

5. Vigilence of employers to avoid Implied contract

6. Vigilence of employers to avoid claims for unemployment compensation for extended periods

Specific termination provisions in Offer letters
Specific termination provisions in employment contracts and Employee handbooks

Wrongful Termination by Statute

1. Termination for the wrong reason

At Will employee can be terminated for no reason or any reason
But cannot be terminated for an unlawful reason
2. Discrimination

Age
Race
Gender
National Origin
Religion
Disability
Sexual Orientation
Military status
3. Violation of Other Statutory Laws

Civil Rights
ERISA
Equal Pay
Family and Medical Leave Act
Invasion of Privacy
Plant Closings/ Takeovers
Sexual Harassment
State and Federal Tort Claims
Wages and Hours
Whistleblower Protections
Worker’s Compensation

Tort, Equitable and Common law Claims

1. Implied Covenant of Good Faith and Fair Dealing

2. Violation of Public Policy

3. Negligent Hiring and Supervision

4. Interference with Contractual or Advantageous Business relations

5. Assault and Battery, False Inprisonment

6. Misrepresentation, Deceit and Fraud

7. Infliction of Emotional Distress

8. Fiduciary Rights of Minority Shareholders in closely held Corporation

Damages in Employment Termination

1. Contract Damages

2. Tort Damages

3. Statutory Damages

Demand Letter

1. Factual Background

2. Legal Claims

Implied Contract
Discrimination
Other Statutory violations
Good Faith and Fair Dealing
Tort Claims

3. Demands

Additional Consideration
Changes from separation Agreement
Attorney’s fees

4. Litigation

Deadline or recourse to litigation
Notice to preserve electronic records

Employment Litigation

1. MCAD filing requirements for discrimination claims

2. Complaint – Claims made and their survival

3. Discovery – plan to gain information to enhance case

4. Motions and briefs

5. Trying the case

Negotiating Severance and

The Separation Agreement

1. Severance Pay and Benefits

Amounts and timing
Allocations to Emotional Distress, Attorneys fees and medical expenses to save taxes
Payments for attorneys fees, outplacement and other specific costs to enhance severance
Medical coverage
Other Employee Benefits
Duration of severance

2. Job Search and reputation

Outplacement
Office Space
Inquiries from contacts and potential employers
References
Confidentiality
Mutual non-disparagement

3. Releases

Mutual release
Legal rights
Rights to enforce settlement
4. Enforcement
5. Cooperation

ABOUT THE SPEAKER AND PRESENTATION

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA 02110, (617) 951-9980. Fax (617) 951-0048. E-mail:radelson@engelschultz.com Website: www.engelshultz.com Mr. Adelson is a graduate of Boston University, Phi Beta Kappa and Northwestern University Law School in Chicago where he was a member of Law Review. He also has an LL.M. degree in Taxation from New York University and is a member of the Massachusetts, New York and US Tax Court Bars.

Robert Adelson began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004. Mr. Adelson is specialized in corporate, taxation, contracts and intellectual property law. His clients are (1) startup and early stage companies; (2) officers, employees and executives; (3) consultants and service providers; and (4) family businesses. Working with employees and executives, in addition to issues of employment termination, wrongful termination and severance negotiations, Mr. Adelson drafts, negotiates and advises clients on Offer letters and employment agreements; Noncompete, confidentiality, restrictive covenants; Stock, options, SARs and phantom stock; Issues under IRC §409A; Relocation, tax gross-ups, recruitment issues; Change of control issues; Severance, retention, termination agreements; Consultant, director, service agreements.

Mr. Adelson is a frequent speaker at business forums and author of numerous published articles including articles on employment termination and employment negotiations. For articles, see http://www.engelschultz.com/index.php/category/publications/ For further information on Mr. Adelson’s background, see http://www.engelschultz.com/index.php/attorneys/partners/robert-adelson/

The speaker thanks Annette Reynolds, for the opportunity to speak and present to this meeting of 128 Innovation Capital Group / Blitztime on the subject of “Employment Termination and Severance Negotiations” from Boston, Massachusetts, on September 24, 2009.

The purpose of these materials is to to offer an outlines on the subject matter of the presentation to officers, executives and employees and ssome business owners on the issues of employment termination, wrongful termination and severance negotiations. Thus, it is hoped these materials will be informative to those in attendance. These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

Determining which tool offers the best protection

admin — Fri, 05 Jun 2009 17:35:33 +0000

By Robert A. Adelson

Copyrights and trade secrets can be important assets that can add value to your business.

They are also an important protection for work of your creation or customer information, know-how and other business information developed over time or in current use and proprietary to you.

If properly used they can give you an edge over your competition in business and serve as a low cost, practical barrier to entry.

The best protection for inventions is utility patents, which offer a 20-year monopoly from date of grant. Even those who do not copy or independently develop are barred from use unless they license from the patent holder.

However, to gain patent protection, the invention must be a “useful process, machine, manufacture or composition of matter” or improvement of the same. It cannot be obvious and must be an advance over prior art, with the application filed within a year of first publication, public use or offer for sale. It must be fully disclosed and can take several years and generally $7,000 to $12,000 in filing and legal fees, and after vetting by the U.S. Patent and Trademark Office, it may prove be too narrow to protect against infringement.

Thus, if the invention is not intended for mass marketing, or if disclosure, time delays or costs or patent requirements raise concerns, then, copyright or trade secret protection may offer cheaper and more practical intellectual property protection.

Copyright filings:

Copyright is the exclusive right to copy and control publication of original expressive work fixed by the author in a written work, sketch, computer code, audio or video recording, architectural work or other tangible medium. Thus, copyright protects the expression but not the idea itself and bars against copying but not independent development.

Federal filing within three months of publication or prior to infringement is needed to gain statutory damages and attorney fees in later infringement actions to defend works. A deposit of materials is needed, but filing costs and expected attorney fees are a fraction of patent costs — generally, less than $1,000, even with compilation and serial filings, and sometimes even less than $500, with registration secured in months not years. Yet, duration is longer than patents — author’s or joint author’s life plus 70 years, or 35 years from author’s transfer, or 95 years from publication in case of “work for hire.”

Copyright protection for computer source and object code is also possible, where disclosure in the form of Copyright Office deposit blots out most of the source code.

Trade secrets:

A trade secret may consist of any formula, pattern, device or compilation of information used in one’s business that gives the owner an opportunity to obtain advantage over competitors who do not know or use it.

Thus, while trade secrets have the broadest scope in information covered, with novelty or even expression not required, they are the hardest to safeguard because they must be kept confidential and vigilance is needed.

State law and court decisions that uphold trade secrets look to these elements:

• Extent to which information is known outside business and within business.

• Extent of measures taken to guard the secrecy of information.

• Value of information to owner and its competitors.

• Amount of money or effort expended in developing information.

• Ease or difficulty to properly acquire or duplicate information by others.

Trade secret protection involves confidential information agreements with employees, contractors and sometimes distributors and clients as well — those with access to the information and further programs internally to demonstrate care and protection afforded information. Attorney fees for such work may be $1,000 or more, still far less than patent costs. Duration is as long as secret is maintained. Some continuing trade secrets have existed for centuries.

Robert A. Adelson is a corporate, tax and intellectual property attorney and partner at Boston law firm Engel & Schultz LLP.

______________________________________________________________________

The above “Insider View” article – “Determining which tool offers the best protection”

appeared in the Boston Business Journal, Issue June 5-11, 2009, page 38 in the BBJ’s Intellectual Property Law focus section:

If you have any questions or comments on this article

If you or your company would like help to protect written materials you have developed in your business, or artistic, music, video or literary works
If you or your company would like help to protect confidential information from use in competition with your business
Or if you have other questions or issues involving or copyrights, trade secrets, trademarks or a service marks or other intellectual property

The author can be reached as follows:

Robert A. Adelson, Esq.

Engel & Schultz, LLP

265 Franklin Street, Suite 1801

Boston, MA 02110

Telephone: 617-951-9980 ext 205

E-mail: radelson@engelschultz.com

Engel & Schultz, LLP » Consultants and Contractors

Entrepreneurship 101: Starting a Successful Business

ABOUT THE SPEAKER AND PRESENTATION

Consultants: How to make sure you get paid for your work

Respecting Consultant needs & value of your services

Innovative Billing approaches for cash-strapped clients

Protective Methods to enhance Chances for payment

Legal Strategies for collection

Getting Paid in Stock, Options or Promissory Notes: Negotiating Terms

ABOUT THE SPEAKER AND PRESENTATION

Getting Paid In Stock, Options Or Promissory Notes: Negotiating Terms of Non-cash Payment for Consulting

Negotiating Compensation, Employment and Severance Contracts

Making Effective Contracts: To Advance Organizational Success in a Changing Competitive Marketplace

EXAMPLE (Hypothetical and Fictitious)

DreamSoft Consultants – Making Effective Contracts

MAKING A VALID CONTRACT

►What makes them unenforceable?

►When to leave things unenforceable?

►Can Oral contracts be enforced too?

MAKING A GOOD CONTRACT

►How to cut legal costs to enforce the contract

►When should I seek Rob Adelson’s help?

Production/ Supply Contracts /Purchase Orders

Subcontractor / Service Provider Agreements

Software Development Agreements

Dealer and Distributor Agreements

Sales Representative Agreements

Value Added Reseller Agreements

Product Licensing

ABOUT THE SPEAKER AND PRESENTATION

How To Maximize Your Return, As Owner, From Your Business

Business Formation and Early Stage Tax and Legal Issues

DISADVANTAGES of Incorporation

Distribution of Products or Services

Venture Capital Finance

Employment Temination And Severance Negotiations

ABOUT THE SPEAKER AND PRESENTATION

Determining which tool offers the best protection