I’m honored to have recently been elected to the national Board of this terrific 30-year-old nonprofit organization, which is focused on fostering high school completion, college access and college completion for underprivileged children. The Foundation’s 30th Anniversary ‘Spirit of the Dream’ Gala is Tuesday evening, June 14, 2011. Click here for more information. This year’s Honorees include former NJ Governor Tom Kean, Shmuel Meitar (founder of Time To Know) and Stuart Udell (CEO of Catapult Learning and Chair of the National Dropout Prevention Center). We expect to have over 500 guests including leaders in the educational reform movement.

If you’ll be in or around the NYC area in mid-June, please consider attending the Gala. If you’d like to learn more about the Foundation in general, please feel free to contact me.

Jeff

I’m pleased to report that my panel was featured in a news segment about the The US/Israel Venture Summit, in an April 8th broadcast of The Jewish Channel. A link to the section of a YouTube video covering the panel is below. Fast forward to the 8:31 minute mark in the video.

I’m pleased to announce that Dorsey & Whitney is the Diamond Sponsor of the US/Israel Venture Summit, now in its 5th year, which is being held at Digital Sandbox in downtown NYC on Wednesday, March 30th. This conference will bring together over 50 venture capital firms and over 300 attendees including entrepreneurs, investment bankers and professional advisors, all interested in the activities of cutting-edge Israeli companies in the United States. This year’s conference will include companies from three major tracks that correspond nicely with Dorsey’s areas of expertise:

• Technology – see Dorsey’s Technology, Internet and e-Commerce Industry Group
• Life Sciences – see Dorsey’s Life Sciences Industry Group
• Cleantech – see Dorsey’s Cleantech Industry Group

I will be moderating the 9:00am panel, The Changing Venture World: How Does It Affect Israeli Startups?, which will feature VCs from Lux Capital, iNovia Capital, Canaan Partners, Norwest Venture Partners, Clarian Health Ventures, DFJ Gotham Ventures, and Robert Bosch Venture Capital.

Mike Moyer will moderate the 3:00pm panel, Solid Clean-Tech Deals Investors Will Fund, which will feature VCs from Sail Venture Partners, Greenhouse Capital Partners, Good Energies, WAVE Equity Partners, Signal Lake, and Kleiner Perkins Caufield Byers.

Steve Khadavi will moderate the 4:30pm panel, The Venture Roadmap: What Israeli Startups Need to Know To Attract US Capital, which will feature VCs from Mass Medical Angels, LaunchCapital, Rock Spring Ventures, Bridge Investment Fund, BD Technologies, Chart Venture Partners, and Highland Capital Partners.

Five members of Dorsey’s Israel Practice Group are planning to be at the US/Israel Venture Summit:

• Gary Abelev, Intellectual Property Group (Patent Strategy, Prosecution and Enforcement)
• Jeff Fromm, Corporate Group (Venture Capital, M&A and Emerging Companies – particularly technology companies)
• Mark Kaster, Regulatory Affairs Group (Risk Management, Health and Safety, Business Transactions)
• Steve Khadavi, Corporate Group (M&A, Capital Markets and Public Companies)
• Mike Moyer, Corporate Group (Venture Capital, M&A and Emerging Companies – particularly cleantech companies)

If you would like to discuss this conference or learn more about our capabilities with respect to cross-border business with Israeli companie and investors, please feel free to contact any of us.

Reprinted from Matt Bartus’s blog, A View From The Valley. Posted there on October 12, 2010.

Today the Palo Alto office of Dorsey & Whitney released the results of a survey we conducted of startup founders and CEOs about the criteria they use to select investors. The full survey can be downloaded here and a press release about the survey’s key findings was released today here.

Many people have asked us why we conducted the survey. First and foremost, we wanted to get a snapshot of the early stage financing market to determine if the trends we are seeing in our own practice of representing startup companies and investors matches up with broader trends in the market (and it did).

Second, a lot of the talk in blogs and popular press about the different types of investors and the purported competition of Angels vs. Super Angels vs. VCs has focused on how investors define themselves. We wanted to give entrepreneurs a voice to express what is important to them and how they view investors. We think the results speak loud and clear.

First, some information about the survey:

• The survey was conducted online over a 4-week period. We had 363 respondents that completed the survey. Participants were automatically registered to win an iPad, which went to Hiten Shah of KISSmetrics (congratulations Hiten!).
• 42% of survey respondents were based in the San Francisco Bay Area/Silicon Valley region, with 20% international and the rest distributed throughout the U.S. All respondents had either raised funds over the past 12 months and/or were planning to raise funds within the next 12 months.
• Respondents represented a range of sectors, spanning IT infrastructure, software, gaming, life sciences/biotech, and green tech/energy. However the majority of startups participating in the survey were in the consumer Internet, cloud computing/SaaS or mobile sectors, 34%, 17% and 13%, respectively.

We encourage people to read the full survey because it produced some interesting results, some of which are highlighted below.

While CEOs still find traditional deal terms like valuation, dilution, liquidation preferences and board control as very important elements in completing a deal, the survey illustrated the importance of other criteria. Following are some of the findings:

• 91% ranked the speed at which the deal can get done as “somewhat important” to “very important.” >tweet this stat<
• 92% ranked whether the investor understands the startup’s funding requirements and encourages them to not take more or less than what the business requires as “somewhat important” to “very important.” >tweet this stat<
• While valuation rated important, a full 32% of CEOs said that this factor was only “somewhat important” to “not important.” >tweet this stat<

• 64% of the respondents are seeking $1 million or less in funding, underscoring the new funding requirements of today’s tech startups. >tweet this stat<
• 48% of respondents ranked prior relationships with an investor as “not important.” >tweet this stat<

• The perception of the investor’s brand does not appear to carry the same prestige and value with today’s entrepreneurs. Approximately 75% thought that a tier-one “brand name” VC was only “somewhat important” to “not important.” >tweet this stat<

*  *  *

We hope that people find the survey results informative. It’s an interesting time to be working with early-stage startups and the technology industry in general. We think the survey provided a helpful overview of what early-stage startups founders and CEOs are looking for from investors and where those needs are being met.

We welcome any feedback or input people have so please drop us a line or note.

– Matt Bartus & Ted Hollifield

I wanted to memorialize the passing of Gail Koff, a long-time client and friend, on August 31st. Gail quietly fought a type of Leukemia for more than 10 years, yet due to her strength and love of life the people around her never thought her final day could be so soon.

Gail was one of the founding partners of Jacoby & Meyers, which started more than 35 years ago as a law firm for the average citizen. Gail had many ups and downs at her firm during that period, but never dropped her focus on trying to improve the world through her legal services. She also spent a great deal of time and energy on the boards of non-profit organizations and educational institutions such as Bank Street College and The Calhoun School.

The New York Times wrote an obituary here. The Wall Street Journal wrote a remembrance piece about Gail here. The Wall Street Journal Law Blog covered her passing here. Death notices in the New York Times are here.

On a personal note, this is the first time I had a client who became a friend pass away and I find myself very saddened by it. Gail was truly an inspiration with her strength, vision, perseverance, commitment to social causes, and love of family, friends and life. I consider myself very fortunate to have known her and will truly miss her.

Rest in peace, Gail.

On August 17th, I had a real treat of joining my non-profit, pro bono client, University of the People, for the closing bell ceremony at NASDAQ. UoPeople, the first tuition-free online university, was founded by Israeli education technology entrepreneur, Shai Reshef. You can learn more about this terrific organization that is trying to democratize higher education globally at www.UoPeople.org. You can view the video of the closing ceremony here.

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Mike Droke, the head of our Seattle office and the Co-Chair of Dorsey’s Labor & Employment practice, recently spoke on Fox Business News about some of the pitfalls of misclassifying people as independent contractors. Federal tax authorities are increasingly targeting companies that treat people as contractors when they really should be treated as employees. Mike’s interview, linked below, provides a good overview of the topic.

TV interview:  Hidden Dangers of Independent Contractors

This post is being filed in my new “Strange (or Interesting) Corporate Laws” category. This one came up in a recent Delaware Supreme Court case entitled Whittington v. Dragon Group, L.L.C.

The general statute of limitations for contract disputes in Delaware is 3 years. However, if the contract in question is “sealed”, then the statute of limitations is 20 years. Not much has to happen for a contract to be “sealed” – for an individual, the court ruled, all it takes is for the word “seal” to appear next to the signature. Those four letters, usually glanced over quickly (if at all) in the signing process, extended the statute of limitations by 17 years.

I am philosophically (and practically) opposed to situations where small, unintended differences result in large, unintended consequences. Four letters, 17 years, is such a situation. Similar differences apply in many other states as well.

The lessons:

• Every word in a contract matters. Therefore, nitpicking sometimes matters.
• The governing law in a contract matters.
• Contractual obligations may be explicit (written expressly in the contract) or implicit (applied by statute or case law, where not covered expressly).
• Careful legal negotiation takes into account all of the above.

A more comprehensive review of the vagaries of profits interests and UARs is beyond the scope of this post, but the key message is that there are effective ways to incentivize employees of an LLC and that care must be taken to determine the optimal way for particular companies and individual employees.

by Gary M. Gansle, partner in Dorsey & Whitney’s Labor and Employment practice

For far too long, employers have taken a laissez-faire approach to classifying workers as independent contractors in order to help control costs, streamline their organizations, and honor the stated preferences of their workers. However, the cost associated with being undisciplined and incorrect about these classification decisions can be quite expensive, and is likely to get more expensive in the near future given the Department of Labor’s “Misclassification Initiative,” which is designed to identify and reduce employee misclassification.

Go to The Association of  Educational Publishers’ Dorsey & Whitney Legal Corner.

In counseling entrepreneurs, one of the first questions that arises is about choice of entity type – in other words, should the entrepreneur’s business be contained in a C corp, S corp, LLC, limited partnership or general partnership, or be structured in some other way? While there are obviously a number of factors that must be considered when answering this question, my answer is – with few exceptions – that an LLC is the best form. This is not yet the universal view, and some excellent attorneys have a different predisposition. So, I’ll lay out my basic reasons here, and I’ll be curious for comments – especially from people with a different viewpoint.

To keep it simple, my reason is that an LLC provides the benefit of limited liability for the owners, pass-through tax treatment (that is, no double tax), and ultimate flexibility in structuring the equity ownership and management rights of owners. No other entity form has this combination of features.

I sometimes word my advice on when to switch from an LLC to a C corp in this way: “when dragged kicking and screaming into being a C corp”. The main downside of C corps is that they result in double tax – once at the corporate level, and once again when profits are distributed to owners. Even if the profits are not distributed, upon the sale of the business there will either be two levels of tax (in case of a sale of assets) or an implicit reduction of sale price (in case of a stock sale that does not permit a write-up of the value of the assets for tax purposes).

Here are three main downsides to LLCs, along with my counter-arguments:

• First, the legal and accounting costs to set them up and administer them properly are somewhat higher than with corporations. This is true – with all the flexibility comes some complexity, and partnership (pass-through) accounting is, I believe, intrinsically more difficult than corporate accounting. However, the effect of double taxation can be almost 15 percentage points of tax on all of the business’ profits and ultimate exit value (above the original investment). Such big dollars, in my view, outweigh the transaction costs and complexity of operating an LLC.
• Second, most venture capital firms don’t want to (or refuse to) invest in LLCs. This is also true, at least for now. The most common and well-understood form of venture investment is still preferred stock in a corporation, and it is difficult to exactly match that in an LLC. Also, something called UBTI (unrelated business taxable income) that can result from ownership in a pass-through entity, can create a problem for some VCs. I have three responses to this:  (1) a small but growing number of VCs, and even more strategic investors, are willing to invest in LLCs to get the tax savings; (2) a transaction can be structured so the VC invests through a “blocker” C corp that, in turn, invests in the LLC; and (3) this is no reason to start out as a C corp – only to become one later if you have a VC that is willing to invest and demands it (getting a lot of capital is a good reason to let go of the “kicking and screaming”).
• Third, equity compensation arrangements for employees are somewhat more complicated in LLCs than in corporations. Again, guilty as charged. In corporations, the tried-and-true method – albeit not without its own problems – is stock options. In LLCs, the most common method is “profits interests”, which are inartfully named but are in fact equity interests in the LLC. More on these creatures in another post, but, again, I view the absolute dollars of tax savings as outweighing the challenges of equity compensation in LLCs.

Please share your experience and views on these topics.

In Aviad Meitar’s book, An Unimaginable Journey: How Pepsi Beat the Odds in Romania, he recounts his incredible experience in launching, building and selling the Pepsi business in Romania. His focus is on the business lessons and personal highs and lows (mostly highs) of that experience. Although he is also a lawyer (non-practicing), the book does not delve into the legal lessons of our journey.

As the General Counsel of Pepsi Romania from 1991-2006, here are the top 10 legal lessons that I learned, which I regularly have the chance to apply in current representations. Many of these lessons can be gleaned from the stories presented in Aviad’s book.

1.  Control the draft – you get countless opportunities to impact the deal in ways that you never could if you merely commented on the other side’s draft.

• See my blog post entitled “Control Freak“.

2.  Contracts matter, including so-called boilerplate - yes, it is true that contracts are often put in a drawer and not looked at for long periods of time; but very often, eventually, significant business and economic rights or obligations will flow from just a few words in a contract – and you will be glad if sufficient thought was given to those specific words at the time the contract was negotiated.

• See, for example, my blog post about “The ‘Notices’ Provision“.

3.  People matter more than contracts - the value of the relationship established by a contract, and the ease of working with the contract over time, depend more on the quality and intentions of the people on both sides than on the precise terms of the contract. One key thing to evaluate during the contract negotiations is your sense of the other party’s style and character, which are likely to impact you in the future – for better or worse.

4. In negotiating with people from another country or region, don’t be overly critical of their system - for every outrageous law or business practice in their country or region, you can think of an outrageous law or business practice in your home area. This is a good exercise to avoid ‘getting on your high horse’, which is important for building trust and understanding with your negotiation partner.

5. If you’re building a business around someone else’s brand or technology, make sure you have strong, long-term rights – reduce the risk of losing a business or technology into which you’ve invested enormous amounts of time and money.

6. Always play by your own (high) rules of ethics and legality, or don’t play - the excuse that “everyone here does it” is neither a justification nor will it be a good defense in the press or the courts if bad behavior comes out. Operating with high integrity occasionally has a short-term cost but is by far the better long-term strategy.

7. In negotiating with people from another country (especially with a different primary language), don’t forget that understanding each other’s words is not the same as understanding each other’s meanings – the opportunities for misunderstandings, both in literal meaning and in context, are countless. Effective communication takes patience, double- and triple-checking meaning, and flexibility to correct misunderstandings once discovered.

8. What you don’t think of or don’t know can be as important as what you do think of and do know – it’s critical to constantly expand your horizons in thinking about legal opportunities and risks. The most valuable or most costly ones may be overlooked if you do not spend dedicated time trying to ‘think outside the box’.

• See, for example, my blog post entitled “The Taxman Always Rings Twice‘.

9. The worst compromise can be better than the best dispute – except in rare cases, the management distraction and dollar cost of a dispute is too great; and no one says you’re guaranteed to win anyway. It is rarely a good idea to pursue litigation out of principle; rather, litigation should be pursued only if it is expected to yield a good economic return on its ‘fully loaded’ costs.

10. At the beginning, plan for the end - it is sometimes awkward to talk about the end when you’re negotiating the beginning, but all things – good and bad – come to an end. The long-term value of a relationship often depends as much on your rights on ‘exit’ as it does on ‘entrance’ and throughout the term. Make sure to create a setting in which you can exit well.

• See my blog post called “Joint Venture Tips“.

I’ve been working on this for a year and am excited about my firm’s commitment to this innovative, rapidly growing and essential industry. We have 35 attorneys who have joined the group so far. Please contact me if you’d like to learn more about our ability to add value to your educational publishing, technology or services business.

A copy of the firm’s press release is reprinted below. You can also find it here:  http://www.dorsey.com/educ_pub_industry_group_pr/

Jeff

February 24, 2010

MINNEAPOLIS – (February 25, 2010) – International law firm Dorsey & Whitney LLP announced today that it has established the Educational Publishing, Technology and Services industry group within the firm to serve the unique legal needs of educational companies and organizations.  The industry group includes lawyers from across Dorsey’s offices and practice areas, with experience representing clients in all industry sectors including traditional and online publishing, testing and assessment, e-learning, and academic and administrative services for the early childhood, K-12 and higher education markets.

“Dorsey recognizes that educational publishers, technology companies and service providers need effective legal representation as they evolve to meet the rapidly changing educational and business models of the 21^st Century,” said Jeff Fromm, Dorsey partner and co-head of the new industry group.  “This group brings together practitioners from throughout the firm, many of whom have years of experience serving educational companies and organizations, to provide an integrated, targeted solution for our clients.”

Ken Cutler, head of Dorsey’s worldwide Transactions Group, said “Dorsey has always served educational publishers, technology companies and service providers. We are pleased to formalize this practice into an industry group that will meet the dynamic needs of our clients in a more efficient and effective manner.”

Lawyers in the industry group counsel clients on a wide range of legal matters including mergers and acquisitions, equity and debt financings, intellectual property (copyrights, trademarks, patents and trade secrets), tax planning, and commercial litigation.

Dorsey is a firmwide member of the Association of Educational Publishers and the Education Division of the Software and Information Industry Association, through which it keeps current on industry trends and contributes to industry thought leadership and knowledge development.

To learn more, visit the group’s web page at www.dorsey.com/educationindustry

My friend, business partner and client, Aviad Meitar, just published a very interesting book about our experience in building the exclusive Pepsi-Cola bottler in the country of Romania. We made the first trip to Romania together in January 1991, just 13 months after the revolution that overthrew Ceausescu. Since that incredible first encounter, Aviad always said one day he would write a book about it. Now the book, An Unimaginable Journey: How Pepsi Beat the Odds in Romania, is out, published by Amazon’s subsidiary, BookSurge.

Here’s the independent review from ForeWord Clarion Reviews:

“The journey described by Aviad Meitar is nothing if not intriguing. This well-written and concise eyewitness account of building an American brand in an Eastern European country offers rare insight into how a business can succeed even in the face of the most daunting challenges.”

At the beginning of each chapter, Aviad presents a voyage-themed quote that relates to the story in that chapter. Most of these quotes were new to me, and many seemed both insightful and of general applicability to emerging companies and entrepreneurs. In this first post about this book, I present my favorite quoted quotes:

“A ship in port is safe, but that is not what ships are built for.”

Grace Murray Hopper

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones that you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

Mark Twain

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

William Arthur Ward

“Without the element of uncertainty, the bringing off of even the greatest business triumph would be dull, routine, and eminently unsatisfying.”

J. Paul Getty

“Most people never run far enough on their first wind to find out they’ve got a second.”

William James

In my next post, I will write about legal lessons learned from our unimaginable journey.

‘No’ is a powerful word in business negotiations. If used wisely, it can help you (or the other party) achieve the target objectives. If misused or misinterpreted, it can crater (or at least hamper) a deal for the wrong reasons. ‘No’ is such a problem in business negotiations that the seminal book on the topic is called Getting to Yes.

One of the most effective ways to use the word is what I call “early and often”. If there is a critical issue of fundamental importance, it is generally best to put that on the table right up front, so there is no misunderstanding later on. Think of “no personal guarantees”. If you don’t make that ‘no’ an unequivocal condition of the deal at the beginning, two things may happen: first, you will probably face even more friction in the deal when the issue arises later; and second, you will probably need to trade something extra of value in order to prevail on the issue. In this instance, there is no word better than ‘no’.

On the flip side, sometimes ‘no’ is blurted out during the heat of a negotiation, as a means of rejecting a request of the other side that you view as unreasonable. Here, the precipitous word choice can damage trust and create an impediment to a necessary compromise. It would be more effective to say, “I’m sorry, I can’t do it that way due to ________, but do you have any other ideas?” The actual word ‘no’ can have the effect of shutting down an option, while a euphemism meaning much the same thing can open new options and help bridge a gap.

Perhaps the riskiest of all ‘no’s’ is the one that comes up at the end of a deal, when the negotiations are nearly complete and a new issue arises. Both sides may be suffering from deal fatigue at that point, so it may not be as easy to problem-solve. Finally, you decide that you need to draw a line in the sand, and you are sincerely prepared to kill the deal if the other party does not accept your position. This type of ‘no’ brings the negotiation to the brink of collapse, often on an issue that could have been addressed in a more favorable and constructive manner earlier in the process. This type of ‘no’ can also damage the longer-term relationship, because issues do start to look more like ‘zero-sum’ issues that late in the deal. Importantly, in order to prevail on the point you have to effectively declare that the value of the entire potential relationship is less than the value of that one final point. For this reason, I rarely recommend brinksmanship of this type except when the issue truly does have such pivotal importance.

My final thought about the word ‘no’ is that it is often best to simply ignore it when said by others. We can’t control when or how our counterparties use the word, but we can control how we respond to it. Whether it comes up ‘early and often’, as a result of blurting out, or on a sticky issue at the end of the deal, I find it helpful to assume the other side meant to say “I’m sorry, I can’t do it that way, but do you have any other ideas”. If they really mean ‘no’, they can always shut their notebooks and walk out the door. As long as the other person is at the table, I assume that he wants to do the deal. And ‘no’ is just an invitation for me to help him find a way to do it.

In the past few years, I’ve worked on an unusually large number of matters requiring complex tax analysis in high-stakes situations. While I’ve always had a healthy respect for the importance of tax issues, these more recent engagements have left me in absolute awe of the risks associated with the tax code. Seemingly harmless transactions consummated years before can dramatically alter your tax position years after.

The notion I wanted to get across with this post’s hopefully catchy title is that there are always at least two occasions on which tax advice is critical for any transaction or business arrangement:  first, at the time of entering into the transaction or arrangement; and second, at the time of exiting the transaction or arrangement.

A corporate and transactional lawyer is, by definition, at least half a tax lawyer — he or she must have enough knowledge and experience to spot issues, and then must have a full tax lawyer nearby. Obviously, tax advice should always be obtained in connection with any venture capital financing or merger & acquisition transaction. But, the tax code is full of other tricks and traps to catch the unwary. Some of the usual suspects in my practice include:

• complex rules regarding limited liability company (LLC) membership interests, including the use of profit interests for purposes of employee or consultant compensation — these issues seem particularly acute when a company wants to superimpose a corporate-style capital structure (e.g., common stock, preferred stock, options and warrants) on an LLC
• complex “change of ownership” rules that can dramatically limit the value of net operating loss (NOL) carryforwards — these rules are specific to ‘C’ corporations (as opposed to pass-through entities such as ’S’ corporations or LLCs) and can pose problems whenever there are meaningful share issuances or transfers; it is important to keep track of the ‘change of ownership’ test on the occasion of each such issuance or transfer
• complex rules governing the use of equity incentive compensation, such as non-qualified stock options (“NSOs” or “non-quals”), incentive stock options (ISOs), restricted stock, and stock appreciation rights (SARs) — the decisions on this topic impact the tax benefits available to the company and the after-tax income ultimately received by the recipient, and often have unintended or at least under-appreciated tax, accounting and financial consequences for both sides
• Section 409A rules that regulate details that must be included in any deferred compensation arrangement (which is quite broadly defined to include most compensation that is not paid in cash at the time it is earned)
• Section 280G rules that greatly complicate “golden parachutes” (i.e., substantial compensation payments due as a result of a change of control transaction)
• Section 83 rules that provide an optional election (under Section 83(b)) in connection with the receipt of restricted property (such as restricted stock or profit interests) that vests over time (while the election allows the recipient to eliminate the tax that would be due at each vesting date, it can result in a higher tax under some other circumstances)
• and others…

Effective tax planning can create substantial economic benefits for a company (or individual), while a lackadaisical approach can result in real tax costs. Although there is a fairly high upfront cost to good tax planning, in my experience it is a fraction of the cost later incurred in trying to fix a tax problem that otherwise could have been avoided. Unfortunately, since most people have not personally experienced a large unexpected tax bill, the risk of such a tax bill is often underestimated; nevertheless, it is quite distressing if and when it comes. Conversely, tax savings create dollar-for-dollar value that is available to fund working capital, growth or distributions to owners. Accordingly, my strategic advice to companies (and individuals) is to discuss tax issues with their legal counsel early and often, no less than on the ‘entry’ and ‘exit’ of every significant transaction.

It’s been a while since my last post. Since then, I became a Partner in the Corporate and Transactions Group at Dorsey & Whitney LLP, a Minneapolis-headquartered firm that has 650 lawyers in 19 offices throughout the U.S., Canada, England, China and Australia. At Dorsey, I have an exceptional group of colleagues who greatly increase the depth and breadth of services I can offer clients. It’s also a firm that places a high value on professionalism and continuing legal education, which I really appreciate. Our internal training department, DorseyU, has several full-time employees who coordinate multiple educational programs for our lawyers each week — it’s already been a great resource for me.

In thinking about the “re-launch” of this blog, I decided to rename it from Business Law Insight to Business Law Strategy. The purpose of this blog, as always, is to facilitate an understanding of legal principles in order to help companies achieve their business strategies. While this blog strives to provide insights, of course, the real emphasis is on strategy. I hope you’ll find that the posts meet that goal.

I am also happy to announce that Dorsey became a new member of the Software and Information Industry Association, and I am in the process of forming a Publishing, Education and Training Sector Group within Dorsey. Among other things, I anticipate that this Sector Group will engage in the re-launch of the Surveys of Education Venture Capital & Private Equity that I’ve conducted on several occasions since 1998. We also intend to develop various webinars, presentation and seminars on legal topics of interest and importance to companies in this sector.

Please feel free to comment on any of the posts on this blog, and/or to reach out to me either through the blog or directly to fromm.jeff@dorsey.com.

All the best for 2009.

There are some phrases that show up in contracts and simultaneously amuse me and remind me of the importance of careful legal drafting. One such phrase refers to the right of a company to “terminate the Executive” on certain grounds. After conjuring up images of Arnold Schwarzenegger in one of his most famous roles, I correct the language to say “terminate the employment of the Executive” or something like that.

But that’s not what this post is about. This post is about the need to differentiate between types of terminations and, indeed, types of resignations. Whether I am representing the company or the executive, I believe it is important to think in a disciplined manner about each such type and the consequences that should follow a termination or resignation of that type.

There are seven major ways in which an executive’s employment can end:

1. Expiration of the agreement;
2. Termination by the company “without Cause”;
3. Termination by the company “with Cause”;
4. Resignation by the executive “without Good Reason”;
5. Resignation by the executive “with Good Reason”;
6. Death of the executive; or
7. Disability of the executive.

Many readers may be familiar with the concept of “Cause” as a trigger for termination of employment. The key to drafting the ”Cause” definition is to determine the right language along three continua:

• how narrow (e.g., commit a crime) or broad (e.g., perform inadequately) the definition will be;
• how easy (e.g., Board decision) or difficult (e.g., court order) the trigger will be; and
• how soft (e.g., material breach) or hard (e.g., fail to achieve 25% growth in 2 years) the trigger will be.

To paraphrase a congressional aphorism, on these questions “where you stand depends on where you sit”.

The concept of “Good Reason” in termination provisions may be less familiar to some readers. Essentially, it is the flip side of “Cause” and forms the grounds on which an executive can terminate her employment with more favorable consequences than if she just quit for no reason. Common examples of “Good Reason” include salary reduction, demotion of position or diminution of responsibility, relocation, and the like.

In some cases, it is appropriate to hire an employee on an “at will” basis. An employment agreement can specify that the employment is at will, or it might be deemed to be the case (depending on state law) in the absence of an employment agreement. Either way, at-will employment effectively allows the company to fire the employee, or the employee to quit his employment, at any time with little or no notice and without any adverse consequences. In cases of at-will employment, the seven termination types above are not relevant.

For most executive employment relationships, however, things are not that simple. Rather, the company wants to know that it will have the long-term services of the executive, and the executive wants to know that she will have long-term job security. If either party’s long-term expectations are not met, certain meaningful consequences will follow.

Well, what can those consequences be? There are six major ones to consider:

1. Severance – payment of additional salary and/or anticipated bonuses for a period of time (perhaps in a lump sum) following the termination;
2. Bonuses – payment of past bonuses that have accrued but not yet been paid, and payment of current bonuses that have not yet formally accrued (fully at least);
3. Benefits - continuation of fringe benefits (at the company’s expense) such as insurance, automobile allowance, housing expenses, memberships in health clubs or country clubs, etc.;
4. Treatment of equity ownership or options – forfeiture of shares or options, accelerated vesting, buyback of shares (either at FMV or, in some cases, a discount or premium);
5. Treatment of restrictive covenants – especially any non-compete or non-raid/non-solicitation covenants; and
6. Other valuable matters in the specific employment agreement.

Without wanting to over-complicate matters, I believe it is useful to think about the seven types of terminations and the six types of consequences as a matrix, where you contemplate the reasonable answer for each box in the matrix one at a time. In a few agreements, I’ve included an actual matrix to set forth the rights, since that made them much easier to understand than the dense prose that normally appears in these sections.

One other feature that I’ve used effectively in some employment agreements, in appropriate cases, is to delineate two types of “Cause” (such as “Cause” and “Severe Cause”) and two types of “Good Reason” (such as “Good Reason” and “Severe Good Reason”). This feature should only be used when the substantial economics at issue warrant the extra complexity, but it can help to address the situation, for example, when a company would like to terminate an executive and stop paying his salary, and the executive is prepared to live with that but would not accept that such a termination would result in the forfeiture of the executive’s vested options.

While an elaboration of the arguments and counter-arguments with respect to each box in the matrix is beyond the scope of this post, they may be covered in a future post. In the meantime, readers are invited to make comments and ask questions about these topics on this page.

I find that many clients can benefit from an explanation of the fundamental differences between the main types of intellectual property. There are four main types that come up regularly in my practice:  copyrights, trademarks, patents and trade secrets. Here’s a very basic description of each type:

• Copyrights – provide ownership rights to original works of authorship; note that copyright protection covers the specific expression of ideas, but does not afford any protection to the ideas themselves.
• Trademarks - provide ownership rights to names, logos and taglines associated with specific products or services (technically, such rights with respect to services are called servicemarks, but the protection is roughly the same).
• Patents – provide exclusive exploitation rights to new inventions (e.g., technologies, business processes); note that the inventor must disclose the invention in detail in order to obtain patent protection, but is then given exclusive exploitation rights for a finite period of time.
• Trade Secrets - provide indefinite protection for inventions about which the inventor takes strict measures to protect secrecy.

It may be illuminating to further differentiate between the types in this way:

• Copyrights protect things like books, photographs, songs, etc., while trademarks protect the names (and logos) given to your company, products or services. Copyright protection has a limited life (for works in the U.S., life of author plus 70 years or, in case of corporate authorship, the shorter of 95 years from publication or 120 years from creation). Trademark protection can exist indefinitely, but may be lost if the trademark is mishandled.
• Patents and trade secrets can both protect inventions; however, patent protection exists for only a finite period (in the U.S., usually 20 years after the filing date) but requires full upfront disclosure of the invention, while trade secret protection can last indefinitely, so long as the invention is kept secret.

One of the most famous trade secrets ever is the Pepsi-Cola formula (many practitioners refer to the Coca-Cola formula in this context, but as a former Pepsi-Cola bottler I feel inclined to refer to the Pepsi-Cola formula). To this day, it is still kept secret and still benefits from trade secret protection. If the formula had been patented, the world would have known the exact formula and production method for most of the last century, and anyone in the world would have been free to produce the identical beverage after the patent protection had lapsed (almost a century ago).

For most of my clients (many of which are publishing and/or technology companies), the proper protection of intellectual property is critical to ensuring that they are able to raise equity capital when they need it and able to sell their business successfully when they want to. Intellectual property protection should be treated as a strategic imperative, in the same way as is product development and sales & marketing activities.

In future blog entries, I will discuss each of the main intellectual property types in more detail.

A confidentiality agreement is seldom a strategically important agreement. But you can make a strategically important mistake in signing one. The risk of this is exacerbated if you are among the droves of managers who sign confidentiality agreements (sometimes called non-disclosure agreements, or NDAs) without really reading them.

Here’s the key risk:  some confidentiality agreements, especially those offered up by potential business partners, will contain restrictions on your engaging in a competitive business (a ‘non-compete’) or on your soliciting or hiring employees, customers, suppliers, etc. (a ‘non-raid’). If you do nothing else before signing a confidentiality agreement, check to see if it contains one of these extraordinary restrictions.

Such restrictions are rarely appropriate at the early stage of discussions when the confidentiality agreement is signed. One exception may be where a seller is nervous about introducing a potential buyer to the seller’s key employees unless a non-raid is put in place. In that case or other unusual cases, it is important to carefully tailor the language to the specific circumstances so as not to be overly broad and restrictive. And, the document should be renamed — in my opinion, it is never appropriate to include a ‘non-compete’ or ‘non-raid’ in a document that only has ‘confidentiality’ in the title.

What else should you look for in a confidentiality agreement? While I’ll answer that question, first let me say that these agreements are both (1) usually impractical to enforce and (2) often used for information that isn’t truly confidential. The net result is that, in most cases, I think of these documents as good faith expressions of intent rather than legally enforceable agreements. (If you’re holding the Coca-Cola formula or some other highly valuable trade secret, this doesn’t apply to you.) Nevertheless, as a lawyer I have to focus on the details too (the devil often being in them):

• Check the survival period. Many confidentiality agreements say they expire after some number of years (e.g., 1, 2 or 3 years). Frankly, if you’re the recipient of information, that works to your advantage. However, I believe that most confidentiality agreements should not have an express time limit, because there is already the natural time limit of ‘as long as the information is confidential’. If you believe your business plan is confidential, I’m sure you wouldn’t be happy to see it published in the Wall Street Journal a year or even two years later. But that is exactly what an expiration date would permit. Note that there should never be an expiration date if you are disclosing true trade secrets.
• Consider whether you have to explicitly mark information as confidential (and explicitly summarize in writing any confidential information disclosed orally) in order for it to be treated as confidential. I usually try to avoid that requirement (especially when representing the discloser of information), instead relying on the broader, though admittedly tautological and vague, designation of all confidential information as confidential. Legally, information that is explicitly marked will be more protectable, but I am more concerned about (1) the practical reality that people will forget to mark all relevant information as confidential and (2) the implication that unmarked information is somehow ‘fair game’.
• Make sure the usual carve-outs to the definition of confidential information appear. Essentially, these say that information in the public domain, information you already possessed, information you receive later from someone else, and information you create on your own, are not considered confidential information under the agreement.
• Make sure you are expressly permitted to disclose information if required by law (e.g., government or court order). While many agreements contain this exception, they often add that you first have to notify the other party. Try to modify that language by adding ‘if permitted by law’, since you may be prohibited from telling the other party they are under investigation.
• Consider your future obligation to give back the confidential information. I try to avoid an automatic obligation to return the information at some later date (e.g., if a deal doesn’t take place), and instead give the other party the right to request it back. The main reason is that, in practice, information is rarely actually returned, and I prefer that my agreements not say things that I know will not occur. Also, you should ask for the right to destroy the information rather than give it back, particularly with respect to your own work product (e.g., notes, memos, etc.) that contain confidential information (as opposed to the original information that the other party delivered to you). Furthermore, you may want to carve out exceptions for archival copies (e.g., electronic backups that are difficult to purge) or copies held in your lawyer’s or accountant’s office.

One final, practical suggestion:  if you are going to sign the other party’s form of confidentiality agreement, it is better to sign their ‘mutual’ form rather than their ‘one-directional’ form — even if you will not be disclosing any significant confidential information to them. Besides the fact that you may end up disclosing some confidential information to them, it is also likely that their mutual form will be more balanced and reasonable in its specifics.