We are pleased to announce that Brenda Furlow has joined AlphaTech Counsel!  We are excited about this news and want to share a little about her.

Brenda has over twenty years of experience as an attorney, including more than a decade as general counsel, most recently at TomoTherapy and Promega.   As general counsel, Brenda has significant experience with preparing and negotiating contracts, addressing employee-related matters ranging from incentives to litigation, and setting up and overseeing international distributors and operations.  In addition, she has run an HR department and worked for a large Chicago law firm for a number of years.

Brenda is a great fit at AlphaTech as not only is she an experienced practitioner, she understands the needs of emerging companies.  She is well-versed in helping executives balance important legal and business issues.  Brenda has quickly stepped in and is already actively engaged under our On-Call General Counsel service with one of our clients.

Here is more information about Brenda: http://alphatechcounsel.com/furlow-bio.html

Executives who have not led a sale or merger of a company before are often caught off-guard by how much work goes into due diligence. For many who are successful, the building of the business crescendos and culminates in a sale. The term sheet is signed, you smell the money, and perhaps even book your post-closing vacation, but you may not realize that you’ve just signed up to run a muddy obstacle course race while also running your business. Your next several weeks, maybe months, will be consumed by responding to page after page of information and document requests from your potential acquirer. You will be questioned about all aspects of the business. Because you want to keep the pending transaction under the radar and limit the impact on your business if the deal does not go through, you assemble the smallest employee team possible to help you with the transaction. You may find yourself requesting files and summaries from various employees in the guise of another business need, copying after hours, and arranging off-site meetings with the acquiror.

To preserve some of your sanity during an M&A transaction, there are steps that you can take in advance to prepare for due diligence.

What Makes Your Business An Attractive Acquisition Target

The documents and information that will be of greatest interest to an acquiror depend on the reasons the acquiror wants to buy your company. Is the acquiror primarily interested in your proprietary technology? Your customer base? Your shared supply needs? Your distribution network? Your skilled labor force? Assess your assets, the competition, and the market to determine what makes your business an attractive target. Understanding this will help you identify which documents and information buyers will scrutinize and therefore require the greatest attention.

Financial Acquisition

You might conclude that an acquiror would be purchasing your business mainly for financial reasons, such as to increase revenue via your key customers, take advantage of your distribution network, or combine purchasing power from suppliers. In that case, you should make sure your key customer, distributor, and supplier contracts are current, signed, and complete, and that they are assignable upon a change in ownership. Determine whether you have obtained and are keeping up-to-date the necessary permits and licenses. Limit the exclusivity or non-compete arrangements with global distribution and supply partners that may impede an acquiror’s business. Your financial statements should also be in good order, audited (if possible), and GAAP-compliant, as the acquiror will likely want to confirm the amount of revenue, profit margin, cost of goods, and other key financial drivers.

Intellectual Property Acquisition

If the main attraction of your business is the intellectual property behind it, then you will want to pay particular attention to your IP portfolio. Figure out which of the IP assets are the likely to be most appealing to buyers and have them thoroughly analyzed to make sure they are properly protected, including perhaps securing IP monitoring services to find other parties who may be infringing. Make sure you have an updated, complete list of all of your IP assets and that a docketing process is in place to ensure that necessary renewals and other filings are timely made. Verify that you have invention assignments from all employees and consultants who have contributed to your technology. Implement physical, technical, and administrative safeguards of your IP and other confidential information. Determine whether there are any existing or potential infringement IP claims that you will need to disclose or that can be addressed beforehand.

Core Records of Every Business

In addition to the documentation relating to your key assets, acquirors or their counsel will examine certain core documents that apply to almost any business.  These include, among other things, records relating to incorporation/organization, minutes, stock or other ownership interests, employees, loans, facilities, contracts, disputes, regulatory compliance, and tax filings. With all of these, it’s helpful for your team to get in the habit of maintaining organized files, entering key data into tracking tools, and developing processes to monitor details and meet deadlines. As you deal with the crisis of the day, it’s easy to let organization slip, but the devil’s in the details. During the due diligence stage of a deal is not the time to find out that you are missing signed invention assignment agreements, did not finish papering that stock redemption when so-and-so left, or have not been properly filing tax returns and corporate qualifications in other states.

Preparing in Advance for Due Diligence

These just scratch the surface of what you will be required to gather or prepare and provide. Once you get into house-cleaning mode, you will see other documents and information that need to be organized. Going through this exercise uncovers many matters that require follow-up. Better to tie loose ends when going about “business as usual” instead of scrambling to meet a due diligence deadline.

Establishing good record-keeping habits early or at least well in advance of a transaction will help keep momentum as you work toward the closing, reduce the chances that any skeletons in the closet will become bargaining chips for the acquirer, and preserve some of your sanity.

94labs incubator (formerly Spreenkler incubator) recently showcased the fourteen companies graduating from its summer session. The event was hosted at the Wisconsin Institutes for Discovery and featured the founders of the fourteen companies as well as the five companies emerging from the second-stage accelerator class. Joe Kirgues, Greg Meier, Steve Glynn, Emmanuel Mamalakis and others from 94labs led the event.

In introducing the 94labs incubator to the more than 300 attendees, co-founder Joe Kirgues explained the four main goals for companies going through the incubator: (1) develop a scalable business model, (2) build a software prototype, (3) identify and talk with potential customers, and (4) create an investor presentation. The idea is that the companies then leverage the capital, partnerships, and customers that they gained while in the program.

Each of the founding teams gave a four-minute pitch with slides. Steve Glynn emcee’d the program. Despite the stereotypes about young engineers, computer science, and math major graduates, the speakers were dynamic and articulate. Each team wore matching t-shirts with their company logo.

Here are short synopses of each of the companies:

Jungol

Jungol offers an online platform to enable organizations to work together, with tools like to-do lists, file sharing and discussion boards, increasing efficiency and collaboration, leading to greater donations.

Door 6

Door 6 is developing a mobile game platform for making hard core games for mobile devices. The company was a finalist in Google’s Android Developer Challenge 2.

Quasi Electronics

Quasi Electronics offers a web-based tool and social community for non-professional market to design, build and order circuit boards. The tools on their site will facilitate the design and execution of electronics projects, targeting the rapidly growing non-professional market of students, DIYers, artists, and inventors.

Servique

Servique is an online platform for finding commercial and residential contractors. Their first city will be Milwaukee.

Open Education

Open Education offers a math learning software for teachers to create assignments online, where students can show their work, allowing teachers to track their progress.

Socle6

Socle6 provides a private social network that allows users to better manage the dissemination of pictures and messages that, through traditional social media, often fall into the hands of recruiters, ex-friends, and others who should not have access.

Shindig

Shindig offers a crowd-powered event booking platform that connects attendees, artists, and venues by allowing people to choose who they want to see perform where and when, by leveraging existing social media networks.

SASR

SASR has an iPad application called LivePaper for sharing class notes and communicating with professors and other students online, making studying more efficient and social.

ScioMD

ScioMD offers software to produce understandable lab test reports for patients. The software will compare a patient’s results with others in their demographic as well as give suggestions.

StyleShuffler

StyleShuffler offers a tool that gives personalized clothing suggestions, building on the customer’s preferences.

72 Web Design

72 Web Design offers professional campaign sites for small or local races, an alternative to more expensive web design firms. Their tools enable customization, online volunteer sign-up, and online political fundraising.

Searium Studios

Searium Studios is developing challenging multiplayer role-playing video game with unique, customized character and an immersive story targeting avid gamers, to be released on PC and xBox platforms.

PinPoint Software

PinPoint Software offers an expiration data management software called Date Check Pro, which tracks inventory expiration dates based on product purchases, saving grocers time and keeping expired items off of the shelves.

Jawnt

Jawnt is a social media related service that offers local hosts to provide authentic tours to travelers. The idea is to create unofficial and unique tours by giving people a “local’s view” of things to do.

The 94labs launch event was one of eight events that took place between August 18th and 27th as part of the Forward Technology Festival. The festival brought together up-and-coming and serial entrepreneurs, inventors, investors, and others plugged into the technology community.

A key financial backer of 94labs, Emmanuel Mamalakis, wrapped up the program with remarks that drew applause – that there’s no reason why Wisconsin can’t compete with the coasts in being a breeding ground for ideas, and that changing the culture of Wisconsin requires community, legislative, and family support.

The Capital Saving and Raising at the Brink event held Monday, August 22, 2011 as part of the Forward Technology Festival was a success!  Entrepreneurs, investors, government representatives, and others interacted and shared ideas in a collaborative forum.  We put together a resource page for the event: http://alphatechcounsel.com/capital-saving-raising-2011.html

Capital Saving

In the Capital Saving segment led by Troy Vosseller, attendees were divided into six teams, and each team collaborated to identify the ways in which they have saved capital in their businesses.  Teams simultaneously entered their ideas in different tabs of a GoogleDocs workbook.  Team captains pitched their team’s top two ideas, and attendees voted electronically on the top two ideas.  The winning ideas were:

(1)  Run contests for everything (from logo designs to product ideas)

(2)  Get your customers, strategic partners, and others to pick up company expenses

Members of winning teams selected prizes from local startups, murfie.com, FlattCola, and Sconnie Nation.  Many of the teams’ ideas are listed in the Team tabs in this GoogleDocs file: http://tinyurl.com/3h853a7.

Capital Raising

The second segment of the event focused on Capital Raising.  The session leader Matt Storms gave the attendees a choice of these topics to discuss, in addition to angel financings: founders financings, friends and family rounds, government and nonprofit funding and resources, and other topics such as incubators and venture debt.  Matt raised questions on these topics and attendees shared information and their experiences and perspectives as well as their questions.   Here is some of the advice raised by attendees:

• Develop Relationships.  Raising capital and entering into strategic deals starts with developing relationships.  Investors value the quality of the management usually more than the technology or business model itself.  You may not know who is an accredited investor, but the well-established angel networks are a good place to start.  It’s never too early to approach VCs, angels, or strategic partners, not to pitch them, but just to ask for advice and build relationships to lay the groundwork for potential deals, referrals, or leads later.  A personal introduction to them through someone you know helps provide credibility.  It can be surprising, the types of companies that large consumer companies are looking to acquire (e.g., software, social media, security).  Generally, these types of companies prefer to be in contact with startups early, so they can help shape the direction of the business.
• Expand Search Regionally.  In addition to looking for investors locally, expand your search to Chicago, the Twin Cities, and other areas in the region.  Network at area events and meetings.  Be prepared to answer what position local investors have taken with regard to your company, because the question will likely come up when searching for angel or venture capital money outside of your local area.
• Educate Yourself.  Educate yourself on how to read your financial statements and understand the investors’ economics.  Also, understand legal terms related to investments.  Model out different scenarios with spreadsheets (e.g., liquidation preferences).  You’ll be better equipped to discuss deal terms.  As a couple people said, entrepreneurs should know as much about legal deal terms as their lawyers.  How you fare at the end of the day has as much or more to do with the legal terms than your pre-money valuation.  As one person mentioned in connection with the sale of the company, you don’t want to end up wearing a barrel.
• Investment Range and Terms.  The amount of an angel investment can vary by type of business.  It can be as low as $20,000 or as high as $2 million, if syndicated.  Sometimes angel deals end up above $5 million, but that’s rare in our area.  Attendees suggested that $200k – $250k for an early stage IT deal is typical, whereas the range is higher for other types of companies due to greater development costs.  Go into a potential deal with angels knowing the terms you want — terms that are standard in the region and for your type of company and growth stage.  There is typically less negotiating with angels  if the proposed deals terms are within the range of what is normal.  Contrast that with VCs, who will give you a term sheet.  Drum up interest between multiple investors to increase your negotiating leverage.
• Act 255 Tax Credits.  Apply early for Qualified New Business Venture status so future Wisconsin investors in your business can get the Act 255 25% income tax credits (assuming you meet the criteria).  Currently, it can take 6 – 8 weeks to get certificated and must be in place before an investor is eligible to receive the credit.  After your business plan is prepared, contact the Wisconsin Economic Development Corporation to see if your business meets the criteria and to discuss the application requirements.  Attendees stressed that not getting approved for the Act 255 program is not an invalidation of your business model; it just means your business didn’t meet the program criteria.  But, not meeting the criteria can affect your ability to raise capital locally.
• Government Programs.  The Small Business Development Center and Wisconsin Entrepreneurs Network can help entrepreneurs tap into the federal well of money, and your regional development manager at the Wisconsin Economic Development Corporation can help you get in touch with state money.  The application process, particularly for SBIR/STTR grants and loans, can be long and drawn out; it helps to stay in touch with the grant program manager.  Madison Development Corporation offers venture debt to qualified Dane County businesses that have reached revenue stage, even if they have a negative cash flow.  One attendee suggested that government funding should be supplemental to other sources of funding, and you have to be careful to maintain the focus of your business.
• Customer Funding.  Customers can be a source of funding, as they may want to invest in order to secure a right to be first-to-market with your product (that may be an add-on to theirs).  There were several in the audience that had done this, either receiving funding for their business or providing funding to others to enable them to expand.  They also may enter into a long-term contract which provides a solid stream of revenue.  Getting customer buy-in can provide validation to outside investors, as it demonstrates commercial interest.

Open Mic

The final segment of the program was an open mic session emcee’d by Jonathan Fritz.  Eleven attendees each gave a 2-minute pitch on an idea, and the attendees asked questions and provided feedback.  Ideas ran the gamut from tongue-in-cheek silly to potentially groundbreaking.

The Capital Saving and Raising at the Brink event was a success overall as attendees met new contacts, learned from each other, and had fun!  Several people urged doing it again next year.

As a paralegal, I have done my fair share of preparing and updating corporate minute books.  Keeping an organized, complete minute book is necessary for establishing the legal record of actions properly documented, retrieving information, and quickly disclosing documents to investors for due diligence, among other reasons.  Despite the proliferation of electronic files, physical copies of minutes and consents are still typically kept in three-ring binders or those confounded hard red books.  Neither Wisconsin nor Delaware laws require that minutes be kept in original, hard copy.

There are more efficient, searchable, paperless ways of maintaining corporate records.  The best solution depends on how a company weighs the below factors.  The following table compares the traditional paper method to various electronic options.

At the very least, this table demonstrates how electronic minute books have significant advantages over their hard copy counterparts.  The main advantages that the cloud-based solutions have over network file folders are external access and search features.  External access is an extremely important factor for at least a few reasons: (1) it is a more secure way to share files than by email, (2) it is deal-room ready for review by potential investors and buyers, and (3) in a separate folder, documents can be shared with the board of directors for board meetings.   Beyond simply storing documents, tailored solutions can offer a richer set of capabilities, such as (1) tracking capitalization and equity grants, (2) preparing stock certificates, (3) storing contact details for officers and directors, and (4) setting reminders.  The added capabilities are rather expensive though for most small companies.

As with any decision whether to move files to the cloud, there are considerations of security and reliability.  Many have written on this topic, but at the very least you would want to look into encryption protocol, administrative, technical and physical safeguards for security, geographic redundancy, the cloud provider’s reputation / longevity, and their policies for file recovery in the event you inadvertently delete a file.

If you decide to use an electronic storage method for your minute book, it is important to develop and follow an organization structure and file naming conventions for the documents.  Here’s one way to organize and name the files (bold titles represent folders):

Articles

2011-01-31 Articles of Incorporation

2011-03-16 Certificate of Authority (IL)

2011-07-21 Articles of Amendment

Bylaws

2011-02-03 Bylaws

2011-07-15 Amended and Restated Bylaws

Minutes and Consents

2011-02-03 Incorporator Consent

2011-02-03 Board Consent

2011-04-01 Board Consent

2011-04-01 Shareholder Meeting (This would likely consist of an Agenda, Minutes, Affidavit of Service, and Exhibits, all of which could be combined into an Adobe Portfolio or Binder)

Stock

Stock Tables

Capitalization Table (w/separate tabs for snapshots as of various dates)

Equity Grants Tables (w/separate tabs for options, restricted stock, and other types of awards)

Stock Register

Warrant Register

Stock Certificates (or Stock Issuance Statements, if uncertificated)

01.         Jones

02.         Capitol Investment Group

03.         Green Partners

Stock Incentive Plan

ABC Inc. Stock Incentive Plan

Equity Grants

Restricted Stock

2011-05-17 Meyer

Stock Options

2011-04-05 Johnson

2011-04-05 Williams

Warrants

01.         Capitol Investment Group

02.         Green Partners

Documents will be displayed in alphabetical order, so the file names should start with either the number of the document (if numbered) or the date to force a logical display order.  The organizational folders and file naming conventions will vary depending on the types of documents, but the above structure gives a baseline framework.  Electronic drafts of these documents should be kept in another folder so it’s clear that the above folders include only the final versions.

For companies that already have years of company history stored in hard copy minute books, the decision to convert to electronic minute books is a cost-benefit analysis.  The cost is the time for a staff member or intern to scan, save, and organize the files (perhaps as a down-time project) or the fee to outsource to a digital reproduction service.  Then, companies must train their personnel on the new system.  The benefits are listed in the above table.  Many will conclude that the benefits outweigh the costs.

Let’s face it — organizing minute books is not most people’s idea of fun (unless you’re warped like me).  However, keeping your corporate minute book documents organized, especially electronically, will help you find information you need and speed up the due diligence process for an investment, acquisition, or other deal.  Developing a plan early in your company’s life, or converting from a paper system to an electronic system, will be well worth the time invested.

A confusing topic for many entrepreneurs is joint ownership of intellectual property.  It often comes up in connection with joint development arrangements, subcontracting portions of work, joint ventures, and other collaborative projects involving intellectual property development, whether it be in connection with software, cleantech, medical device, drug development, or other technology-based initiatives.

Joint ownership of intellectual property can result when two (or more) people co-invent a patentable invention or co-author a joint work of authorship.  Joint ownership can also come up as a matter of a compromise in a contract.

While it may seem fair and a reasonable compromise to declare that all intellectual property developed as part of a collaborative project should be jointly owned, many of the implications of jointly owned intellectual property are counterintuitive.  For instance, joint ownership related to patents is very different than joint ownership of copyright.

So, let us go through the basic implications of joint ownership by the default rules in the United States for patents, copyright, trade secrets, and trademarks.

Joint Ownership of a Patent

In the absence of an agreement to the contrary, each joint owner of a patent may make, use, offer to sell, sell and import the patented invention without the consent of the other joint owners, provided that the joint owner does not infringe the patent rights under a separate patent.  Notably with patents, there is no duty of accounting among the owners of the patent.  In other words, one owner can profit from the patent and does not have to share  the proceeds of the profits with the other owner(s).

To exclusively license a patent to another, however, generally requires the consent of all the owners of the patent.  Also, the consents of all owners of a patent are generally needed for patent enforcement.  This means that in many cases, any single owner can limit enforcement of the rights under the patent.

Joint Ownership of Copyright

Analogous to patents, each owner of a copyright is free to copy, distribute, prepare derivative works based on the joint work, and exercise the other exclusive rights of copyright.  Unlike patents, however, joint owners of copyright do have to account to one another for profits they receive in connection with the jointly owned copyright.  In other words, each owner has to share the profits with the other owners.

To exclusively license copyright requires the consent of all the owners of the copyright.  Also, unlike joint owners of a patent, one owner of a copyright cannot block another owner of that copyright from suing for infringement by simply refusing to join in the suit.  While each individual owner has the right to enforce the copyright in preventing others from using the copyrighted material, another owner can circumvent that enforcement by simply licensing to the “infringer” the right to use the copyrighted material.

Joint Ownership of a Trade Secret

The law surrounding joint ownership of trade secrets is not as well established as it is for patents and copyright.  As with copyright, joint owners of a trade secret likely have to account to one another for profits related to the trade secret.  Although, that conclusion is not entirely clear by case law or statute.  To exclusively license a trade secret likely requires the consent of all the owners of the trade secret.  Sometimes joint ownership can make maintaining secrecy difficult, however, which if compromised could jeopardize the trade secret status.  Although in some contexts, joint owners may have an obligation to one another to keep a trade secret confidential.

Joint Ownership of a Trademark

While joint ownership of trademarks is possible, it is somewhat unusual in that joint ownership is counter to the fundamental purpose of a trademark, which is to serve as a designation of origin from a single entity or person.  A more common strategy is a jointly owned single entity owning the mark.  When there is joint ownership of a trademark, however, as with copyright and trade secrets, joint owners of a trademark likely have to account to one another for profits related to the mark.  To exclusively license a trademark requires the consent of all the owners of the trademark.

Other Issues of Joint Ownership of Intellectual Property

There are a few other general things to keep in mind with regard to joint ownership of intellectual property.  As with the status of joint ownership itself, the parties can modify many of the default rules by addressing the particular issues in a contract, subject to certain legal restrictions such as those related to antitrust.  For example, the parties can decide that only one party is in charge of registration, maintenance, and prosecution of the intellectual property and that the parties must share all royalties in a certain manner (e.g., 70/30).

In addition, the default rules outlined above are quite different in many foreign countries.  For example, in Canada and the U.K., in the absence of an agreement to the contrary, a joint owner of a patent, while having the right to exploit the patented invention, has no right to license it to a third party without the consent of the other owners.

While joint ownership makes sense in certain contexts, many times it does not.  Often joint ownership sounds good in concept at a very high level, but when emerging companies understand the implications of joint ownership of intellectual property they frequently try to avoid it or they contract out of many of the default rules.

Suppose a customer proposes an idea to improve the software or SaaS offering of a company. The company likes the idea so much that it integrates the idea into its next upgrade. The question becomes, who owns the idea that is integrated into the software or SaaS offering?

As a general rule, the person who creates an idea, authored work, invention, or process, owns the related intellectual property.  There are exceptions to the general rule.  But, in the software and SaaS arena involving licensors and licensees, the general rule applies in most circumstances.

With ownership established by law, there are several ways to handle the intellectual property rights related to customer feedback through contracts and policies.  Here are some of the approaches companies take:

“We don’t want your ideas”

One approach is to not solicit or accept customer feedback.  This is the approach that McDonald’s has taken with regard to its Customer E-mail Center Terms and Conditions.  A rationale for this approach is to avoid confusion or conflict of ownership if a customer has the same idea as someone within the organization.  As is the case for other organizations that have adopted this approach, McDonald’s policy is that if a customer ignores McDonald’s request that they not send ideas or suggestions, the customer grants McDonald’s a license to use, copy, and display whatever the customer provides to McDonald’s.  For a variety of reasons, such as the negative public relations associated with not wanting customer suggestions or ideas, most SaaS and software companies do not choose this approach.

“We own your ideas”

At the other end of the spectrum, the recipient of the ideas, authored works, inventions, or processes can take the position that everything that is submitted to the recipient is owned by the recipient.  One sees this approach in a variety of contexts, especially where either contracts or terms of service are not heavily negotiated or where the relevant idea, authored work, invention, or process created will have little value to the creator.  Radiant Systems is an example of this approach.

“We can use your ideas”

Somewhere in between the above two alternatives is the concept that while the creator of the idea, authored work, invention, or process owns it, the recipient has a royalty-free right to use, copy, and display it.  This allows the company to use the customer feedback, but the customer retains ownership of it.  Adobe, Hewlett Packard, SAP, YouTube, and others take this approach with at least some of their offerings and general public feedback.

Ignoring the issue

Sometimes contracts and terms of service ignore the customer feedback issue.  Presumably, this is just an oversight or the companies are taking the position that they at least have an implied license to the feedback.

For many businesses, listening to and incorporating customer feedback into the product or service improvement process not only is good for sound customer relationships but it just makes good business sense.   Similarly, for software and SaaS companies, ensuring that the companies’ contracts adequately address intellectual property ownership and license rights to that customer feedback makes good legal sense.