Archive for the ‘Forms’ Category

Wisconsin Incorporation Documents

We figured it was about time at least one law firm did it: we are making available publicly sample Wisconsin incorporation documents for an emerging technology company startup: http://alphatechcounsel.com/Wisconsin-Incorporation_Documents.html.  The documents include Wisconsin Articles of Incorporation, Bylaws, Restricted Stock Agreement, initial consents, Invention Assignment Agreement, etc.

Like many of our clients, we have developed a way to use technology to increase efficiency while providing value.  We prepared the suite of sample incorporation documents by selecting from alternatives of a significant number of variables that are available for the automated systems that we have developed internally.  We programmed these variables into our incorporation documents to help us prepare the documents efficiently and accurately. We are making these documents available for informational and reference purposes.

In addition to automating incorporation documents, we have also automated bridge financing documents, employment and consulting documents, equity grant documents, and confidential disclosure agreements, among others.

Hopefully the sample documents will prove to be a good reference source for Wisconsin emerging company startups.

August 13th, 2012 by Matt Storms | Permalink | 1 Comment

 

Electronic Minute Books 2.0

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.

Paper Binders

Company Network File Folders

Cloud-based Storage (e.g., box.net, dropbox.com)

Tailored Solution (e.g., Corporate Focus or Secretariat)

Ease of Use

Clunky books

Simple navigability

Login; simple navigability

Feature-rich, so more complex

Searchable

No

Yes, limited

Yes

Yes, advanced

External Review

No

No

Yes

Yes

Controlled Access/ Permissions

No, unless by lock and key

Yes

Yes

Yes

Accessibility Anywhere

No

No, unless external access is set up

Yes, via Internet

Yes, via Internet

Paperless

No

Yes

Yes

Yes

Make Notes Regarding a Document

Sticky notes

No

Yes

Yes

Hyperlink to bulky attachments

No, just paper cross-reference page

Yes

Yes

Yes

Backup Copies

No

Yes

Yes

Yes

Easy Exportability

No

Yes

Yes

Yes, but more involved to export database fields

Cost

None, except office supplies and staff time

None

$10 – $20/mo.

>$200/mo.

 

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.

 

August 8th, 2011 by Macy Stoneback | Permalink | No Comments

 

Who Owns the Rights to Customer Feedback?

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.

July 6th, 2011 by Matt Storms | Permalink | No Comments

 

Bridge Financing Documents

One of the sets of documents that we automated at AlphaTech is the bridge financing documents for an emerging company.  Attached is a sample of the documents: Convertible Note and Subscription Agreement

Instead of just using form documents as most law firms do, robust automation allows us to deliver common document sets for emerging companies in a more efficient manner.  So what else does “robust automation” yield?  It improves document accuracy, provides a valuable knowledgebase from which to draw, and enables us to deliver common document sets to our clients quickly.  It also frees up time of our lawyers to enable them to spend less time on basic contract drafting and more time on activities that afford our clients higher value.

Take for example the attached bridge financing documents.  With a click of a few buttons and filling in of a few blanks, we can change the attached bridge financing document set from a $1,000,000 bridge financing with a single lead investor but with multiple closings and a 20% discount on the next round’s security to a set of documents that includes a $750,000 bridge financing from five investors in a single closing with 30% warrant coverage and a $5 million pre-money cap on the next round’s valuation for conversion purposes.  To quote a client, “that’s neat.”

November 6th, 2010 by Matt Storms | Permalink | 1 Comment

 

Preparing Board Meeting Minutes: Necessary Evil and Corporate Drudgery?

For many entrepreneurs, the idea of preparing minutes of board meetings seems like a thankless chore, especially when there are only two or three directors. It may be tempting to skip this corporate formality if the purposes for it are not understood. Also, many entrepreneurs wonder what magic language should go in them to make them “legal.”

Reasons for Preparing Board Meeting Minutes

There are several reasons for preparing good corporate minutes:

  1. State Law Requirements and Corporate Bylaws. State laws generally require corporations to prepare and keep minutes of board meetings. According to Delaware state law (a state where many companies are incorporated), “one of the officers shall have the duty to record the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose.” The Wisconsin Statutes do not require corporations to take board minutes unless requested by a director, but most corporation bylaws require the corporation to maintain adequate minutes of board meetings.
  2. Reduce Personal Liability Exposure. Preparing and maintaining proper corporate minutes may help reduce the risk of personal liability. Directors have a fiduciary duty of care, meaning that they have to show that they sufficiently analyzed the alternatives before making a decision. They also have a fiduciary duty of loyalty, meaning that they must act in the best interest of the corporation and its shareholders, above any of his or her own interests. Maintaining good corporate minutes can help to establish that the duties of care and loyalty have been fulfilled. Also, by having good corporate records, there may be less chance of a third party “piercing the corporate veil” by claiming that the corporation is nothing more than a sham of the owners who disregard the separateness of the entity and should not receive the benefits of limited liability protection.
  3. Third Party Requirements. Another reason to keep minutes is to provide evidence of approval of transactions involving third parties (e.g., banks, investors, and strategic partners). In addition to being a state or bylaws requirement to approve significant transactions, some third parties require evidence of such approval as a condition of closing.
  4. Reduce Likelihood of Certain Types of Litigation. In a 2006 case, the Supreme Court of Delaware described best practices for approval of an action by a board committee and concluded that the company could have avoided decade-long litigation if proper minutes had been recorded for every meeting with detail regarding the information that was used to make the decisions.
  5. Creation of a Historical Record. A bonus of preparing minutes is that the company will accumulate a searchable, historical record of all of the significant actions taken by the company. By either gathering signatures electronically or by scanning and combining the final, signed minutes into a searchable PDF binder, they will be easily searchable and ready for delivery to future investors, bankers, and auditors who require them for a transaction or audit.

Appointment of Secretary of the Meeting

Minutes are traditionally prepared by the corporate secretary as prescribed by most bylaws, but the duty can typically be delegated to another officer or employee, or a lawyer or paralegal from the company’s law firm. The chairman of the meeting can typically appoint a person as “secretary of the meeting.” The secretary of the meeting should take thorough notes during the meeting and convert them to formal minutes as soon as possible after the meeting. Using a laptop with a template for corporate minutes may facilitate capturing the necessary information.

Format of Minutes

Many meeting secretaries struggle with the proper format for corporate board minutes. The company’s attorney or paralegal should be able to provide a template for minutes or attend the meeting and take minutes. Below are the most common components of corporate board minutes:

  • Attendance – Name the directors that were present as well as any officers, employees, investors, and advisors who are present by invitation. Indicate any who participated by phone, video conference, or other electronic means of communicating (most states permit this as long as each of the directors can hear or otherwise interact with one another in real time). Note the names and times that people entered or departed the meeting.
  • Date, Time, and Place of the meeting – Include information as to the date, time, and place of the meeting. If the meeting was conducted by telephone or videoconference, indicate that as well in lieu of the location.
  • Notice and Quorum – State that notice was either properly given according to the company’s bylaws or waived. Confirm that a quorum exists according to the requirements of the company’s bylaws.
  • Chairperson and Secretary – Indicate which individuals served as the chairperson and secretary of the meeting.
  • Approval of Previous Minutes – If applicable, the minutes should reflect review and approval of the minutes from the prior meeting.
  • Business Agenda Items – Summarize topics covered during the meeting in chronological order, citing who gave presentations and who led discussions. Clearly state resolutions approved, regardless of whether they were written by counsel and circulated in advance or whether they were proposed at the meeting. It is typically not necessary to indicate who moved and seconded a proposal. Depending on the state where incorporated, it may not be necessary to identify those dissenting, unless they request that their dissent be noted in the minutes. If no resolution was adopted, but the board authorized or gave guidance to management to take further steps, indicate those.
  • Reports of Board Committee – If the Board has set up committees, such as audit, compensation, nominating and governance, summaries of reports and presentations should be included in the minutes.
  • Adjournment Include a sentence regarding the time the meeting was adjourned.
  • Signature – The secretary of the meeting should sign the minutes after they are approved by the Board or committee, as the case may be.
  • Attachments –Refer to any documents approved and attach them as exhibits to the minutes (e.g., stock option plan, executive employment agreement, lease). If the documents are rather lengthy or it is cumbersome to attach them, at the very least indicate in the minutes that the documents were circulated to the board and, if applicable, that they were circulated in advance of the meeting.

Promptly following the meeting, the secretary should circulate the draft minutes to the directors for review while the meeting is fresh in their minds. At the next meeting, the directors should formally approve the minutes, after agreeing on any suggested corrections. If the minutes are not properly approved, they may not stand up as evidence in court. One Delaware vice chancellor of the court had this to say about a company who suddenly caught up on their minutes and approved several at once: “That tardy, omnibus consideration of meeting minutes is, to state the obvious, not confidence inspiring . . . .”

Style of Corporate Minutes: Level of Detail

Boards take different approaches on what level of detail to include in minutes. The style of minutes of a small charitable organization or social group meeting (you do this and I’ll do that) can be too informal for a startup corporation. On the flip side, a transcript of who said what at a corporate board meeting is overkill.

The main goals of corporate minutes are to clearly memorialize the actions taken at the meeting and to demonstrate that the directors fulfilled their duties of loyalty and care in reaching those decisions. Generally, when describing discussions, the level of detail should reflect the importance of the matter. It is possible to demonstrate due care without revealing details of the back-and-forth in the boardroom. Some ways to show due care include stating: (1) the amount of time a topic was discussed, (2) that an outside expert gave a presentation to the board, and (3) that relevant materials were distributed in advance for consideration. Companies that have a contingent of dissatisfied shareholders may be counseled to include more or less detail, depending on the specifics of the situation. Many companies take a middle-of-the-road approach as to the level of detail in minutes and seek their legal counsel’s advice during unique situations.

Preparing Minutes Becomes a Habit

Preparing and maintaining proper board meeting minutes may seem like corporate drudgery, particularly when you are part of a small corporation. Once you have a format and get into a routine, however, preparing minutes and getting approvals soon becomes second nature.

September 28th, 2010 by Macy Shubak | Permalink | 1 Comment

 

Paper Stock Certificates: A Thing of the Past?

As public companies are increasingly opting out of providing paper certificates to shareholders in favor of providing electronic registration (a movement known as “dematerialization”), most private companies and their shareholders have yet to follow suit.  Issuing uncertificated shares is allowed under most states’ laws, and, as many on the public company side can attest, numerous cost and time efficiencies can be gained by going paperless with shares.  As we accept electronic statements to represent our public company holdings and exhibits to Operating Agreements to note our LLC ownership interests, do we really still need as evidence of our private company ownership a hokey, bordered piece of paper with an eagle on it? 

Disadvantages of Issuing Paper Stock Certificates

Consider the inefficiency and chances for errors in the typical cumbersome process to issue paper stock certificates: 

  1. Law firm staff orders special certificate paper
  2. Attorney gives legal staff information needed to complete the certificates
  3. Law firm staff keys in information on a blank Word document in calculated places on the page to line up with the paper form (or pulls out the old typewriter)
  4. Law firm staff puts special certificate paper in the shared printer
  5. Law firm staff reprints each certificate until the text lines up in the blanks
  6. Law firm staff flips over the certificate (hopefully correct side up) and puts it back in the printer and prints the restrictive legend on the back side
  7. Attorney reviews certificates for accuracy
  8. Law firm staff sends or delivers the certificate to the company
  9. The company obtains two busy officers’ signatures
  10. The company sends the signed certificates back to the law firm to send out
  11. Law firm staff prepares cover letters and overnight envelopes (or arranges for messenger service) to the investors
  12. If the delivery was set for “do not release without signature,” the investor can be frustrated with having to be available for the package
  13. The investor is then instructed to sign the stock receipt and return it in the envelope
  14. Law firm staff follows up with investors who have failed to return the signed stock receipt, and sends another one

In addition to the inefficiency and error prone nature of issuing paper stock certificates, replacing lost stock certificates can be administratively burdensome for private companies.   Private companies typically require an affidavit of lost stock certificate and could (but usually do not) also require an indemnity bond to replace a lost certificate.  If a shareholder fails to replace a lost stock certificate while the company is private and it goes public, replacement can be quite expensive for the shareholder.  The transfer agent will pass through to the shareholder a fee charged by its indemnity carrier to insure replacement of the certificate, typically 2 – 3% of the fair market value on the date of replacement.  This could easily be tens of thousands of dollars!  What’s more, when delivering the certificates to the company or transfer agent for the IPO, most courier services will not insure a legal document delivery worth more than about $50,000.  I have seen a situation where a paralegal from the firm representing the selling shareholders in a follow-on offering, flew to the transfer agent’s office with shares worth millions in hand.

As rapidly growing emerging companies can go through one or more stock splits before an exit event, the disadvantages of issuing paper certificates multiply – more certificates for shareholders to safeguard, more chances for errors, and more costs associated with printing, proofing, and delivery.

Written Statement Instead of Paper Stock Certificates

The laws of Delaware, Wisconsin, Illinois and 42 other states/territories (all but Louisiana, Missouri, New Hampshire, New Jersey, North Dakota, Oklahoma, West Virginia and certain territories), with limited exceptions, provide that the board of directors of a company may approve the issuance of shares without certificates as long as the shareholder is provided with a written statement containing applicable information within a reasonable time after the issuance or transfer.  The written statement, which in most situations can be transmitted by email, typically must include the following: 

  • Name of the corporation and what state organized under
  • Name of the shareholder
  • Number and class of shares and the designation of the series
  • If a corporation is authorized to issue different classes or series of shares, include (i) a summary of the designations, relative rights, preferences and limitations applicable to each class and for each series, and the board’s authority to determine variations for future series and (ii) a conspicuous statement that the corporation will furnish the shareholder the information described in item (i) on request, in writing and without charge
  • Transfer restrictions, if any

Usually, the board of directors can authorize the creation of uncertificated shares either by the first issuance or as replacement for shares previously represented by certificates.  The board also typically has the discretion to issue stock certificates for some classes and series of shares and not others.  Generally, there are no differences between certificated and uncertificated shares, except for the process to transfer them and to perfect security interests in them. 

Resistance to Uncertificated Shares

Despite the legality of uncertificated shares in most states, most private companies still issue paper stock certificates and most shareholders still expect them.  Shareholders sometimes prefer to have tangible evidence of their company ownership even though they do not appear to have the same expectation for partnership or LLC interests.  Some people want stock certificates for historic preservation and pride.  That may make sense in the context of long-standing businesses, but makes less sense with emerging companies funded by angel and venture capital investors.  With most technology start-ups, the company sells, merges, dissolves, or goes public within several years, in which case the stock certificates typically must be tendered for replacement shares or cash; shareholders cannot keep them for historic sake, unless of course the certificates become worthless.  On the public company side, many brokers have been discouraging shareholders from requesting paper certificates in their name by passing through a $500 fee that the Depository Trust Company (DTC) started charging on July 1, 2009.

Changing the Tide from Paper Stock Certificates to Uncertificated Shares

DTC’s change in fees and procedures last year led to declining public company shareholder demand for physical stock certificates.  Just as stock certificates are becoming a thing of the past for public companies, it is time for privately held emerging companies to consider issuing uncertificated shares.

August 21st, 2010 by Macy Shubak | Permalink | No Comments

 

Wide Adoption of Electronic Signatures and Electronic Contracts Overdue

While almost a decade has passed since the federal Electronic Signatures in Global and National Commerce Act (ESIGN Act) became law, most companies have yet to take advantage of the opportunities that the act affords. Other than online click-wrap license agreements and Internet sales terms and conditions, most companies are still entering into most of their agreements on paper.  Having moved beyond faxing in most cases, the norm these days for most businesses is to print, sign, scan, and email the contract. In large or important agreements, companies typically also exchange multiple sets of originals, so that each side (and their legal counsel) have original copies. In most situations, this elaborate process is unnecessary.  For a variety of reasons, we often encourage clients to go paperless with their contracts when appropriate. 

Software and Internet Services that Assist with Electronic Contracts

There is some encouraging news that going paperless in the contracting process may become more prevalent.  Adobe recently released a free beta version of its online eSignatures software-as-a-service (SaaS).  The SaaS offering is easy to use and may spur more adoption of e-signature technology.  Low cost competitive products from DocuSign, Arx, and AlphaTrust are also worthy of consideration.  These and other e-signature vendor products offer the following benefits:

  • E-signatures speed up the contracting process.   The extra steps of printing for signature, scanning, preparing a cover letter/fax, and mailing/faxing are removed. 
  • E-signature service can be accessed virtually anywhere.  All that the parties need is a computer with an Internet connection.  No need for the traveling executive to find a printer and scanner/fax or have the hotel staff print the document, prepare a coversheet and fax the signed document back. 
  • Electronic contracting saves paper.  There is no need to print the agreement, so it supports the virtually paperless office, such as ours.

In addition, traditional concerns over security have mostly been allayed.  The e-signature vendors typically offer one or more security measures to authenticate the sender and verify that the document has not changed since it was signed.  Many e-signature vendor offerings are SAS 70 Type II compliant and upload and download over an SSL encrypted channel.  Audit trails show when and by whom documents were sent, viewed, and signed.  After signing and downloading, with most of the products, the party sending the contract typically has the ability to delete the electronic contract from the cloud.

Laws Related to Electronic Contracts

Numerous laws in the United States and abroad recognize the legitimacy of electronic signatures.  The federal ESIGN Act and Uniform Electronic Transactions Act (UETA) serve to establish generally the legal equivalence of electronic records and signatures with paper writings and manually-signed signatures, removing barriers to electronic commerce.  Forty-seven states have adopted the UETA, a model law for states to enact to cover contracts governed by state law; the remaining states, New York, Illinois, and Washington, have each adopted their own statutes governing electronic transactions.  Under the UETA, an electronic signature is attributable to a person if it was the act of the person, which can be shown by the effectiveness of the security procedures for signature authentication and the context and surrounding circumstances at the time of the document’s creation.  No one can be required to use a digital signature or to accept a digital signature.  Besides the United States, the European Union has adopted the Electronic Signature Directive (1999/93/EC) and numerous countries have adopted electronic signature laws.   

How Electronic Signatures Work

These are the basic steps to send a document for signature using an electronic signature solution.  The initiator sets up a password-protected account, uploads a document, types the email addresses of the recipients, composes a short cover note (if desired), clicks to sign (or chooses to sign last), and sends.  Recipients receive an email with the customized message and a link to a document to sign.  Recipients are not required to pay to use the electronic signature service, but they may need to set up an account.  After completing any required authentication checks, they click on the link, review the document, and click to sign and send.  After the document is fully signed, all parties receive an email with a link to the document with digital signature stamps from each signing party.  In the case of Adobe’s eSignatures SaaS offering, Adobe will apply a certifying signature, appearing as a blue ribbon, indicating that the document has not changed since it was signed. 

Additional E-Signature-Based Offerings that Facilitate the Electronic Contracting Process

E-signature vendors with low-cost software or services offer many of the following additional features (some of which Adobe may incorporate into later versions):

  • Signatures in multiple places and on specific lines (whereas Adobe’s eSignatures SaaS offering just appends a signature page to the end with all the electronic signatures)
  • Fill-in-the-blank forms and agreements, guiding receiving parties through the document with signature flags, initial flags, and instructions, and preventing a party from signing a document with an incomplete blank
  • Ability to compare the signed document to the encrypted hash captured at document signing to confirm that the signature is valid and the document has not been modified (whereas Adobe’s blue ribbon indication is immediate)
  • Signing parties other than the sender do not need to subscribe to the service (free)
  • Folders to deliver multiple documents in logical groups
  • Workflow processes for internal approvals
  • Access via mobile devices
  • Optional multi-layered authentication, such as passwords, ID checks administered by third parties with questions from public and private databases, security fobs, etc.
  • Integration with business enterprise software 
  • Server-based as well as hosted solutions
  • Custom branding and instructions 
  • Optional behind-the-scenes digital signature cryptology

Using Digital Signatures for Additional Security

A subset of electronic signatures, digital signatures provide more checks to ensure security, but more time and cost can be involved in administering them.  Digital signature technology can also be used to control who has access to a document or who can sign or certify it.  Digital signature technology is the gold standard of security in terms of validating the authenticity of the signature and preserving the integrity of the document.  This is due to the secure method of locking and unlocking the signatures on the document.  A digital signature, also known as a digital ID, requires a private key of the signer and a public key for the receiving party to validate the signature.  Many large organizations implement a public key infrastructure to issue, authenticate, and revoke digital IDs used for digitally signing documents.  Most receiving parties require that a certificate authority, such as VeriSign or GlobalSign, validate the authenticity of the public key.  There are fees in the hundreds to thousands associated with using a Certificate Authority.  David Youd explains digital signature cryptology in simple terms and pictures (http://www.youdzone.com/signature.html).   While it is not difficult to establish a digital ID or validate another party’s digital IDs, some education and administration is involved. 

When to Use Handwritten Signatures vs. Electronic Signatures on Contracts

Although electronic signatures are in most cases recognized as being equally valid as handwritten signatures, there are occasions when handwritten signatures may be more appropriate.  When doing a substantial deal with a party in a more formalistic country, such as Japan, China, Spain, and Italy, a personal signing ceremony can be a culturally sensitive choice.  Parties might also prefer to sign in person or exchange wet ink signatures when stakes are high or emotions run deep, as with the sale of a business.  In addition, under law, there are certain types of agreements that cannot validly be signed electronically.  For example, in many places, wills, testamentary trusts, family law documents, and U.C.C. documents must be signed by hand.  If in doubt as to whether a contract may validly be signed electronically, check with your attorney first.  Also, government regulators in some highly regulated industries such as pharmaceutical and financial services regard the use of digital signature technology favorably for regulatory and legal compliance. 

Just as signing and emailing documents became prevalent with widespread adoption of PDF files and improvements in scanners, so, too, are electronic signatures likely to become more mainstream as people discover the increasing efficiency and security of e-signature technology.

June 4th, 2010 by Matt Storms and Macy Shubak | Permalink | 2 Comments