Last week the European Commission announced that the Standard Contractual Clauses (the “SCCs”) are being updated.  These changes primarily apply to entities exporting data out of the European Economic Area.  Starting in 2021, whether you’re a controller or a processor (or both!), you’ll need to make certain your SCCs and your data export policies are compliant with the new laws. 

The good news is that data exporters will have all of 2021 to align with these new obligations.  To ensure data exporters don’t have to start from scratch, the European Commission has provided recommendations to ensure compliance.  

Step 1 – Transfer Mapping

Curious about where to start?  Step 1 is to create a road map of where the personal data exported by your company goes.  Data exporters should review their existing data relationships.  Whose data are you exporting?  What personal data does that export include?  Which countries are receiving the exported data?  What are your reasons for exporting that data? 

You also need to think about the downstream data use.  For example, if you’re a processor, are you transferring personal data to a sub-processor who’s located in a third country?  Are THEY transferring that data to another party in a different country?  Remember that a “transfer” can be something as routing as cloud storage or support services outside the EEA.   

This can be a strenuous task for companies that export a lot of personal data out of the EEA.  However, the transfer mapping is an absolutely essential first step in knowing what actions – if any – you’ll need to take with your existing data agreements and internal practices. 

Next Steps – Transfer Tools and Assessments 

There’s more to do after you’ve completed your transfer mapping project.  If you’ve mapped any personal data being exported out of the EEA, you’ll need to move on to steps 2 and 3: verifying your transfer tools and assessing third-country laws.  Make sure to check back in for our next posts on these steps, and contact me if you have any questions, especially ones about standard contractual clauses!

By: Ashley Long

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You have an idea for a new startup. One of your first google searches will probably be about how/where to incorporate your business. There’s some good advice out there and some bad advice out there. In the interest of cutting through the noise, here’s the advice we typically give our clients.

Welcome to Delaware

If you’re a high growth startup and plan on taking investment from angel investors and VCs, Delaware is the safe choice.

Here’s why Delaware is great:

• No one will ever ask, and you will not have to begrudgingly answer, “Why didn’t you incorporate in Delaware?”
• A lot of the standard form documents that are available on the web and are widely accepted in startup circles (see, e.g., the Series Seed documents and the NVCA document suite), are prepared for Delaware corporations.
• If you’re already in Delaware, you can’t be forced to reincorporate in Delaware by some pushy investor. This is what we in the biz call a 4-dimensional chess move.
• If you move your company, Delaware is pretty portable. Every state’s major commerce center has lawyers who know and can work with Delaware corporate law, so you’ll never have to worry about finding a new lawyer.
• There are certain provisions of Delaware law that are more favorable to company management than many other state laws.
• Delaware has a separate court system dedicated to corporate disputes, and Delaware corporate law is updated more often than the corporate laws of other states.

Here’s the short list of cons for Delaware:

• It’s generally more expensive in terms of fees and taxes.
• You’ll invariably get a franchise tax bill for some absurd amount of money payable to Delaware in your first year. While heart attack inducing, this usually isn’t a big deal, and there’s an alternate calculation method (on the back of the notice that you just threw across the room) that you can use to get the tax way down to a couple hundred/thousand bucks.

Visit Washington

While we work with and form a ton of Delaware companies, we are located in Seattle, Washington. Washington is actually a pretty solid place to form a company. Here’s why:

• It is less expensive to form and maintain a Washington corporation (the annual fee to keep your corporation alive in Washington is just a little over $100 a year; Delaware starts higher, and the costs of Delaware go up over time relative to the costs of being incorporated in Washington. It costs less in third party fees to dissolve a Washington corporation.
• Washington corporate law is substantially similar to Delaware law, and in the event of any litigation, Washington courts would likely look to Delaware court opinions as persuasive authority.
• If you run into a complex question of corporate law and you are incorporated in Delaware, you may have to retain a law firm in Delaware to assist you. This will probably wind up being more expensive than continuing to work with a Washington corporate lawyer.
• Investors are generally pretty okay with Washington – we haven’t had much issue with investors insisting a Washington company converts to Delaware (though with one exception being accelerators like Techstars and Y Combinator). Microsoft is a Washington corporation, and it never held it back.

Other States

Here’s where some of the bad online advice comes in. A number of people will float states like Montana, Nevada, or Wyoming. There are some benefits to incorporating in states like this depending on where you ultimately go, like not seeing who the owners of a corporation are, lower taxes, wide-open spaces, etc. That said, there’s a litany of issues with these states (see “why not Delaware” and “what do you mean there’s no attorneys that know how to interface with Wyoming corporations in San Francisco?”). Incorporating in states like these should only be done if you have some sort of special requirement, and after talking with a lawyer and an accountant that agree that there’s some benefit with going to a more “exotic” state.

There are other states out there, like New York, that are “review states.” This means that every time you need to do a charter filing or other state filing, you have to barter with some attorney on staff at the state (whereas in Washington and Delaware, there is no process like this – you file, and your filing is accepted immediately). Because of this, incorporating in review states typically results in hair loss and melancholy, especially if you’re trying to close a transaction or financing which requires a charter amendment.

Conclusion

I just want to say that I’m not trying to bag on the corporate jurisprudence of other states. If you’re planning on creating a bootstrapped company that’s going to throw off cash on day one and will never leave your state of incorporation, you can probably do whatever you want. If for whatever reason, you grow out of a state, most of the time, it’s not too painful to convert elsewhere (unless you incorporate in a review state… ick, or someplace without a conversion statute).

In any event, I hope this was helpful. If you’re looking to set up your startup in Delaware, or if you want to walk on the wild side and give the beautiful state of Washington a try, we’re happy to help, and always feel free to contact me.

By: Bryant Smick

For more articles like this, please visit, here.

Carney Badley Spellman is about Advocacy, Strategy, Results. Located in Seattle, we are a full-service law firm committed to exceptional client service and professional excellence. Our firm serves individuals and businesses of all types and sizes. Also, our attorneys work with closely-held companies to Fortune 500 corporations in the Pacific Northwest and across the United States. Although Carney Badley Spellman‘s location is in Seattle, Washington, we are proud to be a part of the Washington state community and communities across the nation.

Most entrepreneurs don’t know of a simple way to avoid millions of dollars in capital gains tax. Section 1202 of the Internal Revenue Code grants non-corporate taxpayers a tax break of up to $10,000,000 in capital gains on “qualified small business stock” that the taxpayer holds for more than five years. This is a huge exclusion.  I believe all entrepreneurs should have a basic grasp of Section 1202’s high-level requirements so that they can take full advantage of its tax breaks. So, here they are. 

What Are The Requirements? 

C-Corporation

To qualify, the issuer of the stock must be a C-corporation. S-Corporations or LLCs taxed as partnerships do not qualify. Founders should consider this in particular when choosing an entity. 

Less Than $50,000,000 in assets 

The issuer must have less than $50,000,000 in aggregate gross assets before and immediately after you receive your shares. 

80% of Assets Used

The issuer must use at least 80% of its assets in the active conduct of its Qualified Trade or Business (more on that below).

Issued After August 10, 1993

The company must have issued the stock after August 10, 1993. 

Original Issuance

Generally, you must acquire the stock directly from the company.  This becomes more complicated if you receive equity compensation, like options or restricted stock, or if you hold convertible debt or a warrant. 

Domestic Corporation

The company must be organized in the United States. 

Qualified Trade or Business 

The issuer’s business must not be any of the following.  I generalized the descriptions below for simplicity’s sake.  For details, see the statute. 

• Professional services 
• Financial services
• Farming
• Mining
• Hospitality

Five Year Holding Period

You must hold the stock for more than five years before you sell it.  This also becomes more complicated if you receive equity compensation, like options or restricted stock, or hold convertible debt or a warrant. This will also become more complicated if a company began as an LLC and is converted into a C-corporation.

In Exchange for Money or Other Services

The company must issue the stock in exchange for money or other services.  If the company issues the stock in exchange for other stock, it won’t count. 

Conclusion

We have written about Section 1202 before here, here, and here. This post is just a summary, and Section 1202 can get complex quickly depending on the situation.  If you have any questions about 1202 or any of its complexities, feel free to contact me. 

By: James Graves 

Carney Badley Spellman is about Advocacy, Strategy, Results. Located in Seattle, we are a full-service law firm committed to exceptional client service and professional excellence. Our firm serves individuals and businesses of all types and sizes. Also, our attorneys work with closely-held companies to Fortune 500 corporations in the Pacific Northwest and across the United States. Although Carney Badley Spellman‘s location is in Seattle, Washington, we are proud to be a part of the Washington state community and communities across the nation.

This blog does not constitute legal or tax advice. In all instances you should visit your legal or tax advisor with regards to your personal tax situation.

Starting your company is an exciting time.  The temptation will be to sign all your legal documents as fast as possible so that you can get up and running.  We highly suggest you avoid that temptation and take the time to thoroughly review and, if appropriate, negotiate your documents.  With that in mind, in this post, we will cover how to read your founder documents and what to look for. 

The Document Set 

The documents you will likely be asked to sign are (1) a Proprietary Information and Invention Assignment Agreement (“PIIAA”) and (2) a Stock Purchase Agreement (“SPA”).  Don’t be afraid of these documents.  They are standard, and the company attorneys aren’t trying to pull anything on you.  That being said, there are parts to be aware of and negotiate. 

Proprietary Information and Invention Assignment Agreement

Why It’s Important

The PIIAA is the document in which you assign all intellectual property to the company you will develop or have developed relating to the company’s business.  99.9% of the time, this is non-negotiable.  Intellectual property is uniformly the most valuable asset of an early startup.  Investors abhor–and will frequently refuse to invest in–companies with muddled intellectual property ownership.  An intellectual property lawsuit is a nightmare for everyone involved, and most startups simply don’t have the funds to finance one through trial.

What’s more, there’s usually no early resolution (settlement) of an IP lawsuit since the startup will need a judgment stating that it actually owns the IP.  This means the startup will have to finance the lawsuit through trial, which is really expensive.  The negative repercussions of this range from being unfundable (because you have to disclose to potential investors that you are in court over your most valuable asset) to expending all your bootstrapped capital on attorneys’ fees (because you can’t secure funding), with the net effect of not having any capital leftover to actually advance your company.  

This is all a long way of saying that the PIIAA is very important, so expect to sign one. 

What to Look Out for in a PIIAA

Now that you know why you have to sign it, here are a few things to note or look out for: 

• You will have the opportunity to disclose and carve out any preexisting intellectual property that should not be assigned to the company.  If that exists, be sure to fill out the form correctly.  
• Are there negative covenants, e.g., a Non-Competition or Non-Solicitation clause? If so, were those part of the deal?
• Sometimes, Non-Competition clauses are unenforceable under state law.  For example, Washington state has a law making Non-Competition clauses for employees unenforceable unless the employee makes $100,000 or more in annual cash compensation or the employee receives equity in the company connected with entering into the non-compete. 
• If you are forced to accept a Non-Competition provision, make sure that it terminates if you are terminated without “Cause” or you leave with “Good Reason,” or if the company is sold (more on “Cause” and “Good Reason” below).  You could also shorten the time period and narrowly define the “industry” you are prohibited from working in. 

Stock Purchase Agreement 

A stock purchase agreement typically lays out the following terms and conditions: (a) the price per share of the common stock that you will pay; (b) whether the shares are subject to vesting and the company’s rights to repurchase unvested shares; (c) restrictions on transfer, representations, and warranties, and market standoff provision; (d) whether the company can repurchase vested shares at fair market value, and (e) other possible provisions, such as as a non-competition and non-solicitation (if they aren’t contained in the PIIAA). Your agreement may be called a Restricted Stock Purchase Agreement or a Stock Purchase Agreement. “Restricted stock” refers to shares subject to vesting and the company’s right to repurchase unvested shares. Still, the title of the agreement is immaterial–, and companies (and law firms, for that matter) frequently mislabel them–so make sure you carefully read it to see if your shares are subject to vesting. 

What To Look Out For In Your SPA

Here are a few things to note or look out for in your SPA.

Price Per Share

The first issue is the price per share.  A company must issue its shares for no less than fair market value under Internal Revenue Service rules. If your founder shares are issued at the time of incorporation, they will likely be issued for a nominal price per share.  This is typically the par value of $0.0001 per share, which you will need to pay to the company. This makes sense because the company’s valuation is justifiably close to zero when it is created. But if you are a co-founder that joins after the company has raised outside investment or created any significant value, then the company likely would not be justified in issuing your shares for only a nominal price per share. Be careful if you are faced with this situation because you may have a significant tax bill unless you pay cash for the shares upfront.

Vesting and Repurchase Rights

The second issue we will cover is vesting and repurchase rights. 

The shares of common stock issued to founders are typically subject to vesting and the company’s right to repurchase unvested shares. A typical vesting schedule is 4 years with a 1-year cliff.  This means  25% of the shares vest on the 1st anniversary of the founder’s service start date, and the remaining shares vest in smaller monthly installments over the next 3 years. 

If the founder stops working for the company, then the company may repurchase the unvested shares for, typically, the lower of (i) the price per share paid by the founder or (ii) the fair market value on the date of repurchase. This is a strong incentive mechanism for a co-founder to continue pulling his or her weight to grow the company. A co-founder should not view vesting negatively, though, because he or she will want other co-founders to be bound by the same terms. This way, all founders are bound together to grow the company. 

Generally, this right to repurchase is deemed automatically exercised by the company within a certain time period after you leave.  If you would like, you can try to negotiate to reverse this presumption and/or shorten the time period. 

The alternative is the company granting all co-founders’ shares upfront and not subject to any vesting.  In this case, anyone co-founder could leave and keep all of his or her shares, which is very unfair for the remaining co-founders who will be working hard to grow the company.  This also gives the remaining co-founders no mechanism to recapture the departing co-founder’s shares.  This is informally known as “walking off the job” and leaves the company with what is known as “dead equity.”  If there is a significant chunk of this dead equity, the company could become unfundable.  Investors will pay close attention to this. 

Vested Share Repurchase Right

Additionally, some stock purchase agreements contain a “vested share repurchase right.”  A vested share repurchase right gives the company the right to repurchase not only unvested but also vested shares, too, in certain circumstances.  These circumstances include a founder leaving the company or materially breaching an agreement with the company.  In this case, the shares must be purchased for fair market value when the company repurchases them–not the low initial purchase price.

This provision should also not be looked at negatively.  It is a way for the company to avoid the “dead equity” mentioned above.  You should be aware of it and prepared for the company to exercise it in the event you leave the company, even if all your shares have vested.

Non-Competition and Non-Solicitation Provisions

Next, be sure to review your SPA, whether it be a restricted SPA or just a SPA, for Non-Solicitation and Non-Competition clauses like in the PIIAA, using the same analysis as above.

Single and Double Trigger Acceleration, “Cause”, and “Good Reason”

Double and Single Trigger Acceleration

Next, be sure to review the document to see if there is a “Single Trigger” or “Double Trigger” acceleration.  Most documents nowadays come standard with double trigger acceleration.  What this means is your shares will immediately vest in full if the company is acquired AND you are terminated without “Cause,” or you leave for “Good Reason” within twelve months of the acquisition.

Instead, you could negotiate a “single trigger” acceleration.  This could mean your shares will vest in full if the company is acquired OR you are terminated without “Cause,” or you leave for “Good Reason.”

“Cause” and “Good Reason”

In any event, either of these accelerations is critical to your compensation and will ensure you are properly compensated in the event of acquisition and/or there is a dispute with the company over your departure

The definitions of “Cause” and “Good Reason” are critical to whether your single or double trigger acceleration benefits will trigger. In your review and negotiations, try to negotiate a narrow definition of “Cause.”  You don’t want the company to terminate for some vague, unsubstantiated reason and have your shares not vest in full.  

On the other hand, try to negotiate a broad definition of “Good Reason,” so you have more latitude to leave and still have your shares vest in full. 

File Your 83(b) Election with the IRS

Section 83(b) of The Internal Revenue Code gives taxpayers receiving equity compensation the option to pay taxes before they vest. If your shares are subject to vesting, this is your most important deadline, and you only have 30 days to file this election from the date you execute your SPA. It should be attached to the back of your SPA.

If you miss the 83(b) election filing deadline, you will have put yourself in a grave tax situation. Not making the election timely results in the following:

1) When your shares vest, you will owe taxes on the difference between the value of the shares at the time of vesting and what you paid for them.

2) This is a disaster because you probably paid virtually nothing for your shares, and they will go up in value. Plus, this tax hit occurs every vesting period. So as your shares go up in value, you will owe more and more taxes as the shares vest.

For this reason, you have to own your 83(b) filing. File it yourself. Do not expect the company or company counsel to do it for you. Neither generally will for liability reasons.

Conclusion 

Don’t be afraid to negotiate these documents.  They’re going to live on forever, and a little upfront effort and negotiation have the potential to spare you a lot of headaches and make you a lot of money in the future.  Always consult with an attorney, and if you have any questions, please contact James Graves or Danny Neuman.  

By: James Graves and Danny Neuman

Disclaimer: this post is for informational and educational purposes only.  It is not intended to provide any legal advice.

This post will cover the best way for your company to obtain a 409a valuation, the reason why, and when your company needs to obtain one. 

If you’ve ever started a company, you know and are probably sick of dealing with the terms “fair market value” (FMV) and “409a”.  There is already tons of educational content from the legal community on what Section 409a is, why it is important, and its minutiae.  I am sure you are sick of reading about the rules by now.  Rather than conceptually rehash Section 409a, what I will try to do in this post specifically is set forth the best way to obtain a 409a valuation, why, and when your company needs to obtain one. 

The Best Way to Undergo a 409a Valuation

The Independent Appraisal Method

The best way to undergo a 409a valuation is via an independent, professional appraisal of the company’s FMV done by companies like Carta or Scalar, called the “Independent Appraisal” method.*  Why? Because the law gives the professional appraisal of the FMV of a company’s stock a rebuttable presumption of reasonableness.  This means that if the IRS ever audited the company, the burden of proof would be on the IRS, not the company, to show that the methodology used was not a  “reasonable valuation methodology.”  This dramatically reduces the likelihood of a successful IRS challenge of FMV.  

Be Careful Doing It By Yourself

Compare this to if the company used a different method of appraisal, such as doing it by itself.  In this case, the burden of proof would be on the company to demonstrate it used a reasonable valuation methodology.  This is expensive, time-consuming, and highly burdensome to prove.  Even if the company was 100% correct, it would take time and money the company could otherwise invest elsewhere to meet its burden of proof.

Further, the company runs the steep risk that it simply did not use a reasonable valuation methodology.  You are in the business of running your company, not valuing shares of stock.  You are therefore by definition probably not qualified to do so.  Why run the risk, when the adverse consequences are so dire? 

My one caveat here is this.  If you are a brand new company, say, less than a year old, you probably can rely on a good-faith valuation of your shares that you do yourself since the shares’ value would be so nominal.  However, as you grow, start considering an Independent Appraisal sooner rather than later. 

Your Employees May Be Penalized By The IRS The Most For Your Non-Compliance

What’s more, the tax penalties for violating Section 409a are not imposed on the company.  They are imposed on the company’s service providers (e.g., employees or independent contractors) unless the company fails to report or withhold any amount that becomes taxable because of a failure to comply with Section 409a.  These penalties include: 

• All vested deferred compensation (e.g., options or restricted stock) becomes taxable immediately.
• An additional 20% penalty tax levied on the service provider on top of regular income tax.
• Possible imposition of interest on previous years’ vested equity compensation. 

When Your Company Needs to Obtain a 409a Valuation

First, an Independent Appraisal valuation only lasts twelve months. So, your company should plan on obtaining one at least annually if it wants to have the ability to consistently issue deferred equity compensation in compliance with Section 409a. 

Second, the valuation via Independent Appraisal only lasts twelve months if an event that “materially affects the value of the corporation” has not occurred in the interim.  Here are some examples of material events that could re-trigger the company’s obligation to undergo another 409a valuation: 

• The resolution of material litigation (explicitly mentioned in the regulations)
• The issuance of a patent (explicitly mentioned in the regulations)
• A debt or equity financing
• Undergoing any sort of merger or acquisition 
• Launching a central product or service of the company.  

Note that this is a non-exhaustive list, but should give you a good idea of what would be considered a material event. 

Finally, the entire 409a valuation process typically takes around two weeks to complete if you are organized and have all your documents ready to go.  However, most startups aren’t, which can extend the process to a month, or even longer.  Waiting for a 409a can hold up equity grants, which can have a negative ripple effect on your organization.  So, be sure you are organized and current and ready for the valuation process.  

Conclusion

In sum, Section 409a is a very complex statute and this post is just the tip of the iceberg. Always consult with an attorney if you have any questions and always feel free to contact me. 

By: James Graves

Disclaimer: this post is for informational and educational purposes only.  It is not intended to provide any legal advice.

* Note that there are two more “safe harbor” methods set forth in Section 409a called the “Formula Valuation” and “Start-up Company Valuation” methods.  While valid, these are more difficult to comply with and I do not praise them as highly as the Independent Appraisal method.

How should you pick a trademark? You’re at the beginning of the trademark selection process.  You want a trademark that grabs your customers’ attention while being legally enforceable.  Your graphic designer is busily cranking out possible brand names for you, but you’re not sure which of these options will survive legal scrutiny.  So, how should you do it?

Some trademarks, by their very nature, are legally stronger than others.  Here’s a guide to help you determine where your trademark finalists fall on this spectrum.

Arbitrary/Fanciful Trademarks

Arbitrary or fanciful trademarks are the strongest trademarks.  Arbitrary trademarks take real words and pair them with goods/services with which they’re not usually used.  One of the best examples of this is an APPLE for computers.

Fanciful trademarks are things like gibberish or made-up words.  Examples of fanciful trademarks include POLAROID, KODAK, and EXXON.

The advantage of arbitrary and fanciful marks is that they are unlikely to (1) have been picked as trademarks by others because they are so random, and (2) be industry terms that others need to use to describe their own goods/services (and therefore, generally unavailable as trademarks).

The disadvantage of arbitrary and fanciful trademarks is that your customers won’t know by looking at the trademark what the underlying goods/services are.  This means more promotional and marketing efforts on your part to get customers to associate the trademark with your offerings.

Suggestive Trademarks

Suggestive trademarks are those who don’t directly describe your goods/services but instead convey the quality or attribute of those goods/services.  The classic example of a suggestive trademark is the GREYHOUND mark for bus transportation services.  A greyhound is a fast animal, and the quality of speed is a virtue Greyhound Lines wanted to convey to its customers.  Another example is VENUS for hair salons, where Venus is known to be the goddess of beauty, and customers want to feel beautiful after they go to a salon.

Suggestive trademarks are the best of both worlds.  They are unique enough that they are less likely to be used by others in your industry but descriptive enough that your customers have some idea of what they’re getting with your trademark.  It’s the “Aha!” moment you’re looking for!

Descriptive Trademarks

Descriptive marks are trademarks that directly describe some aspect of the feature of your trademark.  These trademarks are regularly refused by the Trademark Office for registration.  Here are some trademarks that were deemed descriptive and what they were describing:

• COASTAL WINERY (wine made on a coast)
• E-FASHION (Internet service of providing information about fashions)
• OPENING DAY (baseball-related merchandise)
• SCOOP (ice cream)

But, with consistent marketing and promotional activities, you may eventually be able to convince the Trademark Office you’re entitled to full registration rights for your descriptive mark.   This concept is known as “secondary meaning” or “acquired distinctiveness” (blog post on this particular topic forthcoming).

Descriptive marks can come in a variety of flavors, including geographically descriptive.  If you want to include the name of your hometown or region in your trademark, just know that you may be in for an uphill battle!

Surname refusals are another kind of descriptiveness refusal.  Personal names get inconsistent treatment before the United States Patent and Trademark Office (USPTO).  You can register a trademark including the first name without much ado.  You can register a first + last name combo, so long as the appropriate consent of the named individual is provided.  However, if you try to register the last name, be prepared for a refusal. 

Generic Trademarks

A generic trademark is a misnomer.  If a word or phrase is generic when used in connection with certain goods and services, it can never achieve trademark status.  For example, you couldn’t register E-MAIL as a trademark for e-mail services or expect to have any trademark rights in the same.

Here’s another trick.  Trademarks can actually commit genericide.  This happens when the trademark itself becomes entirely synonymous with the goods/services it’s used in connection with.  Some marks that have committed genericide include trampoline, yo-yo, aspirin, and – wait for it – heroin. 

Pro-tip for those of you getting ready to introduce something to the market that no-one’s ever seen before: make sure to come up with a generic name AND a trademark to pair with your novel thing.  That way, your trademark doesn’t become generic straight out of the gates.

In Closing…

Trademark selection can be both fun and exasperating process.  If you’ve got some trademarks in mind but unsure where they fall on the arbitrary–>generic spectrum, you can always reach out to a member of our trademark group at trademarkteam@carneylaw.com for more help.  Think you’re ready to move forward with your chosen mark?  Read up on our post on clearance searches before you set sail with your new brand!

By: Ashley Long

Your product is ready to launch.  You’ve selected the perfect name for it.  At least, you think you have, until the cease and desist letter hits your inbox, at which you start to wonder whether your Trademark is actually YOUR Trademark.

This is a common enough story and one we never want to have happened to our clients!  That’s why it’s important to check the trademark you want to use before you adopt it for your product.  We call this process, “clearing the trademark.”

What do we mean by “clearing”?  Clearing refers to conducting a search for physically similar trademarks that are offering similar goods/services to you.   If two marks are physically similar to each other, and they offer similar goods/services to similar customers, that’s essentially trademark infringement.  If we find marks that could be infringing, we’ll counsel you to figure out a different option.

Here are some FAQs we get about clearing trademarks.

Can I do the search myself?

Yes, of course, you can.  It’s always good to look online first to check if someone else has beaten you to the trademark.  You can also check the Trademark Office’s database for current trademarks: http://tmsearch.uspto.gov/.  (Make sure to note the serial/registration number – the results time out fast!)   Keep in mind our legal expertise allows us to anticipate what the courts and Trademark Office will consider infringing.  You can contact us at the email below for clearance search options.

What if the results I find are from different countries?

Trademark rights are governed on a country-by-country basis.  If a brand owner doesn’t have use of a trademark in the United States, it’s unlikely it has any rights to that mark here.

I searched the Trademark Office database and didn’t find anything.  Am I safe?

Nope!  US trademark rights are a bit of a different bird.  In the US, you can have trademark rights without registering a trademark.  This is called “common law” trademark use.  You’ll always want to check for unregistered trademarks before adopting your trademark.

What if I spell my mark differently than another trademark I found?

It depends on how differently.  Slight misspellings, additions/deletions of punctuation, and other nominal differences are generally not enough to distinguish between trademarks.  However, if the differences change the meanings between two trademarks, this could be enough (e.g., NOWHERE versus NO WEAR).

What if I find a similar mark, but they’re doing something different than me?

Again, it depends on how different.  For example, if you’re providing a mobile app for organizing events, and the trademark you found is for plant nurseries, it’s unlikely consumers will think the products come from the same source.  However, if the trademark you found is a mobile app for calendaring meetings, that’s similar enough in function and purpose to be a problem!

If you have other questions about trademark clearance and selection, please don’t hesitate to contact us at trademarkteam@carneylaw.com.

By: Ashley Long

The venture capital world has been buzzing lately regarding a new form of a venture fund (see: https://techcrunch.com/2020/08/05/gumroad-founder-sahil-lavingia-launches-new-seed-fund-in-collaboration-with-angellist). Angel List recently coined the term “Rolling Fund,” a catchy name. At its core, though, the concept of these new types of funds is pretty simple.

Rolling Funds are Subscription Funds

Rolling Funds can also be called subscription funds. They aim to make the venture fund asset class more accessible to both limited partners and venture fund managers.

The primary elements of a Rolling Fund are that it allows limited partners to commit to smaller check sizes, spread out over a given subscription period. For example, an LP might commit to funding 25k every quarter for 8 quarters, for a total investment commitment of $200k. These commitments can also be spread out over multiple funds.

Historically, the way venture funds have worked is — LPs commit to putting a total amount of some size in, say $250,000 — and the GP draws that money down by capital calls over the investment period. The investment period could be 5 or 6 years or a shorter time period. Typically, there are limitations on the total percent drawn down during any calendar year — say, no more than 30%. Also, usually, even after the investment period is over, there may be continuing capital contribution obligations to fund follow on rounds of portfolio companies, up to an LPs total capital contribution obligation.

This old-style approach and methodology has remained unchanged for a long time and serves as somewhat of a blocker for smaller investors to participate in the venture asset class (though things like “investment clubs” and the like have been used for years in an attempt to circumvent this). The reality is that smaller investors generally aren’t interested in more considerable venture funds due to restrictions on the number of LPs a fund can have (99 generally, though a special, lesser-used exemption exists, which allows funds to get up to 249).

Rolling funds, or subscription funds, provide previously unobtainable access to smaller limited partners and venture investors. While in turn, allowing for some exciting investment strategies for venture fund managers to try out, like predictable, recurring investment funds that can be applied across multiple funds at scale to a high volume of small-dollar figure revenue sharing agreements or other unique investment instruments. Also, many rolling funds can be structured as 506(c) offerings, meaning they can be generally advertised.

Hi folks, time for a thread with an update on @earnestcapital Fund II. Dig in if you want to learn about building a new fund (ignore if that sounds super boring!)

AMA if you read to the end

👇

— Tyler Tringas (@tylertringas) August 5, 2020

We recently created the subscription fund model for Earnest Capital (https://earnestcapital.com/) and continue to work with funds and founders to build new, innovative fund and investment structures. If you have any questions about rolling funds or subscription funds, we love discussing and brainstorming about these structures, so feel free to reach out.

By: Bryant Smick and Joe Wallin

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Bryant Smick

Joe Wallin

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The Startup Law Blog

Legal documents can range from the moderately annoying to the insufferably pedantic. Convertible promissory notes are no exception but are so commonplace, you are going to need at least a basic understanding of how they work.

With that in mind, I created a list of common key terms in convertible notes and what they mean. I hope you enjoy. 

• Amendment – Whose consent is required to amend the terms of the note.  Almost always, convertible note documents are amendable by some majority of the noteholders and the issuer.  If it is a single note (not in a series of notes), the convertible note documents will typically say that the terms cannot be amended without the consent of the issuer and the noteholder. 

• Assignment – Who has the power to assign their rights under the note.  Typically, an investor in a convertible note may not assign the note without the company’s consent.

• Attorneys’ Fees – Notes frequently say that if an action is initiated to collect or enforce the terms of the note, the prevailing party would be entitled to recover its attorneys’ fees and costs from the other side.  I consider including this provision “market.” 

• Borrower – This refers to the company that issued to the note to the investor.  Borrower, company, maker, issuer – these all refer to the same thing. 

• Default Interest Rate – Sometimes notes specify that upon the occurrence of an event of default (e.g., the company fails to make a payment under the note), the interest rate increases sharply. This is not very common in startup land, but sometimes it does happen.

• The Denominator – This refers to the number of shares the valuation cap will be divided by in order to calculate the conversion price per share into which the debt under the note will convert.  Rather than get too far into the complexities, I’ll just point you to an article my colleagues wrote on the topic that will answer most questions you have. 

• Discount – The discount refers to the discount on the purchase price of the next financing round that the holder of the note is going to receive (meaning the amount of shares the holder’s note will convert into) if and when such a next financing round occurs,  For example, a note might say that the holder of the note gets to convert the holder’s shares into the next round at 80% of the next round’s price.  This would be referred to as a 20% discount. 

• Events of Default – Sometimes convertible promissory notes specify events of default, e.g., the company filing for bankruptcy.  The note may then go on to say that if this occurs, the interest rate of the note will increase to the Default Interest Rate (see above). 

• Governing Law – Usually notes are governed by the law of the jurisdiction where the borrower primarily does business.

• Information Rights – Sometimes notes entitle the holder to receive certain types of information from the company. I would consider this atypical.  Information rights are generally given to fixed-price round investors. 

• Interest Rate – It is typical for convertible notes to bear interest at 4-8% per year. Sometimes notes don’t bear any interest.  Obviously, the best deal for a startup is: (1) no valuation cap; (2) no discount; (3) no interest rate (this is basically what one of the Y Combinator SAFEs does).  There is a misconception that the note has to bear interest in order to comply with federal tax law. That is generally not true unless the lender is a related party. It is possible to have a note with a zero percent interest rate.

• Liquidation Overhang – This refers to the concept that a noteholder, if they convert at a discount to the price paid by the new fixed-price round investors, they will get liquidation preferences they didn’t pay for. For example, suppose you invested $100,000 into a note. If the note reverts at an 80% discount to the price, unless there is a provision that says otherwise, you will receive stock with a liquidation preference that exceeds your $100,000 investment.

• Maturity Date – the “Maturity Date” is the date on which the note becomes due and payable. 

• Maturity Date Conversion – This refers to the optional conversion of the debt under the note into equity of the company at the Maturity Date if a Qualified Financing (see below) has not occurred before the Maturity Date, or if a Non-Qualified Financing (see below) has occurred, the investor has chosen not to convert the debt into equity. 

• Most Favored Returns clause– This refers to the right of a holder to receive any more favorable terms offered to other investors during the round. 

• Non-Qualified Financing – The term “Non-Qualified Financing” refers to a financing with a monetary amount less than a Qualified Financing (see below).  It generally triggers an investor’s right, at its option, to convert the debt under the note into equity.   

• Noteholder– This just means the investor, i.e., the person or entity that owns the note.  Noteholder, investor, lender, holder – these all refer to the same thing. 

• Participation Rights – Sometimes convertible notes contain a right in favor of the investor to participate in future rounds of financing. I would consider this atypical.  This is more commonly found in fixed-price rounds. 

• Prepayment – Most convertible promissory notes disallow any prepayment by the company without the consent of either the noteholder (if there is only one) or a majority of the noteholders (if there are several). 

• Qualified Financing – The term “qualified financing” is used to define when a note will be automatically converted into equity.  It is a monetary amount (e.g., $1,000,000) that, when hit, will trigger automatic conversion of the debt under the note into equity of the company. 

• Security Interest – It is not common in convertible promissory notes (it is much more common in straight promissory notes), but sometimes noteholders demand a security interest in the borrower’s property.

• Shadow Series – This refers to what a company might do in order to avoid giving converting note holders liquidation preference that they did not pay for (see Liquidation Overhang). 

• Subordination – Note holders may be asked to agree to subordinate their note to other debt of the company.

• Tax Issues – Is the conversion of a note a taxable event? In general, no. Except for interest. Interest is taxable in all events. For this reason, sometimes investors want the right to ask that interest be paid in cash. Similarly, the company should have the right to withhold taxes.

• Tax Withholding – Sometimes a note or a note purchase agreement will contain an authorization for the company to withhold.

• Valuation Cap – A valuation cap is a cap on the valuation at which the note will convert into stock of the company issuing the note. For example, if the note has a $10M valuation cap, even if the company raises money at a valuation of greater than $10M, the noteholder’s shares will be priced based on the $10M valuation. Generally, automatic conversion via a Qualified Financing will convert either via the Valuation Cap/Denominator method, or via the Discount. 

• Venue – Venue for resolution of disputes is commonly specified. Meaning, sometimes notes will state that any lawsuit or arbitration filed to enforce them it must be stated in a particular jurisdiction.

• Voluntary Conversion Price – This refers to the price at which a noteholder can voluntarily convert their note into shares of the Company.

Still with me?

Those should get you started!

If you have any questions (or if you think I forgot anything) please feel free to contact me.

By: James Graves

Disclaimer: this post is for informational and educational purposes only.  It is not intended to provide any legal advice.

Privacy law, where do I begin? You’ve got customer names. You’ve got user addresses. Your analytics are starting to pile up. But, you haven’t even started to figure out how to process, store, and maintain this data. More than that, you don’t know what your responsibilities are to the people you’ve collected data from.

It’s time to get yourself sorted out. To do that, you need to get the lay of the land. We’ve prepped a quick slide deck that talks about the different privacy laws that might apply to your business. We’ve also described the kind of business contracts that you might need for privacy compliance.

Consider this your privacy primer. Once you’re ready for more, feel free to reach out to any of the members of our privacy group at privacygroup@carneylaw.com for further assistance!

Carney Badley Spellman is about Advocacy, Strategy, Results. Located in Seattle, we are a full-service law firm committed to exceptional client service and professional excellence. Our firm serves individuals and businesses of all types and sizes. Our attorneys also work with closely-held companies to Fortune 500 corporations in the Pacific Northwest and across the United States. Although Carney Badley Spellman‘s location is in Seattle, Washington, we are proud to be a part of the Washington state community and communities across the nation.

By: Ashley Long