Lots of start-up founders try to do things the easy way and create a corporation online with the Indiana Secretary of State, which has really one of the best, fastest, and easiest to use websites around.  This is a great way to start, and it will indeed form your corporation with Secretary of State and generate a basic Articles of Incorporation for you.  The problem, though, is that most people will stop right there, falsely believing that filing articles is all that is necessary.  That is not the case.  Indiana law requires a number of formalities when setting up a corporation, including the approval of bylaws.

Indianapolis attorney, Hannah Joseph, recently launched a new blog called FinePrintLawyer.com.  The blog takes a stab at an interesting niche – which Hannah describes as “…the legal angles of social media, marketing and advertising…common sense explanation of the tiny writing that clutters up all that nice marketing copy.”

Check it out!

Internet start-ups are a lot like traditional, brick and mortar businesses.  The require all of the same things I listed here. There are also some unique matters that must be attended to when starting and operating and Internet Business. Below is a checklist of some of the things every Internet start upshould have.

• A properly organized corporate entity.  Just because you are doing business on the Internet does not mean you are free from the liability concerns of traditional businesses. Make sure you form an entity through which to do business and adhere to corporate formalities.
• A plan to protect your intellectual property. This should include proper registrations of copyrights, trademarks and patents.  It should also include the use of confidentiality, nondisclosure, and invention assignment agreements. There should also be clear, conspicuous notices of your intellectual property rights.
• Properly drafted Terms of Use and Privacy Policy for your website. This is an important step for traditional businesses who’s website is merely complimentary to the bricks and mortar.  It is a vital and even more important step for an Internet business.  Don’t rely on cutting and pasting from another site – that is just a bad idea.
• If you are an SaaS provider, make sure you SaaS agreement is bullet proof. Don’t try to do this on your own!  You not only need to make sure the provisions in the agreement are sound, but you also need to make sure that you have a valid acceptance of the agreement by the end user.
• Make sure you have carefully reviewed any development agreements.  Among other things, this needs to be reviewed VERY CAREFULLY to ensure the scope of the project, developer obligations, warranties and most importantly intellectual property ownership are all adequately spelled out in the agreement.

This list is, of course, not inclusive.  You should consult with an Internet Start Up Attorney prior to and during the operation of your Internet start up business

I get questions from friends and clients all the time about what is and isn’t ok to post on a blog in terms of copyrighted and trademarked materials.  The answer is not all that easy to explain, but Indianapolis attorney Kenan Farrel has an excellent post on his blog that does a nice job of explaining the issue.  You can read the entire post here (A Legal Primer For Bloggers – Intellectual Property), but I have included a few highlights below:

On copyright law, fair use, and transformative use:

Keep in mind that the law favors “transformative” use.  In other words, if you’re reposting another person’s original work, it’s more likely to be fair use if you’re using that work in a different manner or for a different purpose than the original.  While you may borrow directly from another source, adding your own commentary and content is better than strict copying.  Likewise, it’s better to repost only a small portion of someone else’s work than the work in its entirety.

On what to do if someone contacts you to remove their work:

Also, on a practical note, if you’re using someone else’s text or images and they contact you to ask you to remove them, you probably just want to go ahead and do it.  After all, there are lots of different ways to express an idea and usually hundreds of equally wonderful pictures to adorn your blog.

On nomative fair use of someone else’s trademark:

…while trademark law prevents you from using someone else’s trademark to sell your competing products, it doesn’t stop you from using the trademark to refer to the trademark owner or its products. That is called “nominative fair use,” and is permitted if using the trademark is necessary to identify the products, services, or company you’re talking about, and you don’t use the mark to suggest the company endorses you.

Again, you can check out the entire post, as well as two other posting in his “Legal Primer for Bloggers” series here.

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I read an interesting post on Gigaom.com this morning titled “The 10 Ways Startup Advice is Flawed.”  It focuses on advice given by people perceived as successful start-up entrepreneurs – attacking the premise that someones status (i.e. wealth, fame…etc) may not necessarily be related to what they did as a start-up – and that therefore their advice is not sound.  Here is a key excerpt from the post.You can read the whole post here.

1. Maybe the thing they did really didn’t cause them to get rich. A lot of startup stories are after-the-fact rationalizations or outright myths. As they say in Latin (and on the “West Wing”):Post hoc ergo propter hoc. In other words, just because something takes place after something else, doesn’t mean the two have a causal relationship.

2. Maybe they got lucky. After all, as my grandmother used to say, “Even a blind pig eventually finds a truffle.”

3. Maybe they did the thing they said and it was actually a bad idea, but they were in the right place at the right time. A lot of powerful businesses (especially network-effects businesses) are largely resilient to incompetence.

4. Maybe the thing they did worked, but only in conjunction with some other unnamed factor. For example, many visionaries partner with a heads-down, practical type.

5. Maybe the thing they did worked, but it only under certain circumstances. For example, perhaps it worked in their industry and not in yours, or only in certain phases of growth, or for certain kinds of teams.

6. Maybe the thing they did used to work, but it doesn’t anymore. For example, perhaps competitors now know how to counter such a move.

7. Maybe the thing they did worked, but for a different reason than they think. For example, perhaps it was the feedback of their customers, not their grand original idea, that was key to success.

8. Maybe they didn’t really do the thing they said they did. Most of the mythological startup stories are highly misleading. Many of us remember the past the way we wish it had been rather than the way it actually was.

9. Maybe they’re not really rich and/or famous. A lot of startup energy goes into what I call “success theater” –- that is, convincing the world that you and your startup is successful. Next time you’re listening to a guru, ask yourself: How do I really know that they’re successful? What is their definition of success? What’s mine?

10. Maybe they have an agenda. Ask yourself: Does this person stand to benefit if I follow this advice? The VCs I know and trust are honest and very pro-entrepreneur, but I routinely hear others give advice that entrepreneurs should be suspicious of. Fundamentally, their incentives are based on having a portfolio of startups. As an entrepreneur, you have a portfolio of one. Think about that the next time a VC advises you to swing for the fences.

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One of the exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 506.   Rule 506 contains no limit on the amount of capital that can be raised in an offering. Similar to other exemptions, an issuer using Rule 506 cannot use general advertising or general solicitation to market its offering.  Rule 506 is available to an unlimited number of accredited investors and up to 35 non-accredited investors.  Unlike Rule 505, all nonaccredited investors, either alone or via a purchaser representative, must be sophisticated, that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.  Just as with Rule 505, nonaccredited investors must receive a substantive disclosure document that includes financial statements, although even if only accredited investors are involved, care must be taken such that the anti-fraud requirements are met and that there are no false statements, no misleading statements, and no omissions that might make what you have disclosed misleading.  Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption.

As always, make sure you get the advice of a securities attorney with private placement experience. There are lots of complicated regulatory requirements to comply with, both on the state and federal level.   A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

One of the exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 505.  Rule 505 allows a company to raise an aggregate amount of $5,000,000 over a twelve-month period.  Similar to Rule 504, Rule 505 does not permit an issuer to use general advertising or general solicitation to market its offering.  A Rule 505 offering is available to an unlimited number of accredited investors and up to 35 non-accredited investors.  Unlike a Rule 504 offering, nonaccredited investors must receive a substantive disclosure document that includes financial statements, although even if only accredited investors are involved, care must be taken such that the anti-fraud requirements are met and that there are no false statements, no misleading statements, and no omissions that might make what you have disclosed misleading.   Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption.

As always, make sure you get the advice of a securities attorney with private placement experience.   There are lots of complicated regulatory requirements to comply with, both on the state and federal level.   A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

Most start-up ventures are strapped for cash – and most start-up ventures typically require at least some, if not a significant amount, of legal work to help them get the business up and running.  One great way for a start-up to save itself some money is to negotiate fixed fees for the transactional legal services it receives.  Billable hours have been a cash cow for big law firms for a long time, but most smaller and solo law practices will be more than willing to provide a fixed fee for certain types of work.  In my business law practice, I provide project based fixed fees for all kinds of projects, including entity formation, contract review, trademark matters, and even some larger business acquisition transactions.  Projects that potentially involve significant negotiations with other parties are very difficult to offer fixed fees – there is just no way of knowing how difficult or lengthy negotiations might be.

Seek out attorneys that are willing to provide fixed fees for your projects – and if you can’t find an attorney that markets him or herself as providing fixed fees – don’t be afraid to ask for fixed fees from an attorney – even if it is an attorney you have used in the past who you have historically paid by the hour.  Fixed fees will help you control your costs, and will help you more accurately budget your tight cash flow since you know EXACTLY how much your legal expenses will be.

Those of you who have ever been to the Indy 500 – or any big motorsports event – know that transporting a cooler from your car, to a tailgate, to your seat, and then back, can be a major pain.  Andrew Shelton, the founder of TrackPack Coolers, LLC, identified this need and figured why not make a cooler that takes the form of a backpack…and why not also make it so the backpack cooler dispenses drinks without having to take the backpack off.  Brilliant!  Thus, the TrackPack Cooler was born.

TrackPack Coolers, LLC manufactures a proprietary insulated backpack cooler called The TrackPack that is capable of dispensing beverage cans without the need for putting a cooler down, opening it, and rummaging through ice to find the cans. Founded in March 2006, TrackPack Coolers LLC has been retailing since January 2007. In its first year of operations TrackPack sold more than 8500 coolers through less than 100 retail locations.

I actually own a TrackPack Cooler – and let me tell you – the thing is awesome.  The TrackPack Cooler is a UNIQUE, proprietary backpack cooler – capable of dispensing 20 beverage cans. Each pack comes with 3 reusable freezer gel-packs (so there’s no leaking), a proprietary dispensing frame, and a water-proof liner (so the frame can be removed and the pack can be filled with just about anything…including ice). Inside each TrackPack an internal plastic frame holds beverage cans stacked on their sides in four vertical columns – a lot like a soda machine. To keep everything cool, the frame holds 3 REMOVABLE & REUSABLE GEL-PACKS so your drinks will stay cold all day –WITHOUT ICE!!! When you’re wearing the TrackPack, dispensing ports on either side of the bag can be opened to reveal the ice-cold beverages inside. It’s so easy! Just load it up and throw it on for a tailgate, party or event, all you’ll have to do is reach back and grab a cold one.

Maybe even more impressive than the actual product, is the way Andrew has built and runs his company…all…by…himself.  TrackPack is essentially a virtual business – design, manufacturing, and logistics are all outsourced.  The TrackPack founder handles most big event sales himself using an RV wrapped with TrackPack images and logos, as well as handling retail placement.  It is an impressive accomplishment to say the least.  The company has plans to expand its product line and begin increasing its workforce (to more than one), so it will be fun watching TrackPack transform from the model one-man virtual business to a big time player in the retail cooler market.

To learn more about TrackPack Coolers, LLC – or better yet – to buy a TrackPack – check out http://www.trackpackcoolers.com/.

One of the more common questions I get from clients interested in raising capital is “what is an accredited investor?” The answer is spelled out in fairly plain english in Rule 501 of Regulation D:

a bank, insurance company, registered investment company, business development company, or small business investment company;

an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

a charitable organization, corporation, or partnership with assets exceeding $5 million;

a director, executive officer, or general partner of the company selling the securities;

a business in which all the equity owners are accredited investors;

a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;

a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or

a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

In addition to understanding what it means to be an accredited investor, it is also important to understand how accredited investor status relates to the most common exemptions from the registration requirements of federal securities law. In a nutshell:

• Rule 504 permits allows a business to sell up to $1 Million in securities during a 12 month period to an unlimited number of non-accredited investors. Additionally, Rule 504 does not require the issuer to provide any specific disclosure to the offerees, regardless of whether they are accredited (but keep in mind the anti-fraud requirements).
• Rule 505 allows a business to sell up to $5 million in securities during a 12 month period to an unlimited number of accredited investors, and up to 35 non-accredited investors.  The big problem with selling to non-accredited investors is that the disclosure requirements are significantly more difficult to meet – very similar to the disclosures required in a public offering.
• Rule 506 allows a business to raise an unlimited amount of capital via the sale of securities to an unlimited number of accredited investors, and up to 35 non-accredited investors.  In addition to the substantial disclosure requirements discussed above for Rule 505, any non-accredited investors must also meet a “sophistication” standard, either themselves or via a qualified purchaser’s representative.  The status of an investor as “sophisticated” is a fairly high standard; investors who are merely knowledgeable about the particular industry are not necessarily sophisticated.

As you can see, raising capital from non-accredited investors puts a start-up in a much more tenuous position in terms of disclosure – which means substantially more legal and accounting fees.  Non-accredited investors also tend to be more difficult to deal with in the long term.  Consider carefully the decision to raise capital using non-accredited investors – and of course consult with a securities attorney.

One other thing to keep in mind is that the burden of establishing whether an investor is an accredited investor falls on the issuing company.  At a minimum, the issuing company must reasonably believe that the investor falls into one of the 8 categories in the definition of “accredited investor.”  This is typically accomplished using a carefully drafted investor questionnaire – make sure you use one and that you consult a securities attorney.