— Mark Cameron White of White & Lee LLP
Facts: Johnny Tech and Lou Market have just left EDA Technologies Corporation, a company which designs and distributes EDA toolkits, to create Super EDA Technologies, a company which will attempt to design more advanced EDA toolkits. Johnny was a junior product design engineer at EDA and will design Super EDA's new products - while Lou was a Vice President of marketing at EDA and will under take the same function at Super EDA.
Questions:
- What is the enforceability of each of the following EDA agreements on Johnny and Lou?: (a) Non-compete Agreements, (b) Proprietary Information and Non-Disclosure Agreements, (c) Employment Agreements, (d) Vesting Stock Agreements, (e) Stock Option Agreements
- Of the information each former employee may take from EDA, which information (a) has the most value, and (b) is most protectable?
- Does it matter that Johnny designed the new Super EDA products (a) during the period that he was employed by EDA, (b) while using a workstation supplied by EDA, or (c) to address end-user needs not addressed by EDA products?
*Note: These illustrations are fictional and any resemblance with existing companies or persons is purely circumstantial.
Facts: Super EDA has no commercial products, though Johnny Tech is currently developing the toolkits. Fourteen months ago, while Johnny was employed by EDA, he made a presentation before the USA Computer Engineers Conference in which he disclosed several of the key technologies now being developed into the new Super EDA toolkits. Separately, Lou has tentatively selected the trade name "MasterTools" to designate the new software products to be marketed by Super EDA. The Company intends to market its products worldwide through authorized distributors.
Questions:
- How can Super EDA best protect its software from competitors? What intellectual property rights are available to EDA, and how should it go about establishing or securing these rights?
- Can the software be patented in the US or in other countries? Would improper publication taint the entire program, such that no aspects of the technology are patentable? Does it matter?
- How protectable is the MasterTools trademark? Can a registration be filed prior to use of the mark? Should it?
- How important is it for Super EDA to establish intellectual property protection for its products in foreign countries? Does it have any protections without taking any action at all - based on rights it has established under US law? What is the cost/benefit?
Facts: Johnny is single with no other sources of income. Lou is married; his wife manages her own public relations firm - which has widely disparate fluctuations in profitability. Johnny and Lou expect the Company to incur significant early losses, with steadily growing profits after the first year. Both Johnny and Lou want to keep profits in the Company as working capital.
Questions:
- What are the principle differences between "S" and "C" corporations? What are the requirements for becoming an S corporation, and what documents are filed?
- What are the tax effects on Johnny and Lou under C status? Under S status?
- What will the effect of S status be on new investors? (private investors and venture investors) On employee shareholders?
Facts: EDA has 2 founders, Johnny and Lou, neither of whom has any funds to support the Company. Funding will have to be raised from outside sources. Johnny has several friends in EDA and another competitive company which would like to work for Super EDA once it is funded. Two of these friends would work as developers, and two more as lower level administrative staff persons. All wish to receive stock in Super EDA as an inducement for them to leave their current positions.
Questions:
- What is the typical capital structure of newly formed technology companies in the Silicon Valley? Is it better to have a larger or smaller number of authorized shares? What is "blank check preferred stock" - and why have it?
- Assume the 4 friends described above are hired by the Company. How should the stock be allocated among the founders and other employees? What type of securities should be issued to the developers? To the staff persons?
- How should the stock be priced? What if hard assets of an ascertainable value are contributed by the founders - what does this do to the stock price? (effect on basis?) If part of the contributed assets are allocated to debt, how much can be allocated - and what is the effect of this? (ie: taxes, new investment)
- Should the Company offer incentive compensation from the outset - or wait until the Company is more mature?
- What type of securities should be offered to outside investors? How should this be priced? When should this outside money come in? (ie: before or after technology/market development)
Under California law, the Company must have at least 3 directors once it has 3 or more shareholders. Currently only Johnny and Lou are directors. With the issuance of incentive stock to the Company's new employees, at least one new member must be appointed to the Board of Directors.
Questions:
- How large should the Board be? What type of persons with what background should be appointed to the Board? What else should be considered in appointing new directors? When are directors "elected" and when are they "appointed"?
- Assuming that the Company anticipates obtaining venture capital, and that a seat should be reserved for a representative of the venture investors, should the Company fill the 3rd vacant seat now, or wait until completion of the venture funding?
Development of MasterTools, the Company's initial product, requires expertise which none of the Company's employees currently have. Harold Hacker has this expertise, but the Company does not expect that it will need Harold's services beyond initial product development. Johnny views MasterTools as his "baby" and plans on supervising carefully Harold's work. Harold insists on working primarily from his home and working at the Company's facilities only 2 days a week.
Questions:
- What are the advantages/disadvantages of hiring Harold as an employee v. retaining him as a contractor?
- What is the Company's potential liability if the IRS recharacterizes Harold as an employee after he has been treated as a contractor?
- What, in fact, is Harold?! - a contractor or an employee?
- Can the Company protect itself by causing Harold to enter into a "Consulting Agreement"? If so, what should it say?
Facts: The Company has successfully beta-tested MasterTools, and now wishes to bring the product to market. Marketing Technologies Corporation has approached EDA about an early-stage investment in return for certain exclusive distribution rights. Vulture Ventures, a venture capital firm, has also approached Super EDA about an investment.
Questions: Which funding makes more sense?
- If Johnny and Lou are concerned about management control? If they are not?
- If industry contacts and market access is most important?
- If timing is critical?
- If follow-on funding will probably be required?
- If Johnny and Lou are primarily interested in liquidity on their stock? If job security is most important?
Facts: Marketing Technologies has just announced a staggering 3rd quarter loss and is no longer in a position to invest in the Company. Johnny's parents are comfortably retired and have volunteered to purchase $1 million of stock in the Company - representing half of their net worth. Lou has friends working in and outside of the EDA industry who have expressed an interest in investing in the Company. Many of these persons are "unaccredited" under the securities laws; however, Vulture Ventures, as mentioned, stands ready, willing and able to invest.
Questions:
- If $1 million is sufficient to fund the Company for now, should Johnny ask his parents to invest? (management and follow-on funding concerns) What type of disclosure documentation is required?
- What about Lou's friends? What is the risk/obligation on the Company associated with investment by "unaccredited investors"? How can the Company protect itself?
- What, typically, would the venture investors request in a seed-round investment like this? How much of the Company would they want? What do they look for in the Company? What disclosure documentation is required?
Facts: The Company is now fully funded and ready to roll-out the MasterTools product. This product is quite complex and will require extensive after-sale support. The Company has made no commercial sales to date.
Questions:
- What are the alternative marketing strategies that the Company should consider?
- What marketing tasks should be undertaken "in-house" and which tasks should be placed on distributors, dealers, and corporate resellers?
- Should the strategy be different with the US and with foreign markets?
- What, in a general sense, are the anti-trust and anti-competitive guidelines - and how can the Company legally control distributor/reseller price maintenance?
Facts: The success of the MasterTools product has attracted enormous industry interest. Singapore Electronics has approached the Company about setting up an EDA joint venture company in Singapore to further develop these products, attempt to qualify for Singapore government grants available through the Economic Development Board, and market the products throughout the Pacific-rim region.
Questions:
- In these circumstances, why might a joint venture be preferable to a straight licensing/distribution arrangement?
- What might the effect of the joint development of new products be on (a) technology ownership, (b) marketing throughout the region, (c) company valuation and investor liquidity?
- Of the following critical issues in a joint venture arrangement, how might they be addressed?
- business form?
- management control?
- technology ownership (now and on dissolution)?
- contribution?
- on-going support?
For answers to SuperEDA Technology hypothetical questions
