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The Future of Legal Practice

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Hi there,

My name is Henry Demasco, and I’m an Operations Associate at Comar LLP. From now on I’m going to be contributing my thoughts on the firm’s blog as often as I can, so be sure to check back here soon! The first thing I want to write about is the future of legal practice…

When asked about attorneys and what they do, most people look to Hollywood portrayals: probably of men and women wearing expensive suits pushing around papers from the tops of glittering skyscrapers, or perhaps Atticus Finch-like characters arguing persuasively in front of moved juries. (Actually, this image is surprisingly accurate in many cases.) But as time goes on, we believe that these glamorous traditions of the legal profession will be largely done away with. In its place will be a much leaner, more client-oriented way of doing business, in which lawyers are driven by the following directives:

·      A need to offer business as well as legal counsel. Sophisticated attorneys often have dozens of active matters that are live at any one time, and have observed countless different fact patterns involving countless forms of business relationships. Attorneys are not management consultants or CEOs, but a good attorney will have wisdom into business scenarios and can help clients structure deals and business outcomes based on what they have seen work in the past. This is something that many lawyers hesitate to do today, and it is something that template documents will never do.

·      An ability to cross legal disciplines. Lawyers will need to have the courage and the smarts to cross legal disciplines and master a number of different legal fields.  Good deal making requires knowledge of litigation, and good litigation requires the ability to think about a deal, and in today’s modern economy, domain mastery over information monetization and intellectual property is a must. 

·      An authentic commitment to positive values. Lawyers comprise some of the most educated members of a society, and we believe that sophisticated consumers of legal services will demand that their counsel display and prioritize a genuine commitment to the common good. This doesn’t mean that every firm has to have an Atticus Finch; but it might mean that corporate lawyers think about how to use a corporate structure to help mitigate social and environmental externalities, and in the litigation context, it might mean that litigators think about what it might to take to get warring parties to a meaningful and balanced settlement.

Stay tuned for more of our thoughts about the future, and how we want to position ourselves for it.

Thanks,

Henry

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Celebrating 70 Years of the San Francisco Lawyer Referral and Information Service!

The Lawyer Referral and Information Service’s Governing Committee, back row from left: Josh Ridless, John Hickman, Tad Devlin, Julianne Jensen, Deborah England, Michael Whelan, David Otsuka (chair), Phil Ward; front row from left: Blanca Young, Jill McInerney, Judge Patrice McElroy, Roger Meredith, Inder Comar, Pam Herzig, Renee Richards, and Mark Wasacz.

The Lawyer Referral and Information Service’s Governing Committee, back row from left: Josh Ridless, John Hickman, Tad Devlin, Julianne Jensen, Deborah England, Michael Whelan, David Otsuka (chair), Phil Ward; front row from left: Blanca Young, Jill McInerney, Judge Patrice McElroy, Roger Meredith, Inder Comar, Pam Herzig, Renee Richards, and Mark Wasacz.

Comar Law is proud to support the San Francisco-Marin Lawyer Referral and Information Service (LRIS), which celebrates its 70th anniversary this year!

Inder Comar, legal director at Comar Law, serves on the LRIS Governing Committee, continuing a tradition of providing quality legal services to the community. Mr. Comar has been a member of the committee for more than three years and looks forward to maintaining an active presence in the years to come.  

LRIS was founded in 1946 to support returning World War II veterans. Today LRIS fields 50,000 calls per year and works to connect clients with legal and social services.  In addition to connecting the community with much-needed legal services, LRIS supports programs such as the Justice and Diversity Center.

A full history of LRIS is available here and will be included in the summer edition of San Francisco Attorney, the Bar Association of San Francisco's quarterly magazine.

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Comar Law Opens New York Office

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Comar Law Opens New York Office

We are pleased to announce the opening of our New York office, right in the heart of lower Manhattan! 

The new east coast presence comes several months after our official introduction of new counsel at Comar Law.

The New York office will act as a launching pad and center of growth for Comar, as we look to expand our client base to the East Coast and also develop and cultivate significant expertise in areas of finance, litigation, and corporate counseling in both the New York and California markets.

We are at 95 Broad Street, 17th Floor, New York, NY 10004.

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Comar to advise on IP issues to national Ghanaian research laboratory

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Comar to advise on IP issues to national Ghanaian research laboratory

Comar Law legal director D. Inder Comar has been engaged by Ghana's premier national research institution to advise on intellectual property matters.

The engagement will focus on intellectual property best practices in the space of agricultural research.

The effects of globalization and climate change have placed increasing pressure on countries to develop new forms of food and agricultural production. 

Ghana is party to several international treaties with respect to intellectual property protection and licensing. Compliance with international IP law, and integration of licensing best practices, will permit the country to enjoy the rights associated with intellectual property development, licensing and development.

The engagement will have an on-the-ground component, with Mr. Comar working in Kumasi, Ghana, for approximately 10 days. 

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Welcoming new counsel at Comar Law

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Welcoming new counsel at Comar Law

We have exciting updates and announcements from Comar Law! First, we are pleased to welcome Kate Westmoreland and Rajeev Ananda to CL. Together Kate and Rajeev bring over 20 years of experience to the practice. If you haven't already worked with Kate or Rajeev you can learn more about them below!

In addition to welcoming Kate and Rajeev, we have also moved to a new office. We are now located at 995 Market St., 2nd Floor (just around the corner from the Impact Hub). The new space is at the WeWork Mid-Market location. We look forward to more collaborations and partnerships as we get to know the WeWork community.

Finally we thank you for your continued support of Comar Law during this exciting period of growth. We are looking forward to a busy and fruitful 2016. In the mean time we wish you a happy and safe holiday season!

KATE WESTMORELAND

 

Kate is an international lawyer licensed to practice in both California and Australia. She has over nine years of experience working with government, the United Nations, and academia on international law, data privacy, and human rights.  

A non-residential fellow with the Stanford Center for Internet and Society, Kate is recognized as an expert in international jurisdiction and government access to user data. She provides consulting advice to cloud-based companies and digital rights organizations on issues of privacy and responsible access to user data. 

At Comar Law, Kate acts as counsel to advise startups and early-stage companies on matters of civil litigation and corporate financing. She excels at researching the law on complex and novel situations, analyzing the implications for business, and providing advice that is accurate, concise, and pragmatic.

Kate is a certified information privacy professional (CIPP/US) and holds a Master of Laws in International Law (with merit) from the Australian National University, Bachelor of Laws from the University of Queensland (First Class Honors), and a Bachelor of Arts from the University of Queensland.

RAJEEV ANANDA


Rajeev is an experienced attorney specializing in commercial litigation, corporate compliance, and contract negotiation. Rajeev is admitted to practice in New York and California.

Prior to joining Comar Law, Rajeev served as General Counsel for a healthcare technology company where he oversaw all legal matters, including negotiating vendor and licensing agreements as well as HIPAA and HITECH compliance. Prior to that, Rajeev was an Associate at a litigation boutique firm where he represented clients in a variety of litigation and obtained significant trial, appellate, and arbitration experience.   Rajeev was also an Associate at a major, national law firm, Hughes Hubbard & Reed, where he represented a large pharmaceutical company in its products liability litigations across the U.S.

Rajeev obtained his Juris Doctorate at the New York University School of Law. He graduated from the University of California at Berkeley, where he earned Bachelor of Arts degrees in Chemistry and Political Science. 

Rajeev provides his clients with his sophisticated legal acumen while at the same time understanding their practical business needs.

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Make sure to have those IP Agreements ready prior to a deal!

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Make sure to have those IP Agreements ready prior to a deal!

In the excitement leading up to a deal, founders need to make sure that in addition to corporate documents being ready, they have their IP diligence completed as well. 

 

The key mechanism of IP diligence is the intellectual property and invention assignment agreement (or "IP Agreement").

 

In the absence of a specific writing, it can be unclear as to who legally owns certain work that is being done on the Company's behalf. The remedy for this is the signed IP Agreement. 

 

When an IP Agreement is signed between a service provider and the Company, it ensures that everything done by the service provider belongs to the Company. This is important because it helps to avoid a dispute down the road as to who owns what.

 

The classic situation is when founders break up, and they did not sign IP Agreements with the Company. If the Company goes nowhere, this is rarely an issue. But if the Company is successful, it can lead to disputes between early stage founders about who developed parts of the business. This can lead to lawsuits and messy stories in the press.

 

Another classic example comes out of working with independent contractors. Without the IP Agreement, it may be unclear if the intellectual property was actually ever given to the Company, even if payment was exchanged for services. People commonly hire engineers and other service provides off the Internet, and may never meet them in person. Particularly in those instances, it is critical that an IP Agreement be put in place.

 

There are countless templates on the Internet for IP Agreements. Whatever you use, have counsel vet the version to ensure compliance with relevant law. An attorney will also ensure that the template is specifically tailored for the business being done by the Company. Investors will want to see all IP Agreements and will frown upon significant issues with the paper trail here. In extreme instances, these may even hold up a deal. Make sure you have your IP Agreements ready to go so your company can make new deals with ease. 

 

 

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Comar to Speak at International Forum on Peace and Justice in Kuala Lumpur

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Comar to Speak at International Forum on Peace and Justice in Kuala Lumpur

Kuala Lumpur at night. Courtesy of Dcubillas (available at https://commons.wikimedia.org/wiki/Petronas_Towers#/media/File:Petronas_Towers_at_Night_-_from_the_base_upwards.jpg)

Kuala Lumpur at night. Courtesy of Dcubillas (available at https://commons.wikimedia.org/wiki/Petronas_Towers#/media/File:Petronas_Towers_at_Night_-_from_the_base_upwards.jpg)

Comar Law’s Legal Director Inder Comar has been invited by the Kuala Lumpur Foundation to Criminalise War (KLFCW) to speak at their International Forum on Peace and Justice on April 18, 2015. Mr. Comar attends the conference as a special guest and will be granted the courtesy of a royal dinner under the auspices of the King of Malaysia, Abdul Halim of Kedah.

Mr. Comar will present his work as lead counsel on the Saleh v. Bush case, which challenges the legality of the Iraq War. He will present alongside prominent diplomats, professors, and legal advisors, including the Fourth Malaysian Prime Minister Tun Dr. Mahathir Mohamed and former UN Humanitarian Coordinator for Iraq Hans von Sponeck. 

Comar Law is grateful for the opportunity to discuss its ongoing work in protecting and advancing international human rights. 

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Comar Helps Close Strategic Partnership for Revolutionary Prosthetic Technology

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Comar Helps Close Strategic Partnership for Revolutionary Prosthetic Technology

The Comar Law team is thrilled to share that our client UNYQa social enterprise pioneering 3D-manufactured covers for prosthetic devices, has partnered with 3D Systems, Inc., a global leader in 3D printing technology. Comar Law has advised UNYQ from incorporation through several funding rounds, and helped acquire their trademark in both the US and European Union.

In this most recent funding round, UNYQ secured investment from 3D Systems, Inc. as part of a larger strategic partnership with with the publicly traded, South Carolina-based company. This multilayer partnership, which involved a major exchange of intellectual property, will see UNYQ and 3D Systems join forces to advance 3D printing technology for prosthetics and orthotics. As part of the deal, UNYQ will commercialize 3D Systems’ personalized prosthetic fairings, braces, and casts, combining UNYQ's stylish, disruptive products with 3D Systems' manufacturing capacity and industry expertise

An innovator in both the wearable technology and 3D printing industries, UNYQ also represents a bona fide social enterprise: a for-profit company helping to make the world a better place by democratizing access to affordable, revolutionary technology for amputees. 

Congratulations, UNYQ!

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Being fired may not be enough for an employment lawsuit

As part of our corporate counseling practice, we often review terminations or adverse actions for both employees and employers and help clients determine whether the law was broken.

One of the biggest misconceptions that exists in California (and federal) employment law is that simply being terminated is enough grounds to bring a lawsuit. In California, it's actually the opposite - employment is considered "at will" (meaning the company can terminate or the employee can leave) at any time. Of course, if there is a contract between the employee and the Company that provides for termination in a specific manner, then it is certainly true that the contract may have been breached.

Another misconception is that a bad boss can be grounds for a lawsuit. Again, this generally is not the case, either. Simply having an arrogant, overbearing or unprofessional boss is not enough to make a claim for harassment or illegal conduct.

California law protects people from harassment and discrimination on the basis of a protected class. If a Company fires someone because that person was a woman, or treats someone poorly because that person is a woman, California law has likely been violated. And certainly, someone with poor management skills may be at greater risk of such claims. But California law requires more than simply being let go, or having a jerk for a boss, in order to bring a claim -- for better or for worse.

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The IP assignment versus the IP license

There's a big difference between a "license" and a full "assignment" for intellectual property rights.

An intellectual property assignment usually means a complete transfer of intellectual property from one party to another. 

In contrast, a license is usually a subset of rights to another party, which can only use the intellectual property in specified ways and for a specified length of time.

A copyright license might say, for example, that a party can only use a certain image or song, perhaps only in the United States or only on a certain webpage. 

A full assignment of an image would give a party the right to use the image in whatever way he or she wants, or to create derivatives of the copyright.

Sometimes people speak of "exclusive" licenses, but this phrase should be unbundled. An exclusive license to use certain intellectual property may simply mean that only one party can use it; but it still might be constrained by length of time, geographic location, or other limitations. 

A fully exclusive, non-revocable, perpetual license comes close to being a full assignment, and for practical purposes accomplishes the same things. But a full assignment will actually transfer ownership in a more complete manner. 

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State or federal court?

Clients often ask whether it's better to file a lawsuit in state or federal court.

The answer is that, "It depends."

In plaintiff side employment cases, California law under the Fair Employment and Housing Act is more generous to plaintiffs with respect to certain types of damages claims than under Title VII, and sometimes it may be beneficial to file a claim in state court. 

State court judges are also considered to be more "plaintiff friendly" than federal judges, but I would hesitate to characterize state judges in such a broad manner.

In defense work, it is true that we try and look for ways to remove a case to federal court. 

Sometimes, the laws at issue require a specific venue. In copyright cases, for example, federal law requires that a federal court hear the claim. 

Federal court tends to be cheaper than state court, and because it is better funded, it is generally more organized. But judicial officers in both systems care more about the strength of the claim than anything else. And of course, whether they will be overturned on appeal.

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Settling shareholder disputes through shares

We've seen an uptick in our practice of disputes between founders, or disputes between consultants and early stage Companies. Many of these disputes involve the number of shares that each party thinks is "fair" for service that has been provided.

In startups, cash tends to be more precious than equity, although later in a Company's lifetime the opposite becomes true. Still, with cash an almost sacred commodity, a Company can consider solving these disputes through issuance of equity. There's nothing wrong with settling a dispute and providing equity to people who may have claims against the Company.

In doing so, however, a Company should still make sure that it is complying with securities rules when it issues shares, particularly if it has not issued shares in the past to the other party, or is relying on a different exemption to do so. Companies are still required to comply with securities rules even if they are using shares to settle a case, instead of to raise finance.

Individuals who are receiving equity from a Company should do all necessary tax diligence to avoid phantom tax with respect to the value of the equity they are receiving. 

Of course, avoiding a dispute is best. Companies and individuals can do this by putting everything in writing and making sure that discussions about equity are crystal clear. This is easier said than done; but, assuming a professional resolution, a small amount of equity to restore harmony (and more importantly to obtain a release of claims and preserve intellectual property) isn't the end of the world.

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Comar Law frees prisoner sentenced in 2004 to 54 years to life

Comar Law is pleased to announce that it has freed Raymond Lee Zimmerman, a Californian sentenced in 2004 to 54 years to life.

Originally sentenced under California’s draconian “Three Strikes Law,” Comar Law was court appointed to help secure Mr. Zimmerman’s release under Proposition 36, also known as the Three Strikes Reform Act, passed by the people of California in 2012.

The trial court conceded application of the Three Strikes Reform Act, but refused to provide full conduct credit to Mr. Zimmerman, reducing his term from 54 years to 18 years and 8 months.

In June of this year, the Court of Appeal agreed with Comar Law that Mr. Zimmerman was entitled to full credits for time already spent in prison. Mr. Zimmerman was ultimately released on October 30, 2014, decades before his initially scheduled release.

Californians have decided that certain non-violent offenders should not be subject to the Three Strikes Law and deserve a second chance. Comar Law is grateful to have played a role in securing the release of one such offender, particularly in time for the holidays

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Tips to protect Company trade secrets

[The following is not legal advice and should not be relied on as such]

The heart and soul of many Companies are their trade secrets (think the Coca-Cola formula, a proprietary algorithm, or even customer lists and other sales/consumer data). Here are five things every Company should think about regarding trade secrets and trade secret protection:

(1) Trade secret law is governed at the state level. Most states have adopted some formulation of the “Uniform Trade Secrets Act,” which, in general terms,  requires that trade secrets be (1) kept secret and (2) provide economic value to the Company on account of the secrecy. However, some states have not adopted the Uniform Trade Secrets Act, including New York. Companies engaged in possible disclosure of trade secrets should check local law to make sure that the disclosure complies with trade secret law in that jurisdiction, so that trade secret protection is not lost.

(2) Assuming the Company is compliant with trade secret law, trade secret protection is generally indefinite. Thus, Companies should consider their intellectual property strategy with respect to their proprietary data and decide which of their confidential information may be appropriate for public disclosure in a patent application that may eventually expire after the term of the patent, and what is more appropriate for private, indefinite use.

(3) Companies that wish to disclose trade secrets (for example, to a potential investor or strategic partner), should always sign a tight non disclosure agreement to ensure that any trade secrets disclosed will be kept secret by the other party. Absent an NDA, such disclosure may result in the loss of trade secret status.

(4) Companies should ensure that their employees and independent contractors do not walk away with Company trade secrets when they leave, or inadvertently disclose the trade secrets upon departure. Best practice in this area includes doing an exit interview with departing employees to ensure they will comply with any confidentiality obligations, and to discuss what the Company considers proprietary and particularly sensitive.

(5) Companies that believe an employee may have walked away with trade secrets must take affirmative, immediate steps to contain the damage, or else they risk permanently losing trade secret protection over what was taken. Companies, for example, should seriously consider seeking a permanent injunction if they fear trade secrets have been taken or potentially disclosed, which is a court order prohibiting any further disclosure. In California, where non-competes are almost impossible to enforce and are generally void, employees can work for competitors immediately after departing a Company; in such situations, it is critical that Companies restrict access to shared proprietary data (such as data in DropBox or Box folders, email accounts, Google Drive accounts, etc.) immediately after an employee departs. Companies should be wary of, and police for, employees who begin to access such materials after departure.

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Ensuring compliance with securities laws for founders

[The following is not legal advice and should not be relied on as such]

Every time a company sells its shares, it is engaging in the offer and sale of securities. Even shares that are sold to initial founders implicate a labyrinth of state and federal securities laws that typically require either registration of the securities offering, or (more commonly for early stage companies) an exemption from registration pursuant to state and federal law.

We receive many intakes from founders who have disregarded or ignored securities obligations even after issuing shares in California or other states. It is really important that founders are aware of, and abide by the variety of laws that implicate the sale of securities. Failure to comply with securities rules can result in civil or even criminal penalties.

The generic federal exemption from registration is known as “Section 4(a)(2)” (formerly Section 4(2)). Section 4(a)(2) exempts from registration any offering of securities that do not involve a public offering. This is a very ill-defined standard, so the SEC has promulgated “Regulation D,” a series of regulations that permit Companies to know in advance that the sale of securities will comply with the Section 4(a)(2).

In California, the most common exemption from registration is known as a “25102(f)” filing, dully based on the same-named section of the California Corporate Code. This statutory provision exempts from registration an offering of securities made privately and to less than 35 people, all of whom have a preexisting personal or professional relationship with the issuer, or have relevant investment experience.

California requires that a 25102(f) notice be filed within 15 days of the first sale made in California.

Other states have similar regulations with respect to the sale and offering of securities.

Prior to offering shares in a Company, founders should ensure that they will be able to comply with the securities regulations in their state, and will also reserve enough time to file whatever paperwork needs to be taken care of after the offering. Many securities deadlines have a small 15-day window, and occasionally need to be notarized. Care should be taken to ensure that these deadlines can be met

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Avoiding mistakes with California's harassment laws

[The following is not legal advice and should not be relied on as such]

Companies in startup, expansion and consolidation phase need to comply with state and federal laws with respect to harassment and discrimination in the workplace. While state laws vary, California’s Fair Employment and Housing Act (“FEHA”) provides a robust set of protections for employees who work in California.

The FEHA prohibits discrimination and harassment on the basis of several protected classes, which includes race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, marital status, sex, age or sexual orientation. Cal. Gov. Code sections 12940(a), (j)(1). It also explicitly covers discrimination the basis of “military and veteran status,” “genetic information” and “gender expression”. Cal. Gov. Code section 12940(a).

In many respects, complying with harassment and discrimination laws is a matter of common sense, but as the old saw goes, sometimes common sense is not so common. Here are some practices companies can take to mitigate exposure to harassment and discrimination claims.

Put in place an official policy to prevent harassment and discrimination and distribute it to all staff. The policy can be part of the employee handbook, or it can be separately distributed. The policy should describe what an employee should do if they feel that there is harassment or discrimination in the work place, and how to report it.  Proof that an employee failed to take tangible steps to utilize a Company’s complaint procedure may limit a Company’s damages in any harassment claim. Faragher v. City of Boca Raton (1998) 524 U.S. 775, 807; Holly D. v. Calif. Inst. of Tech. (9th Cir. 2003) 339 F.3d 1158, 1177.

The absence of any such policy can work against a company as it may permit an employee to sue on the basis that the Company failed to take reasonable steps to protect him or her from the alleged harassment. Cal. Gov. Code section 12940(k).

Cultivate a mature work place where people feel respected. Work provides dignity and it should be a joy for employees to come to work, learn something new, and earn a living. Part of why harassment and discrimination claims become ugly is because people feel really hurt when the work place is uncomfortable or when they feel disrespected.

Make the workplace zero tolerance for harassment or discrimination. Having litigated both plaintiff and defense harassment cases, we’ve seen both extremes: plaintiffs with very weak cases who blow out of proportion their experiences, and on the other hand, defendant companies that are careless and irresponsible with respect to their legal duties. Companies should study federal and state obligations and ensure proper compliance just as they would with securities or other financial compliance. Under California law, supervisors can be held personally liable (in addition to the Company’s exposure) for failure to prevent harassment, and an employer will be strictly liable for any harassment done by a supervisor. Hope v. California Youth Authority (2005) 143 Cal. App. 4th 577, 588-589.

Do what you can to settle disputes early. Litigating harassment and discrimination cases takes a toll on both sides. They are oftentimes emotionally involved, and litigation can go on for at least one or two years. Plaintiffs and defendants are well advised to try and mediate cases out early. As part of their employment contracts, companies can also insert mediation and arbitration clauses requiring that such disputes be settled quickly and confidentially. Cal. Civ. Proc. Code section 1281.1, 1281; 9 U.S.C. section 3; AT&T Mobility LLC v. Concepcion (2011) 563 U.S.321

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Founders and intellectual property assignments

In the excitement of issuing initial shareholder agreements, founders often times forget a document: the intellectual property assignment agreement.

An intellectual property assignment agreement requires founders to assign over any claims they may have on the startup intellectual property to the Company itself.

Absent such an agreement, a founder who leaves the Company could claim that he or she actually owns the contributions made to the Company – not the other way around.

In fact, if there is uncertainty as to who owns the intellectual property, a clever founder may be able to even ask the Company to buy the intellectual property upon departure, in exchange for a full release of claims and a promise not to sue the Company for infringing on the founder’s intellectual property!

There are some very concrete steps a Company can take to avoid this situation:

(1) In the shareholder agreements, the Company should include clauses that (a) require the founder to assign over intellectual property and (b) require the founder to take further steps as needed to help the Company perfect the transfer of intellectual property to the Company (a “further assurances” clause).

(2) In addition to the shareholder agreements, the Company should also draft and have all founders sign a robust intellectual property assignment agreement that affirmatively transfers the intellectual property to the Company and contains another further assurances clause.

(3) If and when founders sign additional agreements with the Company, such as employment or executive agreements, the Company should also make sure such agreements repeat the refrain that intellectual property will be transferred to the Company.

Having different agreements that provide for intellectual property assignments may seem like overkill, but it really isn’t – a founder who leaves the Company, and who never signed anything related to intellectual property, may have a claim that the Company needs to pay him or her for the intellectual property transfer upon departure.

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Doing a preferred seed financing round

In our practice we have seen significant interest in recent months in “preferred seed” financing rounds.

The idea of a preferred seed round is that early stage investors take a preferred interest in the company. In contrast to a convertible note financing (which is generally more common and remains popular for seed investment), the preferred investor sets a price for preferred shares and ends up with actual equity in the Company.

The terms and conditions of a preferred seed round are usually less stringent (and the financing less large) than a traditional Series A round. However, the preferred investor usually ends up with some type of liquidation preference, pro rata participation rights, and drag along rights, along with various other protective provisions.

Here are some things to consider when doing a preferred seed round:

– Preferred investors may or may not want a board seat, or may elect to take board observer status. Whether a board seat will be part of the agreement should be communicated during the term sheet process. Board seats are very common in Series A rounds; but preferred rounds involve less financing and a board seat may be negotiable.

– The same securities laws and regulatory issues will apply to a preferred seed round as with any other type of financing. Investors should be accredited where possible to ease disclosure requirements, and depending on the specific facts, the company may decide that a filing of a Form D may be appropriate.

– Founders should make sure that their Common Stock has already been issued and relevant filings (such as Section 83(b) filings) turned in. Unlike a convertible note round, a preferred seed financing will place a value on some portion of the Company equity. While there are important distinctions between Common Stock and the preferred stock, and while they are not the same form of equity, a very low valuation on the Common Stock (such as $.001 cents a share) is much more defensible when such stock has already issued prior to the preferred equity round

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Using interns under California law

Companies need to make sure that their use of employees, contractors and interns comply with both state and federal law.

Companies may be surprised to learn that the use of unpaid interns is in many instances unlawful. Many industries (entertainment, for example) have long used unpaid interns as part of the “training” process by which young entrants gain experience and make connections in order to find more fulfilling opportunities.

Yet industry customs may not in fact be compliant with law. Under California law (and every state law may have its own quirks) the use of unpaid interns may be permitted under the following specific circumstances, as stated in this letter memorandum by the California Department of Labor Standards Enforcement:

(1) The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school;

(2) The training is for the benefit of the trainees or students;

(3) The trainees or students do not displace regular employees, but work under their close observation;

(4) The employer derives no immediate advantage from the activities of trainees or students, and on occasion the employer’s operations may be actually impeded;

(5) The trainees or students are not necessarily entitled to a job at the conclusion of the training period; and

(6) The employer and the trainees or students understand that the trainees or students are not entitled to wages for the time spent in training.

In short, interns have to be receiving a bona fide educational experience when working at a Company. There should also be links, if possible, to an educational program from a sponsoring school or university, such as the possibility of obtaining school credit.

Note that non-profits are permitted in certain circumstances to permit volunteers to contribute to the organization, but may be prohibited from doing so when the non-profit is engaged in commercial activity. The DLSE discusses that in this letter.

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Doing a SAFE financing round

Y-Combinator’s SAFE ("simple agreement for future equity") is becoming increasingly popular as an alternative to a convertible note.

A SAFE is a promise to provide an investor with future equity in a preferred round, in exchange for money today. It is akin to a convertible note, but without the loan terms.

SAFEs are far more entrepreneur friendly than traditional convertible notes. In contrast to a convertible note, the SAFE never really becomes due. One of the ways an investor can keep tabs on a startup is by knowing that at the end of the loan term, the loan will have to be paid back, extended, or converted at some predetermined valuation. This provides some measure of oversight, at least in theory.

The SAFE removes the loan terms, leaving at its core the promise to convert the investment into preferred shares, if and when the Series A (or other preferred financing) takes place. While this simplifies the seed and angel investment process, an investor loses leverage in keeping track of its startup investment.

On the other hand, startup investment is inherently risky, and a startup that looks promising but only has a month or two left in its note will likely be able to renegotiate an extension. A SAFE thus strips away the fiction that the investor is providing a loan, since most early stage investors are investing not to get the loan back with interest, but to see the startup go big. From that point of view, a SAFE can simplify the negotiation process if both the startup and the investor are aligned.

Before making a SAFE investment, an investor needs to make sure that the startup is aligned in its vision to eventually obtain a Series A or other preferred financing.

SAFEs are about as easy to get done as a convertible note round, and are unlikely to be used for large scale financing. The same securities compliance issues that apply to convertible notes will also apply to SAFEs.

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