Ten Things to Consider When Taking a Product or Service to Market

1. Basic business structure. First and foremost, it is important to make sure that your enterprise is incorporated correctly, whether that be as a sole proprietorship, partnership, LLC, or otherwise.  Making sure that you have completed the applicable governing documents in order to legitimize the overarching business is essential to making sure that a product launch runs smoothly and without legal issue.

2. Separating yourself and employees from competition. Many products or services grow out of pre-existing ones, however, it is critical that those in charge of the operation, as well as any employees, separate themselves from possible conflicts of interest or potential competitors of the product or service in question.  Doing basic background checks of employment history is a common way in which new employers come to know of any hindrances of an employees’ ability to work, such as non-compete agreements or confidentiality agreements.

3. Clear contracts. Contracts with processors, retailers, suppliers, and otherwise all need to be in good standing and properly executed by the time a product goes to market.  Ideally, they should be kept up to date and crucially specific, going well beyond the basics of what is being bought or sold, for how much, and when.  They should also abide by all applicable laws and customs and therefore consulting a reputable attorney is critically important when accomplishing this task.  All too often companies will utilize a generic contract that provides miniscule amounts of protection (if any) and that leaves clients with too much exposure to risk.

4. Licensing. If you are a relatively small company and would perhaps like to broadly expand yet you don’t have the resources to do so, you may want to consider licensing as an alternative approach to taking your product to market yourself.  Licensing is a tool that allows you to essentially enter into a legal agreement with another and have them pay you for your ownership of a product or idea.  It’s important to note here, however, that licensing agreements bring with them a myriad of other legal considerations to think about in and of themselves so it is important to not think it is the perfect legal solution.

5. Laws around sales and marketing. Sales and marketing are integral parts of making a new product launch a successful one.  However, even though the ever-expansive internet may make reaching target markets exceptionally easier than ever before, the laws surrounding just what you can and can’t do are equally broad.  For example, you must be careful not to include copyrighted infographics or photos in marketing as well as make sure any user data you may be collecting or using for such purposes is, in fact, legal.

6. Confidentiality. It is generally a good idea to keep new products or services, especially those of a “new” or “unique” nature, relatively private in order to preserve them until they are ready for the broader market.  From a legal perspective, it is important to prevent public disclosure, otherwise you may lose your ability to file for intellectual property rights protection.  Non-disclosure agreements are also commonplace in such scenarios, even when dealing with information that is merely sensitive and not specifically product-related.

7. FDA approval. If you are considering taking a market that is generally susceptible to applicable United States Food and Drug Administration Laws, it is very important to make sure you are abiding by all applicable rules in relation to that enterprise as well.  The FDA approval process is notorious for being not only costly but time-consuming, so make sure to allot for such provisions in both your overall budget and timeline.

8. Trademarks and patents. Trademarking and patenting certain concepts or ideas is often a good idea in terms of protecting your own interests, though it also reassures you that your business is unique in nature and is not already trademarked or patented as well.  It is a good idea to comb through the website of the United States Patent and Trademark Office, either by yourself or with the help of a lawyer, at https://www.uspto.gov/ and do a bit of background research.  You might also consider looking internationally in this regard if you plan to expand as well.

9. Understanding liabilities. Be sure to know the risks associated with your product, and reasonably protect yourself against them.  For instance, it may be in your best interest to specifically limit your liability in contracts by placing carve out clauses relating to such in the various agreements you use.  Likewise, indemnification clauses are another common way businesses protect themselves, namely by stating that if a specific action occurs, a different party, like a supplier for instance, is held responsible.

10. Hiring and experienced lawyer. Lastly, and as you’ve seen, partially woven throughout this list, it is important that you consider consulting with an experienced business attorney when embarking on taking a product or service to market.  Entrepreneurs face specific challenges when beginning a business venture, and receiving adequate, competent legal advice is vitally important to starting off on the right foot.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Five Things to Think About When Dealing with Purchasing Contracts

  1. Determine what factors are most important to you and your business. Whether it’s price, quality, terms of payment, or otherwise, it’s important to remain introspective into your own company and discover what is truly the most important factor in your own circumstance.  Undoubtedly, price will oftentimes be the most common determinative factor, but it’s often helpful to list out all factors in order to determine the best supplier fit.  If, for instance, prices are relatively the same across suppliers, but the delivery schedule of one is much more favorable to your business over another, it’s important to note and prioritize that.  Likewise, if a price is suspiciously low, you may want to look at other important factors to you to make sure that such a supplier is not taking shortcuts elsewhere.  Creating a list of business go-to items will help the legal analysis for the contract.
  1. Take a look at indemnification provisions. If something goes wrong with the purchased product, you may want to make sure you are protected by the supplier company.  Indemnity clauses obliging one party to pay for any damage or loss incurred, are oftentimes commonplace in purchasing contracts, but it is important to make sure that they are correctly incorporated into such a contract and that you, the buyer, are adequately protected.
  1. Consider what warranties and representation provisions are in play. When a seller contracts with a buyer for something, representations and warranties are implicit within the sale.  For example, the seller is representing him or herself as the owner of such product, with the legal right to do so, while the warranty may be that it is free of defects and if a defect does occur, the seller may fix it up to a certain future time.  Delve into the specifics of these things to make sure they are preferable and realistic in your own situation.
  1. Don’t limit yourself to one supplier. It is easy to fall for the apparent ease of dealing with a singular supplier, but don’t let that discourage you from playing the field.  Competitive pricing for differing products exists, so make sure to talk to multiple suppliers before settling down on just one, and perhaps even let them know you are quoting different sources.  If suppliers know you are doing your homework and not simply settling for convenience, they are more likely to grant you a better deal.  Conversely, however, it’s also possible that a single vendor may give better deals to those who do lots of business with them or who sign on to long-term contracts, so make sure to take those discounts into consideration as well.
  1. Choose a type of supplier agreement. When considering different suppliers and looking into future timelines, one may want to reflect on whether perpetual or finite period of time contracts are best.  While contracts that run in perpetuity may further streamline negotiations, they can sometimes create problems when a party’s circumstances, whether financial or otherwise, change over time or if one party feels their terms are unfavorable.  By contrast, finite contracts may require a great deal more work when it comes time to renew a business relationship. They may result in having to find a new supplier however, this also means that each party ends up with more freedom and flexibility as well as the ability to legally get out of unfavorable contracts under more reasonable timelines.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

New JOBS Act Regulations, Equity Crowdfunding, and Alternatives

Looking to invest in a startup online?  Have your own entrepreneurial idea that may require additional funding?  There have been recent changes in the law that may affect just that.

Certain provisions of the Jumpstart Our Business Startups (JOBS) Act recently came into effect as of May 2016.  Most importantly, Title III of the Act reduced restrictions around equity crowdfunding.  Small businesses are now able to raise more capital through online investments by being accessible to all potential investors.  Now, any individual can invest their money in these early-stage businesses, with the only caveat being that the amount they can invest ultimately depends on their net worth.  This is different than prior rules because it used to be prohibited for any individuals with a net worth of under a certain standard to invest at all, whereas now there are, in essence, tiered amounts permissible for all.  Conversely, if you’re going to be on the other side of the transaction and are looking for investors in your company, it’s important to note that the company itself is subject to minimum disclosure requirements as they pertain to the totality of cash raised.

Equity crowdfunding, however, also involves a great deal of risk.  In addition to the possibility that an investment may be significantly, if not entirely, lost due to the venture failing, it likewise is seen as a more expensive option in general.  It also may be difficult to read and understand all available information and data provided without the assistance of a financial or legal professional.  Such an endeavor may also take up a lot of company bandwidth, and there may be unforeseen pressures associated with the venture.  Due to these factors, it’s possible that such an extensive legal undertaking may not necessarily be for you.  If that’s the case, many alternatives are available:

  1. Borrowing from a bank is likely the most common scenario one imagines when building out his or her company.  Banks may grant loans to individuals or companies at a pre-determined rate of interest, oftentimes offset by a security interest or collateral. There are many loan options but not all business can qualify for a loan. Working with an experienced business attorney and business banker will be key if you go this route. Sometimes, however, the company is too new or has some unique aspect which prevents it from getting a loan, and so another option may be private investors.
  2. Borrowing from private investors, such as friends and family, is another viable option.  One should decide at the outset whether this kind of payment is structured like debt or equity, and treat it as such.  Putting the parameters of the agreement in writing is also highly encouraged.
  3. Active partners may help contribute financially to a business while also taking on some of the work associated with it.  This option may benefit a business by growing the expertise within it while freeing up time, however, the control and overall dynamic of the business may change and future profits may need to be aptly divided.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us

Small Business Mergers & Acquisitions

Mergers and acquisitions (M&A’s) aren’t just for big corporations. Small businesses can, and frequently do, merge with or buy out competitors. If you’re contemplating an M&A transaction as a buyer or seller, here are a few tips to get the process started.

If you’re the Buyer, you should know:

  1. What contracts the Seller has and whether they will be terminated. A merger or acquisition agreement can provide that the Buyer will be the legal successor of the Seller, and will assume all the Seller’s legal obligations. However, it’s best to figure out what those obligations are early on. If the Seller has contractual obligations that the Buyer doesn’t want to continue, the Seller will need to pursue termination of those contracts.
  1. Who’s paying taxes. Most contracts transferring large assets allocate tax responsibility, including assessments against land, to the Seller. There’s not a hard rule, however, so it’s best to have a written agreement that tax payments remain the Seller’s responsibility until the purchase or merger is complete. This minimizes risk in the event the transaction becomes protracted or is never accomplished.
  1. That you can cancel company shares. For example, a merger agreement can provide that at the time the merger becomes effective, corporate shares simply cease to exist. They could be replaced by a proportionate share of stock in the new company, but there’s nothing requiring a buyer to do so.
  1. That buying out or merging with a competitor isn’t the only way to purchase its assets. An asset purchase agreement is a routine way for businesses to sell a portion of their assets—for instance, a product and associated trademarks—without needing to acquire the whole business.

 

If you’re the Seller, you should know:

  1. That selling your business without merging doesn’t mean you have to terminate its current form. A corporation acquired by another corporation, for example, could simply become a subsidiary of the buyer corporation.
  1. That if you do terminate your business in its current form, there’s probably a defined legal process for it. For example, specific rules govern the terminating or “winding up” of an LLC, including paying out shareholders. For a corporation, you might need to file a notice of dissolution with the Secretary of State that the corporation no longer exists. Many states’ Secretary of State websites have resources for dissolving various businesses.
  1. Whether the buyer expects you to sign a non-compete agreement. If a competitor is buying you out, it’s safe to assume they don’t want you establishing a new competing business in the near future. Non-compete provisions can even survive the termination of a contract like a merger agreement, so it pays to be attentive to where, how soon, and how much you can exercise your expertise after selling your business.
  1. Whether you’re indemnified against future lawsuits. An ideal acquisition or merger agreement would clearly state that you’re not obligated to help the Buyer defend any claim arising against the Buyer related to the Seller’s business after the acquisition or merger takes place, pay costs and attorneys’ fees, or pay any damages awards.

 

Lastly, both Buyers and Sellers can benefit from the advice of an experience attorney to help tailor a merger or acquisition agreement to a business’ individual needs. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Considerations When Expanding Your Business

Expanding businesses face choices about whether to add new partners, owners, or shareholders. Unlike simply hiring new staff, adding members to your company’s core may affect the business’ organizational structure. It also entails power- and profit-sharing dynamics that can be detrimental to some businesses.

Given the riskiness of surrendering partial control of your business, as well as the legal and financial headaches of getting rid of a co-owner or partner you don’t like, it is wise to consider alternatives. Here are some common reasons we hear for adding new core members, as well as some other options to meet your business’ needs.

1. I need to offer more services to generate more clients.

Problem: While broadening your service options may require adding new talent, it’s best to know for sure that the person you’re adding—and the services—are a good long-term fit. It can be painful to have a new partner leave within a year. It can be worse to realize that the new service area isn’t actually generating much business.

Alternative: Hire an independent contractor. Basically, this means contracting with someone to provide specific services—such as sales or consulting in a specific area—and ordinarily comes with a time limit. You can be very creative on the payment structure and you get a chance to observe whether you want them around long-term. The perks of this approach are that it’s easy to terminate a business relationship with someone you don’t like or don’t need long term.

Do keep in mind that there is a difference between an independent contractor and an employee, and compensation requirements are very different. Hiring “independent contractors” whose job duties make them look more like employees can cause trouble later if you haven’t been compensating them as employees.

2. I need the financial boost of having a partner buy in.

Problem: Adding partners or shareholders for purely financial reasons doesn’t allow you to prioritize their skill level or experience. Too often the new partner becomes a “silent owner” who exercises considerable control over your business but isn’t easing your workload.

Alternatives: Seek funding through a small business loan, not through a risky partnership deal, and test out potential partners through the independent-contractor framework described above. Or, if you have an investor you trust, set up a profit-sharing agreement. They get a percentage of profits; you get up-front cash while retaining control over your business. You can also set up different classes of shares/stock with and without voting rights. There are some issues on how this is done, but it is feasible.

3. I need someone to share my workload.

Problem: This doesn’t necessarily mean you need to add core members; it might just mean you need more employees. Especially if you’re still figuring out how to manage a high volume of business, you may not want to give up substantial control of the business just yet.

Alternatives: If your problem is sheer workload, try the independent-contractor arrangement described above—it allows you to temporarily offload tasks but gives you an option to terminate relationships at a definite time in the future. When the contract period expires, you can assess whether the work volume has subsided or is likely to persist.

If your problem is too many potential clients, try setting up referral fee agreements with businesses that aren’t your direct competitors. You’ll be compensated when people or businesses you’ve referred become clients of the outside company, and the collaborative relationship may also help direct business to you when business slows down.

Business owners can benefit from the advice of an experienced attorney to help with organizational decisions about dividing ownership or sharing profits. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Top Consideration to Make When Securing Financing for a New or Growing Business

Whether you are a current small business owner or an aspiring one, business financing is an important topic. Without financing, businesses often cannot expand rapidly or even get off the ground in the first place. As the saying goes, it takes money to make money. In this post, we survey the five most common sources of business financing and discuss the most important practical and legal considerations business leaders should make when pursuing each.

Family and Friends

One of the most common sources of financing for small businesses is family and friends. Very small or even new businesses may find that seeking help from neighbors and loved ones is both easy and preferable to other financing options. Although it can be awkward to ask others for help, you might be surprised at who in your network may be willing to help you succeed. Often, friends and family financing involves written promissory notes, gifts, or even small investment in exchange for a stake of the company. Usually, friends and family will be willing to provide you financing in a way that won’t overburden your fledgling company.

Depending on the friendly financier, interest rates and other loan terms (if a promissory note is involved) can be extremely favorable. Such may be the case when wealthy friends or family members are willing to help you start or grow your business. However, one of the greatest risks of friends and family financing is that it can dramatically change the nature of your relationship and even lead to conflict. Thus, despite the financial and legal advantages this source may offer, it should be pursued with caution.

Bank Loans

When friends or family are not available, most entrepreneurs turn to their local bank for a loan. Bank loans are the most common sources of funding for small businesses. Typically, bank loans involve moderate interest rates and short repayment times. Because many small businesses fail, these terms seek to offset the bank’s lending risk. In addition, banks usually require that small business owners chip in a significant portion of start-up or project costs; banks often will not lend 100% of financing needs.

In addition to these characteristics, bank loans usually involve additional legal considerations. For example, most banks will require that the loan be guaranteed by the business’s owners. This means that if the small business fails to pay back the loan, the owners are still on the hook—even if the small business goes bankrupt. Also, banks often require the small business to put up collateral for the loan, as a form of security in case the small business defaults on payments. In the case of default, the bank can then repossess the collateral-property. Depending on the business and amount involved, a bank may seek a security interest in only a few pieces of property to all the assets of the business. Thus a bank may not be as easy of a process as a friend or family, but obviously it is the most traditional and structured process. Although a bank loan may be a little intimidating, a borrower knows that the bank will be a solid institution to approach and receive structured guidance from and perhaps more formality will help make the business you are seeking funding for act more “business” like.

Government Grants and Loans

Some small businesses may find that they qualify for government loans. These sources of financing are essentially bank loans, but without high interest rates, short repayment times, and security interests—sometimes even without personal guarantees. Government loan programs secure favorable loan terms by guaranteeing the loan themselves. Thus, instead of the owners making a personal guarantee, the government makes one instead. Many small businesses will likely find that they qualify for some amount of government loans through the Small Business Association.

The state and federal government also offer grants to small businesses. These grants are usually targeted at increasing opportunity to minorities or encouraging the creation of new businesses in needed industries and in rural areas. In many cases, the grant money is provided at no cost, and without any obligation to repay. However, these grants usually are for smaller sums unlikely to fully cover all financing needs. Therefore, government grants are a good supplement for other sources of funding. You can review available grants at http://www.grants.gov and mn.gov/deed.

Crowdfunding

The newest form of business financing is crowdfunding, which entails seeking a large amount of funds from many people who individually contribute small amounts. As crowdfunding has increased in popularity, it has expanded at the state and federal level and can now finance projects involving only a few thousand to millions of dollars. However, different crowdfunding paths involve very different legal considerations.

The most popular fundraising usually takes place online at websites such as Kickstarter.com. There, anyone (including small businesses) can create a fundraiser. These sites often require that the fundraising be for singular projects, such as the creation of a new product or the building of a new facility. Those who pledge money to the fundraiser are often entitled to some kind of benefit depending on the project. But most importantly, no one who contributes money receives any kind of ownership interest in the company. If you have a compelling project that many people would be excited about, online crowdfunding might be a good first shot at financing.

For those seeking to raise hundreds of thousands to millions of dollars, other crowdfunding programs exist. New in Minnesota this year is MNvest, a program that allows small businesses to crowdfund up to $2 million. Unlike online crowdfunding, though, contributors are investors and own a stake in the company. On the federal level, the JOBS Act allows for crowdfunding through the Securities and Exchange Commission. This crowdfunding is similar to MNvest, but allows small businesses to seek investment from residents of all states and up to $5 million. Small businesses interested in crowdfunding should carefully consider the reporting and regulatory requirements of raising capital in this way, as these may be difficult to comply with and costly.

Equity Financing – Angels and Venture Capital

Lastly, small businesses looking to grow rapidly and needing millions of dollars of funding may turn to “angel” and venture capital investors. These kinds of investors pool large sums of money and invest in multiple start-ups and small businesses at a time and can offer significant financing. Note, however, that this kind of financing is equity financing, which means that the investors gain a stake in the company. And when it comes to angels and venture capital, the stake required is often substantial.

When angels and venture capital firms invest in companies, they usually require certain concessions from the original business owners. In addition to receiving a large stake of ownership, they may require preferred shares that give them dividend and liquidity preference above other owners. In addition, they may seek the ability to select directors for the board of directors and to take an active role in oversight and even management of the business. Some may obligate the main entrepreneurs to stay with the company for a specified period of time so as to reduce risk that the entrepreneurs will leave for other opportunities. While these concessions may seem like a lot to give up, angels and venture capitalists can bring important people and connections to a business (in addition to much-needed financing). Such benefits may be absolutely vital for a company to take off in a short amount of time. Thus, choosing an angel or venture capital investor is extremely important and usually involves significant searching and negotiation.

If you plan to be involved in business financing, you should work with an attorney to help guide you and advise you on associated legal risks. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

 

 

What the New Federal Defense of Trade Secrets Act Means for Minnesota Businesses

If you’re a businessperson, chances are you come into contact with trade secrets every day. Trade secrets are, generally speaking, any piece of information that derives value from not being known to or readily ascertainable by other persons who can use them and which are protected from disclosure by reasonable efforts. Trade secrets are anything from specific customer lists to algorithms for computer systems. And even unpatented inventions are often trade secrets.

Trade secret protections are protected primarily by state law, but recently Congress passed the Defend Trade Secrets Act (DTSA), which adds some federal protections. For most small-to-medium businesses, the DTSA will not have much of an impact; the DTSA only provides additional protections for trade secrets that are exchanged over state lines and supplements state trade secret protections. But for Minnesota companies that share trade secrets and other confidential information with other businesses and persons outside of the state, the DTSA provides additional protections, but imposes some additional requirements.

Immunity Provisions in NDAs

One such additional requirement is the need for parties to provide notice of certain disclosures that are immune from liability under the DTSA. When companies share trade secrets with each other (usually in collaborative arrangements), they often sign confidentiality or non-disclosure agreements (usually referred to as NDAs). Many NDAs contain clauses that require that the parties not disclose any confidential or trade secret information under any circumstances. Under most state laws, this provision is completely valid and has no effect on the remedies available to disclosing parties in the event their confidential information or trade secrets are disclosed to the public by unscrupulous recipients. However, the DTSA limits the effectiveness of these clauses in federal trade secret cases.

Under the DTSA, in order for a trade secret owner to obtain exemplary (punitive) damages or attorney’s fees (essentially reimbursement for the legal costs of suing to protect the trade secrets), all NDAs must contain certain notices of immunity. The DTSA provides immunity for disclosing trade secrets to any person who discloses trade secrets “in confidence” to a federal, state, or local government official, “either directly or indirectly to an attorney . . . for the purpose of reporting or investigating a suspected violation of law” or in a “lawsuit or other proceeding,” so long as the filing is “under seal.” In effect, this immunity provision overrides the “no disclosure whatsoever” approach to NDAs. It further requires that parties must provide notice of this immunity in their NDAs. If the notice is not given, exemplary damages and attorney’s fees are not available to anyone seeking to protect their trade secrets or receive compensation for misappropriation. Since these remedies can be fairly substantial, it is in a business’s best interest not to foreclose the possibility of receiving these remedies.

Effective Date

As stated above, the DTSA does not override or change state trade secret law, so most small businesses are unaffected by the immunity and notice provisions. For larger businesses, however, it makes good proactive sense to begin including an appropriate notice of immunity clause in NDAs. Since the effective date of the law is May 11, 2016, any NDAs entered into after that date should include this language. NDAs entered into before this date need not include a notice of immunity provision.

If you plan to be involved in any sharing of confidential information or trade secrets, you should work with an attorney to draft NDAs in accordance your specific needs and goals and the applicable law. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.