Legal Packages For

Frequently Asked Questions

Below we have included examples of questions answered for free by lawyers on LawGives.

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1. Incorporation and Running a Business

Do I need an engagement letter with a lawyer?

Yes, engagement letters with California counsel are required, and a good idea to set expectations between the parties.

Note: an engagement letter establishes the terms of the legal relationship between a lawyer and the client. The letter articulates the terms and conditions of the legal work to be done and the relationship, including the scope of the engagement and compensation.

What are the benefits of incorporating in Delaware vs. California?

For a company located in California, incorporating in California will minimize the franchise taxes paid to maintain the corporate entity. The majority of venture-backed companies, however, elect to incorporate in Delaware for the following reasons: (1) access to Delaware's court system for business cases, (2) speed and ease of corporate filings in Delaware, and (3) greater familiarity with Delaware corporations for investors nationwide.

Can I hire an intern and not pay him/her?

The short answer for the vast majority of Companies is "No". That’s not to say that unpaid internships are not around – they are – but to be properly classified, an employer would need to meet a six factor test:

1. The internship must be similar to training which would be given in an educational environment;

2. The internship experience is for the benefit of the intern;

3. The intern does not displace regular employees;

4. The company providing the training derives no immediate advantage from the activities of the intern;

5. The intern is not necessarily entitled to employment following the conclusion of the internship; and

6. The company and intern understand that the intern is not entitled to wages for any time spent in the internship.

If a Company can’t meet the above 6 pronged test, then the "intern" is really an employee and is not excluded from minimum wage and overtime requirements. Note that the courts and US Department of Labor tend to focus on numbers 2 and 4 when determining whether a worker truly is an intern. Because of the above, typically only cash-flush corporations hire unpaid interns. Most startups will simply pay minimum wage to its summer workers (note that this requires compliance with tax withholding obligations).

How do I know whether the person I am hiring is an employee or a contractor?

This is a great question, and one that comes up quite often for startup companies of all stages.

The distinction between employee and independent contractor is fuzzy at best, and relies on a series of criteria or tests that, when taken as whole, will tend to point to one or the other. Although the IRS and states may look at different criteria, the common law tests typically applied will look at:

1. Behavioral Control - The degree to which the Company exercises control over the service provider (what kind of supervision and direction the Company requires);

2. Financial Control - Whether the service provider has opportunity for economic gain outside of the relationship with the Company (can they work for others, subcontract the work, etc.), whether the Company or service provider is providing the tools used in the job, etc.; and

3. Relationship between the service provider and the Company - Whether the service provider is engaged to provide the same kind of services that the Company's employee's provide, how the company represents the service provider to customers, etc;

The IRS provides a more in-depth explanation of the issue here.

Note that the law presumes your workers are employees (i.e. it is your burden to show that they are not), so be very thoughtful about how you classify your workers, and don't hesitate to ask your legal counsel for guidance on a case by case basis until you get a better feel for how to think about this issue

How do you change the option pool for a company?

You will need Board consent and a resolution. You also want to show the change in your capitalization table. Also, your Equity Plan should be reviewed in terms of increasing the number of shares. In addition, you also need to have the shareholders approve the increase within 12 months in order to grant ISOs (Incentive Stock Options, which are typically given to employees).

What is the best way to generate a privacy policy and terms of service for mobile enterprise SaaS apps?

For a privacy policy, you can try the Cooley privacy policy generator.

In general, you should hire a lawyer to produce these documents for you. They are your contract with (potentially) millions of users and must be tailored to your actual business practices. They are also highly specialized and regulated now. So it's not typically very useful to use a template or other companies unless they are doing the same thing that you are doing.

2. Taxation

Where should I file my 83(b) election forms?

This IRS webpage contains information on where to file your 83(b) Election. Check here for up to date information. Mail to the IRS Service Center where you file your taxes, within 30 days of your Award Date. Note that you should retain a copy (have the IRS return a copy by placing an extra copy with your filing along with a return stamped envelope), and file that copy with your annual tax returns.

What is the equivalent of an 83b election for an LLC?

This is another important question regarding the difference between a C-Corp and a LLC. There is no 83(b) election because an LLC cannot issue options or restricted stock grants. The bigger issue here is that all equity-incentive plans for an LLC are based on the idea of sharing in "profits" through a phantom plan or participation plan. What that means is the so-called "equity holder" will always incur ordinary income taxation on distributions. Without a "purchase" of the right (i.e., membership unit), the employee never has an ownership right, which ultimately means that the individual will never be able to avail themselves of capital gains taxation. Most LLC’s contemplating a stock option plan will convert to a C-Corp or maybe even a S-Corp. In terms of a founder of an LLC, there is no reason to file an 83(b) because the founder is issued his or her membership units for some amount of money (sometimes even $1), and that constitutes the founder’s capital account (i.e., basis) that becomes important upon distributions and eventual sale of the LLC. The founder may have to report this "purchase" of the units in her tax return, but there is no 83(b) election filed.

What happens when an LLC is converted into a C-Corp, taxation wise?

The simple answer is that there is typically no adverse tax consequences upon conversion. Obviously, once a C-Corp, the company becomes subject to double taxation and other tax consequences faced by a corporation. That being said, every situation is unique so I cannot guaranty that there will be no adverse tax consequences upon conversion. But, my experience with start-ups that convert is that none have faced an immediate adverse tax consequence. This is not, however, true for the conversion of a S-Corp to a C-Corp. There is a concept called BIG (built in gain) that can have serious adverse consequences. But, that is beyond the scope of this answer. Just please be aware if there is an S-Corp looking to convert to a C-Corp.

3. Intellectual Property

What’s the difference between a utility patent and a design patent?

A utility patent application covers the functionality of a product, while a design patent application covers the aesthetic appearance of a product. Some products may warrant coverage by both a utility and a design patent application.

How should we protect our IP? Do we need to have people sign NDA when we are doing needfinding?

Most countries besides the U.S. have a standard of strict novelty, that is an invention cannot be protected by a patent to the extent the invention was publicly disclosed before the filing of a patent application covering the invention. In general, the U.S. permits an application to be filed up to one year after a public disclosure of the invention. In light of the foregoing, it is best to avoid public disclosures before the invention is covered in a patent application. To the extent obtainable, a properly worded NDA can assist in avoiding a disclosure being deemed public. Additionally, NDAs can be beneficial after an application is filed, for example if a stealth operation provides you with a competitive advantage. Hence, the short answer is likely yes.

What are the procedures and timeframes for protecting our idea that we should be aware of?

If you are interested in protecting your IP abroad, you should not publicly disclose your invention before including at least the information that you intend to disclose in a patent application. If you are interested in only protecting your invention in the United States, then in general you can file a U.S. application up to one year after the first public disclosure of the invention. A provisional application is only as good as what it contains; you will only obtain a priority date for the information contained in the provisional application. We work with clients to maximize the content of provisional patent applications.

What steps should a startup take when faced with a possibly dangerous patent application by a direct competitor?

Assuming the competitor's patent application has not yet issued, you should review the file history for the application to assess the scope of the pending claims, the status of the examination process and the claims that will likely issue. If a patent has issued, you should evaluate the issued claims to determine their scope and how you may be able to design around them. You may want to consider filing patent applications of your own, including on any patentable core technology and possible other technology that would be helpful to your company and/or useful in a negotiation with the competitor.

4. Immigration

Can I look for jobs in the US and attend job interviews when I am in the country on the VISA Waiver Program?

If you have a bachelor's degree or higher then you can look for a job while in the US. 9 FAM 41.31 N6 allows for aliens Coming to United States to Pursue Employment Incidental to Their Professional Business Activities, provided that while in the US they maintain their residence abroad, and they are eligible and qualified to secure a US work permit. For example, a professional engineer would be able to look for work because they can secure a TN (as a Canadian citizen) or an H-1B and work as a professional. However, a non-degreed individual who is seeking employing as a waiter or maintenance person would not be able to seek employment.

How do I sponsor a green card for a sibling?

First, you have to be a US citizen. US permanent residents cannot sponsor their siblings for a green card. If you are a USC, then you will need to file an I-130 petition. For more information, seethis link.

The date the I-130 is filed, and received by USCIS, is the Priority Date. Once the I-130 is approved, you will have to wait until your sibling's Priority Date becomes current. This waiting time could be years. For more information about Priority Dates, see this link.

Depending upon where your sibling is from (home country), formal education, and work experience, it may be possible to bring them to the US faster.

I'm a PhD candidate on a J-1 visa, how can I start a company without risking the legal status?

I presume that your J-1 status is not related to a training program offered by a private employer? The J-1 by itself may not allow you to start your own company, but there may be a couple of options available for start-ups and entrepreneurs. They will depend upon your nationality and the stage of your start-up (revenue, capital investment, growth plan, etc.). We can discuss your options in detail over a consultation.

I'm currently on an H1B visa and would like to understand the process if i were to change employers.

The H-1B transfer process is exactly the same as that of applying for a new H-1B-except that the foreign national is not subject to the H-1B quota and if he/she is already working on H-1B, he/she may start working for the new employer as soon as the transfer petition is filed. The requirements for approval remain the same.

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