There are a number of fundamental legal issues that must be considered prior to launching an online business. The issues presented vary depending on the nature of the website that underpins the business, how it was developed (e.g. by whom), and the forms of intellectual capital that it contains. This tutorial will discuss the implications of applicable law and provide a suggested course of action regarding same, where appropriate. It will also discuss a host of issues that may not be initially apparent to an online entrepreneur, even to entrepreneurs that have been doing business online for quite some time.
A non-disclosure agreement ("NDA") is a contract between two parties wherein one or both parties want to share information (on the one hand) but otherwise want to maintain said information in a manner that restricts it from being made available to the public. An NDA outlines the material, knowledge, or information that the parties want to share with one another confidentially. An NDA creates a contractual relationship between the parties to protect the information defined in the agreement and/or trade secrets.
Online entrepreneurs are well advised to make liberal use of NDAs, especially when working on early stages of the venture. Ideas, standing alone, cannot be protected under intellectual property doctrine and, therefore, one of the best ways to protect a great idea (i.e. one that you need to share) is with an NDA. An NDA is a standard business device used to protect ideas and other confidential information. You should not hesitate to leverage one.
There are a number of key terms and conditions that are almost always present in most employment agreements, including the following:
1) Job Duties & Responsibilities
2) Duration & Termination
3) Compensation & Benefits
4) Confidentiality & Non-Compete
5) Ownership of Intellectual Property
6) Dispute Settlement
Online startups will definitely want to have employment contracts with key employees. As discussed throughout this tutorial, there are any number of niche markets in the long tail that could prove to be quite profitable. Succeeding in the long tail will require a combination of technical and domain knowledge applied in ways intended to disrupt the status quo.
Given that online startups are generally monetized through intellectual property in some way, shape or form, it is important to have employment contracts with almostall early employees in a startup. Why? Because nearly all of them are likely to be key employees in the sense that they are likely to contribute significantly to how the niche is monetized, as the business model develops. In short, they are the ones that going to have knowledge of the secret sauce.
It is important that employment agreements be signed at or near the time that employment commences or is renewed, otherwise the agreement may not contain the necessary quiid-pro-quo (the necessary "consideration" in legal terms) to be enforceable.
An owner of intellectual property ("IP") is entitled to exploit its IP rights for profit or other consideration. The owner ("licensor") may contract with third parties ("licensees") allowing these parties to use the IP as constrained by the terms and conditions of the agreement. Both the licensor and the licensees get something of value that they would not have gotten but for the license. Having the proper license also means that you have the legal permission to use the owner's IP.
Feel free to borrow ideas; what you cannot "borrow" is the expression of ideas. For example, you cannot simply "borrow" photographs available on the Internet for use on your website. Photographs are copyrightable subject matter and the wrongful use of a photograph is infringement of the owner's copyright. However, if you need stock photos for your website there are a number of sites, including iStockphoto, where you can license the rights to use photos for far less than it would cost you to produce them yourself or for you to hire someone else to produce.
There are any number of professional services contracts that many online startups may engage in, but one in particular is almost universal in nature. Which one? The "website design and development" contract that you engage in with the third party that builds your website.
Obviously this assumes that you are not a technology startup, in which case you are likely building your own website. However, it does assume that your website is mission critical to your business and that it provides content that is unique and/or novel in order to attract potential customers. In short, your website is likely to be much more than a "business card website" and will require significant investment of capital (i.e. relative to your overall startup budget).
What are the legal issues to look out for? They are numerous and will partly depend on the type of website being built (i.e. the complexity of the code and content that underpins it). Here are some legal issues that almost always apply:
1) Determining ownership of the intellectual property ("IP") of your website. Unless specifically provided for in a contract prior to the commencement of design and development, you may be surprised to learn that you do not own the website that you paid for, but rather have only acquired a license to use it. First of all, what does it mean to own your website? Ownership in this context primarily means ownership of the copyright, trademark, domain name, and other IP rights attached to the work you have paid for. The legal issues surrounding ownership are quite complex and encompass copyright's work-for-hire doctrine as well the requirements that surround the assignment and transfer of copyright ownership as well as other analogous IP transfers. In short, a contract is always required so that the rights of the parties regarding ownership are clearly expressed.
2) Determining the scope of work and how to handle modifications thereto. Because the design and development of a website is a creative effort, it is next to impossible to specify all the requirements upfront. Therefore, a critical challenge that must be dealt with in the contract is how the inevitable modifications to the scope will be managed. Often, an iterative approach is used wherein the project is broken down into phases so that later phases can incorporate what was learned early in the lifecycle of the project. A failure to deal rationally with what is often referred to as "scope creep" will frustrate both parties and could result in a dysfunctional and/or disastrous outcome; both of which are obviously something to avoid.
3) Specifying the compensation schedule including reasonable late payment penalties where applicable. Given the rise of India and Brazil as economic powers in the information technology space, it is likely that many online startups will be working with international consulting companies. In this case, the payment currency should also be expressly provided for in the contract or statement of work. Working with international companies also raises issues regarding applicable law, jurisdiction and venue. All of these issues should be addressed in the contract in order to provide a semblance of certainty should a dispute subsequently arise.
4) Specifying suitable indemnification clauses often running in both directions. The online entrepreneur clearly wants indemnification against the consulting company violating the intellectual properties rights of third parties during the development of the website. Similarly, the consulting company may want indemnification regarding any intellectual property provided by the entrepreneur (e.g. photos, graphics, videos etc) for incorporation into the site.
5) Specifying reasonable non-compete, conflict of interest and confidentiality clauses. From an online entrepreneur's perspective, you certainly are not interested in paying to educate the consulting company on your specific Internet niche business in order for them to subsequently leverage this knowledge with a potential competitor. You need contractual assurances that the company you are hiring to build your website will not engage in this kind of behavior and that they will otherwise maintain all of the information you provide them as confidential. However, the consulting company will not be keen on limiting who they can do business with, for obvious reasons. Achieving the "right" degree of protection will have to be negotiated.
The issues described above are not exhaustive, but rather illustrative of the kinds of issues you can expect in a website design and development contract. Unless you are experienced in these matters then it is recommended that you seek advice of counsel before proceeding.
It is quite possible that an online startup, depending on the business model, could engage in any number of professional services contracts. It is important that theInternet Lawyer you select as counsel have a fundamental understanding of the intersection of legal, business and technology issues that are presented.
First of all we need to answer the question: "what is affiliate marketing?" As the previous link suggests, affiliate marketing is a subset of online marketing wherein a website drives traffic to another website in exchange for some form of compensation. Many of the Top 500 online retailers have implemented successful affiliate programs and there are few barriers to entry for online entrepreneurs that want to do the same. That said, you will want to pay attention to emerging legal issues that threaten to dampen the enthusiasm that has fueled affiliate marketing.
If you decide to launch an affiliate program you will likely want to have an electronic contract in place that makes it easy for prospective affiliates to join your program. This strategy allows your affiliate program to scale and reduces the administrative burden of contract management. So what are the terms and conditions that your affiliate contract should contain? The specific answer to this question will depend largely on the type of business you are in, but in general your affiliate contract will want to specify: 1) how links to your site are managed; 2) who owns the responsibility for maintaining the affiliate site; 3) restrictions that you want to place on affiliate conduct; 4) how commissions and tracking will be managed; 5) the term of the agreement and how it may be terminated by either party; and 6) the use of affiliate marks and logos.
The list of terms and conditions enumerated above are obviously not exhaustive. They simply reflect the kinds of issues you will want to think through, most likely with the advice of counsel. In today's hyper-competitive environment, affiliate marketing represents an important channel for getting the word out about your product or service. Simply put, affiliate marketing increases your digital footprint and thereby makes you more visible to prospective customers.
The most common forms of business entities in the U.S. is the sole proprietorship, the corporation (of various flavors), general and limited partnerships, and the limited liability company ("LLC"). The primary difference between the various business entities generally fall into two major categories: 1) whether they provide limited liability to owners; and 2) how the IRS treats the entity from a tax perspective.
What is limited liability? Limited liability is a business concept wherein a partner, investor, or shareholder cannot lose more than the amount invested in the business. Thus, the investor, partner, or shareholder is not personally responsible for the debts and obligations of the business in the event that these are not fulfilled, provided that certain basic rules of the road are followed. Limited liability applies to certain business organizations (e.g. a corporation or LLC) and not to others (e.g. a sole proprietorship).
In general, and for obvious reasons, limited liability is the kind of protection that an online entrepreneur wants, and therefore, most online businesses choose either a corporation or an LLC as a business entity type. For example, assume your net worth is $250,000 and you decide to invest $25,000 in an online business. Further assume that you get sued for copyright infringement and get a judgment against your business. The most you could lose (assuming you have followed the rules of the road) is $25,000. Your entire net worth would not be exposed and subject to the judgment. In short, limited liability is a legal doctrine that encourages investment without compelling the entrepreneur to put at risk their entire life's savings.
What are the rules of the road that must be followed? At the risk of gross oversimplification, the principle rules of the road are as follows: 1) you must appropriately create the entity in a state of your choosing; 2) you must follow certain annual processes and procedures in said state to maintain the entity active; 3) you must pay taxes to the IRS in a manner consistent with the type of entity selected; and 4) you must maintain the books and records of your business completely separate from your personal financial records. Although these formalities are not overly burdensome, they must still be followed according to applicable law or you risk losing the designated business entity status.
Formation of a corporation or LLC in most (if not all) states is relatively straightforward. However, the tax implications of these entities should be discussed with your attorney and/or CPA. Further, if the corporation or LLC is made up of multiple shareholders (for a corporation) or members (for an LLC) then things can get complex rather quickly. Why? Because once you have more than one individual involved issues regarding business entity governance become important to resolve at the onset. These issues include, but are not limited to, who owns controlling interest in the entity, who will manage the entity, how will the sale of shares or units of membership be handled, what happens if one of the owner dies, etc. These types of issues are dealt with in shareholders agreements for corporations and in operating agreements for LLCs.
Despite the low barrier to entry there are still pitfalls that the uninitiated should be aware of. For example, most online entrepreneurs will choose to form an LLC or corporation in their home state, and generally this is a good idea because it simplifies the annual reporting process. However, for historical reasons and/or for reasons that are more germane to large corporations, some may choose to form an entity in a differnt state (e.g. Delaware). If you are fairly certain that you are sitting on the next "Facebook" then a different state may be the way to go, but you may stilll need to file paperwork in your home state as a "foreighn entity" if you maintain an office in there.
For an in depth overview of LLCs click here. An overview of corporations can be found here.