Building Your e-Commerce Company Wisely From the Start

Who would believe that a story based on how not to start a tech company ' and the lawsuits and stress that follow ' could become a box office sensation?

Yet The Social Network has done exactly that, with $96 million in ticket revenue (as of mid-February), and eight Academy Award nominations.

But stories like that movie's telling of the bumps in the creation of Facebook.com are not so interesting when they involve your company and the legal fees you have to pay to fix them.

Even worse: The lost productivity and time that could have been spent on developing business and growing the company but must instead be devoted to the care and feeding of the lawsuit.

For anyone who may have had his or her head in the sand for the last few months, The Social Network tells the story of the pitfalls the founders of Facebook encountered when they quickly fell into disputes among themselves about who owned what and about who owned how much of the company. (A summary of the plot appears at www.imdb.com/title/tt1285016/synopsis.) From division of ownership and rights to intellectual property to spats over management and arguments over control, the fights dramatized in the movie are no different from those regularly fought in boardrooms and courthouses across the United States (albeit usually with fewer dollars at stake, and without celebrity actors).

For entrepreneurs, the movie teaches one clear lesson (for which the movie ticket, even with popcorn and parking, will be far less expensive than a real-world fight with one's partners): The failure to properly document the ownership of a new company leaves the door open for all involved to spend thousands of dollars in legal fees to sort the mess out later.

While the depositions used to advance the cinematic action were a bonanza for counsel pressing claims to what proved to be an e-commerce titan (and a great story as well), most people prefer a quiet, less notorious existence that doesn't involve daily consultation with counsel.

For the majority of businesses that prefer to invest in growth and development rather than in lawsuits and legal fees, this article lists some of the most common disagreements that can arise as a company grows but that could have been avoided by planning from the start with the help of seasoned advisers. Perhaps not surprisingly, many of the issues depicted in The Social Network appear on this list, not because of their presence in a media sensation, but because what happened at Facebook is quite typical of the experience of many small firms.

Of course, every new company need not resolve each one of these questions; many firms start, thrive and are sold without ever facing these concerns. Instead, I believe that there are many aspects of a firm that can be agreed on much more easily at the start of a firm's existence, when less money is at stake and everyone has a common purpose, than after the company has been launched and has thrived, and the principals may have different agendas.

Let's review what should be on a tech- or e-commerce company's planning list.

Ownership

Carving the Pie Before It's Baked

In its simplest form, dividing ownership can be the easiest step ' if the founders put in $10, $20, $30 and $40, then they will get, respectively, 10%, 20%, 30% and 40% of the equity, however it is denominated.

Of course, the real world is rarely that neat; there may be reasons to give one person more or less because of other non-cash contributions or services provided to the company. (It is beyond the scope of this article, but be alert that a person who gets equity for services has additional tax concerns about properly reporting that income.) Similarly, options to increase one's holdings ' whether from the company or another equity holder ' should also be documented by written agreements, and noted conspicuously on any certificates representing the equity. If each participant is contributing something for the equity, such as rights to a patent or creative work, property (whether cash, securities in another entity or otherwise) or services, then that fact should also be recorded in an assignment document and meeting minutes. No one wants to argue years later over whether the funds transfer was a loan rather than an investment. Similarly, if the contribution consists of intellectual property, documented ownership becomes critical should the contributor leave the company. In addition, potential investors and lenders will demand proof that the company controls its intellectual property rather than having just a contractual right to it (such as an implied license).

Once equity rights have been agreed on, they should in fact be issued, on paper (or another fixed medium), and recorded in an equity ledger; an oral understanding about who will get what can quickly be forgotten as the size of the pie increases. One person should be charged with that task (typically called the company “secretary”) to make sure that the interests are issued, in whatever form. An accounting-journal entry may not be legally sufficient.

“Equity” is simply a shorthand term for a bundle of rights, but the term doesn't specify what those rights may be. But the ways of carving up ownership are almost infinite. All of the following can be part of the “equity,” depending on the particular terms of an issue:

• Rights to cash in normal distributions;
• Rights to cash on liquidation;
• Priority rights;
• Voting rights;
• Rights to appoint decision-makers;
• Veto rights for certain corporate actions; and
• Option rights on future issuances of equity.

Even “equal rights” may be less than what that term seems, if natural alliances exist ' spouses, for example ' that create control blocs that can impose or halt company actions, even when all shares are identical. The handshake deal on the split of “equity,” therefore, really requires more discussion and drafting, to make sure that the owners' expectations match what the law and the writing that is eventually the final version of a document provide.

Control of Operations

Calling the Shots Day-to-Day

Making the decision about who is in charge of a company from 9 to 5, day in and day out, can be as simple as, “Whose word is final?”

In the traditional corporate setting, the president makes the decisions. The board of directors (appointed by the shareholders, the equity owners) can remove the president, but they do not get involved in day-to-day operations or in any individual decision.

Today, however, the limited-liability company has become the business entity of choice because of its flexibility. That flexibility, though, can be a blessing and a curse, even for those familiar with the LLC format. Frequently, there is not a “standard” LLC rule to answer routine questions that arise and that would otherwise have to be referred to an attorney. For example, some LLCs can be created as “manager-managed,” with a manager who has the authority typically found in a president, but that fact is not easy to determine without checking corporate documents, especially if the people trying to set this model up don't know that they should state that option in the business's certificate of formation.

To deal with an LLC, the law uses a concept of “apparent authority”; that is, if a person acting on behalf of an entity has a title that would typically give him or her a certain level of authority, then third parties can rely on that appearance. For example, a person with the title “vice president” could sign a purchase order for inventory, but not a contract to sell the company. Even in an LLC, a member (and especially a managing member) would usually be deemed to have authority to take most ordinary-course actions.

From the perspective of avoiding unintended liability created by one's business partners, however, any member can bind the company, unless the operating agreement and certificate of formation (the LLC analogs to bylaws, corporate resolutions and articles of incorporation) clearly limit who may act on behalf of the LLC. Therefore, people forming such an entity should be sure to put controls in documents if they want to set these limits, such as on spending.

In other words, planners and principals should explicitly write in their documents who will have authority to make decisions. If this isn't done, then by default, a court will set that rule, after the fact, when a third party is trying to impose a liability on the company, or when deciding a spat among the owners over whether an action was authorized.

Finally, as discussed in “Dressing Your e-Business Up for Success,”
in the June 2008 edition of e-Commerce Law & Strategy (see, www.ljnonline.com/issues/ljn_ecommerce/25_2/news/150577-1.html), participants should not forget to set up basic corporate and financial recordkeeping. Documenting a firm's actions properly from the beginning not only avoids the cost of looking for information years later when these records must be created because they weren't kept from the start, but it also avoids the appearance of backdating or other ways of “rewriting history” to suit one's current needs (whether something was actually done, or not) if such records were kept from the outset but must be recreated.

IP Rights

The Jewels to the Crown

Persons forming an e-commerce company may each bring different abilities and assets to the table. In an e-commerce company, some may have programming skills or prior inventions while others may have marketing skills.

Whatever finance- or technology-related contributions each makes, all owners, employees and independent contractors should sign a standard assignment agreement before commencing work. Those in charge of such dealings should get such a form signed before making the first hire; the document can always be tweaked for future employees, but the cost of doing that work will be far less than the cost of not getting IP-protection documents from employees when they are initially hired. One of the plot lines in The Social Network specifically addressed this issue ' just because someone helped design and create a Web site for a business to use doesn't always mean that the company owns that work for future use after the individual who helped create the Web site leaves the firm.

Employee Agreement Musts

The “standard” employee or independent-contractor document should acknowledge that anything created for the company, on the company's dime, belongs to the company, not to the individual (so-called “work for hire” language). While that is usually the rule for a full-time employee, for independent contractors (the backbone of many tech firms), who receive a 1099 form, the legal rule is directly contrary to what one might expect. In other words, in most states, independent contractors retain ownership of what they create for a company, unless they agreed to transfer it all to the company. For knowledge created prior to the formation of the company, the standard agreement will contain the individual's assignment of all rights he or she may own to the company, in consideration for the privilege of being offered a job.

Other absolute musts in the employee agreement include language preserving the confidentiality of company information, including trade secrets, and the individual's agreement that the company can go to court to get an injunction to stop any threatened use or disclosure of protected information. The agreement can also contain covenants against competition with the employer ' defined as narrowly or broadly as will serve the goals of a particular business, and as the courts in the state where the individual lives will enforce, should that need to be done.

An alternative to a non-competition covenant that courts often will accept more readily is a non-solicitation agreement. In that scenario, the individual agrees only that he or she will not solicit the company's existing clients, employees and vendors, but is not prohibited from simply competing for new business or from hiring new persons or firms. In addition, the individuals should agree to sign over to the company any rights the company needs, and grant the company a power of attorney to sign his or her name in case he or she later refuses to do so.

As noted above, this agreement can also include an assignment to the company of pre-existing intellectual-property rights, whether across the board, or limited to particular rights necessary to the project for which the company was formed. Again, the critical point is to make sure that the company, rather than its owners, controls all key intangible assets.

Certainly, many skilled creators will resist signing away such rights, but the alternative can be the fights and aggravation found in The Social Network. If everyone understands that future investors or equity buyers will demand proof that everyone involved with the company is bound by such an agreement ' including the founders ' it becomes more difficult for any individual to refuse to do so. The price will certainly increase if such an agreement must be asked for later, such as just before a sale of the company or prior to an equity investment.

Another crucial initial step will be clearing the names proposed to use, such as a domain name, and for the business. While the scope of that process is well beyond this article, any investment of time or money in a brand that must be changed because due diligence was skimped on will be worthless from the start, and destroy credibility with potential investors, lenders and business partners.

Finally, e-commerce firm-builders must not forget the basic steps of registering intellectual property, and of maintaining that protection. The task is not done when the rights have been registered in the right places: A state fictitious-name or company registration provides no help in a dispute over potentially confusing federal trademarks. After the initial steps, use applicable markings on tangible versions of IP (e.g., “Copyright 2011 My Company, LLC”). If a decision is made not to incur the cash cost of registering rights ' which can limit the ability to use them against third parties ' proper marking may still be valuable in litigation. Also, systems should be put into place from day one to ensure that maintenance filings and renewals are processed in a timely manner, because although the U.S. Patent and Trademark Office now has limited revival rights (for an additional fee), a registered right, once lost, must be re-registered from the beginning. That sort of diligence applies all the more for domain-name renewals, because the cost of paying ransom to cybersquatters who quickly register expired domain names is usually much less than the expensive procedures to recover the name.

Buying Goods, Services from the Founders

Perhaps no aspect of starting a company is as likely to lead to disagreements as vested individuals (founders as employees or others involved as partners) buying goods and services from the founders (especially if there are outside investors who don't participate in such deals). The fact that most business-organization statutes explicitly regulate so-called “insider' transactions highlights their legal significance.

Such related-party transactions can be normal ' payment of compensation or benefits, for instance ' or extraordinary, such as leasing of real property or licensing of key intellectual-property assets. As noted earlier, founders and officials should not forget that initial contributions to launch the company will likely include one or more related-party deals, about which questions may exist concerning the relative values of the interests received in the company and the recipient's contribution in exchange for that interest. The critical fact is that the same person is on both sides of the deal, potentially removing scrutiny of its terms for the benefit of other investors.

However, the typical legal rules are quite simple: Either the terms of the transaction must be fully disclosed in advance and approved by all parties, or be “fair” to the company in all respects at the time the transaction was conducted. In the absence of a prior approval, the “fairness” test will almost always be viewed with that old familiar and stinging 20/20 hindsight that so many people, entrepreneurs included, have felt after a problem has occurred. Unfortunately, the perception of “fairness” usually will differ, depending on which person's eyes are beholding the “fairness,” and surely shall lead to litigation, and expensive expert and valuation reports.

Companies and founders, then, should follow the simple rule provided by the statutes: Full prior disclosure and approval should prevent future problems. If the founders cannot agree on what is fair at the start-up stage, then perhaps they should take their disagreement as an omen of future problems, and decide whether to break up before incurring more costs or work out a way to live together as the company goes forward.

Sharing Profits

Who Keeps How Much?

Much as with the division of ownership, the founders must initially agree on how profits from a business will be used, if they are serious about avoiding future battles. This issue has multiple aspects: Not only should owners consider how to divide future cash profits, but they must also think about the timing of when to disburse them. For example, some owners want ' or need ' to take money out right from the beginning, whether as salary or as profit distribution. Others prefer to reinvest, as a means of growing the future of the business.

If business income is taxed on a pass-through basis, then distribution of cash to pay taxes is critical for owners who do not otherwise have resources to pay tax on deemed profits that they may not actually receive. Depending on the parties' sophistication, different arrangements can be drafted to stagger the return of funds, for purposes such as:

• Return of investment;
• To take advantage of tax incentives;
• To compensate for different contributions; or
• To reward particular contributors.

Naturally, investors and operators often have different perspectives on these points. No investor wants cash trapped in an illiquid investment, regardless of whether or not other owners who also happen to provide services are able to take money out. As a result, if the parties do not agree philosophically, then cash flow provisions (or their absence) can allow those who do not need current distributions to pressure other parties by refusing to release cash from the company.

To avoid intra-company disputes that can undermine even successful businesses and savvy investors, cash provisions can be included in a buy-sell agreement. Although some may consider it premature to discuss the distribution of profits that have not yet been earned, the failure to do so could turn those profits into expenses (and eliminate the need for distribution) if they must be used to pay for attorneys' fees to settle the owners' disputes over who gets the profits, and when.

Planning for the End

Buyout Rights

Talking about buyout rights, and other planning, for the end of a company before it has begun operations may seem just as counterintuitive as planning what to do with cash not yet earned, but it can be just as important for averting fights later. No matter how difficult a dispute may be with another owner, having to run the company with a third party at the table can be even more difficult. Yet, that can happen if the company does not have standard documents restricting the owners' right to transfer their equity, voluntarily and involuntarily (such as in a divorce, or to enforce a judgment against the equity owner).

At a minimum, the owners should have mechanisms in place to allow the buyout of an owner who is at risk of losing equity to a creditor (whether it be a bank, a divorcing spouse or a judgment creditor). Beyond that distress situation, the people involved should think about what the firm would do in the case of death or, more commonly, disability of owners, and how the company would fund a buyout in such a case. While term insurance can provide cash for use following the death of an insurable owner, disability is much more likely to occur, and disability policies replace only the disabled person's income.

The key in all these cases is a deferred-payout mechanism, to try to allow the company to continue in business with affordable payments. To the extent that the recipient may be hostile ' a foreclosing creditor of an owner, for example ' then the longer the payout period, and the lower the valuation, the greater chance there may be of negotiating out of the forced sale. In a tech company, however, where valuations can fluctuate dramatically, depending on changes in the market, principals and counsel should be careful about locking in valuations that may be moot by the time they must be used.

Perhaps the most important item to put on any e-commerce company's planning checklist, however, is, paradoxically, the importance of remembering that planning cannot be limited to any checklist (in the fields of technology and e-commerce, at least), no matter how comprehensively or well done it may be. While there are many issues and forms that a firm cannot afford to overlook, its leaders must also have the vision to always look beyond the current horizon, to think about what could work, or what might arise in the future as the result of changes in technology and the e-conomy ' as Facebook.com's founders did many millions of dollars ago.

Who would believe that a story based on how not to start a tech company ' and the lawsuits and stress that follow ' could become a box office sensation?

Yet The Social Network has done exactly that, with $96 million in ticket revenue (as of mid-February), and eight Academy Award nominations.

But stories like that movie's telling of the bumps in the creation of Facebook.com are not so interesting when they involve your company and the legal fees you have to pay to fix them.

Even worse: The lost productivity and time that could have been spent on developing business and growing the company but must instead be devoted to the care and feeding of the lawsuit.

For anyone who may have had his or her head in the sand for the last few months, The Social Network tells the story of the pitfalls the founders of Facebook encountered when they quickly fell into disputes among themselves about who owned what and about who owned how much of the company. (A summary of the plot appears at www.imdb.com/title/tt1285016/synopsis.) From division of ownership and rights to intellectual property to spats over management and arguments over control, the fights dramatized in the movie are no different from those regularly fought in boardrooms and courthouses across the United States (albeit usually with fewer dollars at stake, and without celebrity actors).

For entrepreneurs, the movie teaches one clear lesson (for which the movie ticket, even with popcorn and parking, will be far less expensive than a real-world fight with one's partners): The failure to properly document the ownership of a new company leaves the door open for all involved to spend thousands of dollars in legal fees to sort the mess out later.

While the depositions used to advance the cinematic action were a bonanza for counsel pressing claims to what proved to be an e-commerce titan (and a great story as well), most people prefer a quiet, less notorious existence that doesn't involve daily consultation with counsel.

For the majority of businesses that prefer to invest in growth and development rather than in lawsuits and legal fees, this article lists some of the most common disagreements that can arise as a company grows but that could have been avoided by planning from the start with the help of seasoned advisers. Perhaps not surprisingly, many of the issues depicted in The Social Network appear on this list, not because of their presence in a media sensation, but because what happened at Facebook is quite typical of the experience of many small firms.

Of course, every new company need not resolve each one of these questions; many firms start, thrive and are sold without ever facing these concerns. Instead, I believe that there are many aspects of a firm that can be agreed on much more easily at the start of a firm's existence, when less money is at stake and everyone has a common purpose, than after the company has been launched and has thrived, and the principals may have different agendas.

Let's review what should be on a tech- or e-commerce company's planning list.

Ownership

Carving the Pie Before It's Baked

In its simplest form, dividing ownership can be the easiest step ' if the founders put in $10, $20, $30 and $40, then they will get, respectively, 10%, 20%, 30% and 40% of the equity, however it is denominated.

Of course, the real world is rarely that neat; there may be reasons to give one person more or less because of other non-cash contributions or services provided to the company. (It is beyond the scope of this article, but be alert that a person who gets equity for services has additional tax concerns about properly reporting that income.) Similarly, options to increase one's holdings ' whether from the company or another equity holder ' should also be documented by written agreements, and noted conspicuously on any certificates representing the equity. If each participant is contributing something for the equity, such as rights to a patent or creative work, property (whether cash, securities in another entity or otherwise) or services, then that fact should also be recorded in an assignment document and meeting minutes. No one wants to argue years later over whether the funds transfer was a loan rather than an investment. Similarly, if the contribution consists of intellectual property, documented ownership becomes critical should the contributor leave the company. In addition, potential investors and lenders will demand proof that the company controls its intellectual property rather than having just a contractual right to it (such as an implied license).

Once equity rights have been agreed on, they should in fact be issued, on paper (or another fixed medium), and recorded in an equity ledger; an oral understanding about who will get what can quickly be forgotten as the size of the pie increases. One person should be charged with that task (typically called the company “secretary”) to make sure that the interests are issued, in whatever form. An accounting-journal entry may not be legally sufficient.

“Equity” is simply a shorthand term for a bundle of rights, but the term doesn't specify what those rights may be. But the ways of carving up ownership are almost infinite. All of the following can be part of the “equity,” depending on the particular terms of an issue:

• Rights to cash in normal distributions;
• Rights to cash on liquidation;
• Priority rights;
• Voting rights;
• Rights to appoint decision-makers;
• Veto rights for certain corporate actions; and
• Option rights on future issuances of equity.

Even “equal rights” may be less than what that term seems, if natural alliances exist ' spouses, for example ' that create control blocs that can impose or halt company actions, even when all shares are identical. The handshake deal on the split of “equity,” therefore, really requires more discussion and drafting, to make sure that the owners' expectations match what the law and the writing that is eventually the final version of a document provide.

Control of Operations

Calling the Shots Day-to-Day

Making the decision about who is in charge of a company from 9 to 5, day in and day out, can be as simple as, “Whose word is final?”

In the traditional corporate setting, the president makes the decisions. The board of directors (appointed by the shareholders, the equity owners) can remove the president, but they do not get involved in day-to-day operations or in any individual decision.

Today, however, the limited-liability company has become the business entity of choice because of its flexibility. That flexibility, though, can be a blessing and a curse, even for those familiar with the LLC format. Frequently, there is not a “standard” LLC rule to answer routine questions that arise and that would otherwise have to be referred to an attorney. For example, some LLCs can be created as “manager-managed,” with a manager who has the authority typically found in a president, but that fact is not easy to determine without checking corporate documents, especially if the people trying to set this model up don't know that they should state that option in the business's certificate of formation.

To deal with an LLC, the law uses a concept of “apparent authority”; that is, if a person acting on behalf of an entity has a title that would typically give him or her a certain level of authority, then third parties can rely on that appearance. For example, a person with the title “vice president” could sign a purchase order for inventory, but not a contract to sell the company. Even in an LLC, a member (and especially a managing member) would usually be deemed to have authority to take most ordinary-course actions.

From the perspective of avoiding unintended liability created by one's business partners, however, any member can bind the company, unless the operating agreement and certificate of formation (the LLC analogs to bylaws, corporate resolutions and articles of incorporation) clearly limit who may act on behalf of the LLC. Therefore, people forming such an entity should be sure to put controls in documents if they want to set these limits, such as on spending.

In other words, planners and principals should explicitly write in their documents who will have authority to make decisions. If this isn't done, then by default, a court will set that rule, after the fact, when a third party is trying to impose a liability on the company, or when deciding a spat among the owners over whether an action was authorized.

Finally, as discussed in “Dressing Your e-Business Up for Success,”
in the June 2008 edition of e-Commerce Law & Strategy (see, www.ljnonline.com/issues/ljn_ecommerce/25_2/news/150577-1.html), participants should not forget to set up basic corporate and financial recordkeeping. Documenting a firm's actions properly from the beginning not only avoids the cost of looking for information years later when these records must be created because they weren't kept from the start, but it also avoids the appearance of backdating or other ways of “rewriting history” to suit one's current needs (whether something was actually done, or not) if such records were kept from the outset but must be recreated.

IP Rights

The Jewels to the Crown

Persons forming an e-commerce company may each bring different abilities and assets to the table. In an e-commerce company, some may have programming skills or prior inventions while others may have marketing skills.

Whatever finance- or technology-related contributions each makes, all owners, employees and independent contractors should sign a standard assignment agreement before commencing work. Those in charge of such dealings should get such a form signed before making the first hire; the document can always be tweaked for future employees, but the cost of doing that work will be far less than the cost of not getting IP-protection documents from employees when they are initially hired. One of the plot lines in The Social Network specifically addressed this issue ' just because someone helped design and create a Web site for a business to use doesn't always mean that the company owns that work for future use after the individual who helped create the Web site leaves the firm.

Employee Agreement Musts

The “standard” employee or independent-contractor document should acknowledge that anything created for the company, on the company's dime, belongs to the company, not to the individual (so-called “work for hire” language). While that is usually the rule for a full-time employee, for independent contractors (the backbone of many tech firms), who receive a 1099 form, the legal rule is directly contrary to what one might expect. In other words, in most states, independent contractors retain ownership of what they create for a company, unless they agreed to transfer it all to the company. For knowledge created prior to the formation of the company, the standard agreement will contain the individual's assignment of all rights he or she may own to the company, in consideration for the privilege of being offered a job.

Other absolute musts in the employee agreement include language preserving the confidentiality of company information, including trade secrets, and the individual's agreement that the company can go to court to get an injunction to stop any threatened use or disclosure of protected information. The agreement can also contain covenants against competition with the employer ' defined as narrowly or broadly as will serve the goals of a particular business, and as the courts in the state where the individual lives will enforce, should that need to be done.

An alternative to a non-competition covenant that courts often will accept more readily is a non-solicitation agreement. In that scenario, the individual agrees only that he or she will not solicit the company's existing clients, employees and vendors, but is not prohibited from simply competing for new business or from hiring new persons or firms. In addition, the individuals should agree to sign over to the company any rights the company needs, and grant the company a power of attorney to sign his or her name in case he or she later refuses to do so.

As noted above, this agreement can also include an assignment to the company of pre-existing intellectual-property rights, whether across the board, or limited to particular rights necessary to the project for which the company was formed. Again, the critical point is to make sure that the company, rather than its owners, controls all key intangible assets.

Certainly, many skilled creators will resist signing away such rights, but the alternative can be the fights and aggravation found in The Social Network. If everyone understands that future investors or equity buyers will demand proof that everyone involved with the company is bound by such an agreement ' including the founders ' it becomes more difficult for any individual to refuse to do so. The price will certainly increase if such an agreement must be asked for later, such as just before a sale of the company or prior to an equity investment.

Another crucial initial step will be clearing the names proposed to use, such as a domain name, and for the business. While the scope of that process is well beyond this article, any investment of time or money in a brand that must be changed because due diligence was skimped on will be worthless from the start, and destroy credibility with potential investors, lenders and business partners.

Finally, e-commerce firm-builders must not forget the basic steps of registering intellectual property, and of maintaining that protection. The task is not done when the rights have been registered in the right places: A state fictitious-name or company registration provides no help in a dispute over potentially confusing federal trademarks. After the initial steps, use applicable markings on tangible versions of IP (e.g., “Copyright 2011 My Company, LLC”). If a decision is made not to incur the cash cost of registering rights ' which can limit the ability to use them against third parties ' proper marking may still be valuable in litigation. Also, systems should be put into place from day one to ensure that maintenance filings and renewals are processed in a timely manner, because although the U.S. Patent and Trademark Office now has limited revival rights (for an additional fee), a registered right, once lost, must be re-registered from the beginning. That sort of diligence applies all the more for domain-name renewals, because the cost of paying ransom to cybersquatters who quickly register expired domain names is usually much less than the expensive procedures to recover the name.

Buying Goods, Services from the Founders

Perhaps no aspect of starting a company is as likely to lead to disagreements as vested individuals (founders as employees or others involved as partners) buying goods and services from the founders (especially if there are outside investors who don't participate in such deals). The fact that most business-organization statutes explicitly regulate so-called “insider' transactions highlights their legal significance.

Such related-party transactions can be normal ' payment of compensation or benefits, for instance ' or extraordinary, such as leasing of real property or licensing of key intellectual-property assets. As noted earlier, founders and officials should not forget that initial contributions to launch the company will likely include one or more related-party deals, about which questions may exist concerning the relative values of the interests received in the company and the recipient's contribution in exchange for that interest. The critical fact is that the same person is on both sides of the deal, potentially removing scrutiny of its terms for the benefit of other investors.

However, the typical legal rules are quite simple: Either the terms of the transaction must be fully disclosed in advance and approved by all parties, or be “fair” to the company in all respects at the time the transaction was conducted. In the absence of a prior approval, the “fairness” test will almost always be viewed with that old familiar and stinging 20/20 hindsight that so many people, entrepreneurs included, have felt after a problem has occurred. Unfortunately, the perception of “fairness” usually will differ, depending on which person's eyes are beholding the “fairness,” and surely shall lead to litigation, and expensive expert and valuation reports.

Companies and founders, then, should follow the simple rule provided by the statutes: Full prior disclosure and approval should prevent future problems. If the founders cannot agree on what is fair at the start-up stage, then perhaps they should take their disagreement as an omen of future problems, and decide whether to break up before incurring more costs or work out a way to live together as the company goes forward.

Sharing Profits

Who Keeps How Much?

Much as with the division of ownership, the founders must initially agree on how profits from a business will be used, if they are serious about avoiding future battles. This issue has multiple aspects: Not only should owners consider how to divide future cash profits, but they must also think about the timing of when to disburse them. For example, some owners want ' or need ' to take money out right from the beginning, whether as salary or as profit distribution. Others prefer to reinvest, as a means of growing the future of the business.

If business income is taxed on a pass-through basis, then distribution of cash to pay taxes is critical for owners who do not otherwise have resources to pay tax on deemed profits that they may not actually receive. Depending on the parties' sophistication, different arrangements can be drafted to stagger the return of funds, for purposes such as:

• Return of investment;
• To take advantage of tax incentives;
• To compensate for different contributions; or
• To reward particular contributors.

Naturally, investors and operators often have different perspectives on these points. No investor wants cash trapped in an illiquid investment, regardless of whether or not other owners who also happen to provide services are able to take money out. As a result, if the parties do not agree philosophically, then cash flow provisions (or their absence) can allow those who do not need current distributions to pressure other parties by refusing to release cash from the company.

To avoid intra-company disputes that can undermine even successful businesses and savvy investors, cash provisions can be included in a buy-sell agreement. Although some may consider it premature to discuss the distribution of profits that have not yet been earned, the failure to do so could turn those profits into expenses (and eliminate the need for distribution) if they must be used to pay for attorneys' fees to settle the owners' disputes over who gets the profits, and when.

Planning for the End

Buyout Rights

Talking about buyout rights, and other planning, for the end of a company before it has begun operations may seem just as counterintuitive as planning what to do with cash not yet earned, but it can be just as important for averting fights later. No matter how difficult a dispute may be with another owner, having to run the company with a third party at the table can be even more difficult. Yet, that can happen if the company does not have standard documents restricting the owners' right to transfer their equity, voluntarily and involuntarily (such as in a divorce, or to enforce a judgment against the equity owner).

At a minimum, the owners should have mechanisms in place to allow the buyout of an owner who is at risk of losing equity to a creditor (whether it be a bank, a divorcing spouse or a judgment creditor). Beyond that distress situation, the people involved should think about what the firm would do in the case of death or, more commonly, disability of owners, and how the company would fund a buyout in such a case. While term insurance can provide cash for use following the death of an insurable owner, disability is much more likely to occur, and disability policies replace only the disabled person's income.

The key in all these cases is a deferred-payout mechanism, to try to allow the company to continue in business with affordable payments. To the extent that the recipient may be hostile ' a foreclosing creditor of an owner, for example ' then the longer the payout period, and the lower the valuation, the greater chance there may be of negotiating out of the forced sale. In a tech company, however, where valuations can fluctuate dramatically, depending on changes in the market, principals and counsel should be careful about locking in valuations that may be moot by the time they must be used.

Perhaps the most important item to put on any e-commerce company's planning checklist, however, is, paradoxically, the importance of remembering that planning cannot be limited to any checklist (in the fields of technology and e-commerce, at least), no matter how comprehensively or well done it may be. While there are many issues and forms that a firm cannot afford to overlook, its leaders must also have the vision to always look beyond the current horizon, to think about what could work, or what might arise in the future as the result of changes in technology and the e-conomy ' as Facebook.com's founders did many millions of dollars ago.