We’ve written in a past edition of our goodnews newsletter about an Illinois program to encourage investment in innovative early-stage companies, the Illinois Angel Tax Credit Program. Illinois has recently made an important change, which could affect the way that companies would want to structure an early investment round.
In the days of yore, when dinosaurs roamed the earth (or thereabouts), goodcounsel offered “fractional general counsel” services. The idea of providing part-time counsel to growing, entrepreneurial companies (like those for which I had previously worked) was sound, but offering it a certain number of days each month was, in retrospect, flawed. If the billable hour is a bad measure of value (which, as a rule, it is), the billable day is not necessarily much of an improvement.
We soon got quite busy with client work of various kinds (on a fixed-fee basis, of course), and the fractional general counsel services fell by the wayside.
Would you like to accept small investments in your company from your Aunt Rose, your brother-in-law Bobby and your best friend from high school? Many people are surprised to learn that, unless these friends and family members are high-net worth investors, this is not the kind of thing that is safe to do – not, at least, if you want to be fastidious about observing securities regulations. Read the rest of this entry »
With some regularity, clients tell me that they want to issue employee equity that represents a fixed percentage of the company, not subject to dilution. What startup company founders should realize is that giving out equity containing an “anti-dilution” feature is an extraordinary and unusual benefit, one that should be agreed to only in exceptional circumstances.
I tweeted this earlier today. To add a little detail: I’ve long been interested in “document automation” and “document assembly” as a way to make the document drafting process more efficient (faster and less expensive) for my clients. Two great looking software packages, ContractExpress and Smokeball, rely on inserting a sidebar into Word, and both are not available for Mac. I’ve spoken to their representatives at length, and both, independently, blamed the manner in which Word for Mac is engineered by Microsoft. I don’t know the technical details, but apparently Word for Mac is different under the hood from the Windows version in a way that renders it impossible for their tools to run.
Whether or not this is accidental or intentional on Microsoft’s part, it just makes life less efficient for those of us using the Mac. My only choice, which I will explore, is to license VMWare, license a copy of Windows and license a copy of Word for Windows, and run those in parallel on my Mac. I thought I was done with Windows, but to paraphrase Pacino, it keeps dragging me back.
Last year, I posted about the silly lawyer drafting practice of representing a number with both numerals and words. It’s a bad habit that many lawyers continue to use unquestioningly, and as I pointed out in that post, it can lead to potentially problematic contractual inconsistencies.
I continue to come across examples of the problem. Here’s another. See if you can spot the issue.
Dickens thought the law was an “ass,” and Sprint is trying to prove him right.
This past Sunday’s New York Times magazine had a fascinating, and ultimately disheartening, article about an entrepreneur who did what great entrepreneurs do. He developed a technology to solve a pressing social problem, specifically, the problem of people texting while driving. Everyone knows this is a huge problem. According to one study, this is now a leading cause of teen deaths in the U.S.
Enter entrepreneur, Scott Tibbitts. Inspired by the story of a texting-while-driving fatality, he overcame daunting technical challenges to develop a way for a cell phone to interact with a car’s telematics systems in order to block the phone’s incoming texts and other communications. American Family Insurance agreed to invest $1 million to further develop the technology. But for it to work, cellular service providers needed to cooperate and implement the technology.
Here’s where it got exciting. Cell carrier Sprint “agreed to allow Mr. Tibbitts’s company, Katasi, to use its network to stop texts. It was a kind of holy grail, safety advocates gushed, a first for an American phone carrier.”
Months later, however, things fell apart. As the article recounts:
[Sprint] officials said they asked themselves what would happen if the technology let one text slip through, and someone reading the message became involved in a crash. That could be a financial liability for the company, and a tragedy.
“The technology works; the technology is there,” said Walter Fowler, a spokesman for Sprint. “It’s a matter of working out the legal issues. The legal uncertainty — that’s the major issue.”
Legal uncertainty? Mr. Fowler, this is complete B.S.
First of all: did this profound concern not occur to Sprint when it initially embarked on the partnership with Mr. Tibbitts over a year ago? Strange that this suddenly arises at the 11th hour.
What about the merits of the concern, however? Would Sprint really be exposing itself to massive legal liability by trying to prevent texting-while-driving deaths? “If the law supposes that, the law is a ass.”
But the law is not actually that much of an ass. General legal principles, not to mention common sense, expose Sprint’s “concern” as a lame legal interpretation at best or a craven excuse at worst.
Assume that Sprint’s system did inadvertently let a text sneak through to the driver’s cell phone. It’s not inconceivable; technology is imperfect. But if that happened, must the driver respond to the text? Of course not. That’s the point. It is still the driver’s legal responsibility not to text and drive. Using a handheld device while driving is against the law in many states, and if you hit someone while texting, you are negligent or reckless.
By contrast, it is not against the law for Sprint to forward a text message to a cell phone. By being responsible and trying to add a safety feature to its system, Sprint does not thereby assume or share responsibility for texting and driving by its customers. The failure of Sprint’s technology would not be in any way a culpable or contributory act. It’s ridiculous to believe that. Not only is it beyond imagination that a jury would hold Sprint liable for taking voluntary steps to help keep people safe (if Sprint’s defense lawyers cannot win that case, they need new lawyers), but I cannot even imagine that a judge would let such claims even reach the jury, since Sprint would have violated no law or legal duty to the victim. If anything, a clever personal injury lawyer would stand a better chance of finding a phone carrier liable for not implementing a safety feature like this.
Yes, anybody can sue anyone for any stupid reason, and yes, Sprint is a deep pocket. That’s the world Sprint lives in already, however, and it does not stop them from going about their business. This is what they have a legal department for – to defend them against frivolous claims. To let a nonsense excuse like this derail its commendable plans to do the right thing, and save countless lives, is unconscionable.
The only thing that would excuse Sprint’s legal department would be if this B.S. did not really originate with them but rather, as the article suggests, was an excuse cooked up by the business geniuses to try to renegotiate the deal. Either way, this has gone from a positive story of public-minded innovation on the part of Sprint, to the negative PR of derailing a life-saving technology.
Most startups are in “bootstrapping” mode, which often includes compensating founders and early employees only with equity. In the early-stage community, we view that kind of frugality commendable, and respect founders who go all-in with equity. The problem is, labor laws require a company to pay its employees at least minimum wage (in Illinois, $8.25 per hour), to pay them regularly (in Illinois, at least every two weeks) and to pay time and a half for all hours worked over 40 in a workweek. Most state laws are similar, and the U.S. Department of Labor also enforces federal labor laws and regulations. In all likelihood, if you are a startup, you are violating these laws – even with regard to yourself.
As some of you know, my preferred mode of transportation is my Brompton (best bike ever, hands down), and that’s generally how I arrive at my appointments.
I am amused by the fact that people here in Chicago consistently assume that I am a bicycle messenger. I have a feeling that if I were in the Bay Area, people might instead take me for a venture capital investor.
We’re getting with the times here in the Midwest… slowly.