Sunday, November 21, 2010

What is branding and how to protect it?

Key to business success often lies in creation of a powerful brand. A brand defines the source of goods and services. The goal is to get customers shopping for a certain type of goods or services to look for your particular brand because they came to identify it with a certain look, feel, quality or another attribute that they prefer. For example, I am currently shopping for a new laptop. I know that I only want to buy a Dell laptop as, in my experience, Dell laptops are the best in terms of durability and quality. Of course, feel free to disagree. The point that I am trying to make is that a powerful brand is what sets you apart from the competition and allows you to establish recognition in this competitive environment.

Creating a brand can be expensive. It is important to first thoroughly research the market to know the competition and determine if someone else is already using the same or similar brand. A brand can include a name and a logo or design, which can be used together or separately. Sometimes, a brand can include a color (like orange for Home Depot) or a slogan.

Protecting the brand is of utmost importance. I recommend that business owners take the following actions to protect it: file federal trademark applications with the US PTO office and enter into non-disclosure agreements (NDAs) with potential investors, partners, licensees, manufacturers, etc. I already discussed the advantages of federal trademark registration in my previous posts (see my posts under Intellectual Property tab). I now want to spend a few minutes discussing the NDAs.

It is important to enter into NDAs to protect the brand name while the brand is being developed. Once the brand is released, NDAs are typically entered into when parties are considering doing business together, either as a collaboration, joint venture, or project outsourcing, - projects that would involve disclosing proprietary information. Proprietary information is defined broadly and is not limited to the brand name (that, once released, is already known to the public at large). It can include information about how you run your business and what makes it successful, such as business plans, financial projects, patents, patent applications, agreements with third parties, trade secrets, designs, licenses, drawings, hardware configurations, technology, research, product plans, products, services, suppliers, customers, prices and costs, etc. The receiving party in an NDA agrees to use such proprietary information only for the purposes specified in the agreement and not disclose it to anyone else (other than employees on an as needed basis). However, there are exceptions to the definition of proprietary information, which include information that is or becomes publicly available without the breach of the agreement; that the receiving party has already known; that the receiving party has already received from someone else or has developed independently; and finally, that the receiving party must disclose to government authorities. Like with trademarks, it is up to the disclosing party to enforce the NDAs. One common method is issuance of an injunction or a restraining order against the receiving party.

A powerful brand must not only be created but also be continuously protected through the use of NDAs, trademark registrations and ongoing vigilance with respect to potential infringements and violations of confidentiality clauses.

Monday, November 15, 2010

Small Business Jobs Act of 2010: Zero Tax Investments

A part of the Small Business Jobs Act that President Obama signed recently relates to investments made between September 27 and December 31, 2010.  Gains on such investments, if they qualify, will not be taxed at the federal level.  This law is meant to serve as an incentive for private investments into small businesses, and may apply to investments made by angels and other investors.  One caveat: such investment must be kept for more than five years, which may be in conflict with the exit strategy of some investors.

A blog describing this new law is found here:

Wednesday, November 10, 2010

Seed Round of Raising Capital: What Terms are Customary?

I am certain that any business owner looking to raise capital by issuing equity securities to investors wants to have a good idea of what terms/privileges would the investors be looking for in exchange for investing in the company. How can a business owner who has never accessed capital markets before know what is reasonable and expected and whether there is room to negotiate? The answer is: the Internet, where much has been written about private placements.  Another answer is, of course, consult a knowledgeable securities lawyer.

In particular, I would like to bring to your attention several sets of investment documents suitable for seed rounds I found on the internet. The seed round is usually $750,000 or less, so the terms are somewhat simplified (as compared to the later rounds when venture capital firms get involved). Typically, one would see the following legal documents as part of the transaction (apart from the disclosure documents): (a) a term sheet summarizing the key investment terms (not binding); (b) restated articles of incorporation or charter, revised to include the terms of the new securities, this document gets filed with the state of incorporation; (c) a shareholders agreement, revised to include the new investors; (d) bylaws that may or may not change; and (e) a subscription or stock purchase agreement, a contract between the company and each of the new investors containing customary representations and warranties by both parties.

The first set of documents was developed by Cooley Godward LLP and can be found here: The second set of documents was developed by Y Incubator and Wilson Sonsini Goodrich & Rosati, and can be found here: The third set of documents was developed by attorneys at Fenwick & West and is found here:

The three models offer some variations but the key terms are as follows. Investors get voting preferred stock that can be converted into common stock at any time at agreed upon conversion rate, subject to adjustment. Upon liquidation, investors get to receive their money first, before the common stock owners. Once investors are paid back, the rest of the money is distributed among the common stock holders. Investors get to vote separately as a class on the main decisions by the company, such as its sale. Investors get rights of first offer in future rounds of financings and if any future financings offer better rights, investors get them too. Investors receive annual and quarterly financial statements of the company. And last but not least, investors get a board seat.

These models are good tools for business owners to get a better idea of what to expect from a seed round of equity financing. All documents have to be reviewed by counsel and negotiated. These are simplified forms generally suitable for early rounds of financing, so some provisions are missing. Again, please consult an experienced securities attorney before engaging in raising capital.

Friday, November 5, 2010

Business Consultants and Finders: Are They Brokers?

This post is not written for the business owners, but rather for the consultants who connect companies that are looking to raise capital with potential investors, whether angels or VCs. I was recently reviewing the broker-dealer definitions in the Securities Exchange Act of 1934, and decided to highlight a part of a definition of a broker that may not be well known or understood by some.

Section 3(a)(4)(A) of the Exchange Act defined “broker” very broadly as “any person engaged in the business of effecting transactions in securities for the account of others.” Depending on various factors, some of which I discuss below, the definition includes (among others) business brokers or finders, who find investors (venture capital, angel) for companies issuing securities, even if in “consultant” category; find buyers or sellers of businesses; act as investment advisers and financial consultants or act as “placement agents” for private placements of securities.

In order to determine whether you are a broker, the Securities and Exchange Commission (SEC) recommends looking at these factors (if answer is “yes” to any of the questions below, then it is likely that you are a broker):

• Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction?

• Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any other transaction-related compensation?

• Are you otherwise engaged in the business of effecting or facilitating securities transactions?

• Do you handle the securities or funds of others in connection with securities transactions?

For example, the SEC recently denied no-action relief to a law firm that intended to help its client raise funds by introducing it to potential investors.  The law firm was to be compensated based on a percentage of the gross amount the client raised as a result of the law firm’s introductions. See Brumberg, Mackey & Wall, PLC, May 2010. The SEC staff stated in its response that “a person’s receipt of transaction-based compensation in connection with these activities is a hallmark of broker-dealer activity.”

If you think that you may be a broker, you should consult with a private counsel or the SEC to determine whether you need to register. You cannot engage in the securities business until the registration is complete. A broker typically needs to register with the SEC. There is a number of exceptions to this rule, one of which is if the broker conducts all of his business in one state (then, registration with the state authorities is in order). However, since a lot of information is posted on the internet and is accessible to persons from any state, a broker may need to register federally as well.

Federal registration process involves filing form BD with the SEC, becoming a member of a self-regulatory organization (such as FINRA or a registered national securities exchange), becoming a member of the Securities Investor Protection Corporation and complying with all applicable state requirements. States require separate registrations.

Certain brokers may also need to register as investment advisers under the Investment Advisers Act. An investment adviser is a person who receives compensation for providing advice about securities as part of a regular business. Registration as an investment adviser involves filing a form ADV (check the recent amendments adopted in October 2010!) with the SEC or the state authorities depending on the amount of capital under management and the number of clients in a state.

In conclusion, it is important to reiterate that none of this should be considered as legal advice. I wrote this blog for information purposes only, as a reference for business consultants who may or may not be required to register as brokers in their states or federally.

Wednesday, November 3, 2010

How to find a unique name for your business, product or service?

I decided to write a blog about how a business owner should go about choosing a name for his or her business, product or service. Branding is very important, and a successful business is one that has a brand that is easily recognizable and unique. I am not an expert in marketing or branding, so I will approach this task from the legal point of view. I will look at trademarks (trade names and service marks) to see which name would be easily protectable by the US Patent and Trademark Office.

Choosing a name for me is a two-step process. First, you think of a name using the criteria I list below. Second, you conduct a thorough search on the USPTO database ( and on the internet to make sure that no one is using this name or a name that could be confusingly similar (including misspelled words, synonyms, foreign word translations). If someone has already claimed it, then go back to step one and start over.

So, step one involves identifying potential names. To do that, think of what are the essential characteristics, purposes or attributes of your business. What needs would the product or business serve? Who are the customers who will use or buy it? What images do you associate with this product or service? With this in mind, look at the five word categories below.

Category 1 consists of fanciful or coined (made up) words, i.e., words that do not exist in the dictionary. For example, Kodak, Aveeno or Neutragena are made up words that came to identify with very successful companies and products. These are the best names to have, as they are distinctive and will not be easily confused with any other name. As you think of your company, product or service, think of a play on words or sounds to make up a unique name that may also carry a hidden message describing what your business does. It may not be as difficult as it sounds.

Category 2 consists of arbitrary words, which are real dictionary words but are used to describe something other than their traditional meaning. For example, “Camel” brand is being used for cigarettes, “Apple” – for computers. These are also good names to trademark, as the use of the word is likely to be unique.

As we go down the category list, the words become more difficult to trademark. Category 3 consists of suggestive words, which can be indirectly used to describe the product or service that they are protecting or that invoke an image that can be associated with the product or service. For example, the word “caress” is a suggestive trademark for beauty soap bars or the word “obsession” is a suggestive trademark for a perfume. Some words can have a double meaning (for example, “Pea in the Pod” maternity clothes line). Here, one needs to be careful not to slip into the next category of descriptive words, which is generally not protectable.

Category 4 consists of descriptive words, i.e., words that describe the underlying product or service. Trademark protection is very unlikely for these words, as they are not distinct. Ordinary words used in an ordinary way do not warrant the protection of trademark law, as there may be many other business owners who would want to use the same words to describe their own businesses or products. For example, Reliable Pet Care would not work for a pet care service, as other pet care services would also like to advertise themselves as reliable.

The final category 5 consists of generic words. The rule here is that the USPTO will not register trademarks that are the generic names of the goods or services they seek to protect.

In conclusion, my advice is as follows: take your time selecting the name that is unique, falls under the first three categories, and is legally available. You would not want to spend much time and money only to find out later that the name is already being used by somebody else. Be creative in choosing your name: try new combinations of words, foreign words, words with double meaning or combinations of word and design that make the overall impression unique. The world of business is very competitive and having a unique brand is one way to distinguish your company and gain competitive advantage.