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.

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:

http://angelsoft.net/blog/2010/10/08/new-federal-law-zero-taxes-on-gains-on-small-business-investments/

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: http://www.techstars.org/2009/02/07/techstars-model-seed-funding-documents/. The second set of documents was developed by Y Incubator and Wilson Sonsini Goodrich & Rosati, and can be found here: http://ycombinator.com/seriesaa.html. The third set of documents was developed by attorneys at Fenwick & West and is found here: http://www.seriesseed.com/posts/2010/02/series-seed-financing-documents.html.

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.