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Does Your Idea Qualifies for a Patent?


You have an idea that you've been kicking around for a while and now, you have decided to try to do something with it, but you are afraid that someone might steal it and monetize your creativity. People working in and around startups keep telling you that the idea itself is not important, but the execution is what makes the difference. While this is true, no one can deny the fact that people occasionally steal other people's ideas and execute them before the real inventor even try to do something with it. To avoid being left with empty hands while someone else has succeeded due to your creativity and labor, make sure you patent your invention. The first step before doing that is to check out whether the idea is patent-worthy according to intellectual property laws.

 

What Are the Requirements?

In general, there are four requirements that your idea must meet in order to qualify for a patent.

It must be useful. Your invention must provide some practical benefits and must help people complete a real-world task.  It must work at least in theory. You can patent your idea as invention even if it hasn't been proven to work in reality, but is likely to work based on sound theory. It doesn't have to be world-changing, but it mustn't be useless.

It must be novel. The invention is novel when it is different from all the previous inventions. It doesn’t have to be completely different, though. It is enough to differ at some of its constituents. Moreover, it mustn’t be published publicly before filing for patent protection. So, aside from not being wise, publishing your idea before protection might prevent you from protecting it later on.

It must be non-obvious. An idea is non-obvious if an experienced someone in the field sees it with an unexpected or surprising development. This can be very difficult for the patent examiner since the non-obviousness is a subjective matter. What is non-obvious for one examiner, may not always be non-obvious for another one.

 

What Doesn’t Qualify for a Patent?

Certain creations are not eligible for patent protection under any circumstances. They include, but are not limited to:

Literary works, such as poetry and novel, which are subject to copyright rather than patent

Processes are done entirely by human coordination, such as choreographies

Inventions intended and used only for illegal purposes

Non-operable inventions

Printed matter with no physical shape associated with it

Mathematical formulas

Newly discovered natural substances, etc.

 

Finally, remember that patenting your inventions is of utmost interest for your startup. Whenever you have something tangible that may be subject to a patent, don't miss to protect it. You never know what may come out of it.

Business Plan Tips

Written by Itay Sagie, Co-Founder at VCforU.com

 

Many entrepreneurs struggle with the financial plan for many reasons. For early stage companies, we are talking about a forecast with too many unknowns for it to be executed as planned. Nevertheless there are a few tips you can follow to create a financial plan that make sense.

 

1. Assumptions are the root of your entire plan. The investor will grill you about your assumptions to make sure they are realistic and you know your stuff. Some assumptions can be validated, such as the expected price for your product based on market research, willingness to pay survey, comparable prices of competitors etc.  The same goes for your margins, and more. These are parameters which can be estimated relatively accurately. What is very difficult to forecast is your growth rate, especially in early stage companies.

2. Create an “Accumulated EBIDTA” to try and calculate your “cash dip” or “cash need”. The round size should be a bit larger than the dip, for example 20% higher to be on the safe side.

 

3. Make sure the round size / cash dip makes sense relative to the stage you are at. For example, if your cash dip was $4.5M but you are raising a Seed round, you will have an issue as it is much higher than normal Seed rounds. In this case I would suggest you either review your numbers, expenses, assumptions or if this is the actual cash need (normally the case in hardware related startups or medical related companies) then you could split the amount to two sperate rounds or one round in two trenches.


4. Make sure your 4 or 5-year revenue forecast makes sense for an investor. VC firms will want to divest after a few years, if they invested $1M, they will want to get $10M after a few years (10X return). So, if the investor has 25%, it means that depending on your industry’s revenue multiple (for example 3) your revenue should be around $13M in year 4 or 5. This means your valuation upon exit is around $40M, thus the investor will get back $10M. If your forecast says $1M in year 4, then the investor has no incentive to invest. On the other hand, if your forecast says $150M in year 4, your might be perceived as “over optimistic” or much worse.


​VCforU is a leading resource for entrepreneurs to create professional investment materials and gain exposure to relevant Investors


THIS ARTICLE IS WRITTEN BY VCFORU.COM LTD. AND IS PROVIDED FOR GENERAL INFORMATION PURPOSES ONLY. YOUR USE OF THIS INFORMATION IS AT YOUR OWN RISK. DO NOT USE THIS ARTICLE WITHOUT SEEKING LEGAL, FINANCIAL AND OTHER PROFESSIONAL ADVICE. THE PROVISION OF THIS LEGAL OR FINANCIAL ADVICE. VCFORU LTD. WILL NOT BE LIABLE FOR ANY DAMAGES, LOSSES OR CAUSES OF ACTION OF ANY NATURE ARISING FROM ANY USE OF THIS ARTICLE.


Know your way around a term sheet

Written by: Itay Sagie, Co-Founder at VCforU.com

 

You have done well, attracted an investor and you reached the pinnacle of your investment journey. You got a term sheet!

First of all, congratulations, this is no easy task, go have a beer.

Now that we have calmed down, let's take a deeper look at the term sheet and learn what you should consider and why.



For example, Common Stock vs. Preferred Stock.

Preferred shareholders have some sort of priority or extra rights over Common shareholders. These can be anti-dilution, drag along, liquidation preferences and more.

 

It is normally not in the entrepreneurs best interest to grant extra rights to their investors over them or other shareholders. However, this is common practice for most investors to protect their investment. Therefore there is no real way around this. It is not to say that you should not fully understand each clause and its implications before signing the term sheet. You could and should negotiate specific terms that may be a deal breaker for you, once you fully understand them. As an initial analysis, you should create an excel spreadsheet with a worst case scenario, probable case and best-case scenarios to each clause in an event of an acquisition and calculate what you and your other shareholders will gain from each scenario.

 

Normally the clauses have the biggest or worst effect in the worst-case scenarios. Meaning if the company sells for a smaller amount than anticipated, the founder might end up with next to nothing.

 

Here is an example to understand better:

Let’s say the investor has a 2X liquidation preference. (to be explained shortly)

and let’s say the investor invested $2M for 25% stake in the company (pre-money valuation of $6M).

 

and let’s say that you were acquired for "only" $10M and not the $100M you and your investors hoped for when closing the round.

Let’s see what happens now.

 

First, the “2X liquidation preference” means that investor gets 2X their investment, meaning 2x$2M=$4M. Now the remaining $6M is split between ALL shareholders.

 

Meaning the investor will get an extra 25% of the remaining $6M = $1.5M. So in total the investor will get $5.5M out of the $10M. If the founder has for example 10% equity at the time of the exit, they will get 10% of $6M which is $600K, after taxes you will be able to buy a nice condo.

 

Now imagine a worse scenario, for example, what if the acquisition was for $4M, this means the investor will get 100% of the money and the founder will be left with nothing. In the event of a success (say $100M acquisition) this won't have much effect on you as a founder and everyone will be happy. So these extra rights normally kick in and have the most effect in the "worst-case" scenarios of an exit (note that most companies don't even reach this scenario and simply have to close down, normally due to lack of capital.) 

 

As most entrepreneurs believe their company is less likely to fail, they don’t spend too much time worried about the worst case scenario and not even the likely scenario. I truly hope they will be right, however statistics say otherwise, and investors know it better than anyone else.

 

To conclude, I am not saying you should reject all term sheets with preferred liquidation or other types of preferred rights as you will be more likely to dry up in terms of capital, just know what you're getting into and make well-educated decisions about the term sheet at hand.


VCforU.com Ltd. is a leading resource for entrepreneurs to create professional investment materials and gain exposure to relevant Investors

 

THIS ARTICLE IS WRITTEN BY VCFORU.COM LTD. AND IS PROVIDED FOR GENERAL INFORMATION PURPOSES ONLY. YOUR USE OF THIS INFORMATION IS AT YOUR OWN RISK. DO NOT USE THIS ARTICLE WITHOUT SEEKING LEGAL, FINANCIAL AND OTHER PROFESSIONAL ADVICE. THE PROVISION OF THIS LEGAL OR FINANCIAL ADVICE. VCFORU LTD. WILL NOT BE LIABLE FOR ANY DAMAGES, LOSSES OR CAUSES OF ACTION OF ANY NATURE ARISING FROM ANY USE OF THIS ARTICLE.

 

Types of Intellectual Property: What Can Be Protected?


Your product, service and technology are what differentiates you from other businesses, therefore protecting your intellectual property means protecting your business. Once you have built a product, it’s crucial to have it protected. That will prevent other people from copying your creative work, and if they do so, you’ll get legal protection by institutions. To get the legal protection, however, you have to protect your intellectual property first.

There are four types of intellectual property that you can protect and own: copyright, patent, trademark, and trade secrets. As a startup founder, you’ll want protected everything that can be protected. Protecting one type of IP doesn’t exclude others.


Copyright

Copyright protects authorship of computer software, graphic design, sounds, music, architectural work, artistic work, literary works, and others. It gives the author the right to modify, distribute, perform, display, and copy the work. To protect it, your work must be fixed on a tangible medium of expression, such as graphic design on a piece of paper or computer program. Your copyright starts to exist from the moment you’ve created the work, but from a legal point of view, it’s wise to register with the US Copyright Office. The process of protecting is easy and straightforward and can be done online. In case of infringement of your copyright, the registration will be a strong evidence that you were the original author.


Patent

Patents protect innovations and inventions that are novel, useful, and non-obvious. It allows you to prevent others from unauthorized use, manufacture, or sale of your innovation or invention. The protection can last up to 20 years, after which it becomes public domain.

There are three types of patents:

  • Utility - any process, composition of matter, machine, that is new and useful. It includes most of the patents that exist in the world. Any software belongs here.

  • Design - the distinguishing design of a product. Think of the Coca-Cola bottle.

  • Plants - any new asexually produced plant.

Patents are binded to territory, which means that the patent protection applies only to a certain territory. If you want to prevent competitors from other countries make your product, consider patenting it there as well. You can hold patents for up to 20 years.


Trademark

Trademark is the name and symbols, such as logo, that distinguishes your brand from others. Famous examples of trademarks include Apple, Microsoft, Nike, and many others. Protecting your name and other symbols will prevent others from putting your name and logo on their products. You can protect a trademark for up to 20 years, and renew it in perpetuity.


Trade Secrets

A trade secret can be a formula, data compilation, customer list, algorithms, survey results, and other business information that gives a competitive advantage to a business. You can’t protect trade secrets with government institutions as with other types of intellectual property. All you can do it protect your sensitive business information by controlling who can get in touch with it and how they can use that information. You can protect it with non-disclosure agreements, post-employment covenants, and other measures of safeguarding trade secrets.


Non-Disclosure Agreements Basics for Startups


Non-disclosure agreement (NDA) is a legally-binding agreement between two sides where one or both of them disclose confidential information, while the other one or both of them obliged to keep it confidential. It is a tool to protect your startup competitive advantage gotten by the uniqueness of your product or service. When you and your co-founders want to protect your business from someone else implementing your idea, it is useful to have an NDA signed with anyone who gets in touch with the innovation, features, know-how, or trade secrets that you want to be kept confidential. Of course, you know that ideas are useless unless implemented properly, but your position on the market depends on them, so it's better to keep them in secret before being ready to reveal them to the world.

When Do You Need an NDA?

You may need a non-disclosure agreement in the following situations:

  • When you present an innovation to potential co-founder, distributor, or investor

  • When you present your business idea to potential co-founder

  • When your employees get in touch with information that should stay confidential

  • When your partners get in touch with your sensitive information, such as marketing and financial strategies

What is in an NDA?

NDAs consist of several key elements. They include, but are not limited:

Identification of the parties. Parties have to be properly identified in the agreement. It is of utmost importance since only the persons you sign the NDA with are obliged to keep the information confidential. In situations when it is reasonably expected for the receiving party to disclose the information to colleagues or advisors, you may want to cover those persons with the agreement as well. Even though they are not allowed to disclose that information to them, it's better if you state it explicitly.

The confidential information. The agreement should state what exactly is the confidential information that is subject to the agreement. Being as strict and precise as possible is essential. Don't hesitate to write several paragraphs to make it clear what is expected to be kept secret. The receiving party also prefer clear and precise information, as they want to be sure about what information they can share with others, and they can't.

It is also important to determine the scope of the confidentiality of the information. Make sure that your agreement obliges the receiving party keep secret the crucial information but also prohibit them use the information itself. It’s one thing to keep information confidential, but it's completely another one not to use it for your own needs while keeping it secret.

Time frame. You can include starting and expiring date of your NDA. It can start immediately after signing the agreement, and it can end in months or years later. There are no limits on the time frame of the agreement. You can adjust it according to your needs. Most NDAs have a time frame of two to five years.

Exclusions. Non-disclosure agreements can include exclusion as well. These exclusions usually cover information that has been known to the receiving party before signing the agreement, information that is publicly known, information that has been disclosed to the receiving party by a person that has no duty of confidentiality, etc. Again, there are no limits on what can be excluded from the agreement. It is up to the parties to agree on that.

Breach. It is essential to secure the NDA with measures to stop the receiving party from abusing the disclosed information. You can include injunction provisions, which will give you the right to get a court order to stop them from breaching the NDA, the jurisdiction of the disputes, a provision on damages recovery, etc.

Why Every Startup Need a Tailored Founders’ Agreement?

Having trust among startup cofounders is essential for startup success. You as cofounders know that very well and it’s great if you trust each other in a way that makes you feel that a detailed and tailored-for-you founder’s agreement is not at all necessary. You probably don’t want to listen to lawyers telling you that you should put things on paper to have peace of mind. It’s not something you want to hear when you and your cofounders breathe together the idea that would conquer the world, but it’s true - you do need a tailored founders’ agreement.


What is a Founders’ Agreement?

Simply said, it’s an agreement between founders of a company about all the essential issues related to the business. It consists of provisions about structure of the business, relations between cofounders, roles and responsibilities of each founder, and so on. In a founders’ agreement, you can put anything that you and your cofounders have agreed on and you think that is important for the startup. There are no limits to what you can include in it. If you change your mind about something later, you can easily change the agreement and adjust it to the new situations. It’s a very flexible document when it needs to be flexible, but it’s also very reliable when things go wrong and you disagree on something. In case of disagreements, it will provide a lasting solution to the conflict. Enter roles and responsibilities issues. Cofounders sometimes disagree on that, and when they do, the conflict will be solved as agreed previously in the agreement. Simple as that.

Why is it Important to Have One Tailored For you?

Because you’ll want to have a written agreement on your specific needs. You can always buy a generic one on the internet; though it can do the work sometimes, it’s not the ideal solution. Many startups fail due to cofounders conflicts, and a large number of them are related to disagreements on roles and responsibilities. When such issues arise, you can point out to the founders’ agreement and discuss why the issue has arisen and how to solve the conflict. It’s a protection against disputes and helps in resolving disputes when they come.

A tailored founders’ agreement will significantly increase your chances of successful resolution of these conflicts. It won’t only specify the exact roles and responsibilities in your startup, but it will outline the decision-making process as well. It will be a decision-making process that you and your cofounder have agreed upon, not some generic processes that might cause more problems than solutions. It will also specify the way you want to solve your own problems.

The Takeaway

Some will tell you that you don’t need a tailored founders’ agreement or you can get by with a generic one. What they tell you is true though, but it’s less than ideal for you. Lawyers have seen a number of startups fail due to issues that could have been prevented with a simple and well-made founders’ agreement. Do yourself a favor and get one made for your startup.

Crowdfunding Legal Issues and How to Prevent Them


Crowdfunding platforms are a great way to get money for your startup. In early stages, there is nothing better than seeing that you have fans who are excited and ready to hand down money to build your product but don’t rush into euphoria just yet. Even when your campaign succeeds, there are some legal issues to consider if you don’t want to slip and fall down, wondering what happened to your business.

 

You Might Infringe Someone Else’s Intellectual Property

Many aspiring startup founders think the same way, target the same industries and try to solve the same problems with their products. Having that in mind, chances that someone else has already worked on something very similar to yours are big. Even when you think that you’ve made a breakthrough in your industry, make sure you check out carefully that someone else hasn’t done the same before. If he or she has done it, chances are that you have infringed their intellectual property rights. You don’t want that.

Also, be careful about using other people’s music and graphics in promotional videos. Being sued due to this could take lots of money out of your pockets even before founding the startup.

 

Someone Else Might Infringe Your Intellectual Property

Make sure you protect your intellectual property before starting the crowdfunding campaign. As you may know already, there are people who lurk around crowdfunding websites, they see what is popular there and steal the ideas. If your product is doing well on the crowdfunding platform, they will produce the same product even before your campaign is finished. That is why you’ll want your intellectual property protected well before even starting with crowdfunding.

 

You Have to Pay Taxes

The money you get from your backers is considered income, not gifts. According to laws, you earn the money through the campaign, hence you have to pay taxes as with any other income you make. If you raise over $20000 in over 200 transactions, you have to pay taxes. If you don’t meet these numbers, you won’t pay taxes, but you’ll still have to report it.

 

You Commit to Binding Contracts with Your Backers

In crowdfunding campaign, you offer some value in exchange for money. When someone backs you, you and your backer enter into contract that is binding for you both. He has to give you the money, and you have to provide the promised incentive. Make sure that you can provide everything your promise if you want to avoid getting in trouble with your backers.

 

Incorporate Before Crowdfunding

You may crowdfund without registering a company, but in that case, you are liable personally with all your property. Should you do any of the abovementioned mistakes, you’re at risk of losing everything you own. Keep in mind that crowdfunding platforms are not responsible for any issue related to your campaigns. The whole liability falls upon your shoulders and the best way to limit it is to simply incorporate your business. 

Why Privacy Laws Are Important to Startups?


Big data has become a big deal in the last decade. Companies collect plenty of data for various purposes, and you must have heard that your startup will have to collect some if you want to be successful. Of course, you’ll do that, but you have to be careful. People are leaving lots of data on the internet and that can make them vulnerable to unlawful or unethical behavior. That’s why governments take precautions and pass strict privacy laws that companies have to respect flawlessly. Whatever industry you’re in, chances are that you’ll run at least part of your business online and you’ll collect some users’ data. That will oblige you to stay compliant with privacy laws. Here are few things about them that you have to keep in mind.

 
Different jurisdictions mean different duties for you

In different situations, people have privacy rights depending on their citizenship, residence, or simply location. Depending on where your customers are from, you have to comply with different privacy laws.

Privacy laws differ from one country to another. Some countries have just the most basic privacy rights, while some go much further in protecting their citizens’ privacy vigorously. Enter the new General Data Privacy Rules (GDPR) of the European Union, the strictest data privacy law ever. It applies to all companies worldwide which process any kind of data of EU residents. Whether your company is based in the EU, in the US, or anywhere else in the world, you have to respect regulations set by local authorities or you’ll get in serious trouble.

 
They are getting stricter

Media is freaking out about the amount of data companies possess and process. People are freaking out as well. Even though in large part, sharing data with companies brings advantages to consumers, such as customized offerings, some companies abuse the personal data they get from users. That’s why privacy protection laws become more and more stricter. The new European GDPR went a step further and granted EU citizens and residents the right to be forgotten from the internet. It’s a big step forward for privacy protection. It also shows how loose are some privacy laws and in what direction they could move in the future. It surely will be a stricter one.

 

Consequences Can Be Devastating For a Startup

Having a data breach as a small startup will bring dire consequences for the company. There are new privacy laws all the times, and fines are getting bigger and bigger. In the EU, they are 2-5% of the annual turnover, and you can expect similar fines in the US and any other part of the world. A single user data breach is enough to get fined. Privacy law violations could be devastating for startups. Make sure that you always comply with them.

Legal Questions Angel Investors Will Ask Before Investing In Your Startup


You have your product or service ready for investors and you know how you’d pitch the startup. Now get ready to answer their legal questions. When someone risks his own money, he wants these questions answered.

 
What Type of Entity Is Your Startup?

Investors want to know what type of entity you’ve chosen when incorporating. Due to a number of reasons, investors prefer to invest in C-corps.

  • There is no limit of the number of shareholders that could own an equity on the startup, neither the type of entity that could be a shareholder.
  • Unlike other entities, C-corps are not subject to the pass-through taxation rules, hence investors can report their income as partners. This way their liability is limited and they save money on taxes.
  • They allow various classes of stock. Investors prefer preferred shares, and C-corp is the only entity that lets them have it.

This doesn’t mean that investors don’t invest in other incorporation types, but it is very unlikely. If your startup is not found as a C-corp and you want outside investment, you should think about making a change.


Where Is Your Startup incorporated?

Investors will ask you about where you have incorporated due to taxation reasons. Different states and different countries provide different taxation benefits. If you incorporate in the United States, they will like you better if you’ve done it in Delaware, Wyoming or Nevada. If you are a European startup and you incorporate in a country where taxes are over 40%, investors would be reluctant to invest in your startup. They think about earning money, so paying lots of taxes is not a desirable option for them.


Relationship Between Founders

Think of tailored for you operational agreement when you incorporate the business. Investors want to know how relationships between founders are set in the company. They might ask you to make certain changes though, but it’s better to have relationship rules put on paper before talking to them. 


Does the Company Own All the Intellectual Property?

When you ask investors to give you money in return for equity, they want to know what exactly they are investing in. If your product or service relies heavily on technology, it is likely that much of the value of your startup comes from the intellectual property it owns.

Most often, startup founders start working on the product or service much earlier than incorporating and protecting intellectual property. In such situation, founders themselves are the actual owners of the IP, not their company.

Investors will want your startup to own all the money-making intellectual property. Industrial designs, trademarks, logos, application code, graphics and anything else that is essential for the product or service and brings money to startup’s bank account should be owned by the startup. Investors invest in startups and if the intellectual property is not owned by the startup, it doesn’t bring value to them and they won’t invest.


Are there any legal risks?

The possible list of legal risks could be endless and depend on the industry you serve. Legal risks are greater if you are entering a highly regulated industry, such as health, pharmacy, law, insurance, or accounting. There are tons of regulations around these industries, and if you want to disrupt them, it is likely that there is some law that could hurt your prospect of building a successful startup.

Investors love to invest in companies that disrupt traditional industries. However, you’ll have to make sure that you meet all the standards set by the laws. Investors will always be interested in legal risks around your business. If you can’t disrupt the industry while being compliant with existing laws, you won’t receive funding. Investors don’t invest in non-compliant businesses.