Launch48 - Web App Legal 101

I am speaking at the Launch48 Conference on 16 October. When I speak in public, I like write something out first, but not memorise it or have it front of me. Because there is a lot to digest, I thought it might be useful if I just blogged my notes. If you want to read them, they are after the jump. I am setting the publish time to 11.30am on 16 October, by which time, I'll be done. However, if you have any questions, leave them in the comments and I will try to answer them.

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Good morning.

I am hired by companies to be a professional cynic, a professional pessimist and a professional pedantic pain in the proverbial. I am a lawyer. My clients are generally deluded optimists, sometimes with only the loosest grip on reality. They are entrepreneurs.

I will admit that sometimes they prove me wrong and things do go right. But frequently I am right and things do go wrong. Which is lucky, because otherwise I would be out of a job.

However, for a few moments I am going to share in your optimism and imagine that the companies you are going to build this coming weekend are all going to be run away success stories. There my optimism ceases and I am going to be pessimistic again. Put it this way, if your aim is to have a fun time over the next couple of days but at the end of it you have no intention in carrying on, then please feel free to switch off for the next 10 minutes or so, and surf the internet instead.

But if there is a risk that your project might have legs and might one day be worth something, please pay attention and only tweet intermittently....

I am going to concentrate on two issues this morning: Intellectual Property Rights (IP or IPR) and the ownership of the project.  I am going to assume that at some point you will incorporate a private limited company to be the vehicle for your project - I'll explain a good way to do this later. I am also going to be a little bit simplistic.

Intellectual Property Issues

IP is quite simple. Just about anything that is created this weekend will fall into the category of IP.  Whether it is graphic design or lines of code or a PowerPoint presentation there will be IP involved.

When a person or a company creates IP, it belongs to them personally. A company can only create IP via the work of its employees, and in law, any IP created by an employee in the course of his or her work, belongs to the employer.

On the other hand IPR created on behalf of a company by anyone other than an employee, such as a contractor - or in your case, a helpful volunteer, will not belong to the company, unless it has been properly assigned.

There is no magic to assigning IP. It doesn't even need to be in writing, although it is quite hard to prove if it is not.  Formal IP assignments can be long documents with warranties and representations and so on, but essentially they need to say simply:  "Bob hereby assigns all his rights in the Intellectual Property to Startup Limited" - there will need to be a definition of Intellectual Property - for an ongoing relationship should include yet to be created IPR as well as pre-existing IPR.

Like I said, there is no magic to it, it just need to get done. But remember you cannot assign what is not yours.  That sounds rather obvious when you say it out loud, but it is possible that you could create IPR this weekend and not own it, and therefore not be in a position to assign it to the project you are working on.

As I said a moment ago, by law, a company owns the IPR created by its employees in the course of their employment. However, many companies insert additional IPR clauses into their employment contracts, particularly for employees who are likely to create IPR, which will say that ANY IPR created by that person belongs to the employer.  My colleague Barry is fond of saying that such a clause cannot possible be interpreted literally and there is no way your employer could claim ownership to the IPR in the letters its employees write to Father Christmas each year.  But, if you are employed to write code or design websites, it is highly likely that your employer would have a decent claim to any code or design you've created in your own time, such as over the next weekend.

If you are in this position, there is a solution. You speak to your employer and you get a release in writing - this can be obtained before or after the IP is created, it's up to you.

Ownership

Turning to ownership. If this time next year, Rodney, we're all going to be millionaires, you're as sure as hell going to want to know how much of it is yours.

Like I said at the start, the most obvious thing is to put everything into a new limited company.  We generally suggest to our start up clients that they do this themselves online.  Under the new Companies Act, forming a company has theoretically become easier, but we'd still suggest you use an agent such as Jordans to help you with this. Before you do so, it is worth deciding who owns what percentage of the company, because if you take shares at incorporation they are deemed to be founder shares and you skip a lot of the tax complications which can otherwise arise.

The company is then the legal personality of your project and should itself own or have a licence to use everything it needs to operate - such as the IPR which I've already discussed.

I can't tell you how to divide up the ownership of the company, that is a matter for each group to decide, but I do have a few observations:

• It is going to be very unwieldy to have lots of shareholders in a company, especially if you are trying to include those who are not going to stay involved after the end of the weekend. Think about other ways you could reward those who make a valuable initial contribution over the next 48 hours, which might not involve giving them equity.
• Balance and fairness is great, deadlock and stagnation is not great. All good businesses need a defined leadership structure and your shareholder structure should support this. 
• The structure does not have to be set in stone - individual shareholdings could change over time to reflect commitment and involvement in the project.

On the last point, when we meet new start up clients, we always advocate that they have a clause in their company constitution which deals with what happens if one founder decides to leave - or is asked to leave - the business. Our suggestion is that the other founders have the right to buy a percentage of the shares from the departing founder at market value - and that percentage should decrease the longer the founder has stayed with the company. Investors usually insist on them and you'll hear these clauses referred to as "good leaver / bad leaver" clauses.

What we never advocate is that the contractual relationship between the founders is highly complicated or involves a lot of time or expense. The priority is your business and making that work, and a pound or an hour spent on legal issues comes straight off the funds or time you have to market or develop your business. It is a question of keeping the legal spend in proportion to the value of the project.

On that note, it would be inappropriate for me to take up any more time, especially as the coffee break is about to start.  Let me just say that I am happy to discuss any legal issue with you - I'll be around until lunchtime today and I'll be back tomorrow evening with my colleague Barry Vitou to answer more questions. The "official" text of this presentation should be on my blog in about 5 minutes time - there's a link from my bio on the Launch48 website.  And if you want more regular legal tips for web start ups, if you have not already done so, please do sign up to our meet up group, Bootlaw, which, as it happens went from concept to launch in a mere 36 hours.

So hurry up and good luck this weekend.