Alan R. Singleton, Esq. Elizabeth C. Kellner · 2017-05-25 · Alan R. Singleton, Esq. Elizabeth C. Kellner [email protected] Entrepreneurship Specialist/ Paralegal [email protected]

Alan R. Singleton, Esq. Elizabeth C. Kellner [email protected] Entrepreneurship Specialist/

Paralegal

[email protected]

Research Park at the University of Illinois 2001 S. First St., Suite 209, Champaign, IL 61820

217-352-3900 phone 217-352-4900 fax

1. Business Entity Selection Chart

2. Business Entity Selection Presentation

3. Entity Formation Filing Fees

4. Motivating Employees through Company Equity

5. Motivating Employees through Company Equity – Scenarios

6. Not for Profit Tax Exemptions Article

7. Not for Profit and Tax Exempt Entity Organization and Maintenance Checklist

8. Not for Profit Formation Basic Filing Fees

9. L3C – Bridging the Gap

10. IP Protection Chart

11. IP 101 Presentation

12. Patent Reform

13. Patent Filing Fees

14. Trademark Filing Fees

15. IP and SBIR Awards Presentation

16. Intellectual Property Audit Checklist

17. Using Intellectual Property to Gain a Competitive Advantage in the Marketplace Article

18. Questions to Ask in the Development of a Software License

19. Mobile App Development Legal Issues

20. Joint Ventures, Joint Development Agreements, Strategic Alliances Presentation

21. Exit Strategies for the Technology Company

22. Speaker Bio

Electronic version of these handouts as well as others that may be of interest can be found at www.singletonlawfirm.com by clicking on the library tab.

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At a Glance

Sole Proprietorship

General Partnership

S CorporationC

Corporation

Limited Liability

Company

Single Member Limited Liability

Company

An individual carrying on a

business for profit.

Association of two or more co-owners carrying on a business

for profit.

Unlimited personal liability for the

owner.

Partners have unlimited

personal liability for partnership

debts.

Single level of income tax.

All income and expenses reported on Schedule C of the owner's 1040.

[email protected]

Limited liability for

owners makes it a

better choice than

sole proprietorsh

ip unless cost of

formation or

maintenance is a

controlling factor.

LLC files a partnership tax return

(form 1065) with all

income and expenses

being passed through to individual owners of

the LLC on a K-1.

Disregarded entity from an income

tax perspective -all income

and expenses

are reported on

the sole member's tax return

and no income tax return need be filed by the LLC.

Liability (Limited v. Personal)

Limited liability for shareholders

even if they participate in management.

Limited liability for

shareholders even if they participate in management.

Combines limited liability

provided by a corporation

with pass through

partnership tax

treatment.

Tax Implications

Pass through tax treatment (partnership

files form 1065 but all income and expenses

pass through to individual

partners on Schedule K-1).

Pass through tax treatment under most

circumstances but not as

complete as for the LLC.

Tax at both corporate and shareholder level - this

double tax can be avoided to some extent

by payment of reasonable salaries to

shareholders in exchange for services

actually rendered.

Business Entity Selection Alan R. Singleton, Esq.

Resarch Park at the University of Illinois, 2001 South First Street, Suite 209 Champaign, IL 61820-3654 217-352-3900

Sole Proprietorship

General Partnership

S CorporationC

Corporation

Limited Liability

Company


Company

Relatively simple to start.

Relatively easy to start -

partnership agreement is

typically entered into but is not

legally required.

Formation similar to S corp except

Sub S election not filed with

IRS.

Formation steps include filing articles

of organization

with the Secretary of

State, contributing

an appropriate amount of capital, and adopting an operating

agreement.

Formation process

similar to multiple-member

LLC except that the

operating agreement will likely be

less complex.

If business conducted other than under the

name of the sole proprietor,

assumed name publication needed.

Managed by the partners or as

described in the partnership agreement.

Can be managed by the members

or, more often, by managers

selected by the

members. Can also

elect officers.

Managed by the sole proprietor.

Problem: Any partner can bind the partnership.

Self-employment

tax treatment

may be less favorable than for S

corp.

Complexity of Formation and Management

Formation steps include filing Articles of

Incorporation with the

Secretary of State, filing Sub S election with

the IRS, adoption of Bylaws and,

usually, adoption of a Shareholder (buy-sell)

Agreement.

Typically required for

publicly traded corporations, businesses that require

venture capital, or if a broad based stock option program is

utilized.

In addition to

circumstances where a

sole proprietorship would be considered,

a single-member

LLC is often used by a

corporation or LLC as a subsidiary to insulate the liability associated

with a particular

line of business.

Sole Proprietorship

General Partnership

S CorporationC

Corporation

Limited Liability

Company


Company

Any transfer of the business would be of the underlying assets as opposed

to a transfer of shares in the

business.

Ability to raise capital is limited

since most investors would prefer to invest

in an entity offering limited

liability.

Limit of 100 shareholders, only one class

of stock is allowed,

difference in voting rights is

allowed, partnerships

and corporations cannot be

shareholders, only U.S.

citizens and residents may

be shareholders.

No limits on type or

number of shareholders,

different classes of

stock allowed (common and preferred) thus

enabling different

priority for return of capital.

No limitation on the

number of members, no limitation on

who may invest,

treatment of gain on

distribution of

appreciated property

more favorable, different classes of ownership are allowed so there is

the flexibility to provide

for a priority return of capital to investors.

Capital needs - addressed through

loan to sole proprietor.

LLC is almost always the

better choice if partnership tax treatment is the

goal.

Is easier to convert S corp

to C corp than it is LLC to C corp in event venture

capital is sought.

If venture capital is being

sought, incorporation should be in the state of Delaware.

Often used to own

commercial real estate.

Information provided on this chart is intended to be general information only, in the nature of advertising. You should consult your attorney when making legal or business decisions and should not rely upon the content of this chart. Alan Singleton is licensed to practice law in the state of Illinois and is a patent

attorney registered to practice before the U.S. Patent and Trademark Office.

© 2007 Alan R. Singleton - www.singletonlawfirm.com

Capital - Effect on Ability to Raise Capital

through Angel Investment,

VC or IPO

Outside investment

allowed only if

converted to a multi-member

LLC.

1

Alan R. Singleton

Singleton Law Firm, P.C.

Re se a rc h Pa rk a t the Unive r s i t y o f I l l i no i s

2 0 01 S . F irst S t . , Su i te 2 09

Cha mpa ig n, IL 6 1 82 0 -3 6 5 4

(217) 352-3900 phone

(217) 352-4900 fax

s ingleton@ sing letonlawf irm.com www.s ingle tonlawf i r m.com

Business Entity Selection

Common Corporate Mistakes Made By Entrepreneurs

Creating a ―cheap stock‖ tax problem by

o Failing to incorporate early in the company’s life (i.e., well before a funding event that sets the price of the stock) or

o Failing to include all ―founders‖ in the company until just before a funding event that sets the price of the stock

Not creating a vesting schedule for founders’ stock for a student startup (if all vests immediately, may create unfair reward to those who do not continue to support company)

Failing to make 83(b) election on stock issued in return for services

Failing to consider employees’ or founders’ obligations to other employers

Failing to comply with securities laws as it raises capital

Considering only the valuation as it negotiates an investment

Common Business Entities

Sole Proprietorship

General Partnership

S Corporation

C Corporation

Limited Liability Company

Single Member Limited Liability Company

2

Factors to Consider When Selecting an Appropriate Business Entity

Liability—Limited vs. Personal

Tax implications

Complexity of formation and management

Capital—Effect on ability to raise capital through angel investment, venture capital, or initial public offering (IPO)

Credibility in the business world

Sole Proprietorship

An individual (or husband and wife team) carrying on a business for profit

Unlimited personal liability for owner

Single level of income tax—all income and expense items reported on Schedule C of the owner’s 1040

Relatively simple to start

If business not conducted under the name of the sole proprietor, assumed name publication needed

Managed by the sole proprietor

Any transfer of the business would be of the underlying assets as opposed to a transfer of shares in the business

Capital needs—Addressed through loan to sole proprietor

General Partnership

Two or more co-owners carrying on a business for profit

Partners have unlimited personal liability for partnership debts

Pass-through tax treatment (partnership files Form 1065 but all income and expense items pass through to individual partners on Schedule K-1)

Relatively easy to start—Partnership agreement is typically entered into but is not legally required

Managed by the partners or as described in the partnership agreement. Problem: Any partner can bind the partnership

Ability to raise capital limited since most investors would prefer to invest in an entity offering limited liability

LLC is almost always the better choice if partnership tax treatment is the goal

3

Limited Partnership

Limited partnerships are partnerships with two types of partners: general partners and limited partners

For the general partners, the law is the same as it is for the traditional general partnership

o General partners exercise management and control

o General partners can legally bind the partnership—and the other general partners—by their actions

o General partners are subject to unlimited personal liability

Limited partners, on the other hand, enjoy liability limited to the value of their registered investment

Tradeoff is that limited partners can not exercise control in the partnership, although the law is changing/has changed on this issue

Limited partnership are often used for:

o Family limited partnerships (FLIPs) — an estate planning device

o Private equity firms

S Corporation

Limited liability for shareholders even if they participate in management

Pass-through tax treatment under most circumstances, but not as complete as for the LLC

Formation steps include: filing Articles of Incorporation with the Secretary of State, filing Sub S election with the IRS, adoption of bylaws, and, usually, adoption of a Shareholder (buy-sell) Agreement

Limitations on the number and type of shareholders and limits on the ability to raise capital:

o Limit of 100 shareholders o Only one class of stock is allowed so ability to give priority return

of capital to investors is compromised o Differences in voting rights are allowed o Partnerships and corporations cannot be shareholders o Only US citizens and residents can be shareholders

Is easier to convert S corp to C corp than it is LLC to C corp in the event that venture capital is sought

C Corporation

Limited liability for shareholders even if they participate in mgmt

Tax at both corporate and shareholder level. This double tax can be avoided to some extent by payment of reasonable salaries to shareholders in exchange for services actually rendered.

Formation similar to S corporation except Sub S election not filed with IRS

Typically required for publicly traded corporations, businesses that require venture capital, or if a broad based stock option program is utilized

No limits on type or number of shareholders

Different classes of stock allowed, for example, common stock and preferred stock, which enables different priority for return of capital

If venture capital is being sought, incorporation should be in the state of Delaware

4

Limited Liability Company

Combines limited liability provided by a corporation with pass through partnership tax treatment

LLC files a partnership tax return (Form 1065) with all income and expenses being passed through to the LLC’s individual owners on a K-1

Formation steps include: filing articles of organization with the Secretary of State, contributing a suitable amount of capital, and adopting an operating agreement

Can be managed by the members or, more often, by managers selected by the members. Can also elect officers.

Self employment tax treatment may be less favorable than for S corporation

Offers several advantages over the S corporation:

o No limitation on the number of members o No limitation on who may invest (corporations, partnerships, and non-US

residents can invest) o Treatment of gain on distribution of appreciated property more favorable o Different classes of ownership are allowed so there is the flexibility to

provide for a priority return of capital to investors

Often used to own commercial real estate

Single Member Limited Liability Company

Limited liability for owners makes it a better choice than a sole proprietorship unless cost of formation or maintenance is a controlling factor

Disregarded entity from an income tax perspective

o All income and expenses are reported on the sole member’s tax return and no income tax return need be filed by the LLC

Formation process similar to multiple-member LLC except that the operating agreement will likely be less complex

In addition to circumstances where a sole proprietorship would be considered, a single member LLC is often used by a corporation or LLC to insulate the liability associated with a particular line of business

Outside investment allowed only if converted to a multi-member LLC

LLC vs. Corporate Structure

LLC

Corporation

Members

Managers

(optional)

Officers

(optional)

Shareholders

Board of Directors

Officers

5

Bylaws and Shareholder Agreements for Corporation

Bylaws

o Procedures for shareholder and director meetings o Election and terms of directors, types officers and officer

duties, and indemnification provisions for officers and directors

Shareholder Agreements

o Restrictions on the transfer of stock ownership (including upon death, disability, or cessation of employment)

o Provisions for resolving deadlock among the shareholders o Method of establishing price of shares o Rights to purchase additional shares issued by the corporation

(preemptive rights), rights to sell shares if other shares of the corporation are sold (co-sale rights), rights to cause a minority shareholder to sell its interest in the corporation when the majority votes to do so (drag along rights)

o Ownership of intellectual property

LLC Operating Agreements

Take the place of both the bylaws and shareholder/buy-sell agreement used for a corporation

Address issues such as type of membership interests, who owns the membership interests, rights and duties of members, whether the LLC is member-managed or manager-managed, rights and duties of any officers, capital accounts, allocation of profits, transferability, and indemnification of managers, employees and agents

Piercing the Corporate Veil

Limited liability associated with a corporation or an LLC can be lost if appropriate formalities are not followed:

o Corporation or LLC should be appropriately capitalized upon setup

o Annual meetings of shareholders and directors (or members and managers if an LLC) should be conducted and minutes of those meetings placed in the corporate or LLC book

o Separate financial records and bank accounts should be maintained for corporation or LLC

6

Using Company Equity to Motivate and Retain Employees

Incentive Stock Options

Nonqualified Stock Options

Restricted Stock

Phantom Stock

Employment Agreements

Nondisclosure of information/trade secrets

Noncompetition

Nonsolicitation of employees and customers

Assignment of ownership of intellectual property to company (Illinois Employee Patent Act)

Employee duties

Compensation

Term of agreement and ability of parties to terminate

Non-Profit Corporations and Tax-Exempt Organizations

The initial steps to forming an Illinois not for profit corporation are the filing articles of incorporation with the Illinois Secretary of State, electing officers and directors and adopting bylaws- however these steps do not confer the federal tax exemption that frequently accompanies non-profit status.

Federal tax exemption is governed by Internal Revenue Code section 501(c) - an application must be made to the IRS in order to receive it

Charitable organizations and chambers of commerce are both exempt from paying income tax under § 501(c).

Contributions to (501(c)(3) charitable organizations are typically deductible to the donor as a charitable donation; contributions to chambers of commerce (501(c)(6)s) are not deductible as a charitable donation but dues are likely deductible as a business expense

7

501(c)(3) — Charitable Organization

501(c)(6) — Business League or Chamber of Commerce

Exempt from federal income tax

Contributions are tax deductible to the donor

Exempt from federal income tax Contributions are not tax

deductible to the donor as charitable contribution; but may be deductible as a business expense by a business



The HDF Group

o Located in Research Park at University of Illinois

o Organized as a 501(c)(3) not-for-profit corporation ― That is, it enjoys the advantages of both tax exemption and tax

deductible contributions

o Its charitable mission is ―to ensure the sustainable development of HDF technologies and the ongoing accessibility of HDF-stored data.‖

o ―Most of The HDF Group products and services will be available to all persons for free.‖

o Source: company website

o This demonstrates that the 501(c)(3) not-for-profit form is hardly limited to conventional charitable causes


Additionally, Illinois law provides the following exemptions from state taxes:

o State income tax – tracks federal

― Tax will be due at both the state and federal level on income earned from the incidental conduct of business not related to the exempt purpose (unrelated business income)

o Sales tax exemption – different standard and test

o Property tax – different standard and test

Illinois (as well as other states) requires that certain charitable organizations register with the Attorney General and to file an annual report with that office

8

Low-Profit Limited Liability Companies: L3Cs

A new form created to:

o ―bridge the gap between non-profit and for-profit investing

o by providing a structure that facilitates investments in socially beneficial, for-profit ventures

o while simplifying compliance with IRS rules for program related investments.‖

Most private charitable foundations are required to distribute at least 5% of their average net assets annually to recipients that further the stated charitable purpose of the foundation.

Often this is in the form of grants.

o But there is an alternative: the program related investment (PRI)

o Ordinarily, investing activity would not go toward satisfying the minimum distribution requirement. PRIs, however, can.

Program-related investments leverage foundation assets.

o Instead of grants, which don’t come back through the door, PRIs (which take the form of loans, financing guarantees, and other investment forms) are made with the anticipation of return of capital.


PRIs have three requirements o The primary purpose is to accomplish one or more of the

foundation's exempt purposes

o Production of income or appreciation of property is not a significant purpose

o Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose

How does an L3C facilitate receipt of PRI funds?

o By adopting the L3C form, with its accompanying requirement to document explicitly its charitable purpose and related restriction, the L3C signals its eligibility to receive such funds

o In the alternative, foundations would have to go through a due diligence process—perhaps even going so far as getting a Private Letter Ruling from the IRS—before making the investment


Although it has generated some excitement among practitioners of non-profit organization law, others are skeptical that it will be a ―magic bullet‖

o In particular, the L3C form, while it makes it easier to meet IRS technical requirements in one fell swoop, does not add any substantive rights or authority.

o That is, everything that can be done with the L3C could already be done (and was already being done) with the more traditional forms of organization—albeit with greater administrative burdens for the parties

9

Business Financing

General Concepts

Risk vs. return

Equity (e.g., stock ownership) vs. debt (e.g., a loan)

―Smart‖ money vs. ―dumb‖ money

―Free‖ money

Dilution

o Substantial outside equity investment at early stage of company will cause loss of control whereas same dollar investment when company is more mature and more valuable might not

o Small piece of big pie worth more than 100% of marginal company

Business Plan

Written business plan required by most financing sources

Even if outside funds are not being obtained, or if a friend or relative is providing the funds, a written business plan is a good idea

10

Sections of the Business Plan

Executive Summary

Description of Business

Marketing

Financial Plan/Statements

Management Team

Business Plan—Sources of Assistance

Attorneys and accountants

SCORE

SBDC

Sources of Funding

Personal funds

Friends and family

Champaign County Regional Planning Commission

Banks (SBA)

Loan brokers

Bootstrap (company profits)

Government and foundation grants

Joint development agreements

Angel investors

Venture capital

Bonds

Initial public offering (IPO)

11

Personal Funds

People who are considering loaning you money or otherwise investing in your business are more likely to do so if they see that you are also investing some of your own funds

Friends and Family

Run the risk of losing a friend or straining family relationships if there is difficulty with repayment

Best reserved only for situations where the friend or family member can afford to lose the money

Banks

Asset based lenders

Risk averse, but the cost of borrowing is less

Require good credit record

Will want to see a written business plan

Typically want 20% financed by you

SBA loans through banks can allow bank to take on more risk

12

Champaign County Regional Planning Commission

Provides debt and equity financing to qualifying small businesses in Champaign County

Preference towards capital-intensive and/or technology-oriented businesses

Must create a specific number of full time jobs

Can’t constitute more than 50% of the total project investment

Work with a local bank as well

Bootstrap

Use company profits to grow the business

o Revenues from sale of product o Revenues from consulting used to support

product development o The ―old fashioned‖ way o Not possible for some businesses

Grants

Available only under very limited circumstances

Typically not available for retail, restaurants, etc.

―Free‖ money but not ―easy‖ money

Don’t have to repay

Typically retain ownership of intellectual property, subject to certain conditions, particularly in government grants

Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs through US government agencies (www.sbirworld.com)

13

Joint Development Agreements

Big company interested in small company’s technology will ―give‖ small company money and resources to refine product

May lead to eventual license of IP to a big company

Be careful with respect to ownership of IP generated under the JDA

Nondisclosure agreements needed

Risks associated with dealing with big company include superior litigation resources available to big company in event of dispute

Angel Investors

Angel investors are typically high net worth persons or an entity owned by these individuals

Three types

1. Passive 2. Ones that add value to company through

expertise or contacts 3. The kind that think they add value but really

don’t!

Venture Capital

Only available for certain types of businesses (for example, commercializing a technology)

Can accelerate the growth of the company through contacts and management expertise added by the VC

14

Stages of a Venture Capital Transaction

Courting process

Letter of intent

Term sheet

Due diligence

Final agreements

Ongoing input from VC

Assistance with location of follow on rounds

Exit

Bonds

Debt whereby the issuing company or governmental body promises to pay the bondholders a specific amount of interest for specific amount of time and to repay principal on expiration date

Can offer a very favorable interest rate and no loss of equity

Typically feasible only for substantial amounts of capital

Initial Public Offering

Very few companies actually go public

Most exit through sale to another company or just operate and then wind down

Very expensive

Very difficult to go public in current market and economy

15

Attorney Roles

Advisor—Assist in identifying appropriate funding sources and preparing a credible presentation to financing sources

Referral source—To venture capital firms, bankers, and private investors

Assist by reviewing and negotiating terms of the financing and by making sure you understand what you are signing

Alan R. Singleton


Re se a rc h Pa rk a t the Unive r s i t y o f I l l i no i s

2 0 01 S . F irst S t . , Su i te 2 09

Cha mpa ig n, IL 6 1 82 0 -3 6 5 4

(217) 352-3900 phone

(217) 352-4900 fax

s ingleton@ sing letonlawf irm.com www.s ingle tonlawf i r m.com

Business Financing

Alan R. Singleton, Esq.

Illinois Corporation

Standard Illinois

LLCDelaware

CorporationDelaware

LLC

$281.25 $207.00 *

$614.75 $190.00

$320.00 * $645.00

$46.65 $46.65$281.25 $614.75 $573.65 $881.65

$158.50 * $308.75 $158.50 * $308.75

$50.00 n/a

$350.00 * $250.00

$46.65 $46.65$158.50 $308.75 $605.15 $605.40

Information provided on this chart is intended to be general information only, in the nature of advertising. You should consult your attorney when making legal or business decisions and should not rely upon the content of this chart. Alan Singleton is licensed to practice law in the state of Illinois and is a patent attorney registered to practice before the U.S. Patent and Trademark Office. © 2009 Alan R. Singleton - www.singletonlawfirm.com

Articles/Certificate of Incorporation

Articles/Certificate of Organization

Authority to Transact Business in IL

Delaware Registered Agent fee

Corporate Formation Basic Filing Costs

Initial Setup:

IL annual report/franchise tax (minimum)

All fees are based on 24-hour filing.

* Based on minimum filing fees. Actual amounts vary based on paid in capital and/or shares authorized/issued.

The above information is accurate to the best of our knowledge and based on numbers published on the Illinois and Delaware Secretary of State websites as of 03/30/2012. Actual numbers may vary based on individual situations.

Delaware fees listed above may include certified copy fees (when necessary for IL filing) and courier fees.

Notes:

DE annual report

Delaware Registered Agent fee

Annual fees:

2001 South First Street, Suite 209, Champaign, IL 61820 phone 217-352-3900 fax 217-352-4900

[email protected]

DE franchise tax (minimum)

mailto:[email protected]

1

Motivating Employees Through Company Equity

Alan R. S ing le ton

Single ton Law F i rm, P.C .

R e s e a r c h P a r k a t t h e U n i v e r s i t y o f I l l i n o i s2 0 0 1 S . F i r s t S t . , S u i t e 2 0 9C h a m p a i g n , I L 6 1 8 2 0 - 3 6 5 4

( 2 1 7 ) 3 5 2 - 3 9 0 0 p h o n e

s i n g l e t o n @ s i n g l e t o n l a w f i r m . c o mww w. s i n g l e t o n l a w f i r m . c o m

Presentation Outline

I. Benefits of Employee Ownership II. How to Motivate Employees

Financial Compensation Non-Financial Compensation

III. Types of Equity Compensation Instruments Stock Options

Incentive Stock Options Non-Qualified Stock Options

Restricted Stock Phantom Stock Stock Appreciation Rights (SARs) Special Considerations in LLC and S Corporations

IV. The Importance of Fair Market Value - 409A of the Internal Revenue Code

V. Which Plan is Right for Your Company Sample Calculations

1

I. Benefits of Employee Ownership

Employee ownership offers attractive tax benefits to employees, employers and/or bothIt allows growing companies to compensate employees with equity or its equivalent rather than cash

2

Benefits of Employee OwnershipProductivity Gains

Just as important are the productivity gains accruing to the company…

Studies consistently show employee ownership plus a participative management style results in companies performing better than expectedNeither ownership nor participation alone accomplish these significant gainsCompanies need employees to “think and act like owners”What better way to do so than by making them owners?Tech firms, in particular, increasingly attract quality employees through offering company equity

Benefits of Employee OwnershipSubstantial Growth in Company Ownership

Over the past decade, the number of companies sharing ownership with employees grew substantially:

According to the National Center for Employee Ownership, approximately 9 million employees participate in some 3,000 plans, up from only 1 million in 1990There are approximately 11,500 ESOPs in the U.S. covering almost 14 million participants and controlling several hundreds of billions of dollars in assets

Of these, approximately 5% are in publicly traded companies while the remaining 95% are in closely held firms

The median percentage of employee ownership for private firms is about 30-40%, with about 3,000 companies now majority employee ownedA significant number of companies provide stock options or other kinds of individual equity to most or all employees

Benefits of Employee OwnershipAdditional Reasons to Share Company Ownership

Employee ownership benefits owners, employees and their companies in a variety of ways

Aligning the interests of the employee with those of the company, thereby promoting dedication to the companyAssisting the company in attracting and retaining good employeesProviding an avenue for buying out an existing owner when necessaryPromoting shared entrepreneurship and lessening the burden on any single entrepreneurRaising and conserving capital by exchanging equity for lower wagesProviding valuable tax benefits

3

Companies typically motivate, attract and retain quality employees through a combination of Financial and Non-Financial Compensation programs

A strategic combination of the two typically produces optimal results for the company and employees alike

II. How to Motivate Employees

Base SalaryBonuses

DiscretionaryBased upon goals met by the individual or the organization as a whole

BenefitsHealth Insurance (employee and dependents)Life InsuranceDental InsuranceFlexible Spending Accounts & 401(k) Plans

Granting an Equity Interest in the Business

How to Motivate EmployeesFinancial Compensation

How to Motivate EmployeesNon-Financial Compensation

Thank God It’s Monday!Job TitlesLeadership RolesFlexible SchedulesRecognition/AttentionGood Work EnvironmentAsk Employees What They Want! (you might be surprised ― and easily able to accommodate employees’ desires making for a relatively effortless win-win situation)

4

How to Motivate EmployeesElements of Total Compensation

Health, LifeDental Insurance

Pay for TimeNot Worked

Employee Services& Perquisites

IndirectCompensation

Profit-Sharing

StockAwards

401(k)

Deferred Comp/Benefits

Fixed

ProfitSharing

Incentive Bonus

Variable

DirectCompensation

Financial Nonfinancial

Extrinsic Rewards Intrinsic Rewards(Thank God It's Monday!)

III. Types of Equity Compensation Instruments

Equity compensation instruments include:Stock Options

Incentive Stock Options (ISOs)Non-Qualified Stock Options (NSOs)

Restricted Stock

Phantom StockStock Appreciation Rights (SARs)

Stock Options Definition

Stock options give an employee the right to:Buy (“exercise”) a certain number of shares of the employer’s stockAt a specified price (the “award,” “strike” or “exercise” price)Over a certain period of time (the “exercise” period), which is typically ten years or less

Stock options typically are subject to vesting such that the employee has the right to purchase a certain percentage of shares over period of time –e.g., 25% after two years, 50% after three, 75% after four and 100% after five years

5

Stock OptionsTwo Common Types of Plans

Employee stock options come in two basic flavors:Incentive Stock Options (ISOs) ISOs are a class of options created by the IRS and subject to the Internal Revenue Code rules, which, if followed, qualify the options for preferential tax treatment. Hence, they are also known as “Qualified Stock Options.”

Non-Qualified Stock Options (NSOs)NSOs are those options that do not “qualify” or meet the requirements of ISOs. Further, if an employer/employee fails to adhere to the restrictions of an ISO, the stock automatically reverts to non-qualified status.

Incentive Stock Options (ISOs) Requirements

ISOs offer preferential tax treatment. In order to qualify for such tax benefits ISOs must meet multiple eligibility requirements including, to name just a few:

Must be granted to an employeeUnder a written ISO AgreementAt a price equal to or greater than the “fair market value” at the time of grant (see 409A slides) Via a written Plan specifying the total number of shares that may be issued and the eligible employeesThe Plan must be approved by the stockholders within 12 months either before or after the plan’s adoptionEmployee must not, at the time of grant, own stock representing more than 10% of the voting power of all stock outstandingThe option must be exercised within 10 years of grantThe aggregate value of any ISO stock exercised for the first time cannot exceed $100,000 in any given year

ISOsKey Provisions

Employee may buy stock at a specified price which is in compliance with Section 409A (not less than 100% of fair market value) for a given period of time (10-year maximum)

Options may be exercised in any sequence

The annual value of ISOs which become exercisable in any one year cannot exceed $100,000 per individual

Appreciation from grant to sale qualifies for capital gain treatment provided holding period requirements are met (stock must be held at least 2 years after grant and 1 year after exercise)

6

ISOsTax Consequences for Employee and Employer

Employee:An employee receiving ISO realizes no income upon its receipt (at grant) or exerciseThe employee is taxed upon a qualifying disposition (one held for the holding period) at capital gains ratesDisqualifying dispositions are taxed at ordinary incomeAlternative minimum tax can kick in depending on circumstances

Employer: Employer is not entitled to a deduction with respect to the issuance of the option or its exerciseIf the disposition of the stock is qualifying, the employer receives no deductionIf the employee causes the option to be disqualifying (by disposing of the stock prior to the end of the holding period), the employer generally may take a deduction for the amount recognized by the employee as ordinary income in the same year as the employee recognizes the income

ISOsSummary: Advantages and Disadvantages

AdvantagesEmployee’s tax liability is deferred until stock is soldLong exercise period allows employee flexibility and can be retentiveEmployee may defer taxes or may sell the stock earlier in a disqualifying disposition

DisadvantagesEmployee investment is required at exerciseCompany loses tax deductionSpread at exercise is considered tax preference item for purposes of computing alternative minimum taxMore complicated instrument for administration

NSOsKey Characteristics

All options outside of ISOs, including ISOs that fail to meet the requirements or otherwise qualify as ISOs, are rendered NSOs

Employee may buy stock at exercise price for a given period of time so long as the valuation is in compliance with Section 409A of the Internal Revenue CodeAppreciation from grant date to exercise date taxed at ordinary income rates

NSOs differ from ISOs in a number of ways including:They are far more flexible and easier to administerThey can be given to anyone – partners, consultants, board members, advisorsThey are typically taxed at exercise at ordinary income tax ratesThey provide the employer with an accompanying compensation tax deduction equal to the income recognized by the employee

7

NSOsTax Consequences for Employee and Employer

If, as is almost always the case with non-publicly traded companies, the NSOs do not have a readily ascertainable fair market value at the date of grant, there is no taxable event at the time of grantThe tax event occurs at the time the employee exercises the optionThe employee will be taxed at the ordinary income rates for the amount equal to the difference between the fair market value of the stock at exercise and amount paid for the option The employer has a corresponding deduction in the same amount at the same time as the ordinary income is recognized by the employeeIf the stock is held after exercise, any additional gain to the employee is generally treated as capital gain

NSOsSummary: Advantages and Disadvantages

AdvantagesCompany receives tax deduction at exerciseNo limitations on the amount that may be exercisedOffers potential for long-term appreciation as company grows

DisadvantagesEmployee investment is requiredEmployee incurs tax liability at exercise

ISOs v. NSOsTax Consequences

The preferential tax treatment available via ISOs include: ISOs are taxed when the employee sells the stock (not at the time of grant or exercise) while NSOs are taxed on the date of exerciseTherefore, with ISOs, paying taxes on unsold but exercised option stock is avoided (which potentially could become worthless) and profit is not realized unless and until the stock is sold

ISO shares may receive long-term capital gain tax treatment

If the holding period is met – i.e., the later of 1 year after the stock is transferred to the employee or 2 years after the option is granted – the ISO stock is taxed at the lower long-term capital gains rate, which is currently 15(20)%NSOs are taxed at ordinary income rate which can go up to 39.6%

Note: Alternative Minimum Tax requirements may apply in certain situations, thereby reducing the tax benefits of ISOs

8

ISOs v. NSOsTax Implication Comparison Chart

ISO NSOEmployee exercises option No tax Ordinary income tax (up

to 39.6%)Employer gets tax

deduction?No deduction Tax deduction upon

employee exercise

Employee sells options after holding period

Long-term capital gains tax at 15(20)%

Long-term capital gains tax at 15(20)%

1000 shares @ $10 exercise price

20% capital gain tax

ISO NSO

Employee exercises when market value is $20/share

and 28% tax bracket

No tax paid Tax = ($20 - $10) * 1,000 * (0.28) = $2,800

Employee sells at $30/share after holding

period

($30 - $10) * 1,000 * (0.20) = $4,000

($30 - $20) * 1,000 * (0.20) = $ 2,000

Total tax paid $4,000 $4,800

Restricted StockDefinition

Restricted stock refers to stock in a company with limitations attached, such as:

Requirement that a certain amount of time passesCertain goals be achieved prior the stock being transferrableSubject to forfeiture if employment is terminated

Upon satisfaction of the conditions, the stock vests and becomes transferable

Restricted StockKey Provisions

Outright grant of shares with restrictions as to sale, transfer and pledging

Restrictions lapse over a period of time (e.g., three to five years)

As restrictions lapse, employee has unrestricted shares which he may sell, transfer or pledge (subject to limitations in corporate documents such as stockholders’ agreement)

If employee terminates employment, all unvested shares are forfeited

During restriction period, employee receives dividends and can vote the shares

9

Restricted StockTax Consequences for Employee and Employer

Tax Impact on Employee (absent 83(b) election)At grant – no taxAs restrictions lapse – the current market value of vested shares taxed as ordinary incomeDividends received during restriction period taxed as ordinary income

Tax Impact on Company (absent 83(b) election)At grant – no tax deductionAs restrictions lapse – company receives tax deduction equal to employee’s ordinary incomeAt sale – no tax deductionDividends paid during restriction period are deductible by company when paid

Restricted StockSummary: Advantages and Disadvantages

AdvantagesNo employee investment requiredPromotes immediate stock ownershipRecognizable to most employeesOffers employee potentially long-term appreciation as company grows

DisadvantagesImmediate dilution of EPSEmployee may incur tax liability before shares are sold

Restricted Stock83(b) Election

AdvantagesAllows employees to pay tax at the time of receipt of stock at the then current fair market value (FMV) and thereby lock in the low value of the stockCapital gain holding period begins at grant and not at vesting

DisadvantagesAccelerated payment of taxes (must be filed within 30 days of receipt of the stock)Overpayment of taxes in case the value of the stock decreasesIf the FMV is set high due to venture capital funding, substantial income tax may be paid on stock which may or may not be valuableIf the stock is forfeited, there is no loss deduction

10

Phantom Stock

Phantom Stock refers to a type of incentive grant in which:

A promise to pay a bonus based on some formula or allocation

Recipient is not issued actual shares of stock on the grant date, but rather receives “hypothetical” stock (the company gives the employee the benefits of owning stock in the company without actually granting stock)

Phantom stock increases or decreases in price and pays “dividends” as if it were real

Eventually, the phantom stock is settled and cash is distributed to the employee

Phantom stock distributions are not “qualified” and are taxed as ordinary income at distribution

Stock Appreciation Rights (SARs)

A Stock Appreciation Rights ("SARs")Contractual arrangement between a company and an individual, usually an employee The recipient has the right to receive an amount equal to the appreciation on a specified number of shares of stockOver a specified period of timeNormally paid out in cash, but it could be paid in shares

Generally, a recipient's ability to exercise a SAR is subject to a contractual "vesting" provision that expires after a specified period of time, either all at once or in incrementsMay be granted in conjunction with options - to pay for their purchase at exercise

How SARs Differ from Stock Options

SARs differ from stock options in the following ways: Recipient is not required to pay an amount to exercise the SARsRecipient only receives the appreciation in the value of the stock between the date of grant of the SAR and the date of exercise (generally, the recipient controls the timing of exercise)Recipient generally does not receive any shares of stock of the granting company (the amount received by the recipient is payable in cash)

11

Phantom Stock and SARSTax Consequences for Employee and Employer

Employees are taxed when the right to the benefit is exercisedAt that point, the value of the award, minus any consideration paid for it (there usually is none) is taxed as ordinary income to the employee and is deductible by the employerIf the award is settled in shares (as might occur with an SAR), the amount of the gain is taxable at exercise, even if the shares are not soldAny subsequent gain on the shares is taxable as capital gain

Special Considerations in S Corporations and LLCsGeneral

S CorporationLimit of 100 shareholders None of the shareholders may be a nonresident alienTreated as corporate entities and ISOs are availableUpon filing of 83(b)/exercise of options the holder is considered a stockholderPhantom stock and SARs are a possibility if they don’t create a second class of stock

LLCHigh administrative cost and complexity in pass through LLCsISOs are not available except where LLC has elected to be taxed as a C corporationValue of unrestricted capital interests granted (less anything paid) is ordinary income and deduction is available to companyRestricted capital interest is taxed at time of vesting and deduction is available83(b) election is available

VI. The Importance of Fair Market Value Section 409A of the Internal Revenue Code

Congress enacted Section 409A of the Internal Revenue Code as part of the American Jobs Creation Act of 2004 in response to perceived abusive compensation practicesSection 409A applies to non-qualified deferred compensation (NQDC) plansDeferred compensation plans which do not meet the specific requirements of 409A are treated as “current income” and subject to a significant excise taxes plus penaltiesSection 409A of the Internal Revenue Code applies to employees, directors and “other service providers”Section 409A contains very specific rules governing the timing of deferrals, timing of distribution, funding methods and various other aspects of deferred compensation

12

409A Penalties for Non-Compliance

If there is a violation, affected service providers owe:Current tax on deferrals for current year and all prior years (to the extent not subject to a substantial risk of forfeiture)Interest at underpayment rate +1% from original deferral dateAdditional tax of 20% of the taxable compensation

If the plan is not drafted correctly, all plan participants could be “affected” and all post-2004 deferrals taxable

Exceptions to 409A Coverage

Section 409A defines deferred compensation broadly to include elective deferred compensation plans as well as non-elective arrangements

Exceptions to Section 409A coverage include the following equity compensation instruments:

Non-discounted stock optionsRestricted StockStock Appreciation Rights (SARs)

In order to fall into the 409A exception, however, the equity compensation instrument MUST be valued at “fair market value” at the time of grant

How Does 409A Affect Stock Options and SARs?

Non-discounted options are not subject to Section 409ASimilar treatment now extends to all SARs

Private and public companiesCash and stock settled arrangements

Exercise price may not be less than the “value” of the “service recipient stock” on the “grant date”Tax on vesting for discounted stock options & SARsConcepts apply to LLCs and partnerships

13

How is Value for a Private Company Determined under 409A?

Value is determined “by the reasonable application of a reasonable valuation method” – what does that mean?Unreasonable to use:

Previously calculated value that fails to reflect all material informationCalculation that is more than 12 months old

Two primary safe harbors:Written valuation report for illiquid stock by a person with significant knowledge and experienceIndependent Appraisal (which can cost a cash strapped start-up $5,000 to $7,000)

IRS Guidelines for 409A Valuations

“Reasonable method, reasonably and consistently applied”

The value of tangible and intangible assets The present value of future cash-flows The market value of stock or equity interests in similar companies and other entities engaged in businesses substantially similar to those engaged by the corporationRecent arm’s length transactions involving the sale or transfer of the stockOther relevant factors, such as control premiums or lack of marketability

VI. Which Plan is Right for Your Company?

Administrative complexity (ISOs and LLCs) Tax consequences for service providers and

employers Size of compensation pool Pre-IPO considerations Vesting patterns Paying for the stock Signing the stockholders agreement at exercise Repurchase rights

14

Incentive Stock Options Sample Calculations - 1

Assumes the capital gain rate is 15%

Incentive Stock Option Grant Exercise Sale

Fair Market Value: $2 $6 $9

Employee Investment: $0 $2

Employee Gain: $0 $0 $7 (Capital Gain)

Employee Tax: $0 $0 $1.05 Tax Due($7x.15)

Employee Net Gain: $0 $5.95 Net Gain(After Tax)

Incentive Stock OptionsSample Calculations - 2

Assumes the capital gain rate is 15%

Incentive Stock Option Grant Exercise Sale



Employee Gain: $0 $0 $7 (Capital Gain)

Employee Tax: $0 $0 $1.05 Tax Due($7x.15)


Non-Qualified Stock OptionsSample Calculations - 1

Assumes the capital gain rate is 15% and ordinary income tax rate is 35%

Non-Qualifed Stock Option Grant Exercise Sale



Employee Gain: $0 $4 $3Ordinary Income Capital Gain $7.00

Employee Tax: $0($4x.35 = $1.40) $1.85

Employee Net Gain: $0 Total Net Gain(After Tax) $2.55 $5.15

Total Gain

Total Tax Due

$2.60

($3.00 x.15 = .45)

15

Non-Qualified Stock OptionsSample Calculations - 2

Assumes the capital gain rate is 15% and ordinary income tax rate is 35%

Non-Qualified Stock Option Grant Exercise Sale



Employee Gain: $0 $5 $2Ordinary Income Capital Gain $7.00

Employee Tax: $0($5 x.35 = $1.75) ($2 x.15 =.30) $2.38

Employee Net Gain: $0 Total Net Gain(After Tax) $1.70 $4.95

Total Gain

Total Tax Due

$3.25

Restricted StockSample Calculations - 1

This example assumes the employee is subject to an ordinary income tax rate of 35%. If an 83(b) election were made within 30 days of the award, the employee would be taxed on the fair value of the stock at grant as ordinary income, with subsequent appreciation treated as a capital gain. 83(b) elections are sometimes not made because the employee cannot recover taxes paid at grant if he or she forfeits the shares if the shares decrease in value.

Restricted Stock Grant Restrictions Lapse

Fair Market Value: $2 $10

Dividends $0 $1.00


Employee Gain: $0 $11 (Ordinary Income)

Employee Tax: $0 $3.85 Tax Due($11.00x.35)


Restricted StockSample Calculations - 2

This example assumes the employee is subject to an ordinary income tax rate of 35%. If an 83(b) election were made within 30 days of the award, the employee would be taxed on the fair value of the stock at grant as ordinary income,

with subsequent appreciation treated as a capital gain. 83(b) elections are sometimes not made because the employee cannot recover taxes paid at grant if he or she forfeits the shares if the shares decrease in value.

Restricted Stock Grant Restrictions Lapse

Fair Market Value: $5 $10

Dividends $0 $1.00


Employee Gain: $0 $11 (Ordinary Income)

Employee Tax: $0 $3.85 Tax Due($11.00x.35)


16

Motivating Employees Through Company Equity




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1

Motivating Employees Through Company Equity - Scenarios




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ScenariosI. Start Up/Formation

Several foundersNot much money to start the companySweat equity component for some of the foundersIP contribution

Restricted stock with vesting schedule

Considerations Beware of immigration issues Beware of Illinois Wage Payment and Collection Act No unpaid interns unless stockholders 83(b) election likely appropriate

ScenariosII. A Little Further Along

Founders already establishedNeed to attract some knowledgeable employees (perhaps post doc level people)No significant outside investment that has set a valuation on the company

Restricted stock with vesting schedule Stock options with vesting schedule (implement stock

option plan)

Considerations 83(b) election likely appropriate Illiquid start up valuation method likely available Implement option pool

2

ScenariosIII. First VC Round

Post-money valuation of $1.5MInvestors have a lot of leverage

Stock options Restricted stock likely not optimum as it would generate

adverse income tax consequences

Considerations Workout size of option pool with investors Illiquid start up valuation method likely available

ScenariosIV. Later Stages

Stock options Restricted stock likely not optimum as it would generate

adverse income tax consequences

Considerations Size of option pool is set Approval of stockholders/investors is needed to increase

the size of the option pool Outside valuation most likely needed - illiquid start up

valuation method likely not available as the company is no longer a start up (older than 10 years) or company is “too big”

ScenariosV. “Rearranging” Founder Equity

Three founders each owning one-third of the company equityOne agreeing to leave Possibilities:

Restricted stock which is not vested is forfeited Fully vested stock may be: Repurchased by the company (redemption) Purchased by the other stockholders Gifted (gift tax provisions apply - $14,000 annual gift

exclusion in 2014) In all cases at FMV

3

ScenariosVI. Very Mature Stage – Sale to an ESOP

50M in revenueFounders seek to be bought out yet reward employees and keep the business runningStock is held in a trust for employees meeting minimum service requirements and allocated to employees

Champaign based companies Hobbico and Human Kinetics

Considerations ESOPs are funded by the employer, not the employees Potential beneficial tax treatment for seller Owner can stay with the business or retire FMV must be determined at least annually by an outside,

independent appraiser The company is making enough money to buy out an owner Management continuity must be provided Maintenance of ESOP is costly and complex

Motivating Employees Through Company Equity - Scenarios




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BUSINESS LAW

Tax exemptions for not-for-profit corporations --

understand which may apply

By Alan Singleton

CIBM Contributor

Published: Dec. 2008

Not-for-profit corporations provide a wide range of valuable services to Champaign

County, from afterschool programs offered by local boys and girls clubs to emergency

medical services provided by the local hospitals. Incorporation as a not-for-profit is a

logical step for a variety of charitable, religious and other endeavors. However, there are

certain important distinctions and requirements which prospective founders should keep in mind.

First is the commonly blurred distinction between a not-for-profit corporation and a tax exempt

organization. A not-for-profit corporation is an independent business entity formed by filing articles of

incorporation with the Illinois secretary of state. Not-for-profits are governed by the Illinois Not-For-

Profit Corporation Act and must have as their stated purpose one of the accepted purposes under that Act.

However, incorporation as a not-for-profit does not make the organization a tax exempt organization. For

that matter, there are several distinct forms of tax exemption, each of which carries its own requirements

and application process.

Generally, the first tax exemption sought by a not-for-profit is relief from federal income tax.

Qualification for this exemption is recognized by the Internal Revenue Service upon application by the

not-for-profit. Section 501(c) of the Internal Revenue Code provides a list of 28 types of entities which

qualify for exemption from federal income tax. The most commonly relied upon exemption is found in

section 501(c)(3) and applies to entities "operated exclusively for religious, charitable, scientific, testing

for public safety, literary or educational purposes, or to foster national or international amateur sports

competition or for the prevention of cruelty to children or animals." This broad sweeping exemption is

relied upon by churches, sports leagues, schools and any other organizations that share the stated

purposes.

An advantage of a 501(c)(3) designation over some of the other exemptions listed in Section 501(c) is the

fact that not only is the entity exempt from income tax, but also any donations made to the organization

are tax-deductible for the donor on his personal income tax return. However, a 501(c)(3) exemption also

carries two important restrictions. First, no portion of the income of the organization may go to any

private shareholder or individual. Employees, directors and officers of a 501(c)(3) organization may be

paid for their services, but care must be taken to avoid any payments to individuals beyond fair market

value for the services actually performed. Such overpayment could be found to be "private inurement"

and may jeopardize the organization's tax exempt status. A second restriction has been particularly

relevant during the recent election cycle and prohibits any "substantial portion" of a 501(c)(3)

organization's activities from attempting to influence legislation or intervening in any political campaign

in support or in opposition to any candidate.

A second commonly used exemption, and one of particular interest to the business community, is

501(c)(6), which applies to business leagues and chambers of commerce. Donations made to a 501(c)(6)

are not tax deductible for the individual donor. However, for the most part, businesses will be members of

these organizations and will pay membership fees, which are then deductible as an ordinary business

expense. Like 501(c)(3) organizations, no part of the earnings of a 501(c)(6) entity may inure to the

benefit of a private shareholder or individual. However, 501(c)(6) organizations are not prohibited from

engaging in political or legislative activities.

In addition to the exemption from federal income tax, the state of Illinois offers exemptions from real

estate taxes for certain charitable organizations. These exemptions apply to property owned by schools,

religious organizations and orphanages, as well as certain other types of property as long as the property

is "actually and exclusively used for charitable or beneficent purposes." This exemption has been the

subject of considerable attention recently as the courts work to determine whether our two local hospitals,

Provena and Carle, qualify for an exemption.

Finally, certain organizations may be eligible to receive an exemption from sales tax, depending on the

circumstances. Organizations may apply to the Illinois Department of Revenue for such an exemption.

However, this exemption is fairly narrow and often more difficult to meet than either the real estate or

income tax exemptions. Still, it could provide a substantial advantage to a not-for-profit and should be

considered.

The list of business and charitable purposes that can be supported by a not-for-profit corporation is fairly

broad. However, incorporation as a not-for-profit is only the first step, and founders should consider the

multiple exemptions from taxes that may be available. Qualifying for exemption at one level does not

guarantee exemption at any other level, since the standards are different, but each exemption helps toward

serving the organization's charitable or business purpose.

Alan Singleton is a corporate and intellectual property law attorney with Singleton Law Firm, P.C. in

Champaign. He can be reached at (217) 352-3900 or [email protected].


[email protected]


Not For Profit and Tax Exempt Entity Organization and Maintenance Checklist

I. Initial Organization

A. Organizational Documents

1. Articles of Incorporation - NFP 102.10 a. Corporate Name b. Registered Agent c. At least three directors d. Statement of Purpose e. $50 Filing Fee

2. Bylaws – Official rules of how the organization will be run a. Organizational Purpose b. Voting c. Meetings d. Members, Directors and Officers e. Salaries f. Committees g. Amendments h. Indemnification

3. Organizational Minutes a. Initial election of directors and officers b. Ratification of organization c. Adoption of initial documents, such as Bylaws and Conflict of Interest Policy

B. Registration as Charitable Organization

1. Illinois – Pursuant to Charitable trust and Solicitation for Charity Acts – Forms CO-1&2 a. Must register if you are based in, solicit contributions from, or hold over $4,000

for a charitable purpose in Illinois i. Information about the organization and copies of organizational documents

ii. Director and Officer information iii. Methods of Solicitation iv. Financial Statements v. $15.00 Filing Fee ($200.00 if not filed within 10 days of initial solicitation)

2. Other States – Most other states require registration if you solicit contributions from its citizens

C. Application for Federal Employer Identification Number (EIN) – SS-4

II. Tax Exemptions

A. Federal Income Tax –

1. §501(c) of the Internal Revenue Code – 28 types of entities eligible – most common are 501(c)(3) organizations, which are entities, “operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals.”

2. Benefits can include both exemption from federal income tax and tax deductibility of certain contributions

3. Typically must apply for the exemption by filing Form 1023 a. Information about and copies of the organizational documents: specific language

required b. Narrative description of activities and copies of any printed materials c. Compensation of directors, officers, employees and independent contractors d. Disclosure of family or business relationships e. Conflict of interest policy f. Material leases, contracts, loans and other arrangements g. Benefits to organization’s members h. Statements regarding certain specific activities, such as political support, gaming,

methods and areas of solicitation, affiliations, intellectual property, connection to foreign countries and organizations and other specific activities

i. Detailed financial statements j. Public charity or private foundation status k. Specific information regarding churches, schools, hospitals, supporting

organizations, homes for the elderly, handicapped or low income residents, successor organizations and/or provision of scholarships, fellowships or other educational loans or grants

l. Filing Fees i. Gross Receipts < $10,000 = $300.00

ii. Gross Receipts > $10,000 = $750.00

B. Illinois Sales and Use Taxes 1. Available to any corporation, society, association, foundation, or institution

organized and operated exclusively for charitable, religious or educational purposes, nor to any not-for-profit corporation, society, association, foundation, institution or certain senior citizens organizations.

2. Must apply for an exemption number with the Illinois Department of Revenue a. Copies of organizational documents and printed materials b. Narrative of Activities c. Financial statements

d. IRS exempt organization determination letter, if applicable

C. Illinois Property Taxes 1. To qualify for a property tax exemption, the organization must:

a. be an exclusively beneficent and charitable, religious, educational, or governmental organization

b. own the property that is used exclusively for charitable, religious, educational, or governmental purposes and not leased or used for profit

2. Must apply for exemption at the county level a. IDOR Form PTAX-300 (PTAX-300R for religious organizations) b. Photo of the property c. Copy of the deed or other proof of ownership d. Notarized affidavit of use e. Copies of any leases of the property

III. Basic Maintenance

A. Annual Meetings/Consent Minutes

1. Annual a. Elect directors and officers b. Ratify actions of previous directors and officers

2. Special a. Major decisions, including those specified in the General Not-For-Profit

Corporation Act should be recorded in minutes from special meetings or consent minutes

B. Annual Report – Illinois Secretary of State’s Office

C. Return of Organization Exempt from Income Tax 1. Form 990 – Gross Receipts > $100,000; or Total Assets > $250,000 at year end 2. Form 990-EZ – Gross Receipts between $25,000 and $100,000; and Total Assets <

$250,000 3. Form 990-N - Gross Receipts < $25,000 4. Form 990-PF – Private Foundations

D. Federal and State employment taxes and unemployment insurance, if applicable

E. Charitable Organization Annual Reports

1. Illinois – Form AG990-IL, with the Attorney General’s Office 2. Other States as Necessary


*$200.00 if not filed within 10 days of initial solicitation. Dependng on the location of the organization's activities additional registrations may be required in other states.

$39.25 $39.25IL annual report/franchise taxIL Charitable Organization annual report filing

Notes:

$850.00

$987.75$537.75

$54.25$54.25$15.00

All fees are based on 24-hour filing.

The above information is accurate to the best of our knowledge and based on numbers published on the Illinois Secretary of State & Attorney General websites as of 03/30/2012. Actual numbers may vary based on individual situations.


Gross Receipts > $10,000

$122.75

$15.00

$122.75

Annual fees:

$15.00

Articles of IncorporationIL Charitable Organization Registration *

IRS Tax Exempt filing

Based on minimum filing fees.

$400.00

$15.00

[email protected]


Not For Profit Formation Basic Filing Costs

Initial Setup:

Gross Receipts < $10,000


Alan R. Singleton, Esq. [email protected]

2001 S. First St., Suite 209, Champaign, IL 61820 217-352-3900 phone 217-352-4900 fax

Information provided is intended to be general information only, in the nature of advertising. You should consult your attorney when making legal or business decisions and should not rely upon the content of this article. Alan Singleton is licensed to practice law in the state of Illinois and is a patent attorney registered to practice before the U.S. Patent and Trademark Office. © 2011 Alan R. Singleton ‐ www.singletonlawfirm.com

L3C - Bridging the Gap between Nonprofits and For-Profits

Effective January 1, 2010, Illinois became the fifth state to recognize the low-profit limited liability company (L3C). As of this writing, 64 L3Cs have been formed in the state. An L3C is a hybrid business structure that combines the financial advantages of LLCs with the social advantages of nonprofit organizations with respect to funding, distributions to owners, return on investment and achievement of social goals. Like nonprofits, an L3C is organized to further one or more charitable or educational purposes. However, unlike nonprofits, the L3C has owners and may in fact have different classes of investors - individuals, nonprofits, for-profits, and even government agencies. As a variety of LLC, it generally shields owners and investors from liabilities of the enterprise.

The opportunity for L3Cs lies in PRIs (program-related investments). PRIs are loans or investments private foundations can make for charitable or educational projects, even if those projects are run by for-profit entities. Federal tax law requires that private foundations distribute at least 5% of their assets (estimated at more than $23.5 billion only in Illinois) every year to social programs or PRIs. PRIs may involve high risk, low return, or both, but are nonetheless made by foundations because they are intended to achieve charitable purposes. The key to PRI funding is the foundation’s motivation in making the investment. PRIs can be recovered, along with earnings, by the foundation and reinvested in qualifying PRIs.

However, for-profit’s access to PRIs is restricted because investment in PRIs is complicated and the private foundation may be fined if IRS does not view the project as adequately charitable. L3Cs facilitate access to PRIs because, while the IRS does not automatically recognize L3Cs as eligible to receive PRI, the very structure of these entities may serve to facilitate the charitable nature of the investment. To ensure the L3C is properly structured, under Illinois law, specific language has to be included in the articles of organization. However, until PRIs in L3Cs are formally recognized, foundations will have to rely on private letter rulings by IRS or an opinion of counsel regarding the PRI treatments.

An L3C enjoys a flexible ownership structure and can have different classes of investors with distinct investment goals and affinity for financial risk. Unlike nonprofits, L3Cs are allowed to distribute profits to their owners/investors as long as the company continues to pursue its charitable purpose and production of income is secondary. Also, unlike nonprofits, at dissolution, the company is not required to distribute its assets to other nonprofits; there are no provisions that limit the sale of an L3Cs by the owners. If at any point the company ceases to satisfy the L3C requirements, it will be treated as an LLC and is required to amend its articles.

Even though similar to the tax-exempt nonprofits, an L3C is subject to taxation on its income. Just like an LLC, an L3C is taxed as a partnership if it has more than one member and as a disregarded entity if it has only one member. To reduce its tax burden when wholly owned by a nonprofit, the L3C may also opt in for corporate tax treatment.

The L3C will often be a great fit for social entrepreneurs, i.e., those seeking to do well while furthering social goals and seeking innovative solutions to pressing social problems.

For-Profit L3C Nonprofit

Exempt from income tax No No Yes, if 501(c) entity

Donor receives charitable deduction No No Yes, if 503(c)(3) entity

Tap into private foundations PRIs Only with difficulty Likely easier Easier; set up to access these funds

At wind down assets are distributed to Owners Owners Other charitable organizations

Fiduciary duty to maximize profit for owners Yes No No, there are no owners


At a Glance

Patents Trademarks Copyrights Trade Secrets

Process, machine, manufacture,

composition of matter, or improvement

thereof.

Any distinct word, name, symbol, or

device used to identify a source of goods or

services.

Original work of authorship fixed in a tangible medium of

expression.

Commercially valuable information not generally

known or readily ascertainable, if

reasonable efforts are used to keep it secret.

Inherently distinctive if arbitrary, fanciful, or

suggestive.

Fixed if it is sufficiently permanent (written

down, recorded, painted, saved

electronically, etc.)

Disclosure to one person without confidence may destroy a trade secret.

Action RequiredU.S. Patent and

Trademark Office. Application required.

U.S. Patent and Trademark Office for

federal protection. Secretary of State’s

office for state protection.

Registration advised but not required.

U.S. Copyright Office within the Library of

Congress. Registration advised but not

required.

NONE.

Research Park at the University of Illinois, 2001 South First Street, Suite 209 Champaign, IL 61820-3654 217-352-3900

More efforts required for more valuable secrets.

Rights

Property Protected

Intellectual Property Protection

Also distinctive if descriptive with

acquired secondary meaning.

Originality requires some amount of

creativity by the author.

[email protected]

Right to exclude others from making, using,

selling, or offering for sale in U.S. or

importing to U.S.

Right to stop others from using confusingly

similar marks in commerce.

Exclusive right to reproduce, prepare derivative works,

distribute, perform publicly, and display

publicly.

Right to sue others from improperly acquiring the

trade secret or breaching confidence regarding the trade

secret. Does not prevent reverse engineering.

Must be useful, novel and non-obvious. Recently passed

America Invents Act of 2011 amended

statutory provisions of novelty. New

provisions rendering the US a first-inventor-

to-file system take effect March 16, 2013.

Patents Trademarks Copyrights Trade Secrets

Pat. Pending.TM or SM if not

registered with USPTO.

“Copyright” or ©, year of first publication,

author’s name.

Registered: No limit as long as you continually

use it and file appropriate renewal

papers.

Work for hire: the earlier of 95 years from

publication or 120 years from creation.

Infringer’s mark causes a likelihood of

confusion with your mark.

Infringer has copied your work without

permission.

If your mark is famous, then you can also sue

if another dilutes or tarnishes your mark.

Infringer’s work is substantially similar to

yours.

© 2007 Alan R. Singleton - www.singletonlawfirm.com

Information provided on this chart is intended to be general information only, in the nature of advertising. You should consult your attorney when making legal or business decisions and should not rely upon the content of this chart. Alan Singleton is licensed to practice law in the state of Illinois and is a patent attorney

registered to practice before the U.S. Patent and Trademark Office.

Notice to show confidential nature to

employees and anyone else with access to the

information.Pat. No. ######. ® if registered with

USPTO. © 2007 Joe Smith.

No limit as long as it still qualifies as a trade

secret.

Infringement

Every claim limitation in the patent is found,

literally or equivalently, in the accused device

or method.

Another has knowingly misappropriated your trade secret for his or

her own gain or to harm you.

Duration

Generally, 20 years from the earliest US filing date for which priority is claimed.

Provisional applications are excluded in this

calculation.

Non-registered: No limit as long as you continually use it.

Life of the author plus 70 years.

Public Notice

1

Alan R. SingletonSingleton Law Firm, P.C.


(217 ) 352 -3900 phone(217 ) 352 -4900 fax

s ing le ton@sing le ton lawf i rm.comw w w.s ing le ton law f i rm.com

© 2 0 1 3 A l a n R . S i n g l e t o n

IP Protection

Importance of IP to a Company

Increasingly important as a business asset May constitute the most valuable asset in

early stage tech companies

1

Why do Companies Care about IP?

Freedom to Operate—Ensure that someone else’s IP will not prevent your company from carrying out its business objectives

Competitive Advantage—Protect your company’s IP to acquire a competitive advantage in the marketplace by precluding others from using it

2

2

Common IP Mistakes Made By Entrepreneurs

Failing to secure IP rights from founders by assignment or license

Failing to address how jointly-owned patents are to be licensed and utilized in joint development situations

Failing to file a U.S. patent application within one year of public disclosure or other statutory bar

Failing to consider international patent protection prior to disclosure (no one year grace period)

Failing to use nondisclosure agreements Failing to properly register trademarks

3

Patent—Anything man-made that is “new,” “useful,” and “non-obvious”o E.g., new scientific instrument, chemical process, software

coupled with operation on a computer Trademark—Any distinct word, name, symbol, or device used

to identify a source of goods or serviceso E.g., company logo

Copyright—Original work of authorship fixed in a tangible medium of expressiono E.g., a novel, software, website content

Trade Secret—Commercially valuable information not generally known or readily ascertainable, if reasonable efforts are used to keep secreto E.g., the Coca-Cola secret formula

Contracts—Protect IP by entering into agreementso E.g., Non-Disclosure and Employment Agreements

Ways to Protect IP4

Hershey’s Kisses Protected by Five Types of Intellectual Property Protection

Patent for its method of reducing fat levels in cocoa used (#5,464,649)

Trademark for its shape (#1,038,025) and the term Kisses® (#2,416,701)

Copyright for commercial advertisements (PAu-697-741)

Trade secret on its recipe for producing the milk chocolate candy

Contracts, e.g., nondisclosure, employment, and supplier agreements

5

3

Patents—Rights & Duration

A patent gives its holder the right to excludeothers from making, using, offering to sell, or selling the patented invention in the U.S. or importing the invention into the U.S.

A patent does not grant its owner the right to make, use, offer to sell, or sell the patented invention; as such, one can have a patent but not be able to use the patented invention if it would infringe on an existing patent

Generally, U.S. patents last 20 years from the date the application is filed with USPTO

6

Patents

An invention must fit into one of the following categories of subject matter in order to be patented:o Machine, manufacture, process, composition of matter,

biological plant, ornamental design Anything man-made that is “new,” “useful,” and “non-

obvious” may be patented.o Useful—The easiest test to meeto Novel (New)—The invention must not already be known

by the public or in public useo Non-obvious—The invention must not be obvious in view

of the prior art and the knowledge of a person having ordinary skill in the art

7

Patents—Obtaining Protection

To secure a US patent, one must file a patent application with the USPTO

A patent application must be filed within one year of any commercial use, offer for sale, or public disclosure of an invention in order to be patentableo There is no one year grace period in most foreign jurisdictions

Before applying for a patent, consider the following:o The prosecution and enforcement of a patent can be very time

consuming and expensive― Determine whether the life span of the invention and its value justifies

a patento A patent requires a disclosure of the invention

― Determine whether disclosing the invention would provide competitors with an advantage, or if other forms of protection, such as a trade secret are preferable

8

4

Patents—Other Considerations

First to File v. First to Invento EFFECTIVE March 16, 2013, the U.S., like most foreign jurisdictions,

uses a First to File system, meaning that the first person to file may be awarded a patent.

o PRIOR TO March 16, 2013, the U.S. used a First to Invent system, meaning that the first person to invent may be awarded a patent.― Laboratory notebooks and invention disclosure forms were used to

document the date of the invention, i.e. the time of conception and the time of reduction to practice.

Use nondisclosure agreements to prevent public disclosure. A patent application may only be filed by an individual in the

U.S. Make sure that you have agreements in place to assign

ownership of any patent applications or patents to a company.

9

Patents—U.S. Provisional Patent Applications

A provisional patent application (“PPA”) can temporarily delay the need to file a utility patent application o E.g., an article containing an enabling disclosure of the invention will be published

in a scientific journal Must file a regular application within one year of the

provisional filing date or lose the filing date and the ability to obtain a patent if a public disclosure made or other bar occurs

Does not count against the 20 year term A PPA is less formal than a utility patent application,

but you need to ensure that what is disclosed in the PPA is sufficiently detailed so it will support a later utility application

10

Patents—Public Notice

“Pat. Pending” may be applied to goods for which a PPA or utility patent application has been filed and which is in prosecution

“U.S. Pat. No. #######” may be applied to goods once a patent has been issued

Marking increases the likelihood of obtaining damages should a patent be infringed

False marking may result in liability for statutory damages

11

5

Patents—Infringement

A patent claim is infringed when every claim limitation in the patent claim is found, literally or equivalently, in the accused device or methodo Example:

― A claim from Patent 1 claims a method comprising (a) scanning a barcode and (b) placing an item in a plastic bag.

― A claim from Patent 2 claims a method comprising (a) scanning a barcode, (b) placing an item in a plastic bag, and (c) carrying the plastic bag outside.

― The claim from Patent 2 contains every claim limitation found in the claim from Patent 1, and therefore infringes Patent 1, even though the claim from Patent 2 contains additional limitations.

12

Trademarks—Definition Any distinct word, name, symbol, or device used to identify a

source of goods or serviceso A mark is distinctive if it is:

― Fanciful—Made-up term, e.g., KODAK for cameras― Arbitrary—Term that has no connection to the product with

which it is associated, e.g., APPLE for computers― Suggestive—Term that suggests a connection to the

product with which it is associated, e.g., MICROSOFT for computer software

― Descriptive + secondary meaning—Term that describes the product with which it is associated and that has become associated with the product in the minds of the consuming public, e.g., PARK N FLY for airport parking lots

o A mark is not distinctive if it is generic. A mark is generic if consumers associate the mark with the product rather than the producer, e.g., CAR for a car

13

Trademarks—Marks That Can Be Protected

Examples of protectable marks:o Product names and logos

― E.g., DU PONT and o Sales slogans

― E.g., LET’S DO AMAZING for HPo Container shapes and distinctive packaging

― E.g., the shape of a Coca-Cola bottleo Sounds

― E.g., Intel “Chimes”o Colors

― E.g., Owens Corning’s pink insulation

14

6

Trademarks—Obtaining Protection

1. Brainstorm several potential marks—Better to create more than one in case some are incapable of being trademarked.o Best practice—Avoid generic or descriptive marks, and instead

create fanciful marks or choose arbitrary marks, which have the best chance of surviving the registration process.

2. Perform a clearance search—Ensure that you have the freedom to use the mark and to minimize the likelihood of any issues in the prosecution of a trademark application

3. Use the mark in connection with your goods or services—Use is an integral part of trademark law. If not registered, use the TM symbol. Once registered, use the ® symbol. Although trademark rights normally attach when the mark is used, it is possible to file an intent to use application with the USPTO prior to using the mark.

4. Register the mark—Registration with the USPTO provides important benefits and puts the world on notice that you are using the mark as a trademark

15

Trademarks—Rights & Duration

The owner of a trademark enjoys the right to stop others from using confusingly similar marks in commerceo Although trademark rights can be acquired without

registration, registration provides important benefits, including: constructive notice, prima facie evidence of validity, federal jurisdiction, and statutory damages

Trademark rights last indefinitely as long as the trademark is being continuously usedo For registered marks, renewals must also be filed

from time to time to show that you continue to use the mark

16

Trademarks—Infringement & Other Causes of Action

Infringemento An existing trademark is infringed when an infringer’s

mark causes a likelihood of confusion with the existing trademark.― E.g., MACROSOFT for software

Other remedies for “famous” markso Dilution by blurring—Unauthorized use of a famous

mark on unrelated goods― E.g., a company that tries to sell KODAK shoes

o Dilution by tarnishment—Unauthorized use of a famous mark on inferior or unwholesome goods― E.g., using a CATERPILLAR mark to sell shoddy car parts

17

7

Copyrighted Works—Definition

Original work of authorship fixed in a tangible medium of expressiono Original—A work is “original” if its author

used some amount of creativityo Fixed—A work is “fixed” if it is sufficiently

permanent, e.g., written, recorded, painted, saved to a hard drive

Examples—Textbooks, software, photographs, movies, this presentation

18

Copyrighted Works—Obtaining Protection

Protection exists from the moment a work is “fixed” in a tangible medium of expression—publication, registration, and notice are not required for the five exclusive rights to attach to a work

For maximum protection, notice and registration suggestions should be followed:o Marking a work with “©” or “Copyright,” the year of first

publication, and the author’s name provides notice to the world that the work is protected― E.g., © 2013 John Smith

o Registering a work with the U.S. Copyright Office within certain time periods provides the highest degree of protection, allowing, for example, the copyright owner to recover statutory damages, attorney’s fees, and injunctive relief

19

Copyrighted Works—Exclusive Rights

Copyright owners enjoy the exclusive right to:1. Reproduce the copyrighted work

― E.g., make copies of copyrighted software2. Prepare derivative works of the copyrighted work

― E.g., film a movie based on a copyrighted novel3. Distribute the copyrighted work

― E.g., sell DVDs of a copyrighted film4. Perform the copyrighted work publicly

― E.g., perform a copyrighted play 5. Display the copyrighted work publicly

― E.g., hang a piece of copyrighted art in a public place

20

8

Copyrighted Works—Duration

In general, copyrights exist for the life of the author plus 70 years

In the case of a work for hire, the copyright lasts for the earlier of 95 years from publication or 120 years from creation

21

Copyrighted Works—Ownership of the Work of Others

Employer/Employee—If certain tests are met, an employer becomes the owner of the copyright in a work created by an employee if the work was created within the scope of the employee’s employmento Employee v. Independent Contractor

Works for Hire—A company commissioning a third party to create a work may or may not become the owner; this is a fact-based inquiry

Prudent to document these issues in a signed agreement that also contains language addressing assignment of copyright

22

Trade Secrets—Definition

Commercially valuable information not generally known or readily ascertainable, if reasonable efforts are used to keep secret

Any formula, pattern, device or compilation of information used in a business that gives the trade secret owner an opportunity to obtain an advantage over competitors who do not know it. The trade secret cannot be public knowledge.o Examples—Coca-Cola formula, proprietary blend

of chemicals

23

9

Trade Secrets—Obtaining Protection

If information is secret and reasonable measures are taken to keep it secret, it will be protected by law; there is no registration process

The law does not create a monopoly for use of the secret like other protections of intellectual property; it only protects the secret from being improperly appropriated

Unlike patents, trade secrets may be “reverse engineered,” thereby destroying the trade secret

24

Trade Secrets—Obtaining Protection

Businesses must take proper steps to ensure the security of their trade secrets, including:o Security within the plant or office;o Contractual safeguards, such as non-competition

agreements and confidentiality agreements, with employees and business partners; and

o Workplace controls to prevent the dissemination of trade secrets to individuals that do not need access to them—disclosure to one person, without confidence, may destroy a trade secret.

The more valuable the secret, the more security required for protection

25

Trade Secrets—Rights, Duration, & Misappropriation

Rights—The owner of a trade secret has the right to sue others for improperly acquiring the trade secret or breaching confidence regarding the trade secret. There is no right to prevent reverse engineering.

Duration—No limit as long as it qualifies as a trade secret

Misappropriation—The owner may sue if another has knowingly misappropriated the trade secret for his or her own gain or to harm the owner

26

10

Licensing Issues

Exclusive vs. Nonexclusive One or a few fields of use vs. all fields of

use Territory—Worldwide vs. geographic

restrictions Right to sublicense Royalty rate and sharing of sublicensing

revenues Term or duration

27

Licensing Issues in a University Setting

Inventor in University setting is required to disclose invention to University

University will evaluate and decide whether to patent

If University pursues patent it will become the owner of the patent

Inventor must then license the technology from the University in order to commercializeo Typically the University receives 40%, the Inventor

receives 40%, and Inventor’s Department receives 20%

28


University will frequently license a patent of a startup company owned by an inventor if the startup is serious about commercializing the technology:o Be a company rather than an individual inventoro Be capable of meeting market demando Have a written plan to commercialize the

technologyo Address conflicts of interest, such as time

constraints for faculty, influence over students, influence on junior faculty, effect on research

29

11


Due Diligence milestones Minimum royalty payments Repayment of patent costs advanced by

University Equity in startup to be taken by University? Issue fee License of trademarks otm.illinois.edu

30

Hot Topic—IP Agreements

It is important to execute agreements between a company and its founders, employees and independent contractors to ensure that any IP is either owned or assigned to the company

Key Termso Assignment of IPo Works Made for Hireo Confidentiality

Shop Right – Without proper agreements in place, an employer’s rights in an invention may be limited to a “Shop Right,” meaning the employer receives a royalty free right to practice the patent, but the employee would own the patent

31

Hot Topic—Open Source Software

Open Source software may reduce a company’s costs and increase revenues, but has many pitfalls

“Open Source” does not have a single definition, and includes many variations:o GPL, LGPL, Apache, BSD, MIT

Benefits of using open source software:o Reduce costs; develop user communities; create revenue

streams from servicing; “dual licensing” Risks of using open source licenses

o Use of small parts of open source software in a larger program may require you to license the larger program under a specific open source license; loss of control of your IP; some investors and acquirers disfavor the use of open source

32

12

Hot Topic—SBIR/STTR SBIR and STTR funds are an excellent resource for tech

companies, but proper IP management is important The following considerations should be taken:

o STTR – negotiate favorable IP terms with University partnero SBIR/STTR – negotiate favorable IP terms with any prime or sub

contractorso Proposals – identify and mark any confidential information or it

may be disclosedo Deliverables

― Review relevant FARs and DFARs― Identify eligible data and assert any restrictions on data rights― Maintain records to justify any restrictions

o Proper procedures can increase the likelihood of a sole-source Phase III award

33

Hot Topic—EULAs

EULA provides the terms under which the customer may use the softwareo Sale v. License

Generally “Shrink-Wrap” and “Click-Wrap” licenses are enforceable, but the following should be considered, depending on the circumstances:o Allowing the purchaser to have the option of returning

the software if it does not agree with licenseo The terms of the license should be visible prior to

acceptance (i.e., do not link terms)o Use of language such as “By clicking this button I

agree to the terms” should be used as opposed to “download”

34

Why do Companies Care about IP?

Freedom to Operate—Ensure that someone else’s IP will not prevent your company from carrying out its business objectives

Competitive Advantage—Protect your company’s IP to acquire a competitive advantage in the marketplace by precluding others from using it

35

13

IP Protection



(217 ) 352 -3900 phone(217 ) 352 -4900 fax

s ing le ton@sing le ton lawf i rm.comw w w.s ing le ton law f i rm.com

© 2 0 1 3 A l a n R . S i n g l e t o n

Patent Reform As of 8/17/2015

Alan R. Singleton, Esq. [email protected]

Research Park at the University of Illinois 2001 S. First St., Suite 209 Champaign, IL 61820 217-352-3900

1

Judicial:

Issue Case Prior Law Holding Effect

Permanent Injunctions

eBay v. MercExchange,

547 U.S. 388 (2006)

Irreparable damage is presumed in cases of

patent infringement, and a permanent injunction is

warranted absent exceptional

circumstances.

The general four-factor test for determining whether a

permanent injunction should issue outside the patent infringement context is

applicable to patent infringement cases. The factors courts

consider are: (1) irreparable injury, (2) insufficient remedies in law, (3) balance of hardships,

and (4) public interest.

It is more difficult to obtain a permanent injunction following

a finding of patent infringement. Lower courts have interpreted the case as

eliminating the presumption of irreparable damage, and some courts have refused to issue

permanent injunctions unless the patent owner manufactures a product and the infringer is a

competitor.

Declaratory Judgment Suits by

Licensees

MedImmune v. Genentech, 549 U.S. 118 (2007)

In order to bring a declaratory judgment action concerning the

validity or enforceability of a patent, a licensee must first terminate or

breach the license agreement.

A licensee is not required to terminate or breach a license agreement prior to bringing a declaratory judgment action.

Allows licensees to “pay and sue” and may encourage

litigation. Because of the low bar, patentees should be aware that a claim of infringement is likely sufficient to afford the alleged accused declaratory

judgment jurisdiction.

Obviousness KSR v. Teleflex,

550 U.S. 398 (2007)

Obviousness is determined by

application of the Teaching, Suggestion, and Motivation (TSM)

Test.

Although the TSM Test is relevant, obviousness is to be

considered in light of the more flexible Graham factors, and

requires: (1) a determination of the scope and content of prior art, (2) ascertainment of the

differences between the prior art and the claims, (3) a

determination of the level of ordinary skill in the pertinent art,

and (4) consideration of secondary factors such as

commercial success, long felt but unresolved needs, and failure

of others.

KSR lowers the burden that a PTO Examiner must meet to establish obviousness, which

makes it more difficult to both obtain a patent in the first

instance and defend against invalidity challenges after

issuance.

Extraterri-torial

Enforcement of U.S. Patents

Microsoft v. AT&T, 550 U.S.

437 (2007)

§ 271(f) of the Patent Act provides that, in

derogation of the general rule, infringement occurs

when one supplies a patented invention’s components from the U.S. for combination

abroad.

Software, in the abstract, is not a component under § 271(f),

although copies of software are. Therefore, because Microsoft

only supplied a master disk from which copies were made for

installation, it did not infringe on AT&T’s patent.

By narrowing the scope of §271(f), the Court has made it more difficult for holders of

U.S. patents to allege infringement for uses in foreign jurisdictions in which the U.S.

patent holders do not hold patent rights. This decision

may increase the need for U.S. patent holders to apply for

patent rights abroad.

2


Scope of Patent

Exhaustion Defense

Quanta Computer v. LG Electronics,

553 U.S. 617 (2008)

The doctrine of patent exhaustion, which

provides that a patented item’s initial authorized sale terminates all patent rights to that item, does

not apply to method patents.

The patent exhaustion doctrine applies to method patents when either of the following occurs:

(1) an authorized license is agreed upon or (2) a sale of

items that substantially embody the patent occurs.

By eliminating the exception of method patents from the patent

exhaustion doctrine defense, the ability of method patent

holders to enforce their rights against downstream infringers

is reduced. Method patent holders must rely on robust

protections through contracts for the sale or license of

products embodying their patents.

Willfulness Standard

In re Seagate, 497 F.3d 1360 (Fed.

Cir. 2007)

Willful infringement requires a showing of

failure to exercise “due care.” When a potential infringer has notice of another’s patent rights, he has an affirmative duty of due care to

determine whether he is infringing (e.g. by

obtaining competent legal advice).

Willful infringement requires a showing of “objective

recklessness” by clear and convincing evidence, i.e. the

infringer acted despite an objectively high likelihood that

its actions constituted infringement of a valid patent.

By raising the standard for willful infringement and

reducing the need to obtain an exculpatory opinion of counsel, the court made it more difficult

for patent holders to prove willful infringement.

Patentable Subject Matter

Bilski v. Kappos, 561 U.S. __ (June

28, 2010))

A method or process is patentable under § 101 of the Patent Act if it is

tied to a particular machine or apparatus, or it transforms an article from into a different

state or thing. This is the machine-or-

transformation test.

The “machine or transformation” test is not the sole test for patent

eligible subject matter.

A method or process can be patentable even if it does not

pass the machine or transformation test. A method or process is not patentable if it

is an abstract idea.

Ownership of Inventions Made With

Federal Grant

Stanford v. Roche, 563 U.S. __ (June

6, 2011)

The Bayh-Dole Act allowed federal

contractors, i.e. research institutions and

universities, to “elect to retain title” to inventions

generated through federal funding.

Patent rights initially vests in the inventor and the Bayh-Dole Act

has not changed this.

For federal contractors such as research institutions and

universities to have title to an invention of an employee, there must be an actual assignment of

the invention rights. A contractual duty to assign is not

enough.

Patent Invalidity;

Standard of Proof

Microsoft v. i4i Limited

Partnership, 564 U.S. __ (June 9,

2011)

A patent is presumed valid, and the

presumption of validity can only be overcome by showing that the patent is invalid by clear and convincing evidence.

An invalidity defense must be proven by clear and convincing

evidence even where the defense is based on prior art not

considered by the Patent Office during examination of the patent

application.

The Court affirmed that when claiming patent invalidity as a

defense the defendant must prove invalidity by clear and

convincing evidence.


Mayo Collaborative

Services v. Prometheus

Laboratories, 566 U.S. __ (March

20, 2012)

A method or process can be patentable under §

101 of the Patent Act if it is tied to a particular

machine or apparatus, or it transforms an article into a different state or

thing.

A claim that recites a law of nature or natural correlation, in

combination with additional steps that are well understood, routine, conventional activity

previously engaged in by researchers in the field, is not

patentable.

A method or process claim that recites a law of nature or

natural correlation should have additional features or steps that are more than well understood, routine, conventional activity

previously engaged in by researchers in the field.

3



Association for Molecular

Pathology v. Myriad Generics, 569 U.S. __ (June

13, 2013)

Nonnaturally occurring manufactures and

compositions of matter are patent-eligible under § 101 of the Patent Act, but naturally occurring

phenomena are not.

An isolated DNA segment is a naturally occurring phenomenon and is not patent-eligible, but a

synthetically created complementary DNA molecule

is patent eligible.

Patent claims in the field of molecular biology should not claim isolated DNA segments, but may claim synthetic DNA molecules, innovative methods

of manipulating DNA molecules, etc.

Fee Shifting

Octane Fitness, LLC v. Icon Health and

Fitness, Inc., 572 U.S. __ (April 29,

2014)

In “exceptional” patent cases, courts may award

attorney fees to the prevailing party;

standards for finding cases to be “exceptional”

are high and rigorous.

Standards for finding patent cases to be “exceptional” are

now lowered; “exceptional” cases are those that stand out with respect to strength of a party’s litigating

position, or unreasonable manner of litigation.

Courts now have greater discretion to shift attorney fees in patent cases on a case-by-

case basis.

Invalidity for

Indefinite Patent

Claiming

Nautilus, Inc. v. Biosig

Instruments, Inc., 572 U.S. __ (June

2, 2014)

A patent claim cannot be invalidated for

indefiniteness as long as a court can reasonably

construe the meaning of the claim.

Current standard overturned; to meet the definiteness

requirement, a patent claim must inform those skilled in the art

about the scope of the invention with reasonable certainty.

The degree of clarity required in patent claims has been

heightened, and also depends on the specification and

prosecution history of the patent.


Alice Corp. Pty. Ltd. v. CLS Bank Intern., 573 U.S.

__ (June 19, 2014)

Rulings on the patent eligibility of computer-implemented methods

are conflicted and inconsistent, particularly on appeal at the Federal

Circuit.

An abstract idea that is not patent-eligible by itself does not become patent-eligible solely by

implementation on a “generic computer.” Reiteration of Mayo

test for patent-eligibility.

A patent for a computer implementation of an abstract

idea must claim not just applying the idea to a “generic

computer” but also include some additional feature, like

improving the computer’s function or solving a

technological problem.

Claim Construction

in Patent Litigation

Teva Pharmaceuticals

USA, Inc. v. Sandoz Inc., 574 U.S. __ (January

20, 2015)

When a trial court makes rulings on the meaning

and scope of patent claims, no deference is

given to those rulings on appeal.

Claim construction is a question of law and remains subject to no deference on appellate review;

however, when the claim constructions are supported by

subsidiary factual findings based on extrinsic evidence, those

findings are entitled to greater deference, and can only be

overturned if made in clear error.

It may now be more difficult for patent claim constructions

by a trial court to be overturned on appeal under some

circumstances, but only if the trial court relied upon extrinsic

evidence to arrive at those claim constructions.

Liability for Inducing

Third-Party Infringement

Commil USA, LLC v. Cisco Sys., Inc., 575 U.S. __ (May

26, 2015)

A defendant cannot be held liable for inducing patent infringement if

the defendant believed in good faith that the patent

is invalid, even if that belief was incorrect.

If a defendant’s belief that a patent was invalid was incorrect,

this belief does not serve as a defense to induced patent

infringement.

A business that sells products that may infringe a patent when

used by a customer cannot insulate itself from

infringement liability by preparing an invalidity opinion.

Patent Infringement

Akamai Technologies Inc.

v. Limelight Networks, Inc., No. 2009-1372

(Fed. Cir., August 13, 2015)

Even if a defendant does not perform all of the

steps of a patent method claim, it can be liable for direct infringement if the

remaining steps were performed through an agent, a contractual

relationship, or a joint enterprise.

A defendant can also be liable for direct infringement if it instructed another party to

perform the remaining steps as a condition of receiving some

service or benefit.

A business can now be liable for patent infringement as a

result of the actions of customers under the business’s

instructions or directions.

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America Invents Act, September 16, 2011:

The Patent Reform Act of 2011, also known as the Leahy-Smith America Invents Act (H.R. 1249), became law on September 16, 2011. The Act introduced many important changes to U.S. patent laws, some of which became effective upon enactment, while others did not take effect until at least one year after enactment. Below is a brief overview of some of the important provisions of the Act.

• First to File – The first inventor to file an application for patent on an invention is entitled to a patent. This is a change from the old law, which allowed a subsequent applicant to show that she is the first inventor and therefore entitled to a patent on the invention. The Act also establishes a Derivation Proceeding to allow an applicant who is not the first filer to challenge the claims of the first filer on the basis that the first filer derived the invention from the challenger. This provision applies to any application having an effective filing date on or after March 16, 2013.

This change in the law brings the U.S. patent system more in line with the majority of industrialized nations. It provides an incentive for an inventor to file earlier rather than later and to file before any disclosure of the subject matter of the invention is made to others. A first-to-file system can work to the disadvantage of a small business or independent inventor who may not have the financial resources to compete with larger companies, which may have the resources to file earlier and more prolifically. On the other hand, the change to a first-to-file system provides clarity and will perhaps reduce the need for costly inventorship disputes.

• Prior Art Exception – The Act provides inventors with a narrower one-year grace period to file a patent application where the subject matter of the application has already been disclosed to the public. This Prior Art Exception is narrow and only applies where the subject matter was disclosed by the inventor or someone who obtained the subject matter from the inventor. In contrast, the previous law provided a one-year grace period not only for disclosures originating from the inventor, but also for any disclosure (any patent or publication, any public use or sale in the United States), as long as it is made within one year of the date of filing. The narrower Prior Art Exception results in a broadening of the universe of prior art that can be applied against a patent application, thereby providing further incentive for an early filing.

Under the previous law, a sale or an offer for sale also provided for the one-year grace period. Under the current law, it is generally understood that sales or offers for sale (by the inventor or someone who obtained the subject matter from the inventor) still provide the one-year grace period, although some believe that this distinction may require clarification by courts.

• Post-Grant Review – Any person who is not the inventor can request that the patent office review the validity of an issued patent, within nine months of patent issuance, on any grounds of patentability. This is effective one year from the date of enactment and applies to all patent applications.

• Inter Partes Review – Any person who is not the inventor can request that the patent office review the validity of an issued patent, after nine months from patent issuance, for novelty and non-obviousness based on prior art patents and printed publications only. This is effective one year from the date of enactment and applies to all patent applications.

• Third Party Pre-Issuance Submission & Comment – Any third party can submit to the Patent Office a publication thought to be relevant to a pending patent application. Only patents, published applications or other printed publications can be submitted. Submissions must be made within a certain time period. This is effective one year from the date of enactment and applies to all pending patent applications.

This provision enables the public to have an effect on the examination of a patent application, with the intended result being improved patent quality and reduced patent litigation expenses.

5

• Supplemental Examination – This allows a patentee to request that the Patent Office consider, reconsider or correct information in a patent if the patentee has information that raises a substantial new question of patentability. This is effective one year from the date of enactment and applies to all patents.

• Micro-entity – A new class of applicants are eligible for further reduced fees. A micro-entity must: (1) qualify as a small entity, (2) the inventor must have no more than four previously filed patent applications, (3) have a gross income below a designated level and not have transferred ownership to an entity with income exceeding this limit. This provision is effective on the date of enactment.

• Best Mode – The failure to disclose the best mode is no longer a basis to establish that a claim is invalid or unenforceable. This provision is effective on the date of enactment and applies to proceedings that commence on or after the date of enactment.

• Prior User Rights – Any party using an invention before another files a patent application will have a patent infringement defense based on prior use.

• Markings – Virtual marking, i.e. a marking that directs the public to a freely accessible website showing a patented article and its patent number, can now be used to give the public notice that an article is patented. This provision is effective on the date of enactment and applies to all cases pending on the date of enactment or commenced on or after the date of enactment.

• False marking – Only the U.S. government can bring a lawsuit seeking a penalty for false marking, and only a person who has suffered a competitive injury from false marking can file a civil action to recover damages.


Large EntitySmall Entity (paper filing)

Small Entity (electronic

filing) Micro Entity

$1,600.00 $800.00 $730.00 $400.00

$960.00 $480.00 $480.00 $240.00

$1,600.00 $800.00 $800.00 $400.00

$3,600.00 $1,800.00 $1,800.00 $900.00

$7,400.00 $3,700.00 $3,700.00 $1,850.00$15,160.00 $7,580.00 $7,510.00 $3,790.00

$420.00 $210.00 $210.00 $105.00

$80.00 $40.00 $40.00 $20.00

$260.00 $130.00 $130.00 $65.00$260.00 $130.00 $130.00 $65.00


[email protected]

2001 South First Street, Suite 209 Champaign, IL 61820 217-352-3900

USPTO Patent Filing Fees (Effective Jan. 1, 2014)

Maintenance Fee – 3.5 yrs.


Total Fees

Total Fees


Utility Patent Application, Issuance, and Post-Issuance:

Provisional Patent Application:

Filing Fee (Including Search and Examination Fees)

Additional Claims Fees (per independent claim beyond first 3)Additional Claims Fees (per claim beyond first 20)

Filing Fee

Issue Fee

Note: The above information is accurate to the best of our knowledge and based on numbers published on the USPTO website as of 1/8/2014. Actual fees may vary based on individual situations.



[email protected]

Application Under 1(a)

Intent to Use Application Under 1(b)

$375.00 $375.00

$325.00 $325.00

$275.00 $275.00

$225.00 $225.00

$100.00

$150.00Minimum Filing Fees $225.00 $325.00

$100.00 $100.00

$100.00 $100.00

$300.00 $300.00

$100.00 $100.00

3 The §8 Affidavit and Renewal Applications may be filed up to six-months after their respective deadlines with the payment of the late fee.

Renewal Fees

Request for Six-month Extension of Time to File Statement of Use

Statement of Use

2 Must be filed within one year of each ten year anniversary of registration, e.g. years nine and ten, nineteen and twenty, and so on, provided that the mark is still being used in commerce.

Basic USPTO Trademark Filing Fees (effective Jan. 17, 2015)

Application and Prosecution Fees

Application per International Class (electronic filing, TEAS)

Application per International Class (paper filing)



Application for Renewal Late Filing Fee3

Application for Renewal2§8 Late Filing Fee3

§8 Affidavit of Use1

Application per International Class (electronic filing, TEAS Reduced Fee)

Notes: The above amounts represent only the USPTO Filing Fees, and do not include professional time necessary to prepare and prosecute trademark applications. The above information is acurate to the best of our knowledge and based on numbers published on the USPTO website as of 1/12/2015, and is subject to change. Actual fees may vary based on individual situations

1 Must be filed between the fifth and sixth year anniversary of registration, and therafter within one year of each successive ten year anniversary of registration, e.g. between years nine and ten, nineteen and twenty, and so on, provided that the mark is still being used in commerce.

Application per International Class (electronic filing, TEAS Plus)

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The Small Business Innovative Research (SBIR) Program:Intellectual Property & SBIR Awards

Presentation Outline

I. The SBIR Program― General Information

II. Qualifying for SBIRIII. The SBIR Process

― Proposals― Phase I― Phase II― Phase III & Sole Source Awards

IV. IP Rights in Government Contracting GenerallyV. IP Rights & SBIR

― Types of Data Rights Unlimited Data Rights SBIR Data Rights Limited Data Rights Restricted Data Rights

― Protecting IP within the SBIR Program

I. The SBIR Program

The SBIR Program provides funding for early stage R&D that serves a need and has the potential for being commercialized in the private sector.

Participating Agencies Include:―USDA, DoC, DoD, ED, DoE, NSF, HHS, DHS,

DoT, EPA, & NASA

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SBIR- Objectives

The objective of the SBIR Program is to increase the participation of small businesses in meeting federal research and development needs.

The SBIR Program is also meant to increase small business commercialization of technology through the use of federal research and development funds.

Small Business Administration

The SBIR Program is administered by the U.S. Small Business Administration (SBA).

The SBA is an independent government agency whose mission it is to aid, counsel, assist, and protect the interests of small business concerns, to preserve free competitive enterprise, and to maintain and strengthen the overall economy of our nation.

The Small Business Technology Transfer (STTR) Program

Involves a small business cooperating with a non-profit research institution (usually a public University).

Most of the information applicable to the SBIR program is likewise applicable to STTR.― Intellectual property rights between the small

business and the research institution must be governed by private agreement between the parties.

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SBIR - Benefits

Awards are grants, not loans. Significant opportunity due to number of

agencies that participate in the program. Alternative to venture capital funding. Establishes credibility for small business, which

can, in turn, attract future venture capital funding.

Establishes a position from which it is possible to become a sole source provider.

Small businesses generally retain IP rights.

Agency Differences: Grants v. Contracts

Grant Contract

Agencies USDA, ED, DoE, HHS, & NSF DoC, DoD, ED, HHS, DHS, DoT, EPA, & NASA

Mission Promote R&D to benefit society and the economy of

the nation.

R&D is meant to satisfy a specific need of the contracting agency.

Control Business has control over thrust of the R&D and

approach taken.

Agency defines the plan, protocols, and objectives

of R&D itself.

Commercialization Opportunities usually come from outside of the agency itself, often in the private

sector.

Opportunities usually come from the contracting

agency itself.

Agency Differences

Some agencies (non-DoD) use FARS and others (DoD) use DFARS.

It is important to check agency websites for individual SBIR programs and the rules governing such.

All agencies are different!

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II. Qualifying for SBIR

In order to qualify for an SBIR award, a small business must meet certain required criteria-― Business must be independently owned and

operated, and organized for profit.― Business, including its affiliates, must have fewer

than 500 employees.― Business’ principal place of business must be

located within the United States. ― Business must be a minimum of 51% owned and

controlled by one or more persons who are citizens of, or permanent residents in, the United States.

Qualifying for SBIR Cont’d

― In the performance of an SBIR award all R&D must be performed in the United States.

― Small business must perform at least 67% of the work under SBIR Phase I, and at least 50% of the work under Phase II.

― The Primary Researcher must be at least 51% employed by the small business receiving the SBIR award, and must work a minimum of three hours per week, and at least one calendar month total on any Phase I award.

III. The SBIR Process- Proposals

Participating agencies solicit proposals regarding research and development topics that they are interested in.―Unsolicited proposals are NOT accepted

Proposals are judged in two stages-― Required Qualifications― Evaluative Process

Typically, about one in five proposals wins an SBIR Phase I award.

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The SBIR Process- Phase I

SBIR Phase I is the Potentiality/Feasibility study stage.

Phase I is typically a period of six months or less.

Phase I awards typically range from $75,000 to $150,000 depending upon the agency providing the award.

The SBIR Process- Phase II

SBIR Phase II is the concept development stage.

Phase II is an outgrowth of Phase I.Awards are typically for a period of up

to two years.Awards generally range from $300,000

to $1,000,000.

The SBIR Process- Phase III

SBIR Phase III is the commercialization stage.

Phase III is work that derives from, extends, or logically concludes effort(s) performed under SBIR funding agreements.

Funding must come from outside of the SBIR Program.

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Advantages of SBIR Phase III

No limits on: number of Phase III awards, duration or amount of the funding agreement, amount of time that can elapse between Phases I or II and Phase III, amount of time that can elapse between one Phase III award and another Phase III award, type of funding agreement, or size of the business receiving the award.

Phase III may be funded by a different federal agency than funded Phases I or II.

SBIR Phase III & Sole Source Awards

Sole Source Awards are contracts for the purchase of supplies or services that are entered into by an agency after soliciting and negotiating with only one source.

SBA encourages the agency to award Phase III to the small business that completed Phases I or II as a sole source award, but the agency is not required to do so.

SBIR Phase III & Sole Source Awards Cont’d

Sole source awards under Phase III are still considered SBIR awards, which is very important due to the implications this has on protecting IP rights.

By properly marking their IP the small business can increase the likelihood of receiving a Phase III award due to the technological monopoly they may have as a result.

If the Government wishes to use the technology they must contract with the owner of the IP, usually in the form of a sole source award.

-Govt can’t use SBIR Data for procurement.-Must deal with the holder of the SBIR Data Rights.

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SBIR Phases- Summary

SBIR Phase I SBIR Phase II SBIR Phase III

Funding $75,000 -$150,000

$300,000 -$1,000,000

No limit on funding amount. Must come from outside of the SBIR Program

Duration 6 Months 2 Years No limit on duration.

Purpose / Stage

Feasibility / Potentiality

Concept Development

Commercialization

IV. Intellectual Property and the Federal Government

General Rule-―When IP is created with federal funding, whether

through a grant, contract, or cooperative agreement; the contractor will retain title to the IP and the Government will receive a nonexclusive, royalty-free license to use the IP for governmental purposes.

FARS & DFARS govern IP allocation between the Government and private contractors.

V. Intellectual Property Rights & SBIR

Under SBIR the Government has several different types of data rights depending upon which category of data the material falls into.―Unlimited Data Rights―SBIR Data Rights―Limited Data Rights―Restricted Data Rights

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Unlimited Rights Data

In certain qualifying data, known as Unlimited Rights Data, the Government has the right to use, modify, reproduce, release, perform, display, or disclose technical data or computer software, in whole or in part, in any manner and for any purpose, and to have or authorize others to do so.

If possible, the small business should attempt to categorize their data as anything except Unlimited Rights Data

Unlimited Rights Data Cont’d

FARS DFARSUnlimited Rights Government receives

Unlimited Rights to all data that is not SBIR Data, Limited Data, or Restricted Data

Government automaticallyreceives Unlimited Rights in-OITM Data, Changes/Corrections to technical data or computer software provided by the Government, FFF Data, Data to which the Government already has unlimited rights, Publicly available data, & Expired SBIR Data

SBIR Data Rights

SBIR Data - Govt, including its support service contractors, obtains a royalty-free license to use, modify, reproduce, release, perform, display, or disclose technical data or computer software generated and delivered under the contract for any Government purpose (except procurement).

Does not prevent the Government from disclosing data to its support service contractors who could conceivably be the small business’ competitors.

- Anyone to whom the data is disclosed is bound by the SBIR Data Rights, however, and must also sign a non-disclosure agreement. - Can only use the data for governmental purposes, not

commercial purposes. - Government cannot disclose data for procurement purposes.

- Small business retains all rights to commercial applications but may potentially be placed in competition for future Government contracts, such as Phase III awards.

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SBIR Data Rights Cont’d

Technical Data in the SBIR context is defined as-―Any recorded technical information

developed in the performance of the SBIR award. Reports Diagrams, Drawings, and Charts Invention disclosures Software documentation Probably does not include prototypes/samples

SBIR Data Rights Cont’d

FARS DFARSSBIR Rights Government receives SBIR

Data Rights in data that is not generally known or made available to othersand is first produced by a contractor under an SBIR award.

Government receives SBIR Data Rights for all technical data generated under the contract and not among the data to which the government automatically receives Unlimited Rights.

Duration 4 years after the completion of the last SBIR award.

5 years after the completion of the last SBIR award.

Acquiring/Selling SBIR Data Rights

If another business acquires the SBIR business, the acquiring business then owns the SBIR Data Rights provided that the SBIR Data Rights were part of the overall acquisition.

The SBIR business can sell its Data Rights without selling the company and the acquiring business can then assert the SBIR Data Rights themselves.

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Limited Rights Data

Under both FARS and DFARS Limited Rights Data is technical data that is developed exclusively at private expense.

Limited Rights only allow the Government to use and disclose the Limited Rights Data within the Government, with few exceptions.

Restricted Computer Software (FARS)Restricted Rights Data (DFARS)

Non-commercial computer software developed exclusively at private expense.

Restricted Rights only allow the Government to use and disclose the Restricted Rights Data within the Government with few exceptions.

Government Data RightsUnlimited Data Government has the right to use, modify, reproduce, release, perform,

display, or disclose data, in whole or in part, in any manner, and for any purpose, and to have or authorize others to do so.

SBIR Data

<will convert to Unlimited Data 4 (FARS) or 5 (DFARS) years from completion of last SBIR >

Does not prevent Govt from disclosing data to its support service contractors who could be the small business’ competitors.- Anyone to whom the data is disclosed is bound by the SBIR Data Rights, however, and must also sign a non-disclosure agreement.- Can only use the data for governmental purposes, not commercial purposes.- Government cannot disclose data for procurement- Small business retains all rights to commercial applications but may potentially be placed in competition for future Government contracts, such as Phase III awards.

Limited Data Government can only use and disclose data outside the government in certain exceptional circumstances. (developed at private expense)

Restricted Data Government can only use and disclose data outside the government in certain exceptional circumstances.

Government Data Rights- Summary

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FARS v. DFARS- Summary

FARS DFARSUnlimited Rights All data not specifically excluded

by other provisions of FARS; Data that is not SBIR, Limited, or Restricted Data

OTIM Data, Changes/Corrections to Government data, FFF Data, Publicly available data, Expired SBIR Data

SBIR Rights Data that is not generally known or made available to others and is first produced by a contractor under an SBIR award.

Technical data generated under contract and no among the data to which the Governmentautomatically receives Unlimited Rights

Limited Rights Technical data developedexclusively at private expense.

Technical data developedexclusively at private expense.

Restricted Rights Non-commercial computer software developed exclusivelyat private expense.

Non-commercial computer software developed exclusively at private expense.

Protecting Intellectual Property

In order to protect IP, a business must mark all proprietary data that is protectable before it is delivered to the agency.

Correctly marking data as proprietary is absolutely essential to maintaining IP rights over such data.

Protecting IP - Night Vision (Case Study)

Night Vision v. United States is a perfect example of why properly protecting proprietary data is so vital.

Night Vision involved a SBIR Phase II award for night vision goggles (NVG).

Upon delivery Night Vision marked its data as proprietary but failed to do so in accordance with DFARS provisions.

USAF provided competitors with data during solicitation of bids to produce NVG.

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Protecting IP - Night Vision Cont’d

One of Night Vision’s competitors was Insight Technology, a subcontractor during the Phase II award.

By improperly marking their proprietary data the Government obtained Unlimited Data Rights as a result.

Government was within its rights to provide Night Vision’s competitors with the data and Insight ended up getting the Government contract.

The court refused to create an exception to strict compliance with the marking requirements of FARS & DFARS.

Protecting IP - Proposals

It is important for a business considering making an SBIR proposal to take steps to protect their IP throughout the proposal process.

In order to protect IP contained within the proposal, the small business must correctly mark such material as proprietary, in accordance with the agency’s rules, FARS, or DFARS.

Protecting IP – Proposals Cont’d

When making a SBIR proposal a small business grants the Government the right to reproduce and use the material provided in the proposal for the sole purpose of evaluation.

If the agency decides to grant the business an SBIR award, the Government then has the right to use, modify, reproduce, release, perform, display, or disclose the material provided in the proposal within the Government

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Protecting IP - Deliverables

The culmination of an SBIR Phase is when the small business delivers the final product/data to the agency.

In order to properly protect their IP businesses must first identify the types of data that it is delivering to the agency, and then properly mark protectable data as proprietary.

Protecting IP- Deliverables Cont’d

FARS DFARSDeliverable Data Business must

furnish agency with UnlimitedRights Data, SBIR Data, and any other data specifically required by the contract.

Business must provide the agency with all data, regardlessof which category the data falls into.

Protecting IP- Subcontractors

If a subcontractor is used in the performance of an SBIR award another relationship is created and IP must be allocated between the parties through private agreement (FARS and DFARS do not apply to the relationship).

Private IP Agreements must address several important issues-― IP Ownership― Right to conduct follow-up research― Right to any awards stemming from that research― Responsibility for expenses― Confidentiality and non-disclosure provisions

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Protecting IP – Additional Protections

Agencies may not make the issuance ofan SBIR award, including Phase III,conditional on the small business waivingtheir data rights.

Links to SBIR Resources/Websites

SBA Resources (www.sba.gov) SBA Proposal Handbook

(osbdc.org/Documentmaster.aspx?doc=1036) USDA (www.csrees.usda.gov/funding/sbir/sbir.html) DoC (oar.noaa.gov/orta) (nist.gov/sbir) DoD (dodsbir.net/) (www.acq.osd.mil/osbp/sbir) ED (ed.gov/programs/sbir) DoE (http://science.energy.gov/sbir) HHS (http://grants1.nih.gov/grants) DHS (https://sbir2.st.dhs.gov/portal/SBIR) DoT (www.volpe.dot.gov/sbir) EPA (es.epa.gov/ncer/sbir) NASA (sbir.gsfc.nasa.gov/SBIR) NSF (nsf.gov/eng/iip/sbir)

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The Small Business Innovative Research (SBIR) Program:

Protecting Intellectual Property During SBIR Awards

Section: Table of Contents

INTELLECTUAL PROPERTY AUDIT CHECKLIST Alan R. Singleton


Contents

Establishing the Goals of Your Audit ............................................................................... 2 Identification of Potential Intellectual Property ................................................................. 3 Classification of Intellectual Property............................................................................... 5 Identification of the Documents Relating to Intellectual Property .................................... 8 Examination of the Documentation ................................................................................. 9 Identify Owners ............................................................................................................. 11 Confirming Validity ........................................................................................................ 12 Retrospective Protection of Identified Intellectual Property ........................................... 14 Prospective Protection of Intellectual Property .............................................................. 21 Methods for Conducting the Audit ................................................................................. 27 Final Product ................................................................................................................. 28

1 Alan R. Singleton

Singleton Law Firm, P.C. Research Park at University of Illinois

2001 S. First St., Suite 209, Champaign, IL 61820 217-352-3900 [email protected]

www.singletonlawfirm.com

http://www.singleton.law.pro/

Section: Establishing the Goals of Your Audit

Establishing the Goals of Your Audit Why are you conduction an audit?

□ Establishing procedures? □ Preparing for a sale, purchase or license? □ In contemplation of litigation? □ Making sure all IP is “in the box.”

What will the scope be? What assets will be involved?

□ Broad Overall review of procedures and policies Developing an index of all intellectual property

□ Narrow Focus on a specific asset for purposes of sale, purchase or license

□ Generic Overview of IP Sources

What do you want the final product of the audit to be?

□ Comprehensive snapshot of your intangible assets and related procedures? □ List of new procedures to be implemented? □ Index of catalogue of all intangible assets? □ Phone call or in person meeting for items where it would be better not to

reduce the findings to writing.

2 Alan R. Singleton





Section: Identification of Potential Intellectual Property

Identification of Potential Intellectual Property Identify all potential intangible assets; each element of the Company’s:

□ Inputs Independent contractors Suppliers Vendors Customers Third party research

□ Resources and processes

Identify the source(s) of each of the Company’s: • Processes & production information, know-how & negative

know-how • Machines & manufacturing information • Customer lists & confidential customer information, reports &

analyses • Operation & design manuals • Designs, drawings diagrams & artwork • Ideas & plans • Technology information • Formulas & calculations • Compounds • Prototypes • Laboratory notebooks & experiments • Experimental, analytical & design data • Vendor & supplier information • R&D information, reports, know-how & negative know-how • Cost, price, profit, loss & margins data, reports & analyses • Quality control information, procedures, manuals & records • Maintenance know-how & negative know-how • Sales & marketing information, reports, forecasts & plans,

advertising materials • Financial information, documents, budgets & forecasts • Computer printouts, operating reports • Administrative & managerial information, key decision

makers, internal organization • Computer software & source code • Creative individual works & collaborative works

3 Alan R. Singleton






□ Outputs Identify all potential marks for company products/services by

reviewing packaging, marketing literature and advertising. Identify all creative works. Identify all potentially proprietary information reports, data &

analyses resulting from processes, R&D, management, marketing and customer relations.

□ Relationships

What inputs and internal sources are related to the corresponding outputs?

4 Alan R. Singleton





Section: Classification of Intellectual Property

Classification of Intellectual Property Intangibles can be protected if they fit under any one of the following categories:

□ Trade Secret Is it generally known or readily ascertainable?

• If yes, then there is no trade secret as trade secret law only protects information that is not generally known and not readily ascertainable

Trade secret generally must also be the subject of reasonable efforts to maintain secrecy and must have commercial value.

Public disclosure to one person may destroy the secret if it becomes generally known.

Reverse engineering, independent development and availability in public materials can make the information readily ascertainable.

□ Copyright

Is it a fixed and original work of authorship? • If yes, then there is copyright as copyright law only protects

fixed and original works of authorship Copyright protection is generally available for the life of the author

plus 70 years for individuals, or the shorter of 95 years from the date of publication or 120 years from date of creation for corporations or works for hire.

Copyright protection is not available for de minimis contributions (words, titles, short phrases and ornamentation), facts (including research and history), forms (format, layout and style), color, typeface, photographic subjects, athletic events, scenes a faire (common themes and plots), ideas procedures, processes, systems, methods of operation, concepts, principles, discoveries and government works.

Originality requires some amount of creativity from an original author.

Copyright protection is unavailable for useful pictorial, graphic or sculptural works when the form and function of the article are inextricably intertwined such that the utilitarian aspects of the design are not physically or conceptually separable from the artistic expression.

• Pictorial, graphic, and sculptural works include two-dimensional and three-dimensional works of fine, graphic, and applied art, photographs, prints and art reproductions, maps, globes, charts, diagrams, models, and technical

5 Alan R. Singleton






drawings, including architectural plans. Such works shall include works of artistic craftsmanship insofar as their form but not their mechanical or utilitarian aspects are concerned; the design of a useful article, as defined in this section, shall be considered a pictorial, graphic, and sculptural work only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified from, and are capable of existing independently of, the utilitarian aspects of the article. 17 U.S.C. §101.

• An architectural work is the design of a building as embodied in any tangible medium of expression, including a building, architectural plans, or drawings. The work includes the overall form as well as the arrangement and composition of spaces and elements in the design, but does not include individual standard features. 17 U.S.C. §101. The copyright in an architectural work that has been constructed does not include the right to prevent the making, distributing, or public display of pictures, paintings, photographs, or other pictorial representations of the work, if the building in which the work is embodied is located or ordinarily visible from a public place. 17 U.S.C. §120.

A work can be fixed in a number of ways, including being painted on a canvas, written on a piece of paper, stored on a hard drive or recorded on a tape, video cassette, CD or DVD.

□ Trademark & Trade Dress

Is it a distinctive source identifier used on goods or services? • If yes, then there is a trademark as trademark law protects a

source identifier on goods or services. Trademark and trade dress protection can last forever, but they do

not extend to protect a non-reputation related disadvantage based on use, cost quality or efficiency.

A mark that is arbitrary (Apple for computers, Red Baron for pizza, Starkist for tuna and Dutch Boy for paint), fanciful (Exxon for gasoline, Kodak for film and Colgate for toothpaste) or suggestive (Greyhound for bus, Pepsi for soda, Snap-On for tools, Velveeta for cheese and Windex for glass cleaner) is protected upon its first use in interstate commerce; whereas, a mark that is merely descriptive (Apple for a fruit grower and Puppy Chow for dog food) of the product or services requires establishing secondary meaning in order to gain distinctiveness. A generic mark (Zipper for zippers, Aspirin for aspirin, Thermos for thermos or vacuum packed bottles,

6 Alan R. Singleton






Cellophane for cellophane and Cola for cola) is never protected; a mark can become generic through common use as a noun or verb.

Trade dress in the form of product packaging can be inherently distinctive, but product design requires establishing secondary meaning in order to gain protection.

□ Patent

Is it a new, non-obvious and useful idea? • If so, it may be eligible for a utility patent

Is it a new, original and ornamental design for an article of manufacture?

• If so, it may be eligible for a design patent Is it a distinct and new variety of plant that the inventor or

discoverer has asexually reproduced? • If so, it may be eligible for a plant patent

□ Utility patent

A utility patent protects a new, non-obvious and useful idea that is a process, machine, article of manufacture, composition of matter or improvement of any of the previous.

Laws of nature, physical phenomena, abstract ideas, copyrightable works are not patentable subject matters.

The invention is not new if: • The invention was in a printed publication, in public use, on

sale or otherwise available to the public anywhere in the world before the filing date of a patent application;

• The invention was abandoned; or • Then invention originated with someone else.

The invention is obvious if the difference between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains.

□ Design patent

A design patent protects a new, original and ornamental design that is applied or embodied in an article of manufacture.

□ Plant patent

A plant patent protects a distinct and new variety of plant that the inventor or discoverer has asexually reproduced.

7 Alan R. Singleton





Section: Identification of the Documents Relating to Intellectual Property

Identification of the Documents Relating to Intellectual Property

Identify all agreements between the Company and any third party □ License agreements □ Assignment agreements □ Maintenance agreements □ Distribution agreements □ Government agreements □ Employment agreements □ Consulting agreements □ Joint development agreements □ Technology transfer agreements □ Sponsored research agreements □ Non-disclosure agreements □ Non-competition agreements □ Work for hire agreements □ Contracts with independent contractors

Identify Filings and Registrations

□ All U.S. state and foreign IP applications □ Registration and recordation materials

Identify any other documents relating to IP rights

□ Contracts with suppliers and customers □ Correspondence relating to IP rights □ List of computer software owned by the company; including all versions

and source and object code, flow charts, other development documents □ Hiring and exit interview materials □ Publications and other documents □ Federal registration documents □ State commercial code filings □ Journal articles □ Published papers □ Competitive analysis documents □ Marketing files □ Confidential procedure documents and manuals

8 Alan R. Singleton





Section: Examination of the Documentation

Examination of the Documentation For each agreement, identify:

□ The parties to the agreement □ The rights being transferred □ The owner of any technology developed under the agreement □ The holder of any right to file a patent application on any technology

developed under the agreement Verify that:

□ Employees and others obtaining confidential information, secrets or inventions have signed confidentiality or non-disclosure agreements.

□ Employees and others in R&D have signed invention assignment agreements. Be sure that each assignment references the Illinois Employee

Patent Act (765 ILCS 1060/et seq.) and has the following language: “[This] agreement does not apply to an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and which was developed entirely on the employee's own time, unless[:]

• the invention relates o to the business of the employer, or o to the employer's actual or demonstrably anticipated

research or development, or • the invention results from any work performed by the

employee for the employer.” □ Employees and others obtaining confidential information, secrets, or

inventions which can be used by competitors have signed non-competition agreements. In Illinois, non-competition agreements are enforceable when the

limitations as to time and territory are not unreasonable, enforcement will not be injurious to the public or cause undue hardship to the employee, and the restraint imposed is not greater than is necessary to protect a legitimate business interest of the employer.

Illinois law now requires employers to offer consideration additional to mere employment, such as additional salary, bonus, promotion, or 2 years of continuous employment, before non-competition agreements can be made enforceable. Fitfeld v. Premier Dealer Services, Inc.

9

Alan R. Singleton Singleton Law Firm, P.C.

Research Park at University of Illinois 2001 S. First St., Suite 209, Champaign, IL 61820 217-352-3900 [email protected]



Section: Examination of the Documentation

□ Agreements have arbitration or other dispute resolution language as appropriate to avoid costly litigation.

10 Alan R. Singleton





Section: Identify Owners

Identify Owners For each piece of intellectual property, identify the owner(s):

□ The company? □ Customers? □ Vendors? □ Independent contractors? □ Employees? □ Corporate owners? □ Competitors? □ Joint works? □ Co-inventors?

Search for Indicators of Clouded Title:

□ Filed financing statements □ USPTO and Copyright Office title searches □ State filings □ Foreign filings □ Filings with domain name registrar (i.e., Network Solutions, Inc.)

Search for Assignment of Intellectual Property Rights

□ USPTO assignment database (for Trademark and Patent information) Trademark assignments must assign the goodwill along with the

mark itself. Patent assignment must be recorded to bind later innocent third

party purchasers. □ Copyright Office (for Copyright Assignments)

The author of a work other than a work made for hire generally has the right to terminate any license or assignment 35 years after the grant was made. The termination right cannot be waived in advance. If the author dies before the termination period begins, the termination right can be exercised by the author's heirs. 17 U.S.C. § 203.






Section: Confirming Validity

Confirming Validity Trade Secret

□ Not generally known? □ Not readily ascertainable? □ Subject of reasonable efforts to maintain secrecy? □ Commercially valuable?

Copyright

□ Fixed in a tangible medium of expression? □ Original work of authorship?

Not an unauthorized derivative work? Modicum of creativity?

□ Not expired? (life plus 70 for individuals and at least 95 years for corporations and works for hire)

□ Not a useful pictorial, graphic, or sculptural work with the form and function of the article inextricably intertwined such that the utilitarian aspects of the design are not physically or conceptually separable from the artistic expression?

□ Not a de minimis contribution, fact, form, color, typeface, photographic subject, athletic event, scenes a faire, idea, procedure, processes, system, method of operation, concept, principle, discovery, or government work?

Trademark & Trade Dress

□ Source identifier? □ Distinctive?

Not generic? If descriptive, then secondary meaning? If product design, then secondary meaning?

□ Used on goods in interstate commerce? □ Not used to protect a non-reputation related disadvantage based on use,

cost, quality, or efficiency? □ Not abandoned?

Still in use? Renewal fees paid?

Utility Patent

□ New? No anticipating reference before filing date? No public disclosure by inventor one year before filing date?






Section: Confirming Validity

Not abandoned?

True inventor? □ Non-obvious?

Consider scope and content of the prior art, difference between the invention and the prior art, and level of skill in the art.

Also consider commercial success, long felt but unsolved needs, failure of others, copying of patent, licensing, unexpected results, and disbelief of experts.

□ Useful? □ If patent is issued or in prosecution:

Sufficient disclosure to support the claims? No inequitable conduct before the patent office?

• All known relevant and non-cumulative references disclosed during patent prosecution?

• No fraud on the patent office? No double patenting? Application not abandoned? Expired for failure to pay maintenance fees? Expired due to its limited duration now typically but not always 20

years U.S. filing date? Design Patent

□ New? □ Original? □ Ornamental? □ Design for an article of manufacture? □ Expired due to its limited duration (currently 14 years from grant)?

Plant Patent

□ Distinct and new variety of plant? □ Successfully asexually reproduced by inventor or discoverer? □ Expired due to its limited duration (typically but not always 20 years from

the U.S. filing date)?






Section: Retrospective Protection of Identified Intellectual Property

Retrospective Protection of Identified Intellectual Property Patents

□ A U.S. patent application must be filed if at all within one year of any public disclosure of an invention.

□ Check the availability of international rights. Most countries bar the right to a patent if there is any publication before the filing date. Also, check any PCT applications to see if a U.S. application is due.

□ Inform patent owners of their rights and encourage owners to license, market, and use the invention.

□ Discovery of new prior art, errors in inventorship, confusing typographical errors, and other errors should be corrected on any pending patent application. A correct inventor or co-inventor is anyone who contributed to the

conception of a single claim. □ Verify that the patent owner’s rights (exclusive right to make, use, sell, and

offer for sale in the U.S., and to import into the U.S.) are not currently being infringed by performing a search of products on the marketplace.

□ Advise the client of the infringement and the benefit of negotiating with the infringer, and the consequences of not immediately suing for infringement (a six year presumption for laches and a six year limitation on damages under the statute of limitations). 35 U.S.C. § 286.

□ Verify that the proper prior art references have been disclosed, including real products in the marketplace, publications, and other evidence of knowledge, use, or sale of the invention in the U.S. (keeping in mind there is no duty to do a search of prior art).

□ Verify that the practice of a patented or patent-pending invention does not infringe any of the prior art patent references for that invention.

□ Verify that outgoing products are properly marked so that purchasers will have imputed knowledge of the underlying patent. To mark a patent, fix the word “patent” or the abbreviation “pat.”,

together with the number of the patent, or when, from the character of the article, this cannot be done, by fixing to it, or to the package wherein one or more of them is contained, a label containing a like notice. 35 U.S.C. § 287.

In the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement except on proof that the infringer was notified of infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice. Filing of an action for infringement shall constitute such notice. 35 U.S.C. § 287.







□ Inform inventors of the need to diligently reduce their currently conceived inventions to practice.

□ Timestamp or ask the inventors to date any documents or objects showing a possible date of conception or reduction to practice.

□ If possible and practical, use direct language instead of means-plus-function language or step-plus-function language in claims. Functional claiming is limited to the specification and equivalents at the

time of filing; whereas, direct claim language is entitled to the claim language and equivalents, including after-arising technology.

□ Verify that pending applications cover, if possible, later conceived competing products.

□ Consider any narrowing amendments to a patent application made during prosecution history. If the claim is amended and narrowed, then the patentee loses the

entire scope and equivalence between the amendment and the original unless the changes fall under a few narrow exceptions.

□ Verify that all new, useful, and non-obvious ideas disclosed in the patent application are claimed.

□ Verify that the inventor or owner documents any and all experimental use. □ Address any long delays (multiple continuations, continuations-in-part, and

requests for continued examination) for patent applications currently in prosecution.

□ Pay any maintenance fees due, and respond to any pending office actions. Maintenance fees are due three times after the patent issues, and they

cannot be paid early. These fees may be paid without surcharge between 3 years and 3 ½ years after issue (first maintenance fee), between 7 years and 7 ½ years after issue (second maintenance fee), and between 11 years and 11 ½ years after issue (third maintenance fee). 35 U.S.C. § 41(b).

Maintenance fees may be paid with a surcharge between 3 ½ years and 4 years after issue (first maintenance fee), between 7 ½ years and 8 years after issue (second maintenance fee), and between 11 ½ years and 12 years after issue (third maintenance fee). 35 U.S.C. § 41(f); 37 C.F.R. § 1.20.

Failure to pay the current maintenance fee on time may result in expiration of the patent. It may be possible to pay the maintenance fee after expiration where the delay is shown to the satisfaction of the Director to have been unavoidable or unintentional. 37 C.F.R. § 1.20.

Maintenance fees are not required for any plant patents or for any design patents. 37 C.F.R. § 1.362.

□ Document profits and sales figures for products based on the patent.







Trademarks □ Verify that trademarks for company products or services have been

registered at: Federal level (USPTO) State level (Secretary of State’s Office) (not necessary to sue in federal

court) Foreign (USPTO via Madrid Protocol) Verify that the class or classes in which the mark is requested matches

the marks correct use □ Verify that the Company’s trademarks are being properly used. The latest versions of the marks are being used. Any licensees of the mark are supervised for quality control.

□ Determine whether and in what manner others are using the Company’s trademarks. Conduct searches on the Internet (Google or Bing are recommended)

to investigate how the Company’s marks are being used. Determine whether this use exposes the Company to risk of loss of

value of the trademark by it becoming generic or being otherwise misused.

□ Conduct the following trademark searches: Federal level - USPTO database State level - Secretary of State’s Office Common Law Usage - Google, Bing, and other search engines Commercial Databases such as TRADEMARKSCAN in Westlaw Outside search firm such as Dialog or Thomson CompuMark

□ Verify that the ™ or SM (common law notice) or ® (notice of federal registration) notice is properly displayed on all: Company literature displaying or discussing the product or service Promotional/marketing materials displaying or discussing the product

or service Advertisements for the product or service Websites displaying or discussing the product or service In-house publications displaying or discussing the product or service. Products or services

□ Verify that there are licensing agreements in place with any parties that may need to use company trademarks, such as distributors, suppliers (for example, putting logos on shopping bags).

□ Verify that the Company has received permission to use the marks of others and is using them properly.

□ Verify that sales figures are available for the amount of goods or services sold under each mark.







Copyrights □ Verify that copyrighted material is properly marked to put others on notice

of copyright (e.g., © 2007 Joe Smith or Copyright 2007 Jane Jones). □ Verify that important copyrights have been properly registered or that

registration has been sought with the Copyright Office (e.g., instruction manuals for products, drawings, books, etc.).

□ The use of a copyright notice was mandatory on all published works before March 1, 1989. Verify that such notice was present.

□ Verify that employment agreements stipulate that all work by employees is done on a “work for hire” basis and all copyrightable work belongs to the Company and that the employee will create any assignments requested by the company.

□ Verify that written work for hire agreements accompany any copyrightable work created by independent contractors for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas.

□ Verify that all copyrightable work created by independent contractors has been assigned to the company and that the assignment has been filed with the Copyright Office.

□ Verify that any assignments over 35 years old have been re-assigned to the Company by the author. 17 U.S.C. § 203.

□ Verify and document the Company’s permission to use the copyrightable material of others’: Graphics Artwork Photographs Character drawings Other original & fixed expression

Trade Secrets □ Physical Security Measures & Notice What are the facility’s physical security precautions, such as a fenced

perimeter of the Company premises, limited entries and exits, alarms and self-locking doors, and after-hours security personnel?

Are there “KEEP OUT” and “AUTHORIZED PERSONNEL ONLY” signs at the access points to sensitive areas of the facility, and is there a policy of enforcing these restrictions?

What keeps visitors from obtaining confidential information? Are ingredients or data secretly coded or encrypted? Are drawers or areas for secret documents and drawings separated

and locked? 17






Are there physical barriers that prevent unauthorized viewing of proprietary process technology?

Are there sign in and sign out procedures for accessing and returning sensitive materials?

Are sensitive documents reproduced in only a limited number, and is there a policy to collect all copies after use?

Are authorized codes and passwords used for access to copying machines and computers?

Is computer data stored and transmitted in an encrypted, secure manner?

Are there policies and procedures to destroy (shred) sensitive documents rather than discarding them in whole?

Are confidential drawings and documents marked as confidential with a stamp, watermark, or confidentiality legend?

Employee Policies

□ Are employees subject to non-competition agreements? Scope reasonable (length of time, geographical area)? Would enforcement of the non-competition agreement be injurious to

the public or cause undue hardship to the employee? Is the restraint imposed greater than necessary to protect a legitimate

business interest of the employer? Is the non-competition agreement supported by consideration

additional to mere employment? Has each employee signed a confidentiality agreement or a non-

disclosure agreement? What are the company’s oversight policies and procedures that

prevent the inadvertent disclosure of trade secrets in written publications, seminars, speaking engagements, or at trade shows, by employees?

Are Company departments separated so that each employee does not have access to unnecessary confidential information?

Are components of trade secrets separated between or among departments so that each has only “a piece of the puzzle?”

Is the Company using confidential or proprietary information from a competitor brought in by an employee?

Are there written rules and regulations that prohibit employees from remaining in the plant after hours without express permission from properly authorized personnel?

Are there rules and regulations requiring employees to stay in controlled areas around their work stations?

18






Are employees required to wear identification badges or carry identification cards?

Is there a policy and practice for advising employees on a regular basis regarding the Company’s trade secrets and confidential business information?

Does the Company hold “exit interviews” to ensure return of company documents and to remind ex-employees of their obligation not to use confidential information of the Company for their own benefit or the benefit of others?

□ Third Party Communications Have trade secrets been disclosed on public material, including

advertisements, the Company’s website, and posters or billboards at the front of the office?

Have trade secrets been disclosed in patent or copyright applications? Has each third party recipient of confidential information signed a

confidentiality agreement or a non-disclosure agreement? Have trade secrets been maintained on a “need-to-know” basis only? Review the relationships with suppliers and customers

Purchase order terms and conditions Sales terms and conditions Forms used for receipt, disclosure or exchange of

proprietary/confidential information Protocol for receipt of unsolicited ideas Documents containing info relating to confidential

information

Domain Names □ Compile a list of all domain names that are: currently registered and active inactive and no longer used list of domain names the Company is considering using in the

immediate future □ Determine whether there have been any assignments made with respect

to domain names □ Search major domain name registries to verify ownership of each domain

name listed by the Company □ Search for domain names confusingly similar to any of the Company’s

mark. Determine whether any such domain name was acquired before or

after the Company acquired rights in the mark. Determine whether any such domain name was acquired with a bona

fide noncommercial or fair use of the mark in the domain name. 19






Determine whether any such domain name was acquired with an intent to divert consumers from the Company’s online location in a manner that could harm the goodwill represented by the Company’s mark.

Determine whether any such domain name is for sale, and whether the sale price is reasonable.

Determine whether any such domain name was acquired through the provision of misleading contact information.

Determine whether any such domain name was purchased along with other domain names that were confusingly similar to the Company’s marks or the marks of others.

Evaluate the distinctiveness and fame of the subject mark.






Section: Prospective Protection of Intellectual Property

Prospective Protection of Intellectual Property Review of Policies and Procedures

General

□ Verify that confidentiality agreements/non-disclosure agreements are required for: All employees Only certain employees Consultants Independent contractors Distributors Suppliers Visitors and maintenance workers

□ Verify that those incapable of consenting to a confidentiality agreement are not allowed to receive confidential information (i.e., children under the age of 18).

□ Verify that exit interviews are required for all employees. □ Require dated Inventor/Lab notebooks for all potential inventors. □ Determine whether there is a communication process for

inventors/developers to share research developments with counsel □ Determine whether there is a system in place that encourages employees

to report infringement, misappropriation, or theft.

Patent □ Determine whether there is a process that ensures inventors and relevant

decision-makers know that a patent application should be filed within one year of any public disclosure of an invention and that any publication before filing could destroy international rights.

□ Determine whether there is a process for informing patent owners of their rights and encouraging owners to license, market, and use the invention.

□ Determine whether there is a process for inventors and others involved in patent prosecution to report new prior art, errors in inventorship, and other errors in the patent application process.

□ Determine whether there is a periodic procedure for assessing whether the patent owner’s rights (exclusive right to make, use, sell, and offer for sale in the U.S., and to import into the U.S.) are being infringed.

□ Determine whether a procedure is in place to notify the inventor and others involved in patent prosecution about the scope of prior art that should be disclosed.







□ Determine whether there is a procedure to design around existing patents and published patent applications so that the Company’s patented product does not infringe any other patents.

□ Identify the procedure for marking outgoing products. □ Ensure that there is a process to inform inventors of the need to diligently

reduce their currently conceived inventions to practice. □ Ensure that there is a procedure to inform inventors to timestamp any

documents or objects showing a possible date of conception or reduction to practice.

□ If possible and practical, use direct language instead of means-plus-function language or step-plus-function language in claims.

□ Identify a procedure for ensuring that amendments to pending applications ensure that pending applications cover, if possible, later conceived competing products.

□ Avoid, when possible, narrowing amendments to a patent application made during prosecution history.

□ Ensure that all disclosed new, useful and non-obvious ideas are claimed in new applications.

□ Determine whether there is a procedure for inventors to document any and all experimental use.

□ Ensure that the Company keeps track of profits and sales figures for specific products based on the patent. Damages for infringement can be based on a reasonable royalty or on

the patent owner’s lost profits. Evidence of profits and manufacturing capability can be important in a determination of damages.

□ Determine whether there is a process for monitoring pre-filing disclosures of patentable information.

□ Determine whether there is a process for reviewing sales literature to ensure that nothing is disclosed in the marketplace to potential customers.

□ Determine whether invention assignment forms are required for new hires. □ Determine whether there is a Patent Review Committee in place to handle: Invention selection criteria – patent v. trade secret Cost benefit analysis in determining whether to file applications Foreign filing strategy Application process and procedures Periodic patent search process in key areas to keep abreast of efforts

by competitors. Determine whether there are education programs to teach employees

about the patent process and their role in protecting patentable intellectual property.







□ Examine the in-house docketing system for monitoring deadlines regarding: Any maintenance fee payments Renewal filings

Trademark

□ Determine whether there is a procedure for promptly registering trademarks for company products or services.

□ Verify that there is a procedure that ensures notices are properly displayed on all: Company literature displaying or discussing the product or service Promotional/marketing materials displaying or discussing the product

or service Advertisements for the product or service Websites displaying or discussing the product or service In-house publications displaying or discussing the product or service. Products or services

□ Verify that there are policies and standards in place for granting licensing agreements with any parties that may need to use company trademarks, such as distributors, suppliers.

□ Verify that there is a system for calculating the sales figures and the amount of goods or services sold under each mark.

□ Determine whether there is a licensing manager and a quality control system in place to protect the goodwill associated with the trademarks

□ Determine whether there is a process in place for phasing out marks that are no longer in use

□ Identify and evaluate any guides for proper mark usage, specifying Proper typeface Color specifications Mark placed in a consistent location on product or package

□ Determine whether there is a system in place for monitoring the registration and use of possible infringing marks or of the subject mark in an infringing manner.

□ Determine whether there is a policy in place outlining the process for dealing with infringement and whether cease and desist letters have been drafted

□ Examine the in-house docketing system for monitoring upcoming renewal deadlines







Due dates between the fifth and sixth year after registration and at the end of every successive ten year period after registration (between years nine and ten, payable up to six months late for a fee of $100 per class).

Copyright

□ Verify that procedures are in place to properly mark copyrighted material □ Determine whether there is a disconnect between valuable creative

expression and the registration process, and suggest procedures that encourage the registration of important copyrights

□ Verify that standard employment agreements stipulate that all work by employees is done on a “work for hire” basis and all copyrightable work belongs to the Company.

□ Ensure that there is a procedure to obtain a written work for hire agreement from independent contractors working on a contribution to a collective work, a part of a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional text, a test, answer material for a test, or an atlas.

□ Verify that there is a procedure for obtaining assignment agreements from independent contractors for copyrightable work.

□ Verify that there is a process for obtaining a re-assignment from the author after 35 years.

□ Determine whether there are “Clean Room” procedures in place that bar access by unnecessary employees during development of copyrightable material

□ Examine whether employees are respecting the copyrights of others and the Company’s policy for: Monitoring employee computer/laptop use to prevent unauthorized

software distribution Monitoring employee computer use to ensure that there is no illegal

downloading of movies, music, other copyrighted materials □ Examine the copyright policies and education programs to train

employees about protecting company copyrights

Trade Secrets □ Physical Security Measures & Notice Verify that the facility or business has physical security precautions,

such as a fenced perimeter of the Company premises, limited entries and exits, alarms and self-locking doors, and after-hours security personnel.

Verify that there “KEEP OUT” and “AUTHORIZED PERSONNEL ONLY” signs at the access points to sensitive areas of the facility, and that there is a policy for enforcing these restrictions.

Review visitor policies to determine whether: 24






Visitors are required to wear temporary ID badges. Visitors are required to sign in and enter and exit through only one

door. Bags are searched by security upon exit of the building. Escorts are required for visitors. Visitors do not have access to any confidential information without

signing a confidentiality or non-disclosure agreement. Visitors are required to be 18 years of age or older.

Verify that there is a policy to encode or encrypt ingredients or data. Verify that drawers or areas for secret documents and drawings are

separated and locked. Verify that there physical barriers that prevent unauthorized viewing of

proprietary process technology. Determine whether there are sign in and sign out procedures for

accessing and returning sensitive materials. Ensure that sensitive documents are reproduced in only a limited

number, and is there a policy to collect all copies after use. Verify that authorized codes and passwords are used for access to

copying machines and computers. Verify that computer data is stored and transmitted in an encrypted,

secure manner. Be sure to check: Laptops Internet/Email PDAs/Blackberrys

Verify that there are policies and procedures to destroy (shred) sensitive documents rather than discarding them in whole.

Determine whether there is a procedure to require that confidential drawings and documents be marked as confidential with a stamp, watermark, or confidentiality legend.

□ Employee Policies Ensure that there is a policy to require all new employees to sign

enforceable non-competition agreements. Verify that each employee is required to sign a confidentiality

agreement or a non-disclosure agreement. Ensure that the company has oversight policies and procedures that

prevent the inadvertent disclosure of trade secrets in written publications, seminars, speaking engagements, or at trade shows, by employees.

Determine whether Company departments are separated so that each employee does not have access to unnecessary confidential information.







Determine whether components of trade secrets are separated between or among departments so that each has only “a piece of the puzzle.”

Ensure that the Company is not using confidential or proprietary information from a competitor brought in by an employee.

Determine whether there are written rules and regulations that prohibit employees from remaining in the plant after hours without express permission from properly authorized personnel.

Determine whether there are rules and regulations requiring employees to stay in controlled areas about their work stations.

Verify that employees are required to wear identification badges or carry identification cards.

Determine whether there is a policy and practice for advising employees on a regular basis regarding the Company’s trade secrets and confidential business information.

Ensure that the Company holds “exit interviews” to obtain return of company documents and to remind ex-employees of their obligation not to use confidential information of the Company for their own benefit or the benefit of others.

□ Third Party Communications Determine whether there is a procedure to prevent trade secrets from

being disclosed on public material, including advertisements, website, and posters of billboards at the front of the office.

Verify that each third party recipient of confidential information is required to sign a confidentiality agreement or a non-disclosure agreement.

Verify that trade secrets are maintained on a “need-to-know” basis only.







Methods for Conducting the Audit

Interviews of management and technical staff Questionnaire to all employees who use or develop IP Physical inspection of employee workspaces Observation of building security procedures Inspection of handbooks, policy manuals and other guidance documents Searches of databases including USPTO, Google Patents, Google, UCC Filings,

Copyright Office







Final Product

Telephone call or face to face meeting for sensitive issues better not put in writing

Written report, including: □ Catalog of IP assets □ Development history of the identified IP Date of acquisition/creation Creator/owner

□ List of actions required to maintain each asset □ Any IP defects uncovered during the audit

List of filings to be pursued □ Copyright, trademark and patent applications to be filed □ Affidavits of continued use of trademarks □ Litigation and negotiation options for discovered potential infringement by

third parties □ Maintenance fees required to keep patents in force

List of procedures to be implemented □ Prioritized to-do list to be used as a starting point for subsequent audits







[email protected]


USING INTELLECTUAL PROPERTY TO GAIN A COMPETITIVE ADVANTAGE

IN THE MARKETPLACE

There are many ways to gain a competitive advantage in the marketplace. For example, a company might be the “first mover,” have superior channels of distribution or the ability to manufacture at a lower cost. Intellectual property (IP) protection, which includes patents, trademarks, copyright and trade secrets, can likewise provide a competitive advantage in the marketplace.

One form of IP protection is the U.S. patent, which applies to an invention that is new, useful and non-obvious. In order to be considered new for patent purposes the invention cannot have been used commercially, offered for sale or disclosed publicly more than one year before the patent application was submitted. The United States Patent and Trademark Office (USPTO) accepts and reviews patent applications. Once a patent is issued, it gives the owner the right to prevent others from making, using, selling, offering for sale or importing the invention to the U.S. for 20 years from the date of filing. If the owner discovers that someone may be infringing upon the patent, the owner may take steps to prove infringement and enforce the patent. For a patent to be infringed upon, every element listed in a patent claim must be found, literally or equivalently, in the infringer’s device or method.

Another form of IP protection is the trademark, which functions to protect any distinct

word, symbol or device used to identify the source of goods or services. This category includes company names, brand names, logos and even some colors and sounds. The USPTO receives and processes applications for federal registration of a trademark. In addition, a trademark can be registered with the Secretary of State’s Office for state protection. Unlike a patent, a trademark does not need to be registered to be enforced, though it is recommended. Registration with the USPTO provides nationwide protection, whereas a non-registered trademark would enjoy protection only a limited geographic area and only in certain cases. Trademarks also differ from patents in that there is no time limit to how long they can be enforced. As long as the trademarked name, phrase, logo, etc. is used continually it remains protected. In addition to continual use, registered trademarks require renewal with the USPTO or Secretary of States Office from time to time to maintain the registration. Similar to patents, trademark protection gives the owner the right to prevent others from infringing on the mark. Since the trademark serves as an identifier of the source of goods or services, trademark infringement occurs when another mark is similar enough to an existing mark that the public is likely to confuse the two. If the rightful owner of the trademark is able to prove the infringing mark is likely to be confusing, then the infringing mark may no longer be used.

Copyrights are another formal means of protecting intellectual property. A copyright can be applied to any original work of authorship fixed in a tangible medium of expression. A work is fixed if it is written down, recorded, saved, etc. Property protected by copyright includes books, songs, software and articles like this one. As with trademarks, registration of a copyright is not required, but it is recommended. The United States Copyright Office within the Library of Congress handles the registration of copyrights. A copyright gives the holder the exclusive right to reproduce, distribute, perform publicly and display publicly the copyrighted work. Typically, this right lasts for the life of the author plus seventy years, unless the work was done for hire. Copyrights on works for hire typically last the earlier of ninety-five years from the date of publication or one hundred twenty years from the date of creation. A copyright is infringed if the author’s work is copied without the author’s permission or is substantially similar to the copyrighted material.

Trade secrets are a type of intellectual property held by virtually all companies in some form or another. A trade secret can be any valuable information not generally known or easily obtained. However, in order for the information to qualify as a trade secret, the company must use reasonable efforts to keep the information secret. For example, if a trade secret is disclosed to employees then the company must give notice to those employees that the information is confidential and is not to be disclosed. The more valuable the secret is, the more effort is required to keep it secret. Trade secrets can be as common as a company’s client lists or as famous as the secret recipe for Coke and the Colonel’s Original Recipe for KFC. There is no formal system for registering company secrets; they are simply held and protected by companies. As long as the information is kept secret there is no time limit on how long it can be enforced. Companies have the right to sue others who improperly acquire the trade secret or those who breach confidence regarding the trade secret. However, trade secret protection does not prevent the practice of reverse engineering.

As businesses strive to identify and create competitive advantages, they should be sure to carefully examine their intellectual property. Intellectual property that is adequately protected and effectively utilized can provide a powerful competitive advantage in the marketplace.

-Alan Singleton is a corporate and intellectual property law attorney with Singleton Law Firm,

P.C.

He can be reached at 217-352-3900 or [email protected].


[email protected]


QUESTIONS TO ASK IN THE DEVELOPMENT OF A SOFTWARE LICENSE

1. General Issues

a. License v. Sale b. Does the Licensor have sufficient rights to license or sell the software?

i. Software developed entirely by Licensee ii. Software or portions developed by third parties

1. Work Made for Hire 2. Assignment 3. License

a. Right to sublicense? 4. Open-Source

a. Type of open-source license? c. Types of Licenses

i. “Off the Shelf” Software ii. Custom Software

iii. Software as a Service (Saas) iv. For distribution

2. The License

a. Licensee i. Who is the licensee, does it include affiliates and subsidiaries?

ii. Restrictions? 1. Specific hardware, operating systems, locations, users, or number of

users iii. Is licensee the U.S. Government?

1. If so, certain language must be included or terms of license will be subject to Federal Acquisition Regulations

b. License Grant i. What is licensed?

1. Software 2. Hardware 3. Documentation 4. Other proprietary information/systems

ii. Exclusive or Non-Exclusive? iii. Transferable or Non-Transferable? iv. Right to Sublicense?

1. Royalties 2. Licensor approval 3. Terms of sublicense or EULA


v. Term vi. Geographic Scope

c. Scope i. Is USE defined?

1. Internal, business purposes only 2. As a service provider to third parties

d. Rights to Copy i. For what purposes?

1. Back-up 2. Production 3. Testing

ii. Number of copies? iii. Medium?

e. Restrictions? i. Reverse engineering and disassembling?

ii. Licensee modification? iii. Transfer to third parties? iv. Export? v. High risk activities?

vi. Use with other software? f. Rights in Software ?

i. Retention of all rights not licensed ii. Rights in derivative works and new ideas

1. Grant-back iii. Custom Software – who owns the final product

1. Developer or purchaser 2. Work made for hire/Assignment

3. Term

a. Term of Agreement v. Term of License b. Perpetual or Periodic?

i. Renewal procedure

4. Payments/Fees a. License Fees

i. Up-front or recurring? ii. Royalties?

iii. Calculation? b. Service and Support Fees c. Procedure

i. Invoices ii. Late payment

d. Taxes i. Who is responsible?

ii. Complex state laws regarding taxation of software and services

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5. Delivery, Installation, Training, and Acceptance

a. Delivery i. What are the deliverables?

ii. Delivery location? iii. Delivery method?

b. Installation i. Who is responsible?

ii. Installation fees and costs? c. Training

i. Will the Licensor provide training? ii. Offsite or onsite?

iii. Costs of training? d. Acceptance

i. Metrics ii. Procedure

iii. Error correction iv. Acceptance date

6. Project Management

a. If Licensor will be developing custom software, how will the project management be structured?

7. Service Level Agreement a. If software offered as a service (SaaS), then Service Level Agreement should be

developed. i. Standards

ii. Credits 8. Maintenance and Support

a. Maintenance i. Bug/Error correction

1. Licensee notification 2. Urgency levels 3. Procedure and correction times

b. Improvements, Modifications, and Updates i. Distribution

ii. Definitions – difference from New Versions iii. Cost

c. Support i. Types of support

1. Onsite 2. Offsite

ii. length of support iii. Separate support agreement iv. Cost v. Right to discontinue support after release of new version

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9. Source Code

a. Ownership b. Escrow

10. Disabling Devices

a. Does the software contain disabling devices? i. In what circumstances may they be used?

11. Confidential Information

a. Will Confidential Information Be Exchanged? b. Definition of Confidential Information? c. Identification of Confidential Information? d. Use of Confidential Information? e. (Non-) Disclosure of Confidential Information? f. Return of Confidential Information? g. Employees, Agents, and Independent Contractors? h. Remedies?

12. Warranties, Limitation of Liability, Indemnification

a. Warranties i. To whom do the warranties apply?

ii. Types of warranties 1. Authority to grant license 2. Non-Infringement on third party rights 3. Media on which software is stored 4. Free from material defects 5. Conformance to specifications and run-times 6. Free from viruses 7. No disabling devices 8. Free from minor defects or errors 9. Uninterrupted operation 10. Merchantability 11. Fitness for a particular purpose 12. Warranties related to third-party software

iii. Duration iv. Invalidation

1. Use on different equipment 2. Modification

b. Limitations on Liability i. Special, Indirect, Consequential, Punitive, and Indirect Damages

ii. Profits iii. Data Loss iv. Loss of Goodwill v. Specific Performance

vi. Limited to Specific Amount vii. Time Period for Cause of Action

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c. Indemnification

i. Indemnifying Events ii. Notification and Procedure

d. Attorney’s Fees e. Insurance

13. Termination and Default

a. Termination i. Termination for Convenience

ii. Termination upon Default iii. Rights and Obligations upon Termination

1. Payment of all outstanding amounts 2. Return of software, documentation, and confidential information 3. Discontinue using software 4. Surviving obligations 5. Use of remote disabling devices

b. Events of Default i. Non-payment

ii. Filing of bankruptcy iii. Breach of provisions of agreement iv. Notice and cure

c. Dispute Resolution i. Informal

ii. Mediation iii. Arbitration iv. Litigation v. Attorney’s Fees

14. Export Controls

a. Federal regulations govern the export of certain software to certain countries

15. Assignment a. Is assignment permitted? b. Any limitations or restrictions?

16. Records and Audits

a. Must the Licensee maintain records relating to its use of the software? b. May Licensor audit Licensee’s records?

17. Non-Competition and Non-Solicitation

a. Non-Competition i. Are their restrictions on either party’s freedom to engage in competitive activity

with the other party? b. Non-Solicitation

i. Licensee may not solicit or hire Licensor’s employees

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1


Research Park a t the Un ivers i t y o f I l l ino is2001 S . F i rs t S t . , Su i te 209Champaign , IL 61820 -3654

(217) 352-3900 s ingleton@singletonlawf i rm.com

www.singletonlawf i rm.com© 2 0 1 5 A l a n R . S i n g l e t o n

Mobile App Development: Intellectual Property Protection

Roadmap

What developers should know about IP protection Mobile Apps and Trademarks

― Mobile Apps and Trademarks: Overview ― Mobile Apps and Trademarks: Candy Crush Saga Example

Mobile Apps and Copyrights― Mobile Apps and Copyrights: Overview ― Mobile Apps and Copyrights: Work-for-Hire Agreements― Mobile Apps and Copyrights: Enforcement

Mobile Apps and Patents ― Mobile Apps and Patents: Overview― Mobile Apps and Patents: Subject Matter Eligibility― Mobile Apps and Patents: Enforcing your Intellectual Property

Rights Other Legal Issues You Should be Aware of

2

2

What Developers Should Know About Intellectual Property Protection

As an app developer, the intellectual property of your business is your main asset― You are developing your new app, and someone claims

that they have ownership rights to the app. What do you do?

― You have an app and users identify its logo with your business. That is a great selling point for you. What happens if another developer starts using your logo?

― A competitor steals your mobile app’s name. You spent time and effort on choosing that name. What can you do?

3

Mobile Apps and Trademarks: Overview

App owners should always consider protecting the brand name of the app by filing a trademark application― Trademark lies at the core of brand identity ― Trademarks constitute element of your mobile app that

identify the source of your products or services (e.g., logo and title of the app) Trademark is not the app functionality or code

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3


What is the difference between the ™ symbol and the ® symbol?― ®: registered trademark U.S. trademark registration establishes legal presumption of

ownership and right to use trademark nationwide― ™: trademarks used in connection with goods or services

without registration – it’s free! However: ™ means common law protection applies and

trademark rights are limited to geographical areas where the trademark is used

In case of litigation, an unregistered trademark is generally at a disadvantage compared to a registered trademark

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There is no “one size fits all” for trademark application― It is important to understand how your mobile app works

as a product or service and explain it to your IP attorney― A trademark registrable for one product or service might

be unregistrable for another All apps might include registrable trademarks:― An app name, icon, or logo used consistently and

prominently to identify your product or service― To be registrable, an app name should not merely

describe the function or nature of the app itself

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4


Before registering the name of your software or app program, you should consider two preliminary issues with your attorney:― Is it worth it to commit expenses to one or more federal

trademark registrations?― Has someone else already registered a similar trademark

for software or related goods or services?

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Mobile Apps and Trademarks: Candy Crush Saga Example

Candy Crush Saga― In many countries, including the U.S., King has asserted

trademark rights for the words CANDY and SAGA in the field of software and video games

― However, King’s CANDY and SAGA trademark applications worldwide have been abandoned, refused, or contested by third parties

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5


How would it work for King? If an app developer releases a similar game and name it, for instance, Candy Star or Great Candy Casino Slots, King may demand that they change the name based on similarity to the trademark CANDY CRUSH SAGA― However, King is not entitled to a claim against each and every

game that uses the words CANDY or SAGA Trademarks are more about protecting a brand as a

whole and less about owning a word ― The "senior user": King would not prevail in a lawsuit against a

company that made a game with the word CANDY in its title if it dates back to before Candy Crush Saga

― King, as the plaintiff in a lawsuit against an app developer, has the burden to prove that a reasonable consumer in that market would be confused into thinking that the defendant's product originates from King, or is endorsed/sponsored by King

9


What did King do right?― Filed trademark applications on a timely basis to establish

priority in countries where it operated― Monitored trademark usage in the field of its operations and

took prompt action against possible infringers― Agreed to coexistence agreements against third parties

ultimately determined to not infringe What did King do wrong?― Claimed overbroad trademark rights – trademark registrations

are not granted for individual words in a trademark― By making highly publicized and broad trademark claims,

effectively invited interested third parties to contest their trademark applications

― Generated bad publicity by targeting small developers on the basis of controversial trademark claims – to the public, appeared to be attempting to “own a word”

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6

Mobile Apps and Copyrights: Overview

Your mobile app is a work protected under the United States Copyright Act (Title 17)― The Act protects “original works of authorship” Examples: text, software, images, graphics, film, user-

generated content Copyright protection grants the author the

exclusive right to distribute, display and duplicate the work to the public ― In general, copyright protection lasts for the life of the

author plus an additional 70 years

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Mobile Apps and Copyrights: Work-for-Hire Agreements

Generally, a person who creates the copyright work is the author for copyright purposes

However, when the work is created by an employee within the scope of the employment and employee sign a work-for-hire agreement, the employer owns the work for copyright purposes ― Work-for-hire agreements only apply to copyrights

For companies: without the work-for-hire agreement, the app developer who writes the source code, design, or other aspect of the company’s app, holds the copyright to that material

12

7

Mobile Apps and Copyrights: Work-for-Hire Agreements

For developers: if a developer signs the work-for-hire agreement and was promised a stake in the company for the work, he or she may have a written agreement with the company’s owners that details the terms of the equity grant in the company

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Mobile Apps and Copyrights: Enforcement

You cannot sue for copyright infringement unless the work is registered― An app copyright registration makes you eligible for

statutory damages up to $150,000.00

Copyright protection may prevent competitors from releasing an app that is identical to yours, or take a “substantial part” of your mobile app, in creative content or look and feel― However, it cannot stop competitors from using your

idea to create a program with similar function

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8

Mobile Apps and Patents: Overview

Patents are the best way to protect your idea/invention

U.S. patent laws provide for patenting of systems, devices, and methods, including ones relating to mobile apps― Software itself cannot be patented in its intangible form,

unless it is at least disclosed and claimed in the context of methods of interacting with a computer or mobile device

― Recent court cases have raised the bar further

15


Patents provide the greatest commercial benefit where:― The expected lifespan of the technology exceeds 3 years― The technology has general application and broad

general interest― There is scope for competitors to use the technology in

the own apps

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9


For an invention to be patentable it must be:― Statutorily eligible subject matter― Useful― New― Non-obvious

An app is patentable, or patent-eligible subject matter if falling into a statutory category: Process, machine, manufacture, or composition of matter Certain subject matter is excluded from patentability, even

if the inventions are novel and non-obvious: laws of nature, natural phenomena, and abstract ideas

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Mobile Apps and Patents: Subject Matter Eligibility

Patents directed to inventions implemented on computers may be rejected for lack of patent subject matter eligibility

Software patent claims could be rejected if found to constitute an abstract idea implemented on a computer

Alice Corp. Pty. Ltd. v. CLS Bank Intern., 573 U.S. __ (June 19, 2014) – the Supreme Court applied a two-part test ― 1. Determine if the claim is directed to an abstract idea― 2. If so, determine whether the claim specifies additional

elements that add “significantly more”― A claim found to be abstract under part 1 must pass part

2 in order to survive

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10

Mobile Apps and Patents: What Is an Abstract Idea?

Rather than a general rule, courts rely more on comparisons to established examples of abstract ideas from past cases

Examples include:― Fundamental economic practices – “business method patents”― Certain methods of organizing human activities― An idea “of itself”― Mathematical relationships or formulas

However, an application of such an abstract idea “to a new and useful end” remains patent-eligible

47

Mobile Apps and Patents: What Is “Significantly More”?

If a claim is directed to an abstract idea, it must specify additional features that embody a meaningful application of the abstract idea

Examples include:― Improvements to another technology or technical field― Improvements to the function of the computer where the idea is

implemented― Implementation on a particular computer rather than a generic

computer― Causing a transformation of an article to another state or

another article― Adding steps beyond the performance of generic computer

functions that are well-understood, routine and conventional

48

11

Mobile Apps and Patents: Lower Court Decisions Since Alice

A computer system for managing a bingo game― The claims recited basic computer functions such as

storing, retrieving, and verifying a set of bingo numbers against winning numbers

― Each step only requires generic computer― Every step can be carried out manually― Claims found to constitute the abstract idea of

organizing human activity, without more― Claims were not subject matter eligible

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Mobile Apps and Patents: Lower Court Decisions Since Alice

An e-commerce system that combines visual elements of a host website and the products or services of a third-party merchant to create a composite webpage with the look and feel of the host website― The claims identify a solution to a problem specific to

the Internet― The claims identify steps involving the execution of

particular algorithms― The claims were found subject matter eligible

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Mobile Apps and Patents: Enforcing your Intellectual Property Rights

What else should you consider:― You have one year from the date of sale, offer to sale or

public disclosure to file a patent application to protect your rights

― Freedom-to-operate searches for NPEs (patent trolls) and third-party rights are recommended

23


Diligent monitoring – most apps can be found online. You may:― Create internal tracking of apps and platforms ― Target specific app stores and platforms― Engage third-party vendors that monitor brands ― Alternative: take action only after receiving a complaint

Takedown notice― Notice request may be sent to a platform operator and the app

may be deactivated A deactivated app may still be found in a user’s mobile device,

and every time the user opens the app, there is an infringement― More commonly, notices may be sent to the developer instead

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13


Consider informing the user with statements and notices in marketing materials to establish your apps

Use digital watermarks and tags for online work Consider effects on public relations before

taking aggressive actions― For instance, sending legal notices or submitting a

complaint or notice to a platform operator before considering contacting the app developer

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Other Legal Issues to be Aware of…

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14

Privacy Laws

Privacy is a key legal consideration when developing a mobile app

If the mobile app collect data, general federal and state privacy laws apply covering entities that collect, use, share, store personal information

Some types of collected data have special treatment:― Financial― Health― Programs that target children

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Privacy Laws: Federal

Federal Trade Commission (FTC) Act §5― Prohibits and makes unlawful “unfair methods of

competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce”

The FTC may bring charges against app developers and companies― Make sure you know and follow your own privacy

practices― Inform consumers about your actual privacy practices

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15

Privacy Laws: State

States authority and laws are similar to the FTC authority and the FTC Act (mini “FTC Acts”) ― Most states have data security breach notification laws that

require entities holding personal data to provide notices in case of breach

― Location of the consumer is a key factor to the applicability of state laws Illinois: Personal Information Protection Act (815 ILCS 530) The Act defines breach of the security of the system data as

"unauthorized acquisition of computerized data that compromises the security, confidentiality, or integrity of personal information maintained by the data collector”

“Any data collector that owns or licenses personal information concerning an Illinois resident shall notify the resident that there has been a breach of the security of the system data following discovery or notification of the breach” (815 ILCS 530/10)

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Privacy Laws: The Children’s Online Privacy Protection Rule

Children’s Online Privacy Protection Act (COPPA) apply to mobile apps that collect information from children under 13

If you target children, you need to provide additional services and information Parents must be notified before collecting information from

their kids The privacy policy must clearly and comprehensively describe

how information collected online from kids is handled Procedures shall be implemented to protect kids’ personal

information

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Privacy Laws

In developing privacy practices, app developers and companies should take into account:― Specific legal requirements that may apply based on the

type of information being collected― Special legal requirements for regulated industries or

sensitive information (e.g. kids)― Industry guidance and best practices

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Mobile App Development Intellectual Property Protection

1

Alan R. Singleton


R e s e a r c h P a r k a t t he U ni ve r s i t y o f I l l i no i s

2 0 0 1 S . F i r s t S t . , S ui t e 2 0 9

C ha m pa i gn, IL 6 1 8 2 0 - 3 6 5 4

( 217) 352 -3900 phone

(217) 352 -4900 fax

s ing le ton@sing le ton l aw f i rm.com w w w.s ing le ton law f i rm.com

© 2 0 1 0 Al a n R . S i ng l e t o n

Joint Ventures, Joint Development Agreements,

Strategic Alliances

Definitions

Joint venture:

-independent business entities

-getting together for a common commercial purpose of defined scope and duration

-by contract or in the form of a new business entity

-pool resources and share risks, rewards, and control

-can take a variety of forms – no ―standard deal‖

-joint development program, contract development, strategic alliance

What is contributed?

Intellectual property (patents, copyright, trade secrets, trademark) – may be too complex, difficult or risky to develop on your own

Background IP

Foreground IP

Capital

Testing capability and access to technical expertise

―Built in‖ end customer or purchaser

Manufacturing capacity

Sales and distribution networks

Possibly, products outside of the core business area

2

Stages

Formation

- who contributes what

- start with NDA and then non binding term sheet

Operation

-split of profits and IP

Winding down

-by agreement

-bankruptcy (snapshot license)

-breach of agreements

-merger and acquisition events

-wind down operations but continue as IP holding company

Preliminary Questions

Why do you want to form a joint venture?

What outcomes do you envision from the joint venture?

Are there other ways of achieving these goals?

What makes the other party an attractive joint venturer?

Are your goals compatible with those of your joint venture partners?

Are you and your joint venture partners a good match?

o Business culture

o Background

o Experience

o Organizational values

Contractual Joint Ventures

o Attributes ― Joint venturers establish and form the joint venture through a

contractual agreement ― No separate legal entity is created

o Why use ― Preferred when the collaboration between the joint venturers is

expected to be of narrow scope and finite duration ― Best when the parties’ business or technology sphere are distinct

enough that they are not competitors of one another nor likely to become competitors in the future

o Legal consequences ― Parties have only limited fiduciary duties to each other ― Tax issues are usually simplified ― IP ownership can be more ambiguous if not adequately addressed in

advance

o ―Joint Development Agreement‖ – common for early stage tech companies to enter into JDA with large company

3

Entity Joint Ventures

o Attributes

― Joint venturers establish a separate jointly owned business entity (such as an LLC or a corporation)

o Why use

― Preferred when the collaboration between the joint venturers is expected to be multi-faceted and continuing over the long-term

― Often used when the parties anticipate developing completely new product lines or commercializing new markets

o Legal consequences

― Parties have a great deal of freedom to limit their exposure to liability or to engage in tax planning by choosing the entity’s form

― IP ownership is simplified since the entity can own IP rights and license them back to the joint venturers

Contractual followed by Entity

The choice of joint venture type is not fixed o Two-Stage Model

― First stage is a contractual joint venture

― Second stage is the creation of a joint venture entity

― More complex and less commonly encountered

― Useful when the joint venturers want a limited initial collaboration to determine the viability of continuing the joint venture as a longer-term, freestanding entity

Example: Stage one is to determine the technical and commercial viability of a proposed new product; if that viability is demonstrated, the parties will form a separate entity to bring the new product to market in stage two

Allows the parties to set tech, business, or financial benchmarks upon which the formation of the new entity will be conditioned

Suppose that two parties collaborate on technology development absent an agreement regarding IP rights. What result? o Patent: Any person who contributed to the conception of one

claim is a joint owner of the patent

― Doesn’t require the joint owners to physically work together or to work simultaneously

― Doesn’t even require a general intention to jointly invent

o Copyright: Similar to the patent scenario

― Like patents, doesn’t require the authors to work together or simultaneously

― Joint ownership will result only if the creators intend to jointly author the work and their contributions must be ―inseparable or interdependent.‖

Without a Written Agreement

4

Without a Written Agreement

Therefore, collaboration without an agreement regarding IP rights tends to create scenarios of joint ownership

Parties can also agree to jointly own IP

Joint ownership sounds like a fair outcome, but it is fraught with peril

Patent Joint Ownership

Patents

o Each joint owner can freely practice and can (nonexclusively) license the patent to a third party (including one of the other joint owners’ competitors)

o No duty to share profits with the other joint owners

o A suit for infringement can typically only proceed if all joint owners participate in the suit

― Any joint owner can cut off the infringement action by granting a license to the alleged infringer

o Astute would-be licensee can play the joint owners off one another to get the best deal

Copyright Joint Ownership

Copyright

o Each copyright joint owner can freely license the work without consultation with or consent from the other owners

o Unlike the case with patents, joint owners have a duty to share profits from the copyright with other owners (―duty to account‖)

o A suit for infringement does not require all parties to join

― Nevertheless, the court can require it if it chooses

― A court will also permit intervention by anyone with an interest in the copyright

5

International Joint Ownership

If you plan to commercialize your jointly developed technology in other countries, you face different laws (but similarly unsynchronized systems for different kinds of IP!) that must be accounted for

Choice of law provisions in agreements that indicate US law will apply will not override the default rules of another country with respect to enforcement and exploitation of jointly owned IP

When Created

What Who Developed

Ownership Licenses

Prior to Joint Venture

Preexisting Background IP

Individually Developed

Developing joint venturer

Nonexclusive to the other joint venturer(s) within the joint venture field of use

While Joint Venture is in Place

New Background IP




Foreground IP

Derivative IP wholly derived from only one joint venturer’s Background IP

Individually or Jointly Developed

Whichever joint venturer owns the underlying Background IP

Nonexclusive license to other joint venturer(s). Possible field-of-use limited.

Nonderivative Any other Foreground IP


One joint venturer only: to be negotiated in advance. Could be ―blanket‖ allocation of ownership (i.e., always to one joint venturer) or by pre-defined area of technology. Joint ownership could be problematic

Exclusive license to other joint venturer(s) in agreed field of use

Possible IP Allocation for a Contractual Joint Venture

When Created

What Who Ownership Licenses




Developing joint venturer OR --------------- NewCo

Exclusive or nonexclusive for NewCo in field of use -------------------- Nonexclusive grantback outside NewCo’s field of use

While Joint Venture is in Place (NewCo)

New Background IP Individually Developed


Exclusive for NewCo in field of use to prevent joint venturers from competing with the joint venture; could be nonexclusive -------------------- Exclusive or nonexclusive grantback outside NewCo’s field of use

Foreground IP

Derivative IP completely derived from only one joint venturer’s Background IP.

Individual Joint Venturer, Multiple Joint Venturers, or NewCo

Whichever joint venturer owns the underlying background IP.

Nonexclusive to NewCo in field of use

NewCo Exclusive to joint venturer who owns the underlying IP outside NewCo’s field of use, possibly with further restrictions



NewCo Exclusive or nonexclusive to joint venturer(s) in defined field(s) of use; could be royalty-free or royalty-bearing

Possible IP Allocation for an Entity Joint Venture (NewCo)

When Created

What Who Developed

Ownership Licenses






While Joint Venture is in Place

New Background IP




Foreground IP

Derivative IP wholly derived from only one joint venturer’s Background IP


Whichever joint venturer owns the underlying Background IP

Nonexclusive license to other joint venturer(s). Possible field-of-use limited.



One joint venturer only: to be negotiated in advance. Could be “blanket” allocation of ownership (i.e., always to one joint venturer) or by pre-defined area of technology. Joint ownership could be problematic

Exclusive license to other joint venturer(s) in agreed field of use

Possible IP Allocation for a Contractual Joint Venture

When Created

What Who Ownership Licenses





Exclusive or nonexclusive for NewCo in field of use -------------------- Nonexclusive grantback outside NewCo’s field of use

While Joint Venture is in Place (NewCo)

New Background IP Individually Developed


Exclusive for NewCo in field of use to prevent joint venturers from competing with the joint venture; could be nonexclusive -------------------- Exclusive or nonexclusive grantback outside NewCo’s field of use

Foreground IP

Derivative IP completely derived from only one joint venturer’s Background IP.


Whichever joint venturer owns the underlying background IP.

Nonexclusive to NewCo in field of use

NewCo Exclusive to joint venturer who owns the underlying IP outside NewCo’s field of use, possibly with further restrictions



NewCo Exclusive or nonexclusive to joint venturer(s) in defined field(s) of use; could be royalty-free or royalty-bearing

Possible IP Allocation for an Entity Joint Venture (NewCo)

6

Your IP and Your Partners’ Employees

Not only do joint venturers have to worry about third parties gaining access to proprietary information; they also need to think about their joint venture partners and what employees may be able to do with that information

The information the employees learn cannot be erased at the end of the joint venture. Two potential hazards result from this:

1. An employee may leave your joint venture partner for a new position with one of your competitors

― Especially problematic if your joint venture partner doesn’t have a non-disclosure agreement with the employee

2. Your joint venture partner may form a joint development relationship with one of your competitors

Your IP and Your Partners’ Employees

Fortunately, by planning ahead, some of these risks can be minimized

o Joint venture partner agrees to limit the type of future work they assign to their employees who were exposed to your proprietary information, for a limited time

― In particular, have these employees excluded from working on other joint ventures that your partner might form in the future with your competitors

o Joint venture partner agrees to have a written confidentiality agreement with its employees naming you as a third-party beneficiary

― As a third-party beneficiary, you will be entitled to enforce the confidentiality agreement yourself, without having to rely on your partner filing a lawsuit

Questions

Is your interest in the venture/alliance primarily strategic or financial in nature?

What consequences would stem from a sale of your interests in the venture/alliance?

Why does it make sense for you to partner on this project rather than go it alone?

What opportunities will you forgo by entering into the venture/alliance?

What is the scope of the noncompetition and exclusivity provisions that are envisioned?

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Questions

What are the strengths that each party brings to the table?

What are the parties’ bargaining powers, both up front and over time?

How much money do you wish to invest in the venture, both up front and over time?

What are the expected exit strategies and do all parties have a shared view of the likely exit scenarios?

Have you adequately considered all that could go wrong with the venture/alliance and how to adequately protect its interests in such various downside scenarios?

Structuring the Deal

What will the governance structure be?

What assets will be conveyed to the venture and by whom?

What will the economic rights of the parties be?

What is the ideal structure from a tax perspective?

What corporate approvals are required? Is shareholder approval needed?

What regulatory filings are needed? Is a Hart-Scott-Rodino or foreign antitrust filing required? Are there any significant anticompetitive consequences to the venture?

Are any third-party consents needed?

Has due diligence been completed? What does it reveal?

What timeframe is desired for completing the deal? What intermediate benchmarks/deadlines exist?

Forms of Entity Joint Ventures

TYPES OF BUSINESS ENTITIES

The oldest forms are partnerships and corporations (or more specifically, C corporations)

Partnerships arise when two or more persons or entities join to run a business together and split profits. There is no tax at the partnership level (what is called "pass-through tax treatment") and partners are fully liable for all claims against the partnership

C Corporations offer limited liability, but it comes at price: profits are taxed first at the corporation level and then again as an individual's income when paid out as a dividend

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Forms of Entity Joint Ventures

The S corporation and the LLC were created to combine the best features of each of these two older forms. S corporations feature the limited liability of C corporations with the pass-through tax treatment feature of partnerships. However, S corporations face strict limitations on who and how many can be shareholders. The shareholders cannot number more than 100 and, with the exception of certain trusts and tax-exempt organizations, must be natural persons who are U.S. citizens or residents. Furthermore, only one class of stock is allowed, although differences in voting rights are permitted.

Finally, the newest form is the limited liability company (LLC). Like the S corporation, it also combines limited liability with pass-through tax treatment. Unlike the S corporation, the LLC is exceptionally flexible with respect to who and how many members (the LLC analogue to the S corporation's shareholder) may have. In particular, there is no upper limit to the number of members, all types of entities may be members, and different classes of ownership are permitted.

Joint Venture Form and Tax Treatment

One principal consideration in choosing between a contract-based joint venture and an entity-based one (including which kind of entity) is the tax treatment associated with the choice.

It is important to keep in mind that the IRS looks to the functional realities of the venture and not merely the legal designations that the venturers have used.

o For instance, a partnership can be formed simply by agreeing to go into business with another and splitting the profits; an explicit choice of the partnership form isn’t always required.

o Consequently, the IRS has regulations that allow them to recharacterize some contractual joint ventures as partnerships if they are too close in function to a partnership.

Joint Venture Form and Tax Treatment

On the other hand, the IRS gives businesses a great deal of freedom under its ―check the box‖ regulations.

Business entities composed of two or more members and which are not organized as corporations under state and federal law may choose to be taxed as a partnership or as a corporation.

o Default rules govern entities that do not file a ―check the box‖ election. Typically, the rules classify them as partnerships.

o Once an election has been made, it cannot be changed for five years---unless there is a more than 50% change in ownership

Note: This only pertains to federal tax. State taxation and liability issues are not altered by this system.

9

Joint Venture Form and Liability Issues

A second key consideration in choosing the joint venture form is exposure to liability. o As mentioned, one of the most desirable features of corporations

(both C and S) are their limited liability. In general, shareholders stand to lose only as much as they have invested

o Partners, on the other hand, face unlimited personal liability for claims against the partnership

o A limited liability company, as its name indicates, shares the limited liability feature of corporations

o Contract-based joint venture parties may face liability from activities undertaken in pursuance of the joint venture

Joint Venture Form and Access to Capital

Venture Capital - while LLCs are attractive because they feature limited liability and pass-through tax treatment, most venture capital firms will not invest in an LLC

IPO - if the joint venture were to go public, it would need to be converted from an LLC to a C corporation or at least elect to be taxed as a C corporation

Joint Venture Exit Strategies

Merger or Acquisition of Joint Venture

- licensed IP should be freely transferable upon change in control; BUT minority contributor to JV may insist that some IP not transferable to a competitor of the minority contributor

Dissolution of Joint Venture

-protect member’s right to use vs. prohibiting member’s right to use

- many of the same considerations that apply to apportioning IP rights during the JV apply to apportioning IP rights at its termination (in particular, avoidance of joint ownership)

- prohibitions or limitations on the members’ rights to IP after dissolution can serve to discourage prematurely dissolving the joint venture

10

Joint Venture Exit Strategies

Bankruptcy

- clauses that say a license terminates in bankruptcy generally unenforceable; better to terminate based on other factors – inability to pay bills, etc.

- bankruptcy courts have broad powers to authorize assignments or rejection of the bankrupt’s contract; in the joint development context, this has two consequences:

• to protect the members, ensure that the IP they license to the JV cannot be assigned away to a competitor by emphasizing the importance of the identities of the parties to the licensing transaction

• to protect the JV, ensure that the IP licensed to it meets 11 U.S.C. § 365(n), a provision of the Bankruptcy Code that restrains the court from approving IP license termination

Distributorships & Sales Representatives

Distributors — Purchase merchandise from manufacturers at a discount (typically larger than the value of a sales commission), profit is made from selling the items at a markup.

Sales representatives — Solicit offers to purchase from consumers, relay these to manufacturers who fill the order, profit is made by earning a commission on sales they procure.

In other words, there are two characteristics that distinguish these roles:

1. Who owns the merchandise? — Distributors purchase the goods and are responsible for storing, protecting, and selling them once they have ownership. Sales reps ordinarily do not have these obligations.

2. Who bears the risk? — Distributors bear the risk of carrying inventory for which there is no demand as well as the risk of a defaulting purchaser. Sales reps do not, although the sales representative agreement can specify that no commissions will be due when the customer fails to pay.


11


Q: What factors might manufacturers consider when deciding to use a distributor or a sales representative?

A: There are two key considerations that enter into the decision: credit risk and control.


Credit risk

Local distributors may have better information about the creditworthiness of local potential buyers. Where the typical potential buyer is a small unknown business, a manufacturer may find offloading the credit risk to a distributor attractive

When the typical potential buyer is large, well-known, and well-capitalized, using a sales representative will be a less costly way doing business


Control

Unlike distributors, sales reps only solicit offers and own no merchandise. Therefore, the manufacturer retains control over:

order acceptance: sales reps cannot accept orders, they only relay them to the manufacturer

price: the sales rep does not own and resell the merchandise as distributors do, the manufacturer keeps absolute control over price

customer relationship: manufacturers typically work more closely with customers when there is no distributor as a middleman

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Exclusive versus Non-Exclusive Arrangements

Procuring Cause Rule (applicable to sales reps only)

Extremely important to specify that commissions are payable only on sales procured by the sales rep (indeed, the agreement should use that very word). Otherwise you might have to pay a commission to a sales rep who had nothing to do with the sale!

Toll Manufacturing

Toll manufacturing, also known as toll processing, tolling, toll conversion, or custom manufacturing, can be defined as performing a service on a customer's raw material or product, for a fee (toll). Toll manufacturers provide a manufacturing/processing service for other companies and receive a volume-based fee

Traditionally used for prototypes, marketing studies, and small-scale specialty products, and is a means to expedite manufacturing and marketing

Tolling also reduces capital expenditures and the need to hire and train temporary personnel

Toll Manufacturing

Toll manufacturing agreements demonstrate a large variety of terms. In many ways, the agreement is limited only by what one is capable of negotiating. The relationship can be continuing or on an as-needed basis. The toll manufacturer and its client can cooperate intensively on the fabrication process or remain quite distant

Given the open-ended nature of the toll manufacturing field, it is important to have considered all possible terms and conditions and to know where you need to be insistent and where you can be flexible

o In addition to the obvious terms of cost, volume, and turn-around time, be sure you know what you need in terms of confidentiality, meeting regulatory requirements, quality control protocols, distribution/shipping costs, risk management and beyond

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Toll Manufacturing

Some of these additional considerations include:

Economics. Lower operating cost must be weighed against the extra cost of negotiating toll agreement and monitoring performance

Confidentiality. Ensuring that intellectual property and commercial secrecy are not compromised is particularly critical. If you and the toll manufacturer jointly develop a product or process as a result of your relationship, how will you split that reward?

Government regulations. Dealing with regulations, particularly those of distant states or foreign nations, can involve uncertainty, red tape, and delays that can be costly

Time zone difference. Consider the implications in terms of the on-call availability of personnel. Consultation with an expert in the home office may be required outside that person's normal working hours. An alternative is to temporarily relocate a technical representative at the facility

Manufacturing practices. This is particularly important in industries where adherence to current good manufacturing practices (cGMPs) is essential.

Conflicts of interest. Potential conflicts of interest may arise if the toller is an ex-employee of a competitor or of your own company

Contracts and the 5Ws

One of the most important functions of a written contract is to document the intentions and expectations of the parties

Remember the 5Ws of telling a story—contracts are no different

o Who are the parties to the contract? Who are any third parties that will play a role in the contracted relationship?

o What do the parties promise to do for each other? What conditions will make these promises come due or excuse them?

o When are the obligations to be performed? When will the contract expire?

o Where is the contract applicable? What territory is envisioned? Which jurisdiction’s laws will govern?

o Why is the contract being created? Use a recitals section to contextualize the contract.

o How much is at stake? Not just dollars, but also volume of merchandise or numbers of licensed users.

―Integration‖ or ―Merger‖ Clause

Paragraph that states the written contract is the entire agreement between the parties and that there have been no other representations or promises made

Typically appears at the end of the contract

The use of an integration or merger clause means that any prior promises made by the parties (whether oral or written) would not usually be enforceable unless there has been fraud

Consequently, the parties should not rely on any ―side promises.‖ If they’re integral to the deal … ―Get it in a signed writing.‖

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Alan R. Singleton


R e s e a r c h P a r k a t t he U ni ve r s i t y o f I l l i no i s

2 0 0 1 S . F i r s t S t . , S ui t e 2 0 9

C ha m pa i gn, IL 6 1 8 2 0 - 3 6 5 4

( 217) 352 -3900 phone

(217) 352 -4900 fax

s ing le ton@sing le ton l aw f i rm.com w w w.s ing le ton law f i rm.com

© 2 0 1 0 Al a n R . S i ng l e t o n

Joint Ventures, Joint Development Agreements,

Strategic Alliances

Singleton Law Firm, P.C. is dedicated to serving the legal needs of business and individual clients of east central Illinois and beyond with an emphasis in the areas of corporate, intellectual property (including patent) and real estate law. The firm was founded by attorney Alan R. Singleton and paralegal Elizabeth C. Kellner following Mr. Singleton’s practice at another local firm as an associate and then shareholder. Ms. Kellner’s experience includes work at the University of Illinois business incubator and then service as the coordinator and then executive director of techCommUnity. Both Mr. Singleton and Ms. Kellner are active in their efforts to grow the local business community. Both maintain contacts in the local business community and beyond which allow them to serve as a team to meet the needs of business and individual clients through the provision of value added quality legal services.

ALAN R. SINGLETON SINGLETON LAW FIRM, P.C.

Research Park at the University of Illinois 2001 S. First St., Suite 209

Champaign, IL 61820 217-352-3900

www.singletonlawfirm.com [email protected]

Mr. Singleton provides legal services to business clients in corporate, intellectual property, securities, and real estate law areas. He has frequently assisted entrepreneurs select and organize an appropriate entity and obtain capital. He has formed limited liability companies, subchapter S corporations, subchapter C corporations, professional corporations, L3Cs, and not-for-profit corporations, including publicly supported organizations and private

foundations. Mr. Singleton has also assisted clients with mergers and acquisitions and with implementing stock option programs.

A member of the patent bar, Mr. Singleton has represented clients in patent prosecution, trademark registration, negotiation of licenses, research and development agreements and joint development agreements. He is familiar with the University of Illinois policies on technology transfer and has negotiated licenses of University technology. Mr. Singleton’s real estate law experience includes purchases and sales, leases, installment contracts, like kind exchanges, and zoning and land use issues.

Mr. Singleton is active in both the business and educational communities. He has served on the Advisory Councils of numerous technology companies and served on the list of advisors at the Illinois Technology Center. He is a member of the business plan review group Second Saturday and has served as a judge for the Academy for Entrepreneurial Leadership Innovation Teams Competition and V. Dale Cozad Business Plan Competition. He currently serves as an Entrepreneur in Residence at EnterpriseWorks.

Mr. Singleton maintained an adjunct faculty appointment with the University of Illinois College of Medicine for roughly 20 years. He has given guest lectures for the University of Illinois MBA course on technology commercialization, the Senior Capstone Design Course in the Department of Agricultural and Biological Engineering, the Academy for Entrepreneurial Leadership Idea to Enterprise Workshop, the Technology Entrepreneur Center, the Advanced Invention to Venture workshop, Enterprise Works, the SIU Carbondale business incubator, the University of Illinois College of Veterinary Medicine and for medical residency programs throughout the state.

The recipient of the 2008 Entrepreneur Advocacy Award and, as an undergraduate, of the Chemical Rubber Company Chemistry Award, Mr. Singleton earned a Bachelor of Science Degree in Geology from the University of Illinois in 1988 and a Juris Doctorate from the University of Illinois College of Law in 1991. Following law school and prior to founding Singleton Law Firm, P.C., he practiced with Webber & Thies, P.C. as an associate and then shareholder.

Mr. Singleton is currently a member of the American Bar Association Sections on Business Law, Intellectual Property Law and Science and Technology Law, the Illinois State Bar Association Sections on Corporation and Securities Law (Prior Member, Section Council) and Intellectual Property Law (Prior Member, Section Council), the American Intellectual Property Law Association, American Chemical Society, Association of University Technology Managers and has previously been a member of the Intellectual Property Law Association of Chicago and Midwest Business Brokers and Intermediaries.

Mr. Singleton has chaired the EDC/techCommunity Mentoring Program, has served on the board of the Don Moyer Boys and Girls Club and Mahomet Area Youth Club, and serves on the boards of the Mahomet Area Kids Endowment Foundation and Mahomet Seymour Soccer Club.

1





Exit Strategies for the Technology Company

Roadmap

Intro-Big Picture (slides 3 – 8) Sample M&A data (slides 9 – 14) Sample of local M&A (slides 15 – 23) Acquisition Criteria (slides 24 – 31) Nondisclosure Agreement (slides 32 – 33) Buyer Visit (slides 34 – 36) Letter of Intent (slide 37) Due Diligence (slides 38 – 47) Deal Structure (Stock Sale, Asset Sale, Merger) (slides 48 – 59) Preferred Stock in M&A Setting (slides 60 – 62) ESOPs (slides 63 – 67) M&A Agreement and Common Terms (slides 68 – 96) Additional local M&A events (slides 97 – 120) Example Study of M&A events in a specific industry (slides 121 – 145) Big dollar tech exits (slides 146 – 155)

2

2

Big Picture - Commonly Used Terms

Merger: a transaction in which two or more corporations combine under state corporation law resulting in all but one of the participating corps losing their identities

Acquisition: a broader term that can mean any general purchase of all or part of a business- can be stock or asset purchases

Consolidation: two or more organizations are combined into one new legal entity

Liquidation: disposition of assets of a business to raise cash; covers a spectrum of business transactions; can include a Chapter 7 bankruptcy

Restructuring: generally, any transaction in which a company’s ownership, assets, or operations are rearranged to increase profitability; can include Chapter 11 bankruptcy reorganization

3

Big Picture - Strategic Buyers vs. Financial Buyers

Strategic Buyers― Typically in a similar line of business― Objective is to “buy low and hold”― Generally, the strategic buyer is a large company that has the

capital and managerial know-how to take the target to the next level of corporate development; this synergy is what makes the deal attractive

Financial Buyers― Often what people think of when they hear “M&A” objective is

to “buy low and sell high”― Perform the function of putting target’s assets to their most

profitable use― Targets are attractive not because of synergies with acquirer’s

business, but because of the target’s financial characteristics

4

3

Big Picture - 10 Exits (John Huston)

1. Grand Slam HomerunExceeds a 10X in five years (>58% IRR)

2. A Lucrative Exit<58% IRR, but at least a 1-10X return

3. The Harry HoudiniEscaped with a 1X return; No loss

4. Lost a LittleDidn’t lose it all (<1X but not a 0X)

5

Big Picture - 10 Exits from John Huston

5. My Grandkids’ CompanyCompany is successful but there’s no exit in sight. Maybe it will occur after my grandchildren inherit the portfolio?

6. The ZombieA walking dead venture which will never become a great company, nor will it die so I can declare the loss

7. Deductible LossIt died without a tail and I got to declare the loss (or sold my shares for $1.00 to record the loss)

6

4


8. Funeral ExpensesNot only did I lose all my original investment, but I had to also cover the costs of winding down the venture, plus pay accountants to provide the final accounting needed so I could take my tax deduction

9. The Worst Gets Worst“The loss that keeps on losing” due to ongoing litigation expenses even after the company has no value

10. Angel HellIn addition to losing all my investment and a considerable amount of my time, media coverage tarnished my reputation, plus damaged my relationship with co-investors

7


The Perfect Loss: I merely lose 100% of my investment; take the tax deduction; suffer no on-going tail of litigation; no wind-down expenses, no media coverage, no damage to my reputation or my relationships with co-investors… and it was a “productive failure” because the entrepreneur, the management team and the investors all learned lessons which will increase their likelihood of success in their next venture

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5

Sample M&A Data

The following slides summarize recent data and exits in the tech industry

9

ExitRound 2014 Report

The ExitRound Report focus on M&A exits below $100 million― 88% of tech M&A deals happen below $100 million― Used data from more than 200 exits that have happened

between 2006 and 2014

10

6


Key Findings:― Companies that generate substantial exits are usually at

least 4 years old Companies below 4 years generally did not show a substantial

variation in price Those more than 4 years old increased substantially in price

Source: Exit Round (2014 Report)

11


Key Findings:― Raising more capital does not necessarily result in a larger

exit price for the company― Exit prices varied among companies in different sectors -

cloud and mobile showed the best return on invested capital


12

7

ExitRound 2014 Report: Exit Curve


The Exit Curve shows the best exits from a return-on-capital perspective form a pattern

13

ExitRound 2014 Report: Exit Curve

It was found that the best average exits tend to be around companies with total capital raises of between $2 million to $3 million and between $5 million to $10 million ― Exit prices tend to drop after companies raise more than $3 million and $10

million


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8

Sample Local M&A

15

American Analytical Chemical Laboratories, Inc

Inception ― 1994: American Analytical Chemical Laboratories (AAC Labs)

founded by biologist Charlie Li in Savoy, IL― 2004: AAC Labs moves to Champaign’s Mattis Commercial

Park Core Technology― Analysis and testing of nutritional supplements for presence

of residues, pesticides, antibiotics, and verification of nutritional content

Market― Dietary Supplement Health and Education Act (2006) requires

supplement testing to ensure identity, potency and safety ― As a result, AAC Labs does testing for ~ 500 customers in the

United States and worldwide ― Major clients include a nutritional supplement company in New

York, and two sizeable customers in Salt Lake City

16

9

American Analytical Chemical Laboratories, Inc

Growth― 1994: AAC Labs opens in Savoy― Revenue increased every year since inception Grew 11% in 2010, during height of economic downturn

― 2004: larger facility, 15 employees― 2010: 23 employees

Exit (2011)― Acquired by Intertek Group for $6.9 million cash― Strategic Buyer ― Founder Charlie Li to remain in charge of Champaign lab,

which expects to grow employee count by 50% to about 35 employees within next 2-3 years

Sources― The News Gazette and London Stock Exchange RNS

17

iCyt Mission Technology, Inc.

Inception― 1995: Cytometry Services, Inc. founded in

Champaign/Urbana― Renamed iCyt Mission Technology, Inc. in 2002

Core technology― Advanced flow cytometry analysis and sorting

technology for use in life science research Market― Private and public research institutions― Pharmaceutical and biotechnology companies― Large medical centers

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10

iCyt Mission Technology, Inc.

Growth― 2000: first full-time employees hired― 2004: 30 employees― 2005: larger facility, 44 employees― 2007: first commercial instrument system

Exit (2010)― Acquired by Sony Corporation― Wholly owned subsidiary, with founder as executive― A strategic acquisition

Source:― Company website and Sony press release dated 2-10-2010

19

Isotech Laboratories, Inc.

Inception― 1985: founded by Dennis Coleman, Jerry Benson and Kerry Riley ― Based in Champaign, IL

Core technology― Isotope testing for the oil and the gas industry: helps reduce risk

in oil and gas exploration and checks integrity of underground storage fields

― IsoTube®, IsoJar®, IsoBag® and IsoPak™ Growth

― 42 employees― Sales: from $1.1 in 2001 to $4 in 2006 and almost $9 million in

2008 ― Now operates three satellite labs in Cairo (Egypt), Rio de Janeiro

(Brazil) and Perth (Australia), in the process of setting up another one in Oman

― Works with almost all oil and gas companies

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11

Isotech Laboratories, Inc.

Acquisition― Isotech reached the point where going forward on its own would

be too risky as its technology was becoming widely used and competitors were emerging

― 2011: acquired by Weatherford Laboratories, subsidiary of Switzerland-based Weatherford Laboratories

― SEC filing by the buyer implies a sale price of $28 million― Weatherford employs more than 50,000 employees worldwide,

and operates in more than 100 countries― Weatherford entered the isotope analysis market through this

acquisition Remains local― Isotech remains in Champaign and operates under same

management Source― News Gazette, SEC

21

Carle Foundation Hospital

Carle Foundation Hospital acquired Carle Clinic Association and its subsidiary Health Alliance― $ 250 million sale― Carle Foundation is a not-for-profit organization― Carle Clinic Association a for-profit, physician owned

multi-specialty group practice Strategic acquisition – creation of an integrated

system for health care― The deal positions Carle to remain under local control― Hospital had been seeking to acquire the Clinic off and

on for the past thirty years – parties’ familiarity with each other

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12

Carle Foundation Hospital

Most of the actual purchase price was allocated to the Clinic’s subsidiary Health Alliance Medical Plans

80% of key employees (physicians) signed employment contracts to continue employment after the transaction

Purchase price paid through borrowing Required regulatory approvals included― Heath Facilities Planning Board― Federal Trade Commission― Department of Justice

Source― News Gazette, December 11, 2009

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Players: Sell-side

At least three groups of people will be involved in the acquisition process—either because they are owners or because of their management role Exiting owners

― Often the founders; view the acquisition as a successful outcome for their entrepreneurship

― May also include angel investors and venture capital firms who made their investment with the goal of an exit

Continuing owners― Includes key equity-owning executives and other personnel,

including possibly the founders, whose continued management is desired by the buyer

Non-owner management― Includes managers whom the 1) buyer wishes to continue to

employ after acquisition and 2) those who will be replaced

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13

Acquisition Criteria

An acquirer will generally formulate criteria regarding the type of business it is looking to purchase before beginning its search, for instance: Industry/Type of business Size of business Profitability Management/Board of Directors style Target’s market characteristics Product lines Tech/R&D activities Purchase price payment options

How acquisition can benefit the acquirer’s bottom lineKnowing these acquisition criteria can help a target identify legal and business steps to make the company more attractive to a potential buyer

25

Acquisition Criteria: Industry/Type of Business

The most easily understood of the acquisition criteria

The usual acquirers of early-stage tech companies are much larger conglomerates― It could also be the end result of a successful joint

development agreement or joint venture Nevertheless, there are legal issues to be

mindful of: will the acquisition give rise to any antitrust or anticompetitive concerns?― Unusual in the context of early-stage tech companies

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14

Acquisition Criteria: Size and Profitability

Size― Metric: annual sales or annual revenue― Companies will look for targets within a specific range,

neither too small nor too large Profitability― Return on equity― Price-earnings ratio― Return on sales― Sales growth trends― Early stage tech company may not yet be profitable but

may still be an attractive target for a strategic buyer

27

Acquisition Criteria: Management Style

Management/Board of Directors style― Has the target been well-managed so far, and is that

likely to continue? Are there middle-rank management who are ready to

succeed following the departure of owners and high-level executives?

What system is in place to continue to recruit and train qualified management candidates?

Does management match the acquirer’s desired attributes, such as for business aggressiveness or conservative management?

Will management be replaced upon closing of the acquisition?

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15

Acquisition Criteria: Market Characteristics

Are there any peculiarities to the target’s market characteristics that need to be considered?― Does a single customer account for a large proportion of

the target’s sales? This may not be especially problematic if the customer is a

government agency― Has the target developed a business niche that sets it

apart from it competitors?― Similarly, has the target developed a geographic niche

that makes it attractive to the potential acquirer?

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Acquisition Criteria: Product Lines and R&D

Product Lines― Some acquirers may not consider single product line

companies for acquisition; strategic buyer may roll the product line into its existing company and be very comfortable with one product line

Research and Development― What are the prospects for the tech it has developed?― What legal protections for its IP are in place? Will there be any difficulties in transferring the IP to a new

owner?― Who drives innovation at the target? If it is a small number of

employees, what would happen if they left the company?― What has the target’s R&D track record been like?― What are the projections for R&D expenditures in the short-

term and the long-term?― See IP audit checklist

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16

How Acquirers Identify Targets

Internal― Some acquiring companies have an internal department whose role (or one

of its roles) is to identify potential acquisition targets - commonly called “Corporate Development”

― Often the companies know each other through trade shows, a joint development arrangement or some other preexisting relationship – the ________ industry is a “small world”

External― Selling companies may retain external professionals to help with the sale― Brokers or finders sometimes handle smaller acquisitions – “main street”

businesses – these often sell through word of mouth without a broker ― M&A advisory firms or investment banks may advise on very large deals― Fees for these groups might range from a 2% “finder’s fee” to the more

complicated “Lehman formula” - 5% on the first million, 4% on the second million, 3% on the third, 2% on the fourth, and 1% on the remainder over four million dollars, although Lehman formula fallen in disfavor

31

Nondisclosure Agreement (NDA)

• Often the first agreement to be entered into and an early first step in M&A transaction

• Use a nondisclosure form that is specifically drafted for M&A activity

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17

Some areas of the NDA that may be unique to M&A

• Confirms language clarifying that discussions between parties about the transaction are confidential, for instance:• identity of the parties • terms of any bid if the recipient is the acquiring company (if recipient is

the acquiring company and needs financing for the transaction, obtain a carve out allowing information to be disclosed to financiers)

• Limits use of the confidential information to evaluation of the specific transaction and for no other purpose

• Non-solicitation/Employment of Disclosing Party’s Employees (important to provider/seller)

• Sets the terms of the NDA (limited or perpetual) (consider unlimited term for trade secrets)

• Privilege – confirms disclosure is not deemed to have waived or diminished attorney-client privilege, attorney work-product protection, etc

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The Buyer Visit

Typically occurs very early in the acquisition process Discretion is important― No need to tip off customers, vendors, employees, competitors,

and others that an acquisition is being contemplated Preparation is important― Buyer is looking for hidden risks and unexploited opportunities― First question buyer will ask is “Why are you selling the

business?” — Make sure you have a good answer The best answer typically focuses on what the buyer brings to

the table that the seller doesn’t have (greater capital, larger sales and distribution networks)

Positions the company as ready to take-off once those advantages are brought to bear

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The Buyer Visit

Know your company inside and out― Know your costs, your margins, and your ratios― Be able to explain the market your company operates in and

provide a forecast for your operations How to handle the company’s weaknesses― Part of knowing your company is knowing its strengths and

weaknesses― Naturally seeming forthright will build more confidence in the

buyer than appearing cagey― Position the company’s weaknesses as capable of easy

correction — a weakness then appears to be an untapped opportunity Example: A company has an 8-week backlog on orders, which

causes lost sales. The acquirer has the resources to handle order fulfillment more

efficiently and recapture the lost sales

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The Buyer Visit

Remember that the buyer visit is a two-way exchange of information― Seller should also question buyer― Seller should use buyer’s responses to identify what

matters to the buyer — and weave this information into making the case for acquisition and drive up your perceived value to buyer

― Seller should get a sense whether the buyer understands your business and the industry and market it operates in Many acquisitions involve earn-outs Need to be confident that buyer has the capability of

meeting the earn-out benchmarks

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Letter of Intent (“LOI”) / Term Sheet

Sets forth key business terms before definitive legal documents are prepared

Legally binding vs. non binding vs. binding only as to particular terms (confidentiality, no shop)― Best to avoid “no shop” provision, which would prohibit

any discussion with another possible buyer― If “no shop,” cannot be removed, negotiate a better

purchase price, break fee, or limit it to a “window shop” - cannot solicit buyers but can talk to them if they come to you

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Conducting Due Diligence

Due Diligence: What is it?― Fundamentally, it is the investigation of a business in

connection with a possible transaction― Usually performed by someone who is considering

whether to purchase or make a significant investment in a business (buy-side due diligence)

― Sellers can and should engage in (sell-side) due diligence to uncover any problems that may be presented by a sale to a suitor

― Although both parties should engage in due diligence, because of the seller’s information advantage, buy-side due diligence tends to be much more intensive

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Due Diligence: What does it cover?― Legal issues This is only a small portion of due diligence

― Valuation issues Financial data Market and industry forecasts

― Due diligence is not designed only to uncover risks (although it is meant to do at least that), it can also help uncover untapped opportunities Due diligence can drive a buyer away when unacceptable

problems are found or it may encourage a buyer when it appears that the problems are solvable

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Due Diligence: How is it conducted?― Traditionally, lawyers for the buyer would prepare a list of

documents required from the seller Usually, this list would encompass all the subject areas of due

diligence, not just the legal due diligence Depending on the bargaining position of the parties, due

diligence demands may (or may not) be negotiated― Seller would then be given a generally short amount of time to

assemble the requested documentation and present it for buyer’s examination in an on-site (seller) “data room” The data room is a famous feature of the M&A process, but the

online data room is replacing the physical data room― Buyer’s M&A team would then review the requested material at

the data room over the course of a few days or longer and make a report to the buyer concerning their assessment

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Due Diligence: What are its objectives?― As mentioned, one objective of due diligence from the

buyer’s perspective is to uncover latent risks in the acquisition

But it is also meant to provide insight on other questions as well, such as …― Can seller effectively integrate the newly acquired

business?― Have the representations that have been made been

accurate?― What is the true value of the business, both stand-alone

and as a unit of the potential acquirer?

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Due Diligence: The seller’s team Clearly, a due diligence can be disruptive to seller’s

business― The additional administrative burden of meeting due diligence

requirements― The risks of disclosures

Minimizing this disruption begins with the formation of a due diligence team― Team leader from the company― Operations personnel― Accounting personnel (internal and/or external)― Legal personnel (internal and/or external)― Other experts from within the company or external consultants

(valuation experts, environmental consultants, risk managers), as needed

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Due Diligence: The seller’s objectives― Uses its initial information advantage to obtain better

terms and less burdensome representations and warranties

― Minimizes the adverse effect of due diligence mandated disclosures

― Controls the marketplace’s knowledge of the pending deal and perform effective damage control if the deal falls through

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Due Diligence: How seller achieves its objectives― Impose certain conditions on the due diligence process Only responds to written due diligence requests Uses staggered due diligence to prevent premature disclosure;

more sensitive disclosure occurs later in the process Imposes distribution restrictions — agree that material

designated as “Attorneys’ Eyes Only” will only go to buyer’s lawyers and not their operations personnel

― Addresses adverse facts Remedies defects before closing Notifies buyer; carries the risk that indemnification will be

sought Ignores them and sees if buyer discovers; as with any

negotiation, seller should be candid but does not need to fall on its sword

Sells off problem assets

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The Data Room

The Data Room Defined― Before, due to the amount and sensitivity of the

documentation requested, seller’s responses to buyer’s due diligence requirements were kept on site at seller’s premises in a location known as the “data room” A customary component of the M&A process even as

technology alleviates some of the cost and confidentiality concerns

― The data room is part of the “beauty pageant” - if the data room is lacking or looks too hastily and unintelligently put together, the buyer’s confidence in the seller may take a serious hit

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The Data Room

Creating a Data RoomWhile the data room is important for maintaining buyer’s confidence, it can be time-consuming and expensive to create

Here are some typical facts about putting a Data Room together:― Many of the documents will be located throughout the company’s

premises and offices; the personnel charged with locating them may have to ask persistently to ferret out the needed documents

― Due to time constraints, it may not be possible to review all documents before they are included in the data room

― Some sellers don’t index anything and let buyer figure it out; others provide comprehensive indexes. Because you don’t necessarily want to provide a map to embarrassing disclosures, the best result is probably to identify what top-level portion of the due diligence list a given document is responsive to

― Be prepared for follow-up requests and to determine how much access to your employees you will grant to buyer

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The Data Room

Running the Physical Data Room― Whether you have one potential buyer or several, there

are some common rules to running a Data Room that help ensure confidentiality and responsiveness are maintained: Have a sign-in procedure for visitors to the data room Develop a check-in/check-out procedures for documents Determine whether copies will be allowed, and if so, how

copying will be performed and what restrictions will be imposed on use of the copies

Similar protections should be in place for an electronic data room

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Deal Structure - Stock Sale

Stock sale – buyer buys the stock of the target― Target corporation realizes no gain and so there is no

corporate tax paid by target― Target shareholders pay only the capital gains tax rate

on the sale of their stock― All assets and liabilities are still the assets and

liabilities of the target― Buyer may leave target as a separate entity or

integrate it into buyer over time in by taking additional measures

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Deal Structure - Stock Sale

Advantages― Target structure is not altered by the deal and remains

generally intact― Need for third-party consent (as to assignments of

contracts, leases, etc.) is reduced― Buyer can still get stepped up basis if the target is an S

corporation and 338(h)(10) election made

Disadvantages― Agreement of every selling shareholder needed― Buyer does not get stepped up basis in assets unless

338(h)(10) election made (limited to S corporations)― Target still has all of its liabilities

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Deal Structure - Asset Sale

Asset sale -buyer purchases substantially all of the target’s assets― Buyers prefer this route because:

it has favorable tax implications (buyer gets a step up in basis in the underlying assets)

cuts off liability for existing target debts facilitates buyer hiring less than all of target’s employees and buyer

need not take on employee benefit plans― NOT favored by sellers structured as a C corporation (most VC

funded firms) because the target/selling corporation will realize a gain, pay tax on that, and the shareholders will pay tax again when the proceeds are distributed This adverse tax treatment mitigated for S corporations

― Both C corp. and S corp. still may prefer to avoid having to deal with leftover liabilities and so may prefer asset sales for this reason

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Deal Structure - Asset Sale

Issues― Buyer and seller will need to agree how to allocate the purchase price

among different IRS categories― Non-assignment clauses in target’s contracts will be triggered so

buyer may have to renegotiate these contracts― Buyer may not end up with a standalone business― Stockholders of target may still be required to sign the sales contract

and be on the line personally for certain obligations under the contract

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Deal Structure - Merger Types

Two-party merger― Acquiring corporation acquires the target by merging

target directly into acquiring corporation― Can be tax-free if the requirements of IRC §368 are met

Multi-party merger― Although the two-party merger is the simplest and most

frequently encountered, a company can acquire several independent targets

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Two-party merger diagram

Acquiring

Target

Target Shareholders

Merger consideration*

Merges into Acquiring

(Target ceases to exist following merger)

* Consideration is acquiring stock and possibly cash or other property (boot)

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Forward triangular merger― Acquiring corporation forms a subsidiary corporation

(“Sub”)― Sub acquires the target by merging target into Sub― Can also be tax-free if the requirements of IRC §368 are

met― Since Sub is a corporation, the acquiring corporation

(which is the sole shareholder of Sub) enjoys some limitation of liability—a feature not shared by the two-party merger

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Forward triangular merger diagram

Acquiring

Target

Target Shareholders


Merges into Sub(Target ceases to exist following merger)


Sub

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Reverse triangular merger― Acquiring corporation forms a subsidiary corporation

(“Sub”)― Sub is acquired by the target by merging Sub into target― Can also be tax-free if the requirements of IRC §368 are

met― Since target ends up as a wholly-owned corporate

subsidiary, the acquiring corporation enjoys some limitation of liability—a feature not shared by the two-party merger

― Because target continues in existence, assignment or transfer of contract rights and licenses can be less problematic

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Reverse triangular merger diagram

Acquiring

Target

Target Shareholders


(Sub ceases to exist following merger)


SubMerges into Target

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Deal Structure - Hybrid Acquisition

The hybrid acquisition involves the larger company taking a large, but not complete, stake in the smaller company, together with the right to purchase the company at a later date according to agreed-upon valuation metrics― Sometimes used in the tech industry

Why acquirer’s sometimes like this approach:― Allows diversification; instead of acquiring one company for $30 million,

the hybrid buyer can take less-than-total stakes over several companies― Access to new products and technology is obtained at a smaller cost― Key personnel are likely to remain in place, but now they also have capital

infusion from the larger hybrid buyer to take company to its next level Owners of selling company may like this approach as it lets

them “take some money off the table” now (their entire net worth may be locked up in the company stock) while still owning a portion of the company going forward

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Deal Structure - Recapitalization as an Exit Strategy

Recapitalization: company raises funds through taking on debt; this money is then used to either buy back stock from exiting shareholders or by paying a “super dividend”

Partial exit: usually, recapitalization represents a partial exit. The shareholding owners retain some equity in the company and managerial responsibility; these continued investment and management by the original owners makes the recapitalization deal attractive to the lender

Positive cash flows required: because a recapitalization will create a debt that needs to be serviced, it is a more appropriate strategy for mature businesses with a positive cash flow

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Preferred Stock

Equity that has preferences over common stock Preferred stock holders may have the right to

receive dividends before common stock holders In case of liquidation, preferred stock holders

are paid before common stock holders― But after creditors

Preferred stock may be convertible― Convertible preferred stock can be exchanged for

common stock― Conversion is one-way

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Participating Preferred Stock in M&A

Form of convertible preferred stock― Often the type of stock provided to VC investors

Provides investor with extraordinary rights if company is sold or liquidated― Investor receives return of its purchase price paid for the stock― Investor may also receive guaranteed return on investment― Investor receives pro rata share of remaining proceeds― Holders may enjoy additional benefits over common stock

holders Enhanced voting rights Dividend preferences

The liquidation preference has a greater effect proportionately in a “modest” exit

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Participating Preferred Stock in M&ANon-participating preferred

Participating Preferred

Shares of common stock 8 million 8 millionShares of preferred stock 2 million 2 millionPreferred stock purchase price $10 million $10 million

Company sold for $20 millionCommon stock proceeds $16 million $8 millionPreferred stock proceeds $4 million $12 million (10 + .2x10)



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Employee Stock Ownership Plan (ESOP)as an Exit Strategy

An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan

Company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares

Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan

Company contributions to the trust are tax-deductible, within certain limits

Shares in the trust are allocated to individual employee accounts

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Employee Stock Ownership Plan (ESOP)as an Exit Strategy

Why ESOPs are used as an exit strategy Owners of privately held companies can use an ESOP to create a ready

market for their shares. Under this approach, the company can make tax-deductible cash contributions to the ESOP to buy out an owner's shares, or it can have the ESOP borrow money to buy the shares.

ESOPs are unique among benefit plans in their ability to borrow money. The ESOP borrows cash, which it uses to buy company shares or shares of existing owners. The company then makes tax-deductible contributions to the ESOP to repay the loan, meaning both principal and interest are deductible.

Capital gains taxation on owners’ sale of stock to ESOP can be deferred if sale proceeds are reinvested in qualifying U.S. stocks and bonds

However, an ESOP requires a corporate form, either an S corporation or a C corporation― ESOPs in S corporations can be a little tricky—S corporations have limitations on the

number of shareholders and who is eligible to be a shareholder― ESOPs in S corporations have greater limitations on tax deferred capital gains than C

corporation ESOPs

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CU Area Companies with ESOP Exits

At least three local companies have used ESOPs as exit strategies

Human Kinetics― 1973: Sports and leisure publishing firm founded by U of I

kinesiology professor Rainer Martens― 1985: Martens left the university to operate HK full-time― 2000: HK was doing $20 million in sales and employed about

250 people― 2005: Martens sold HK to his employees through an ESOP― 2008: The employees proved to be able stewards of Martens’

legacy: HK had revenues over $37 million and a work force of 320

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Hobbico― World’s largest manufacturer and distributor of model

hobby products― Hobbico resulted from the 1986 consolidation of two

other model hobby companies that were founded in the early 1970s

― 2000s: Hobbico employs about 800 people in facilities of over 600 thousand square feet in Illinois and Nevada

― 2005: Clint Atkins, one of Hobbico’s owners, mentioned that the then 20-year-old company had “never had an unprofitable month”

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SAIC― Federal contractor that works on military and security projects― 2005: Went public ― Before that, SAIC was one of the country’s largest employee-

owned companies … and the IPO in 2005 proved to be very lucrative for them IPO raised over one billion dollars, which was distributed as a

special dividend to employee and retiree shareholders Employees retained 80% ownership of company following the

IPO― Privately held companies have to repurchase the employee-

owned stock when employees leave the company; by going public, SAIC used the market to supply the buyers and the funds, rather than company cash

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The M&A Agreement

The M&A Agreement (Stock Purchase Agreement, Asset Purchase Agreement, Merger Agreement) is the primary document that governs the terms and conditions detailing the merger of two companies or the acquisition of one company by another― It implements the LOI in more detail

There are many legal and business issues involved ― This presentation addresses just a few of them

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M&A Agreement Key Provisions

Purchase Price and Purchase Price Adjustments Representations and warranties Buyer and seller covenants Indemnification provisions Closing conditions Termination provisions

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Purchase Price - Determining the Sales Price

Best valuation is the one that comes in the form of a check (or better yet – a wire transfer)

Measure the value proposition in the acquirer’s terms― How will the acquisition benefit the acquirer’s bottom

line?

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Purchase Price -Approaches to Business Valuation

Income approach― Present value of expected future cash flows

Market approach (comparable sales)― Transaction prices of similar companies― See industry specific sales summarized at end of these

slides

Asset approach― Market value of liabilities deducted from market value of

assets

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Purchase Price - Post-Closing Earnout Provisions

Prospective parties to a M&A deal typically have different views as to the value of the subject company making agreement on the purchase price difficult

Sometimes buyer is unable to afford target company, but nevertheless remains very interested in doing so― One way to bridge the gap in the above situations is to have a

portion of the purchase price based on the future performance of the target company

― Such provisions, often referred to as “Earnouts”, entitle the seller to receive additional payments if the business meets certain contractual targets post-closing

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Earnout Characteristics

Earnout provisions allow parties otherwise unable to agree to a purchase price to nevertheless reach a deal― Earnout provisions are important and often times represent a

substantial portion of the total consideration Achievement of the earnout necessarily depends

upon the buyer’s management of the business post-closing, and how the buyer accounts for the post-closing financial performance of the business

In light of this potential conflict between the buyer and seller, disputes often arise relating to earnoutprovisions

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Inclusion of Earnout Provisions - SRS Study74

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Average Periods of Earnout – SRS Study75

Typical Earnout Disputes

Two primary disputes that arise in relation to earnout provisions include:1. Disagreement as to whether the applicable target(s) for

the earnout payment were met (--i.e., whether the EBITDA target was met)

2. Disagreements as to why the earnout targets were not satisfied (--i.e., whether the buyer adequately supported the business after the closing)

These issues can be addressed within the earnoutprovisions themselves through a variety of covenants and provisions

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Earnout Dispute Avoidance

The parties’ rights and obligations with respect to earnout provisions are contractual

The resolution of an earnout dispute often turns to the specific language negotiated by the parties― Courts will not rewrite the agreement in the name of

“fairness”, but will instead focus and enforce the “plain language” of the contract itself

Careful drafting of the contract is key - clearly define salient points with the agreement itself

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Earnout Covenant to Run Business in Accordance with Past Practice

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Covenant to Run Business so as to Maximize Earnout Payment

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Earnout Dispute Example

Comet Systems, Inc. Shareholders’ Agent v. MIVA, Inc. presents a typical dispute relating to whether the earnout was met:

MIVA acquired Comet pursuant to a merger agreement The agreement included an earnout provision where the earnout payment was

based upon relative to performance goals When calculating performance, the agreement allowed for the exclusion of “one-

time, non-recurring expenses” , but did not further define this term Comet paid an approximately $800,000 bonus to its employees MIVA calculated the bonus payment as an ordinary expense resulting in revenue

targets not being met and therefore a significantly reduced earnout payment Comet calculated the bonus as a “one-time, non-recurring expenses” whereby

revenue targets were met and a much higher earnout payment due

The Court found the bonus to be a “one-time, non-recurring expense” Lesson: Parties would be well-served to carefully draft the agreement to

clearly define how the earnout should be calculated (and determine the earnout consistent with the agreement) in order to reduce the likelihood of litigation

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Purchase Price - Closing Adjustment Provisions

Delays, sometimes significant, invariably exist between the Negotiation of the Purchase Price and the Closing of the Deal

During that period of time, numerous events can and do occur affecting the reasonableness of the negotiated Purchase Price

Closing Adjustment Provisions provide an opportunity to allocate risk during this time period

While the determination of the Closing Adjustment appears straightforward, it is not

Closing Adjustments can have a significant impact on the Purchase Price

Disputes often arise surrounding Closing Adjustments

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Net Working Capital Adjustment― Targets a closing balance sheet net working capital

amount― Usually based on an interim net working capital, average

annual net working capital or forecasted net working capital amounts

― To the extent the actual closing net working capital value deviates from the target an adjustment to purchase price may come into effect

― These adjustments may be structured as one or two way adjustments to purchase price

Purchase Price - Net Working Capital Adjustment82

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Purchase Price - Closing Adjustment Provisions

The 2013 Private Target Merger & Acquisitions Deal Points Study from the American Bar Association (ABA) found that 85% of deals analyzed included Adjustment Provisions― Working capital was the most common adjustment (in

91% of the relevant deals)― Other metrics used in calculating adjustments include:

earnings, debt, assets, cash or other

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Sample Post-Closing Purchase Price Adjustment Provision (per ABA)

The “Adjustment Amount” (which may be a positive or negative number) will be equal to the amount determined by subtracting the Closing Working Capital from the Initial Capital. If the Adjustment Amount is positive, the Adjustment Amount shall be paid by wire transfer to Seller to an account specified by Buyer. If the Adjustment Amount is negative, the difference between the Closing Working Capital and the Initial Working Capital shall be paid by wire transfer to Buyer to an account specified by Seller.

… “Working Capital” as of a given date shall mean the amount

calculated by subtracting the current liabilities of Seller … as of that date from the current assets of Seller … as of that date. The Working Capital of Seller as of the date of the Balance Sheet (the “Initial Working Capital” was _______ dollars ($__________)

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Purchase Price - Escrow

Escrow of a portion of purchase price can last in excess of 12 months

Percentage of purchase price varies but can run from five to fifteen percent

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Representations and Warranties

Intended to disclose all material legal, and many material financial, aspects of the business to the buyer

Seller also gives assurances that the transaction itself will not have adverse effects upon the property to be conveyed, such as any limitations on transfer or assignment of rights

Lenders providing acquisition financing will require the buyer to make extensive representations and warranties about the target as a condition to funding

Like any other part of the deal, representations and warranties are negotiable. There are some representations that buyers typically try to include—but by no means does this mean that these provisions must be included

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Common representations and warranties include the following: Financial statements: closing audit is imperative to verify the

authenticity of all the items, particularly inventory, receivables, and payables. Then a post-closing adjustment is factored into the final floating payoff at closing

Assets: buyer wants to be sure he is gaining full title to the assets, particularly as it pertains to items such as intellectual property and patents. Also, the buyer wants assurances that the machinery and equipment are in good working order

Taxes: not only is it critical to verify any tax liability if it is a stock purchase, but in the case of an asset purchase, the owner wants to be sure there are no liens on assets due to failure to pay taxes

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Environmental: can be especially important because environmental liability can be difficult to limit. Liability follows the asset, so even that mode of transfer provides minimal liability protection

Pending and potential litigation: seller will want to place a time period or cap on his or her total responsibility. Usually, the buyer ends up sharing some of the risk for previously made products

Authorization: selling the company from stockholders, directors, or third parties such as the bank the owner will require authorization. Seller will be expected to ensure to the buyer that all liabilities are represented; all contracts are disclosed; all wages, taxes, and insurance are current; and all bonus plans are disclosed

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Pre-Closing Covenants

Apply after signing the M&A Agreement and before closing― Seller generally required to operate the business in

normal fashion, with some restrictions― Buyer will have complete access to seller’s records― Seller required to notify buyer of certain developments

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Post-Closing Covenants

Seller not allowed to compete with buyer or solicit buyer employees― Cooperate regarding assignment of contracts, transfer of

real estate, vehicle titles, etc.― Coordinate regarding accounts receivable collection― Earnout monitoring and payments

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Closing Conditions

Not included in sign and close deals Bring down of representations and warranties― Qualifiers: materiality or MAE

Third-party consents― All required consents or agreed-upon list of material

consents Employment agreements with key employees

remain in place Real estate - no MAE Legal opinion

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Indemnification

Indemnification is the follow up to representation and warranties― it establishes what remedies will be available for breach― Can be in the form of escrow or insurance policy

Indemnification provisions related to M&A transactions (mergers, asset purchases and stock purchases) are some of the most complex and heavily negotiated provisions in M&A agreements

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Indemnification provisions can become a “contract within a contract” having its own term, payment provisions, notice provisions, governing law and dispute resolution

There are a few reasons for this complexity:― The indemnitor is always trying to limit indemnification liability

while the indemnitee wants as much indemnification protection as possible

― Parties attempt to anticipate every conceivable indemnification event

― Everything is negotiable, so there is no one “right” answer concerning indemnifications

Indemnification93

Indemnification parameters include: Time limitations: Establishing a period in which a claim for

indemnity must be raised Subject matter limitations: What counts as “material”? Whose

knowledge can be considered company knowledge? What warranties will have long post-closing periods and which warranties will end soon after closing?

Dollar limitation: What is the maximum seller will pay out? What minimum must be reached before any claims are paid (the “basket” or “deductible”)

Identities: Who precisely is indemnifying whom? Are they jointly and severally liable or not?

Defense of third party claims: If a third party sues, what obligation do seller and buyer have to assist in the defense of the suit?

Dispute resolution: Will claims go to court? Or to an expedited arbitration panel?

Indemnification94

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Representation & Warranties

Only apply when closing is not held simultaneous with signing of the M&A agreement

Reps and warranties must be true as of date of closing

Third-party consents must be obtained or accounted for

No material adverse change in the business Employment agreements with key employees in

place

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Termination of M&A Agreement

Sellers typically want to close quickly Buyers typically want to take enough time to

make sure they know what they are buying If buyer not ready to close on time, buyer can

typically terminate, subject to certain restrictions

Financing contingency sometimes included that allows buyer to walk if it cannot obtain financing

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Additional Local M&A Events

More local M&A cases….

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Caterva, Inc.

Inception ― 2008: Caterva, formerly known as Yottaclick, Inc., was

formed in Champaign, Illinois, by Hieu Li while he was a University of Illinois doctoral student

Core Technology― Caterva’s main product is the Mirror.me, a real-time

social media platform that looks at activity on online social networks

Market― People spend a quarter of their online time on social

networks and blogs, and companies with an online presence are interested in targeting their audience

― Mirror.me was the first online product to craft individualized social signatures for its users based on the interests they express on social media

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Caterva, Inc.

Growth― 2010: 5 full-time employees and received funding from

IllinoisVENTURES in the amount of $600,000 ― 2011: Caterva received $1.2 million in seed funding ― 2012: Caterva secured a new funding round of $490,000

from an undisclosed venture investor Exit (2013)― Infochimps acquired the assets of Caterva, Inc. from

IllinoisVENTURES, RPM Ventures, Serra Capital Sources― The News-Gazette, and Clear Sight Advisors

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TetraVitae Bioscience, Inc.

Inception ― 2006: TetraVitae Bioscience, Inc., formerly known as Advanced

Biofuels, Inc., was co-founded by Hans-Peter Blaschek, director of the UI’s Center for Advanced BioEnergy Research

Core Technology― TetraVitae is a leading developer of bio-butanol with a

patented bio-catalysis technology Market― The growth of renewable chemicals has been spurred on by a

volatile marketplace for oil― TetraVitae proprietary technology and expertise in the fields of

industrial fermentations, process engineering, microbiology, and cellulosic feedstocks aim to lower the costs of production

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TetraVitae Bioscience, Inc.

Growth― 2008: funding from Harris & Harris Group, IllinoisVENTURES and

RPM Ventures totaling $6,300,100― 2010: funding from IllinoisVENTURES and RPM Ventures

totalling $2,869,000 Exit (2011)

― Eastman Chemical company acquired TetraVitae― Tetravitae operates as a subsidiary of Eastman ― Eastman serves customers in approximately 100 countries and

had 2013 revenues of approximately $9.4 billion. Eastman employs approximately 14,000 people around the world.

― Terms of the transaction were not disclosed Sources

― Eastman Chemical’s website, Bloomberg Businessweek, and The News-Gazette

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ByteMobile, Inc.

Inception― 2000: founded by Constantine Polychronopoulos, a University

of Illinois Professor― 2002: by this year, it had already attracted nearly $30 million

in venture capital Core Technology― ByteMobile focuses on optimizing high-bandwidth data

services on wireless networks designed for low-bandwidth voice services

Market― Provides video and multimedia optimization software― ByteMobile uses its own Smart Capacity technology both its

Unison and T3000 series platafforms― By 2006, Bytemobile's products "touch three-quarters of a

billion mobile subscribers around the world”

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ByteMobile, Inc.

Growth― 2001: customers included cellular operators Vodafone, Sprint and

Nextel― 2002: 100 employees ― 2005: Bytemobile acquired ProQuent Systems and absorbed its 30

employees― 2011: Joint Venture with China Comservice

Exit (2012)― ByteMobile was acquired by Citrix Systems for $435,000,000 ― Citrix plans to build on ByteMobile as the center of its go-to-

market strategy for 3G and 4G LTE wireless operators Sources

― Privo, Citrix’s website, and The News-Gazette

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Volition, Inc.

Inception ― 1993: Mike Kulas co-founded Parallax Software with Matt

Toschlog― 1996: Parallax Software split into Volition Inc. and Outrage

Entertainment Core Technology

― Volition develops games, including the “Saints Row” line of videogames

Market― In 2012, total U.S. consumer spending on video game content

amounted to 14.8 billion dollars― In November 2014, physical video game software sales in the

United States amounted to 1.06 billion U.S. dollars― Volition makes games for the "core gamer" market, which are

intended to appeal to the avid player, include action, fighting, racing, shooting and strategy games. Its other areas are "online games" and "kids, family and casual games"

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Volition, Inc.

Growth― 1998: Volition had grown to 30 employees― 2000: approximately 40 employees― 2004: approximately 100 employees― 2011: grows to 220 full-time employees

Exit (2000)― 2000: THQ Inc. acquires Volition for 1 million shares of

THQ of common stock― 2013: Koch Media, headquartered in Germany, wins a

bid by offering $22.3 million for Volition Sources ― The News-Gazette and Statista

105

Argus Systems Group, Inc.

Inception ― 1993: founded and headquartered in Savoy, Illinois, and

continues operation in Savoy until this date Core Technology― Argus operates the system enhancing software PitBull

Market― There is an increased reliance on internet-based business

architectures that support core business processed and require advanced security mechanisms

― International vendor of security software and engineering services, providing security solutions for servers

― Argus software is used by financial services companies, utilities and government agencies around the world

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54

Argus Systems Group, Inc.

Growth― 2003: Argus filed for liquidation and its assets are

acquired by Open Prairie Ventures for $1.5 million― 2006: announced PitBull Foundation and PitBull

Foundation Suite for Linux― 2011: approximately 15 employees working in Savoy, IL

Exit (2011)― General Dynamics acquires Argus― Value of the transaction was not disclosed

Sources ― The News-Gazette and the Washington Post

107

Adrenaline Mobility, Inc.

Inception― 2012: Adrenaline, formerly named Valkyrie Computer

Systems, Inc. was founded by a team from the University of Illinois engineering school

Core Technology― Adrenaline uses military-grade end-to-end encryption to

protect user’s data before storing it on a mobile device and before sending it to cloud servers

Market― Adrenaline operates a platform for creating cross-platform,

pure HTML5, and enterprise-class applications― It also provides cloud-based application services that turn

distributed services into Web services, and enterprise services to host enterprise applications on mobile devices without vendor lock-in

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Adrenaline Mobility, Inc.

Growth― 2012: seed investment from IllinoisVENTURES― 2013: investment Serra Ventures, and a National Science

Foundation Small Business Innovation Research grant Exit (2014)― Adrenaline joined Twitter

Sources― University of Illinois website and Business Week

109

RiverGlass

Inception― 2003: Formed to commercialize eight years of grant-funded

research at the National Center for Supercomputing Applications (NCSA) at the University of Illinois

Market― RiverGlass is the leading provider of advanced, intelligent web

information collection and analysis solutions― RiverGlass provides application solutions to government

agencies and commands in defense; intelligence; law enforcement; and major corporations

Exit― 2011: RiverGlass was acquired by Allen Systems Group (ASG)

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Traco Labs

Inception― 1985: local company

Market― Bulk nutritional goods, including nutritional lipids

Exit― 2000: sale to publicly traded German company –

SKW/Degussa, renamed Degussa Bioactives Source― Company press release

111

Chromatin, Inc.

Inception― 2000: founded by University of Chicago professor

Daphne Preuss with post-docs Gregory Copenhaver and Kevin Keith

― Headquartered in Chicago, IL Core technology― Mini-chromosomes for simultaneous addition of

multiple genetic traits to plants Market― Agricultural, energy, chemical, nutritional, and

pharmaceutical sectors― Plant growers, seed producers, and bioprocessors

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Chromatin, Inc.

Growth in part through an acquisition― 2007: License agreement with Monsanto Company― 2007 - 2009: License agreements with Syngenta

Biotechnology, Inc.― 2009: Technology alliance and license agreement with

Bayer CropScience― 2009: Research and license agreement with Dow

AgroSciences, LLC.― 2010: Research agreement with ACGT Sdn Bhd― 2010: acquired Sorghum Partners, Inc. and Milo

Genetics, LP

113

Biodisplay Technologies

Inception― Founded by U of I biochemistry professor David Kranz

and former U of I faculty member Dane Wittrup Market ― A “virtual company” with no physical location― Yeast display technology that shortens time to get

experimental drugs to clinical trials Exit― 2001: sold for $7 million to Abbott Labs

Source― The News-Gazzete

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Kuck & Associates (KAI)

Inception― 1979: headquartered in Champaign, Illinois

Core Technology― Intel and KAI were leaders in the development of OpenMP™, the

industry standard for multithreaded software development Market

― KAI is a leading provider of performance-oriented compilers and programming tools used in the development of multithreaded applications

Exit― 2001: Sale to Intel― Resulted in Intel having presence in our community― Strategic acquisition

Sources― Intel News Release

115

Demaco

Sold to SAIC some time back Resulted in SAIC having a presence in the

Research Park Dennis Andersh continued as an executive with

SAIC after the transaction SAIC an ESOP for period of time, then went

public Strategic acquisition

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Gill Athletics, Inc.

Exit:― Purchased assets of Porter Athletic Equipment Company― Both companies early innovators in sports equipment― Porter’s activities now moved to Champaign after

transition period Inception ― Gill is a local company; Porter had local ties but based in

Broadview, IL― Porter, founded in 1868, was one of first manufacturers

of basketball goals and gymnasium equipment

117

SourceGear, Inc.

Inception― 1997 founded by Eric Sink and Corey Steffen and based in

Champaign, IL Core technology― Programming tools for software development

Growth― 2002: 36 employees

Exit― 2009: Microsoft acquired the Teamprise division of

SourceGear― 2010: The main product was rebranded by Microsoft: Visual

Studio Team Explorer Everywhere― Rest of SourceGear still locally owned

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A-1 Alarm Service, Inc.

Inception― 1968: founded by Cecil Byrnes and based in Champaign, IL

Market― Residential and commercial alarm/monitoring service― Customer base: 65% residential, 35% commercial

Growth― 2002: Diane Ruedi, the founder’s daughter, took over as president of

company after the founder’s death― 2010: 20 employees

Exit― 2009: Friendly acquisition by local competitor F. E. Moran Alarm

F. E. Moran Alarm had 130 employees, and 50% commercial customers All A-1 employees retained, to move to F. E. Moran Alarm’s HQ

― Customers of A-1 Alarm perceived no change Contact numbers not changed, familiar operators No change in fees for 15 months

A strategic acquisition

119

Intersymbol Communications, Inc.

Inception― 2001: founded by University of Illinois professors Naresh

Shanbhag and Andrew Singer and based in Champaign, IL Core Technology― High speed optical devices for digital communications

Exit― 2006: acquired by Kodeos Communications A strategic acquisition Operated as subsidiary of Kodeos

― 2007: Kodeos Communications acquired by FinisarCorporation Intersymbol continues as subsidiary of Finisar

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M&A Activity in Specific Industry

The following slides summarize M&A activity in the coatings industry

121

Rust-Oleum Corporation

A leading manufacturer and marketer of specialty coatings in the United Kingdom Annual sales of approximately $45 million

M&A activity since 2006― 1994: Rust-Oleum acquired by RPM International, Inc. Purchase price of $178 million

― 2006: acquired Watco Group Based in Godalming, UK, a manufacturer and marketer of

industrial coatings and leading supplier of concrete floorings in the UK

Annual sales: approximately $20 million― 2007: acquired Tor Coatings Limited

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Rust-Oleum Corporation

2009: acquired FibreGrid Limited― A supplier of fiberglass anti-slip safety products based

in the United Kingdom― Annual sales: approximately $3.5 million ― 2010: Rust-Oleum Netherlands BV acquired Chemtec

Chemicals BV― A manufacturer of specialty cleaning and maintenance

products based in Rotterdam, Netherlands

123

Akzo Nobel (AKZOY)

M&A activity since 2008― 2008: acquired Imperial Chemical Industries (ICI)― Purchase price approximately €11.5 billion (EUR)― 2010: acquired Dow Chemical Company’s powder

coating activities― Annual global sales: approximately several hundred

million dollars(USD)

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Hentzen Coatings, Inc.

M&A activity since 2005― 2005: acquired Batavia, IL coatings manufacturing site

and non-core drum and pipe coatings business from BASF

125

Diamond Vogel Paint, Inc.

A Lincoln, NE based industrial-coatings producer M&A activity since 2004― 2004: acquired certain assets of David-Frost Paint Co. Assets associated with the industrial-coatings business and

based at the company’s operations based in Minneapolis, MN and Tulsa, OK

― 2004: acquired Four Seasons Paint

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64

The Sherwin Williams Co. (SHW)

M&A activity since 2007― 2007: acquired Nitco Paints A Mumbai headquartered, privately owned manufacturer

and distributor of exterior specialty paints and coatings used in the construction of office buildings, high rise, apartments, shopping malls, hospitals, and schools.

Annual sales: approximately $18 million ― 2007: acquired Napko, an industrial-maintenance

coatings company in Monterrey, Mexico― 2007: acquired S.A. de C.V.― 2007: acquired Pinturas Industriales S.A., an industrial

paint company headquartered in Montevideo, Uruguay

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2007: acquired M.A. Bruder, a Philadelphia based company with 132 paint stores

2007: acquired Columbia Paint & Coatings based in Spokane.

2007: acquired VHT Paint Lines, an aerosol coatings company in Scottsdale, AZ

2008: acquired Becker Powder Coatings, Inc., a producer of powder coatings applied to appliances, metal furniture, fixtures, and electronic products headquartered in Columbus, OH― Annual sales: approximately $14 million

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2008: acquired the Liquid Coatings Subsidiaries of Inchem Holdings which produces coatings applied to wood and plastic products in Asia― Annual sales: approximately $30 million

2008: acquired Euronavy-Tintas Maritimas e Industrials S.A. of Portugal― A leading innovator of marine and protective coatings

applied to ships, off shore platforms storage tanks, steel, concrete, and flooring

― Annual sales: less than $25 million

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2010: acquired the Industrial Wood Coatings business (Sayerlack) of Arch Chemicals, Inc.― A technology leader in polyurethane, water, and UV

coatings― Annual sales: $147 million – 2009

2010: acquired Becker Acroma Industrial Wood Coatings― A technology leader in water, UV, and other wood

coatings― Annual sales: approximately $300 million

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Tennant Company (TNC)

M&A activity since 2006― 2006: acquired Hofmans Machinefabriek B.V. Annual sales: $7 million – 2005

― 2007: acquired Floorep Ltd. Annual sales: $5.6 million – 2006

― 2008: acquired Applied Sweepers—makers of Green Machines® brand cleaning equipment Deal valued at $68 million Annual sales: $40 million - 2007

131

Tennant Company (TNC)

― Mar. 2008: acquired Sociedade Alfa Ltda.—maker of Alfa brand commercial cleaning machines. Annual Sales: $9 million – 2007

― Aug. 2008: acquired Shanghai Shen Tan Mechanical and Electrical Equipment Co. Ltd. Annual sales: $1.6 million – 2007

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The Valspar Corporation (VAL)

M&A activity since 2005― 2005: acquired Samuel Cabot Incorporated Annual sales: $60 million

― 2006: acquired 80% interest in Huarun Paints Holdings Company Ltd. Annual sales: $200 million – 2006 2008: owns 85.8% of outstanding shares

― 2006: acquired H.B. Fuller Company’s powder coatings busines. Net sales: $75 million – 2005

133

The Valspar Corporation (VAL)

― 2007: acquired majority voting shares in Tekno S.A. Annual revenue: $10.7 million – 2006 2008: acquired remaining shares of Teknos

― 2007: acquired Teknos Nova Coil TNC Oy Annual revenue: €31 million (Euros) – 2006

― 2007: acquired control of Aries Coil Coatings S.A. de C.V. (Aries) Annual sales: $40 million – 2007 2008: acquired remaining shares

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Honda Motor Co., Inc.

Inception― 1948: Founded by Soichiro Honda ― 1959: Founded in the US, American Honda Motor

Company, Inc. Market― World’s largest manufacturer of motorcycles and internal

combustion engines, and 6th largest automobile manufacturer in the world

― Also manufactures garden equipment, marine engines, personal watercraft, power generators, robotics research

135

Honda Motor Co., Inc.

M&A activity since 2005― 2005: Suzuka Circuitland Co., Ltd., became wholly

owned subsidiary of Honda Motor Co., Ltd. Through summary exchange

― 2006: Honda Express Co., Ltd. and Komyo Co., Ltd. became wholly owned subsidiaries of the Company (Honda Motor), through acquisition of all shares of stock

― 2007: Yachiyo Industry Co., Ltd. Became a consolidated subsidiary of Honda Motor Co., Inc

136

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Caterpillar Inc.

Inception― 1925: Founded in California, as Caterpillar Tractor Co.,

currently based in Peoria, IL. Market― World’s largest manufacturer of construction and mining

equipment and diesel and natural gas engines.― Worldwide network including 220 dealers in nearly 200

countries Growth― As of 2009: Caterpillar employs nearly 100,000

employees

137

Caterpillar Inc.

M&A activity since 2006― 2006: Caterpillar Inc. acquires privately held Progress

Rail in a $1 billion cash and stock deal― 2008: Mitsubishi Heavy Industries Ltd.and Shin

Caterpillar Mitsubishi Ltd. Signed definitive agreements that include a share redemption plan which will result in Caterpillar owning 67% of SCM First phase of the share redemption is estimated at 50 billion

JPY― 2010: Progress Rail Services signed definitive agreement

to purchase Electro Motive Diesel for 820 USD from Berkshire Partners LLC and Greenbriar Equity Group LLC Progress Rail Services is a wholly-owned subsidiary of

Caterpillar Inc.

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PPG Industries, Inc.

Inception― 1883: Founded as the Pittsburgh Plate Glass Company.― Changed name to PPG Industries to better reflect its diversity

Market― Global supplier of paints, coatings, optical products, specialty

materials, chemicals, glass and fiber glass Growth― Net income of 336 million USD in 2009― Employed nearly 40,000 employees in 2009

139

PPG Industries, Inc.

M&A activity since 2006― 2006: Ameron International announced it will sell

its Performance Coatings and Finishes business to PPG Industries for 115 million

― 2008: PPG acquired SigmaKalon Group, a Dutch based coatings company, for 3.2 billion

140

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United Technologies Corporation

Inception― 1929: founded as United Aircraft and Transport

Corporation by a multi-business merger Market― Researches, develops, and manufactures high-

technology products in numerous areas, including aircraft engines, helicopters, heating and cooling, fuel cells, elevators and escalators, fire and security, and industrial products

Growth― As of 2010: employs over 200,000 employees

141

United Technologies Corporation

M&A activity since 1999 ― 1999: United Technologies Corp. agreed to acquire

Sundstrand Corp., maker of internal systems for airplanes, for $4.3 billion

― 2005: Crowell & Moring LLP client, United Technologies Corporation’s Pratt & Whitney Division, has completed the acquisition of Boeing’s rocket engine unit, Rocketdyne Propulsion & Power for about $700 million

― 2010: United Technologies completes $1.82 billion acquisition of General Electric Co.’s fire detection and electronic security business

142

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ArcelorMittal

Inception― 2006: formed by merger of Arcelor and Mittal Steel

Market― The largest steel company in the world― Leader in all major global steel markets, including

automotive, construction, household appliances and packaging as well as supplies of raw materials and distribution networks

Growth― 2009: employed over 280,000 employees with revenue

of 2009 being $65 billion

143

ArcelorMittal

M&A activity since 2006― 2006: merger of Arcelor and Mittal Steel― 2006: ArcelorMittal acquires Sicartsa, producer of

long steel, for $1,439 million― 2008: ArcelorMittal announced acquisition of Bayou

Steel, producer of structural steel products in the U.S for $475 million

― 2008: ArcelorMittal announced agreement to acquire the Kippers’ Monessen Coke Plant from Koppers Inc. for $160 million

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Carboline Company

M&A activity since 2005― 1985: Carboline Company acquired by RPM

International, Inc. ― 2005: acquired AD Fire Protection Systems, An international provider of fireproofing products for

the protection of structural steel Annual sales: approximately $18 million (USD)

― 2006: acquired certain assets of Nu-Chem An international provider of fireproofing products for

the protection of structural steel― 2007: acquired the marine and industrial assets of

Finnaren & Haley A privately-held paint manufacturer and retailer

headquartered in Conshohocken, PA

145

Big Dollar Tech Exits

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Top Tech Exits in 2014: MICROS Systems

Inception― 1977: founded in by Louis Brown, Jr, the son and grandson of Maryland

dairy farmer Core Technology

― MICROS Systems provides various cloud-based, mobile and on-premiseapplication tools for customers in the food and beverage, hospitality and retail industries

Growth― 1978: $1.4 million in revenue― 1981: first initial public offering ― Micros has more than 6,600 employees and its products are in use at

more than 330,000 sites around the world Exit

― 2014: sale to Oracle for $5.2 billion (largest deal of the year) Source

― Oracle Press Release and Funding Universe

147

Top Tech Exits in 2014: OpenTable

Inception― 1998: after founder, Chuck Templeton, observed the difficulty

his wife faced while trying to book a dinner reservation by phone

Core Technology― OpenTable allows users to search for restaurants and

reservations based on parameters including times, dates, cuisine and price range and it provides restaurant owners with a reservation management

Market― OpenTable helps restaurants to fill tables by offering online

reservation services to diners― OpenTable’s business caters to about 24,000 restaurants out

of its total customer base of 31,500

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Top Tech Exits in 2014: OpenTable

Growth― 1999: the website began operations serving a limited selection

of restaurants in San Francisco. ― Today: it covers more than 30,000 restaurants in most

states as well as in several cities around the world. Exit― Open table was acquired by Priceline― Priceline has the resources and the expertise to grow

OpenTable globally. There is a lot of scope for cross-promotion and cross-selling activities Significant cost synergies from the merger of the two

companies Sources― Open table website and Forbes

149

Top Tech Exits in 2014: Trulia

Inception― 2005: founded originally only serving properties in

California Market ― Trulia provides price trend information by using listing

and public data showsing how the price of a home has changed over a period of time as well as comparing that house price with other homes

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Top Tech Exits in 2014: Trulia

Growth― 2006: Trulia services offered nationally ― 2012: Trulia reported 22 million monthly visitors― 2013: approximately 437,000 active real estate professionals

Exit― Zillow announced a deal to buy Trulia for $3.5 billion― All stock deal― Together, the two will dominate the traffic for online home

listings and they expect to realize about $100 million in cost savings by 2016

Sources― Trulia’s website and The Mercury News

151

Top Tech Exits in 2014: Shopkick

Inception― 2009: created

Core Technology― Points program called “kicks”, which are usually awarded

when customer-users walk into the participating stores. Shopkick receives a fee for each kick a customer earns

Market ― Shopkick created a shopping app that offers customers

rewards for walking into stores

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Top Tech Exits in 2014: Shopkick

Growth― 2010: Shopkick app was released, initially with 5 retail

partners (Macy’s, Best Buy, Sports Authority and American Eagle Outfitters) and reached its first million users within six months

― 2011: added Target, Crate and Barrel, Old Navy, and Gap― 2012: Shopkick drove $200M in revenue for its partners― 2015: Shopkick has 200 brand partners

Exit― 2014: acquired for over $200M in cash by SK planet, part of

SK Group and SK Telecom Sources― The New York Times & The Wall Street Journal

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Top Tech Exits in 2014: Caviar

Inception― 2012: founded in San Francisco by 5 people

Core Technology― Mobile payments startup that partners with highly-rated

restaurants that don’t normally offer deliver – it offers a “premium delivery” service

Market ― Food delivery service ― Caviar allows buyers to get delivery from top-rated,

popular local restaurants that do not offer delivery

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Top Tech Exits in 2014: Caviar

Growth― 2012: service in San Francisco ― 2014: Caviar's couriers have delivered more than 1

million meals― Today: offered in many cities such as Boston, Chicago,

New York, Seattle, Los Angeles, and Washington D.C. Exit― Square purchases Caviar for a reported $90 million

Source― Business Insider

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Exit Strategies for the Technology Company

Singleton Law Firm, P.C. is dedicated to serving the legal needs of business and individual clients of east central Illinois and beyond with an emphasis in the areas of corporate, intellectual property (including patent) and real estate law. The firm was founded by attorney Alan R. Singleton and paralegal Elizabeth C. Kellner following Mr. Singleton’s practice at another local firm as an associate and then shareholder. Ms. Kellner’s experience includes work at the University of Illinois business incubator and then service as the coordinator and then executive director of techCommUnity. Both Mr. Singleton and Ms. Kellner are active in their efforts to grow the local business community. Both maintain contacts in the local business community and beyond which allow them to serve as a team to meet the needs of business and individual clients through the provision of value added quality legal services.

ALAN R. SINGLETON SINGLETON LAW FIRM, P.C.

Research Park at the University of Illinois 2001 S. First St., Suite 209

Champaign, IL 61820 217-352-3900

www.singletonlawfirm.com [email protected]

Mr. Singleton provides legal services to business clients in corporate, intellectual property, securities, and real estate law areas. He has frequently assisted entrepreneurs select and organize an appropriate entity and obtain capital. He has formed limited liability companies, subchapter S corporations, subchapter C corporations, professional corporations, L3Cs, and not-for-profit corporations, including publicly supported organizations and private

foundations. Mr. Singleton has also assisted clients with mergers and acquisitions and with implementing stock option programs.

A member of the patent bar, Mr. Singleton has represented clients in patent prosecution, trademark registration, negotiation of licenses, research and development agreements and joint development agreements. He is familiar with the University of Illinois policies on technology transfer and has negotiated licenses of University technology. Mr. Singleton’s real estate law experience includes purchases and sales, leases, installment contracts, like kind exchanges, and zoning and land use issues.

Mr. Singleton is active in both the business and educational communities. He has served on the Advisory Councils of numerous technology companies and served on the list of advisors at the Illinois Technology Center. He is a member of the business plan review group Second Saturday and has served as a judge for the Academy for Entrepreneurial Leadership Innovation Teams Competition and V. Dale Cozad Business Plan Competition. He currently serves as an Entrepreneur in Residence at EnterpriseWorks.

Mr. Singleton maintained an adjunct faculty appointment with the University of Illinois College of Medicine for roughly 20 years. He has given guest lectures for the University of Illinois MBA course on technology commercialization, the Senior Capstone Design Course in the Department of Agricultural and Biological Engineering, the Academy for Entrepreneurial Leadership Idea to Enterprise Workshop, the Technology Entrepreneur Center, the Advanced Invention to Venture workshop, Enterprise Works, the SIU Carbondale business incubator, the University of Illinois College of Veterinary Medicine and for medical residency programs throughout the state.

The recipient of the 2008 Entrepreneur Advocacy Award and, as an undergraduate, of the Chemical Rubber Company Chemistry Award, Mr. Singleton earned a Bachelor of Science Degree in Geology from the University of Illinois in 1988 and a Juris Doctorate from the University of Illinois College of Law in 1991. Following law school and prior to founding Singleton Law Firm, P.C., he practiced with Webber & Thies, P.C. as an associate and then shareholder.

Mr. Singleton is currently a member of the American Bar Association Sections on Business Law, Intellectual Property Law and Science and Technology Law, the Illinois State Bar Association Sections on Corporation and Securities Law (Prior Member, Section Council) and Intellectual Property Law (Prior Member, Section Council), the American Intellectual Property Law Association, American Chemical Society, Association of University Technology Managers and has previously been a member of the Intellectual Property Law Association of Chicago and Midwest Business Brokers and Intermediaries.

Mr. Singleton has chaired the EDC/techCommunity Mentoring Program, has served on the board of the Don Moyer Boys and Girls Club and Mahomet Area Youth Club, and serves on the boards of the Mahomet Area Kids Endowment Foundation and Mahomet Seymour Soccer Club.