"Houston, we have a problem." What happens when your software isn't yours.
What should I do before I start my business with a companion?
It is important to consider whether you need a companion at all. Many entrepreneurs feel that they cannot do business on their own, which is true because you need a team, but it may not be true in terms of owning a business. However, if you decide to work with a companion, you should find out as much information as possible about the person, including what they did and who they worked with and talk to their former colleagues and acquaintances. In short, you should get references and see if they will match your company.
In an interview with Rostya Gordon-Smith, we talked about the importance of co-founders having same expectations. Do you also find it important?
Yes, definitely, because if co-founders have different expectations about the company, sooner or later they will get into conflict. I met a company which was built by two people. After several years, it turned out that one of them wanted to build a business that would grow and earn, while the other one wanted to create a business in which he would employ his two sons and provide them with an adequate income. Therefore, it’s good to talk about the expectations right from the beginning and write them not only in the Founders’ Agreement, but also in the Shareholders’ Agreement.
What exactly should be written in the Shareholders’ Agreement?
The Shareholders’ Agreement should indicate what will be co-founders’ responsibilities and duties, what reward they will get, whether a profit share or a wage, what will be the conditions for voting and decision-making and so on. This agreement is beyond the scope of the Founders’ Agreement, which is an obligatory agreement that any company has and is publicly available in the Commercial Register.
Is it common for startups to sign the Shareholders’ Agreement?
No. People usually sign the Founders’ Agreement, put the document in a drawer and let the company live somehow. The founders then focus on software, hardware and slideware, but when the investor comes, it is usually too late.
When should entrepreneurs start to work on legal issues like contracts etc.?
As soon as possible. I am not saying you have to pay big money for a lawyer right now, but it's good to build the company right from the very beginning so that it does not have to be remodeled later. Lawyers are a cost that most companies try to avoid or delay until the very end. They think that if nothing happens, they don’t have to think about law. And when they get into trouble, they can call a lawyer. I encourage everyone to create a brain trust – a group of people who understand marketing, sales, accounting, HR, and law and who you can turn to at any time.
When you start doing business, you usually don't know such people. How can I find a good lawyer for example?
Recommendations work best. "Do you know someone who understands this and that?" Some lawyers are great at litigation, but that does not mean that they are familiar with software licensing, cloud services, and so on. Each area has its own specifics. So, always try to find a lawyer who understands your area and your type of business. This will help you consider more areas, including business strategy, impact on finance, taxes, and so on. It's also good to look for a lawyer who can advise you how to build a business and minimize the risks. Risk protection, on the other hand, should not paralyze you.
Let’s say I found a good lawyer, what should we work on?
In the beginning, you should verify that the name of your business, planned product, or service is not in conflict with other companies' trademarks. The worst thing that can happen to you is that you invest in a project and its marketing, it starts to get successful and then you get a letter from a law firm that you violate someone else's trademark rights. This can be a very expensive experience that I have experienced in several companies. In addition to checking the name of the company in the Commercial Register, it is certainly necessary to go through the trademark database. For trademarks, interchangeability and similarity of name are considered, even phonetic. Trademarks and branding are a very interesting and complex topic which cannot be summed up in such a short interview.
In addition to trademarks, another important thing is a patent. When should I apply for it?
Very simply, a patent can only be given to a solution that is new with respect to the state of the art – you have invented something that does not yet exist and is original. The patent application needs to be done before you publish the details of your great invention, for example in a journal, because then it is no longer new according to the patent law. For patents, it is certainly a good idea to contact a patent attorney who has experience with this very specific area.
Are there any solutions that cannot be protected by a patent?
Yes, there are many such solutions. If we are talking about software startups, there are generally no software patents in Europe, software is protected by copyright. Procedures and thoughts are not protected, only specific codes. The situation in the U.S. is different, though. Software patents exist there, but a number of problems arise in this context. For example, there are so-called patent trolls that buy patents, offer their holders to monetize them and attack software companies for violating often bizarre patents.
How does this system work?
Patent trolls sometimes ask companies to pay for a license or settlement, but usually they file a lawsuit to strengthen their position before negotiating. Several Czech companies have come across this problem when they expanded to the U.S. I have experienced a case with a software patent for a structured database of business contacts, which is basically almost every CRM and ERP solution. Yes, it sounds absurd, but such a patent really exists. The troll filed a lawsuit and, in parallel, asked the company to pay $ 10,000. “Pay or we’ll go to the court, the hearing will take a long time and the attorney will cost you at least $ 50,000. The patent troll business is an actual protection money. Most people think it’s crazy. It is a real problem that is being talked about, and hopefully being tackled in the highest places.
How can businesses protect their copyright?
All software startups need to ensure that they have rights to copyrighted works or have appropriate licenses to use the software. If someone external develops your unique solution for you, you need to make sure your software is actually yours. Therefore, my favorite question is, "Who does your software belong to?" Because when your startup develops software for a client and does not have a copyright agreement, the resulting product will most likely be judged by copyright law as a commission work and thus belong to the person who ordered it. In that case, you can no longer reuse codes without a risk, because the codes belong to your client. You'd be surprised how often these things happen.
How can I ensure that all rights are mine?
You must have copyright contracts and make sure that copyright is included in general terms and conditions. If you want to deliver your software to clients, you must have copyright contracts with your suppliers and customers.
What else do I have to do to ensure that intellectual property rights belong to me and that my trade secrets are safe?
If you talk to someone in general about what you are doing, there is no need to panic, but if you go in more depth, for example you explain how your technology works, you should consider signing a Non-Disclosure Agreement (NDA). The NDA should protect not only technology and trade secrets but also any other information that you consider confidential. Many people think that NDA’s are not necessary, but it is really worth considering and using it to reduce potential risks.
Přemysl Líbal is a lawyer, advisor, mentor and coach with more than 30 years of experience mainly in the field of information technology, contractual relations, business modeling, copyright, electronic publishing and digital advertising. He participated in various projects in Europe, Africa, Asia and both Americas. He has worked for major multinational technology companies, small and medium-sized businesses, and start-ups. He likes to help companies get things moving and find solutions.