Kellstadt Graduate School of Business

DEPAUL UNIVERSITY KELLSTADT GRADUATE SCHOOL OF BUSINESS MGT 398/798, BLW 398/798 Special Topics: Entrepreneurship Law Fall Quarter 2013, Proposed

Instructor: Daniel T. Gillespie Office: Room 7000, DePaul Center Telephone: 312.603.5969 Email: [email protected]

Course Description: This is a class on Entrepreneurship Law. We will be discussing the legal aspects of entrepreneurship. For example, should a person set up her start-up venture as a sole proprietorship, partnership, corporation or limited liability company? We will follow the development of a successful start-up all the way to the IPO. We will be discussing:  The relevant laws and rules relating to HR considerations of the entrepreneurship.  The legal aspects of venture capital financing decisions. We will be discussing  The ability of an entrepreneur to use contracts to allocate risk and reward.

This is an intense course that examines and analyzes critical legal issues confronting start-up and emerging growth companies. There may be guest speakers from time to time.

Course Objectives: This course is designed and structured to examine fundamental legal principles and rules of law necessary to begin a business and to familiarize the entrepreneur with pertinent legal principles and standards of a fundamental business basis necessary to secure a working knowledge of prudently managing and operating a successful entrepreneurship. The course is not designed to produce lawyers but to make entrepreneurs cognizant of basic threshold legal rules and to allow the entrepreneur to recognize “red flag” areas and to identify, react and converse reasonably with trained legal counsel to resolve potential or actual legal problems.

Course Format: Class meetings will be informal, though intense. Students will be required to maintain an entrepreneurship journal that will consist of exercises requiring critical thinking and decision making. At the end of the quarter the completed journal must be turned in and will be graded. Graduate students will form into 3 or four member teams for a Group Project. The Group Project will involve developing an idea for a new enterprise. They will develop a simple, straight-forward business plan. They will go through the steps of setting up the enterprise. They will consider the form the business should take, e.g., corporation, partnership or LLC and prepare the appropriate documents for filing with the Secretary of State. Further details will be the subject of a separate handout. Students will be required to formulate answers to assigned problems which appear throughout the text, to include recitation of the key facts, identification of the key issue, selection of the appropriate rule of law and application of the rule of law to the issue in order to resolve the dispute between the litigants. Students will also discuss by presentation assigned cases and recognize the rule the court used to decide the case. To a certain extent this is a “hands on” course. The student will be expected to maintain an Enterprise Journal which will contain specific legal forms and documents and other data drafted and compiled by the student in delineated sections of the course. For instance, in the first section, the student will be required to form a selected business organization, explain the basis of organization distinctions viz. the selected form and adopt a legal document suitable to validly form the organization. In the area of financing, the student will develop an appropriate outline plan of financing, and prepare suitable documents to secure financing whether in the form of issuance of securities, dealing with a venture or financing institution. The student may also be involved in drafting suitable employment contract terms, develop rules on termination of employees, prepare formal management responses to overtures for unionization and present an outline manual for hiring, retaining and terminating employees. Relative to the organization’s products, the student may be tasked with developing invoices and contract forms appropriate to protect the entrepreneur against product liability, develop correct warranty disclaimer provisions, become aware of tort and warranty liability implications arising from advertising, and be able to understand coverage and liability facets of the new venture’s insurance policy. The contents of the Project will be fleshed out over the course of the quarter and will be collected by the instructor at the time of the final examination for review and grading.

N.B. The class schedule and assignments are subject to change. Please check D2L weekly for the most up-to-date schedule.

COURSE REQUIREMENTS AND GRADING POLICIES

Regular class preparation, attendance, and participation are required. There will be an open-book take-home final exam. The final exam will consist of a complex hypothetical set of facts that raises many of the key issues addressed in the course. Students will be called upon to identify the issues and their appropriate resolution.

CLASS PARTICIPATION

In a typical class, one or more students will be asked to start the class by answering a specific question or discussing a specific issue. Preparation for class (including any assignment questions) should be sufficient to handle such a leadoff assignment. After a few minutes of initial analysis, we will open the discussion to the rest of the class. As a group, we will then try to complete the analysis of the situation and address the problems and issues presented in the readings. The cases and hypotheticals will be discussed in an interactive, Socratic fashion, with follow-up questions by the professor that provide an opportunity for students to defend and refine their reasoning. Cold calls will be used throughout each class session to encourage active participation by all.

The development of verbal skills is given a high priority in this course. The classroom should be considered a laboratory in which students can test their ability to convince their peers and the professor of the correctness of their approach to complex problems and of

2 their ability to achieve the desired results through the use of that approach. Some of the things that have an impact on effective class participation are the following:

1. Is the participant a good listener? 2. Are the points that are made relevant to the discussion? Are they linked to the comments of others? 3. Do the comments add to our understanding of the situation and move the discussion forward? 4. Are the comments informed by an analysis of the course readings? 5. Does the participant distinguish among different kinds of data, such as facts, opinions, beliefs, and concepts? 6. Is there a willingness to share? 7. Is there a willingness to test new ideas, or are all comments “safe” (e.g., a repetition of case facts without analysis and conclusions or a repeat of a comment already made by a colleague)? 8. Does the participant pay attention to and interact with other class members? 9. Do comments clarify and highlight the important aspects of earlier comments being covered? The questions above deal with both the process of class participation and (of equal or greater concern) the content of what students say. Class participation will be a portion of the grade in this course and will be evaluated primarily on the basis of quality not just quantity.

Because faculty members tend to have somewhat different expectations as to class behavior, I would like to outline a few of my expectations concerning such matters.

1. Attendance in every class is considered important. Please schedule other activities, such as interviews, at other times. 2. In the event that for some unavoidable reason you have to miss a class during the quarter, please let me know in advance of class by e-mail. Also, if you do miss a class, it is your responsibility to find out from your classmates what topics were covered and what additional assignments were made, and to obtain a copy of any materials distributed in class. 3. As a courtesy to your classmates and to me, you are expected to be in class on time. 4. I plan to be prepared for every class and expect you will do the same. Because throughout each class session I frequently call on individuals whose hands are not raised, you should let me know before the start of the class if some emergency has made it impossible for you to be prepared adequately for that class. Otherwise, I will assume that everyone in class is prepared. Failure to notify me in advance of your inability to prepare will have a seriously negative impact on your class participation grade. 5. Given the importance of class participation, I will seek to learn your names as quickly as possible. To facilitate that, I will circulate a seating chart during the second class session. Once you select a seat, please sit there every class.

3 Grading: Student performance in the course will be evaluated on effort and comprehension of negotiating principles and practices as discussed in class and as follows:

For Graduate Students: Undergraduate Students: Entrepreneurship Journal 25% Entrepreneurship Journal 45% Project Notebook 25% Class Participation 10% Take-Home Final 40% Take-home final 45% Class Participation 10%

The following grade schedule will be used: 93 - 100 A 90 - 92 A- 86 - 89 B+ 83 - 85 B 80 - 82 B- 77 - 79 C+ 73 - 76 C 70 - 72 C- 67 - 69 D+ 60 - 66 D 58 - 59 D- 0 - 57 F

Required Readings: The textbook is: The Entrepreneur’s Guide to Business Law (4th ed. 2011), by Constance Bagley and Craig Dauchy, ISBN 13: 978-0-538-46646-2. This is an excellent text. The author, Dr. Bagley, teaches this course in the Yale Graduate School of Management. There will be assigned business case studies as well, which will be available for purchase in the Book Store.

Assignments: (Subject to modification from time to time. Please consult D2L before each class for any changes.)

Class #1: Introduction, course orientation, & Leaving an Employer to Start a Business. Readings: Bagley Chapters 1, 2 & 3.

Class #2: Choice of Entity Readings: Bagley Chapter 4. During this class we will explore two practical aspects of entrepreneurship. The first will focus on the legal requirements involved in creating a new app, a software program that one can utilize online or on mobile devices. The second aspect will focus on seeking initial financing and the legal advantages and disadvantages of each option. The student is invited to come up with an idea for a new app that can be brought up on an I-phone

4 or similar electronic device. Then discuss whether that can be regarded as a trade secret or an idea that can be patented. If a trade secret, how can it be protected? If it can be patented, how will you research whether it can be considered “prior art?” What steps should you take next?

The second aspect of entrepreneurship to be explored is how, once the student has created a new app, and perhaps a second and third one as well, how will she get funding to support the selling of this app? Financing and the legal advantages and disadvantages of each option will be considered. Some of the options are raising money from friends and family, from angel investors, self-financing or arranging credit. Some considerations are: • Sources of Money • Friends & family: – Advantages: – Disadvantages: • Angel Investors • What does this involve? – Advantages: – Disadvantages: • Venture Capital Financing • What does this involve? – Advantages? – Disadvantages? • Other Means of Financing • Working with a placement agent – What does that involve? • Self-financing & credit – Seems to be used more often now • Why might that be? • Strategic alliances & joint ventures? – What’s involved? • Pros & cons? • Federal Financing Programs • What types of loans & grants available? – Advantages? – Disadvantages? • Pitch to Investors: Business Plan • What should be included? – Describe your enterprise. – Describe product & market. – Strengths & weaknesses of your team. – Identify the risks. – Describe the competition. 5 – If you are thinking of securities funding, prepare a private placement memorandum. • What should that involve?

Case: Web Saver, HBS No. E239 Covenants Not to Compete and Assignments of Inventions Assignment: WebSaver involves a Stanford MBA student who joins with several classmates to prepare a business plan for a class, then decides to form a new venture based on the business plan after graduation. In the course of planning an initial public offering, she discovers that errors in the venture’s early stages could endanger her ability to go public.

Study Questions: 1. What possible claims could Diamondware make against Fine or Next Step based on the employee non-disclosure agreements that Fine and Salinas signed? What, if anything, should Fine do about this problem? 2. What are the challenges that Next Step faces with respect to the protection of its intellectual property domestically and abroad? 3. What factors should Fine consider prior to making a decision concerning Chen? What should Fine do with respect to Chen? What, if anything, could Fine have done to ensure that the situation with Chen was resolved at an earlier time? 4. What accounting and tax problems could arise by reason of the last- minute issuance of stock to Next Step’s employees? 5. What, if any, other legal issues should be of concern to Fine?

Class #3: Structuring the Ownership: Case: Richard Spellman (A) (HBS Case No. 801-202). Readings: The Entrepreneur's Guide to Business Law: Chapters 5 & 6, Chapter 10: Marshaling Human Resources (pp. 248-249). Assignment: The Richard Spellman case deals with an entrepreneur who has decided to leave one dot-com, where he was a VP, to become CEO of another start- up. The cases focuses on two key agreements that are part of the negotiation—a restricted stock agreement and an employment agreement. As the devil is in the details, students will be expected to read each agreement carefully, even those sections they might initially dismiss as boilerplate. In the (A) case, we will see the first drafts of these agreements, prepared by the attorney for the start-up. In the (B) case, which will be passed out during class, we will have an opportunity to review the final versions and consider the impact of the changes.

Study Questions: 1. What are the key issues related to the restricted stock agreement? What should Spellman’s priorities be with respect to these issues, and what resolution of these issues would constitute a “fair” outcome from your point of view? Be specific as to which provisions you would want added or modified.

6 2. Consider the same questions with respect to the employment agreement. 3. Other than the issues specifically addressed in the draft restricted stock and employee agreements, are there other issues that Spellman should be concerned about? If so, is there any legal documentation that could give him comfort on these issues? 4. Evaluate Spellman’s progress so far in negotiating the issues on his own. How should he use his attorney, Tom Miller, in the next phase of the negotiations? 5. Should Spellman file an 83(b) election?

Class #4: Raising Money & Securities Regulation: Readings: Bagley Chapter 7. Guest speaker. Raising Money: What are the options for an entrepreneur? : Raising Money and Securities Regulation: • Topics Covered in this Chapter A. Raising Money. B. Securities Regulations. • Sources of Money • Friends & family: – Advantages: – Disadvantages: • Angel Investors • What does this involve? – Advantages: – Disadvantages: • Venture Capital Financing • What does this involve? – Advantages? – Disadvantages? • Other Means of Financing • Working with a placement agent – What does that involve? • Self-financing & credit – Seems to be used more often now • Why might that be? • Strategic alliances & joint ventures? – What’s involved? • Pros & cons? • Federal Financing Programs • What types of loans & grants available? – Advantages?

7 – Disadvantages? • Pitch to Investors: Business Plan • What should be included? – Describe you enterprise. – Describe product & market. – Strengths & weaknesses of your team. – Identify the risks. – Describe the competition. – If you are thinking of securities funding, prepare a private placement memorandum. • What should that involve? – Life of sole proprietorship is tied to sole proprietor • Can only sell the assets of the business • Angels and VCs will not typically invest in sole proprietorships

• Securities Act of 1933 • Definition of a Security – – Security – includes any note, stock, bond, preorganization subscription, and investment contract. – Investment Contract – any investment of money or property made in expectation of receiving a financial return solely from the efforts of others. • Securities Act of 1933 • Registration of Securities – – Disclosure Requirements – disclosure of accurate material information required in all public offerings of nonexempt securities unless offering is an exempt transaction. – Integrated Disclosure and Shelf Registrations – permitted for certain qualified issuers. • Securities Act of 1933 • Exempt Securities – – Definition – securities not subject to the registration requirements of the 1933 Act. – Types – exempt securities include short-term commercial paper, municipal bonds, and certain insurance policies and annuity contracts. • Registration and Exemptions under the 1933 Act • Securities Act of 1933 • Exempt Transactions for Issuers –

Class #5: HR Issues Readings: Bagley Chapter 8.

8 Group Project teams to present a short business plan and an interim project report.

Class #6: Risk Management: Contracts, Trade Secrets and Nondisclosure Agreements Reading: The Entrepreneur’s Guide to Business Law: Chapter 9 Contracts & Ch. 14: Intellectual Property and Cyberlaw (pp. 516-529). Case: X-IT and Kidde (A) (HBS Case No. 9-803-041).

Assignment: The X-IT and Kidde case deals with two HBS grads that developed a novel escape ladder. After their company, X-IT, began to gain traction, Kidde, a much larger competitor, began discussions with the two founders to license the technology or to buy X-IT outright. In the course of these discussions, X-IT disclosed certain information to Kidde pursuant to a confidentiality agreement. After Kidde began marketing a very similar ladder, the X-IT founders had to decide how to respond. In the (B) case, which will be passed out during class, we will have an opportunity to review X-IT’s subsequent course of action and consider the consequences of their decisions.

Study Questions: 1. What are X-IT’s strongest legal claims against Kidde? 2. What are the pros and cons of suing Kidde? 3. If you were Aldo DiBelardino, what would you do? 4. If you were an outside investor of X-IT, would you fund a lawsuit? Why or why not?

Class #7: E-Commerce, Sales and Cyberlaw: Readings: The Entrepreneur’s Guide to Business Law: Chapter 10 & 14: Intellectual Property and Cyberlaw (pp. 529-542). Case: BitTorrent (HBS Case No. 806-169).

Assignment: BitTorrent involves the entertainment industry’s ongoing challenge to move toward digital distribution of content while preventing individuals from using unlicensed software to share computer files containing copyrighted music and video.

9 Study Questions: 1. Why haven’t the record companies or film studios tried to shut down BitTorrent? What actions by BitTorrent would make them more or less likely to sue? 2. Does DCM-Doll Capital Management, the venture capital firm that funded BitTorrent, have any potential liability for copyright infringement? 3. What could Napster, Hummer Winblad, and Grokster have done to have avoided suit, or to have given them a stronger position with respect to the legal actions that unfolded? 4. Does Google’s library search project or its image search feature violate the rights of the copyright holders of the content Google digitizes? If you were CEO of Google, what assurance would you want from counsel before proceeding?

Class #8: Operational Liabilites, Insurance & Intellectual Property: Readings: Bagley Chapters 11 & 14. Guest speaker

Class #9: Buying and Selling a Business Reading: The Entrepreneur’s Guide to Business Law: Chapter 16: Buying and Selling a Business. Just read the first 40 pages of the chapter. Case: EMC Corporation: Proposed Acquisition of VMware (HBS Case No. 806- 153). Assignment: The EMC case involves the proposed acquisition of VMware, a California-based software firm with promising and potentially disruptive technology that is embroiled in a patent lawsuit with Microsoft.

Study Questions: 1. What is the most important issue for EMC CEO Joe Tucci? For the lawyers? 2. What kind of comfort on the patent litigation do Tucci and EMC’s board need from legal before going ahead with the deal? 3. What representations and warranties should EMC require from VMware? 4. How can EMC avoid being a stalking horse for other bidders?

Class # 10: Exit Strategies & Project Reports: Project Reports. Readings: Bagley Chapter 17, pages 705-745.

Final Exam: Take-home final will be distributed the prior week and to be emailed to instructor by 10 p.m., Dec. 17th.