Thursday, October 13, 2011

10 Legal Pitfalls for Early Stage Companies

The entertainment world is filled with very talented people offering highly valuable products, services, or content. Many of these offerings have the potential to make these people very wealthy. Unfortunately, many of these same people never get there due to a misstep along the way. This article shares a few of the foundations for protecting your vision.

This information comes from an outstanding panel I sat in on at the 2011 Southern Interactive Entertainment and Game Expo (SIEGE) conference. In this panel , 3 attorneys discussed the safeguards and faults they most often see in their practices. The attorneys were Zach Bishop, TJ Mihill, and Tom Buscaglia… Zach and Tom primarily help businesses on the prevention side, and TJ described himself primarily as a litigator – he’s the one looking to attack or defend the agreements that others have set up (or not set up). Each was very engaging and informative on his own accord, and together they made for a great panel. Their bios appear at the bottom of the article.

So here they are… the 10 most common legal pitfalls

Pitfall #1: Not forming the proper legal entity
From a litigation standpoint: The first thing a litigator tends to look at is corporate structure and adherence. If he can pierce the corporate veil that separates an individual’s assets from the corporations, he can pull one's personal properties (home, savings, etc) into a case, leading to a potentially larger win for his client - not to mention the additional stress on the defendant.

From a funding standpoint: Certain corporate structures will not be funded by venture capitalists. If you’re contemplating this route, it’s important to structure properly – or have a conversion plan – early.

From a vesting standpoint: As people move into and out of one’s organization, work they contribute may give them an ownership claim to the organization’s future fortunes. Corporate structure can impact whether these attempts succeed.

Pitfall #2: Failure to have participants sign paper
It’s important to have anyone who contributes to your product sign an agreement identifying who owns their contribution. Even if it’s someone you trust immensely, you’ll one day likely engage other parties (product distribution people, for example) who may not touch your product without confidence that there are no lurking claims.

Pitfall #3: Using someone else’s property without permission
If you incorporate something someone else has produced, you must get their blessing. You must consider everything: Code, images, music, sounds, and even fonts are suspect. Some people will charge fees, others will want royalties, and some willgrant permission simply for a mention in the product credits.

As an example to prove that people monitor this, note that programs called code scanners have been written to determine if any of your code mirrors that of another program.  I wonder why someone took the time to write such a program...

Pitfall #4: Not knowing what rights you need once you get their permission
Even when you have someone’s permission, it’s important to know WHAT permission you’ve been given. Put a license agreement in place, and be sure to have an attorney review that license.

Pitfall #5: Falling into Open Source Software Traps
There’s a common misconception that public domain and open source software is free for you to use... period. It may not have an up-front cost, but some such code can be very costly if it imposes the condition that incorporating it makes your entire product open source itself. You MUST understand the conditions of any such code you incorporate, and I’m told that the license agreements are tricky – legal consultation is your best bet.

Pitfall #6: Failure to secure Intellectual Property (IP) protections
Copyrights protect text you write, and they’re very easy to get. Interestingly, your creation is protected even if you don’t register it… but the protection is typically not enforceable in court without registration.

Trademarks are important to protect what you create (or name) AND to insure that what you create doesn’t overlap with what someone else has created. As with copyrights, they don’t have to be registered, but it’s best to do so for enforceability and to avoid having to “re-create” because you unknowingly infringed on another trademark.

Pitfall #7: Not understanding publishing agreements
It’s critical that you engage an attorney here. You MUST know what rights you are granting. Intellectual property, ancillary merchandise rights, and sequel rights can unknowingly be given away by a seemingly harmless clause.

Pitfall #8: Not preparing for success
When your product takes off, be able to support it. Availability, technical support, exposure through visibility, these are but a few of the items one needs to be prepared for. The best product in the world will sink if the experience of getting to it is overly frustrating.

Pitfall #9: Not anticipating the downsides of success
There’s a strong likelihood that there will be dips in the growth cycle. It’s important to be ready and willing to make cuts early and as deep as necessary to insure survival. The attorneys (and I) have all seen enterprises that didn’t make cuts when they should have and suffered greatly for it.

Additionally, it’s inevitable that as your success grows, people will appear to make claims against that success. Don’t let it get you down - just know it’s coming, defend against it early, and keep moving.

Pitfall #10: Not calling your lawyer
What more would you expect from a panel of lawyers?!?! Seriously, though, they offered solid advice on managing attorney costs. You should plan those attorney calls and Google your questions in advance. Have an outline of topics so that you can move quickly through them. And where possible, provide insights gained through your advance research. In the absence of such research, you may wind up paying your attorney hundreds of dollars per hour to do what you could’ve done yourself simply to get to the point of being able to make a recommendation.

Pitfall #11?
It’s very tempting to add real estate pitfalls, but I’ll save that for another article! Suffice it to say that getting the right location at the right price with the right protections and flexibility is critical. Many options will present themselves, and it’s important to know what best fits your growth model. A tenant representative will protect your interests and the landlord will already have budgeted to pay their fees, adding no new costs to you.

Disclaimer. The comments in this article are a summary of what was shared in the panel discussion and should NOT be taken as legal advice. You need specific legal counsel. I am a licensed real estate agent and can offer tremendous insight into that field, but I am not an attorney.


The attorneys:

Bishop, Zach
Zach Bishop moderated the panel and gets credit for creating the list of 10 pitfalls.  Zach is an attorney with Wyrick Robbins in Raleigh, North Carolina. His practice is concentrated on technology and corporate transactions, including the licensing and distribution of intellectual property, business process and information technology outsourcing, technology acquisition and development, mergers and acquisitions, venture capital financings, joint ventures and general corporate matters. Zach's practice includes the representation of prominent video game and middleware developers on a full range of matters, and he frequently speaks at gaming industry conferences on legal issues facing gaming companies. Prior to practicing law in North Carolina, Zach practiced in the Atlanta office of a large national law firm, and he is licensed to practice law in North Carolina and Georgia. Zach received his B.A. in Economics from Duke University and received his J.D., magna cum laude, from Tulane University Law School. He was listed among North Carolina Super Lawyers "Rising Stars" in 2009 and 2010.

Buscaglia, Thomas
Tom Buscaglia, The Game Attorney, is a principal in the law firm The Game Attorney PC, with offices in the Seattle, Washington, area. Tom has assisted game developers since 1991 with all aspects of business and legal matters. Tom wrote the chapter entitled “Effective Developer Agreements” for the book, The Secrets of the Game Business and has written numerous articles, including Game Developer Magazine and the Game Law series of articles and an Expert Blog on Gamasutra.com. Tom is a perennial presenter at numerous conferences such as the Game Developer Conference and PAX where he speaks on the game industry business and legal matters. Tom Chairs the International Game Developers Association Charitable Foundation and served on the IGDA Board of Directors from 2005 - 2011. As FaTe[F8S] Tom is founder and Supreme Warlord of FaTe’s Minions, an online gaming "clan" that has been competing online since January, 1998. Tom’s firm web site is www.GameAttorney.com.

Mihill, Thomas
Mr. Mihill’s practice encompasses a wide range of complex business disputes, with an emphasis on intellectual property. Mr. Mihill has represented individuals and corporations in both bringing and defending against trademark and copyright infringement claims, trade secret violations, and cybersquatting actions. In the area of video games and virtual worlds, Mr. Mihill has counseled and represented game developers and publishers in intellectual property and business matters. Mr. Mihill has tried cases and represented clients at the state and federal level, in Georgia and nationwide. Mr. Mihill is a member of the IGDA and GGDA, as well as the American Bar Association, the Federal Bar Association, the State Bar of Georgia, the Atlanta Bar Association, and the Cobb County Bar Association.

Buscaglia, Thomas
Tom Buscaglia, The Game Attorney, is a principal in the law firm The Game Attorney PC, with offices in the Seattle, Washington, area. Tom has assisted game developers since 1991 with all aspects of business and legal matters. Tom wrote the chapter entitled “Effective Developer Agreements” for the book, The Secrets of the Game Business and has written numerous articles, including Game Developer Magazine and the Game Law series of articles and an Expert Blog on Gamasutra.com. Tom is a perennial presenter at numerous conferences such as the Game Developer Conference and PAX where he speaks on the game industry business and legal matters. Tom Chairs the International Game Developers Association Charitable Foundation and served on the IGDA Board of Directors from 2005 - 2011. As FaTe[F8S] Tom is founder and Supreme Warlord of FaTe’s Minions, an online gaming "clan" that has been competing online since January, 1998. Tom’s firm web site is www.GameAttorney.com.