Independent Contractor

Startups represented by seedling growthStartup clients often rely on independent contractors and advisors during their early stages but do not have the cash to pay them, so they turn to equity compensation. Stock options are a great incentive tool, but founders should consider the following before issuing options to advisors or independent contractors:

  1. How Much?: Most founders grant early advisors and contractors options that cover anywhere from 0.10% to 1% of the company’s fully diluted stock on a case-by-case basis. Founders should consider (i) how important the advisor or contractor is to the success of the company, (ii) how much time the advisor will commit to the company, and (iii) the maturity level of the company and its future growth prospects. Advisors and contractors may talk to one another about their option grants, so be consistent and prepared to explain the rationale behind the grants.
  2. Vesting: Just like option grants to employees, advisor grants should be subject to a vesting schedule. Advisor grants typically vest on a monthly basis without a cliff over a period of 12-24 months, although shorter or longer vesting schedules may be appropriate. In certain scenarios, vesting schedules for independent contractors may be customized so that all or a significant portion of the grants do not vest until completion of the project for which the contractor was hired.
  3. Exercise Period: Vested Incentive Stock Options (ISOs), which can only be granted to employees, must be exercised within three (3) months after the employee’s termination. This is not the case for Non-Qualified Stock Options (NSOs) issued to contractors and advisors, but most equity incentive plans require both types of options to be exercised within the three (3) month period. Experienced advisors may negotiate to extend the exercise period because they do not have the cash to exercise the options or are not prepared to pay the tax associated with exercising the options. Depending on the relationship with the advisor, it may be in the company’s best interests to extend the exercise period, especially with advisors who may be able to help the company in the future through their expertise or connections.
  4. Intellectual Property: All advisors should sign some form of confidentiality and invention assignment agreement. Although many advisors or contractors may resist, such agreements can be tailored to address the advisor’s concerns while still protecting the company ownership of its intellectual property, which is key to the company’s future success and ability to obtain venture financing.

Jim Singer writes:

Copyright: bacho12345 / 123RF Stock Photo
Copyright: bacho12345 / 123RF Stock Photo

Have you updated your company’s form employee and independent contractor non-disclosure agreements lately? Do they comply with notice requirements relating to “whistleblowers” that took effect May 11, 2016 under a new federal law? If your answer is “no” or “I don’t know,” read on.

The new Defend Trade Secrets Act helps U.S. businesses protect their trade secrets by asking federal courts to order seizure of property necessary to prevent dissemination of the trade secrets. It also permits businesses to seek injunctions and damages in federal court for trade secret misappropriation. The DTSA applies to any company that owns trade secrets and wants to protect those trade secrets from theft, breach of a duty to maintain secrecy, or espionage.

The DTSA also provides some immunity for whistleblowers who disclose trade secrets under certain circumstances to government officials or attorneys in connection with reporting or investigating a suspected violation of law or in lawsuits alleging whistleblower retaliation.

The immunity section of the DTSA is especially important for employers because it requires employers to provide notice of the DTSA’s immunity clauses “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The Act defines “employee” to include both actual employees and independent contractors. If an employer does not comply with the notice requirement, the employer’s ability to recover damages against that employee in a federal action for misappropriation of trade secrets will be limited.

Employers can comply with the notice requirement by updating their form employee and independent contractor agreements to include either the notice requirement or a cross-reference to a policy document (such as an employee handbook) that states the employer’s reporting policy for a suspected violation of law.

For assistance reviewing or updating your company’s form non-disclosure agreements, please contact the attorneys in Fox Rothschild’s intellectual property, labor & employment or corporate departments.

Jim Singer is a partner and chair of the firm’s Intellectual Property Department, resident in the Pittsburgh office.

Navigating intellectual property protections and issues can be a complicated and challenging process for emerging companies. In the fast-paced start-up world, it is not unusual for IP concerns to take a backseat. But disciplined and proper IP management is critical to any emerging company. Strong IP rights can be used to impose a barrier to competition, generate a portfolio of assets that can be leveraged, and help increase the value of a business. Here are four essential steps to protecting and strengthening your IP assets.  :

Copyright: stuartburf / 123RF Stock Photo
Copyright: stuartburf / 123RF Stock Photo

1. Insist that developers assign all IP rights to your company

Anyone who creates IP for a company should be under a written obligation to assign the rights in such IP to the company. This includes employees, independent contractors, suppliers, other developers and even company founders. Often, companies assume that because they are paying for development work, they own the results of the development. However, this is usually not the case, especially with respect to independent contractors. When it comes to development, having a written agreement that details assignment obligations is always a wise approach.

2. File early for patent protection

Patent protection may not be a top priority for an emerging company during its early stages due to cost concerns or because an invention has not yet perfected. But often, it is the technology developed during the early stages that ultimately has the most value. A wait-and-see approach to patent filing carries with it certain risks. For example, in the United States, a patent application must be filed within one year from the first public disclosure (i.e., a non-confidential, enabling disclosure of an invention such as a public use of the invention, a sale of the invention, an offer to sell the invention, a journal article describing the invention, a trade show presentation or the like). In addition, the United States operates on a first-to-file basis, meaning that the first person to file a patent application has rights for protection of the invention. As such, waiting to file for patent protection risks someone else filing first.

3. File for patents before public disclosure—especially for foreign protection

Although the United States has a one year grace period during which a patent application can be filed after a public disclosure, the majority of countries outside of the United States do not have comparable grace periods. Unlike the United States, a public disclosure is considered a bar to patentability in these countries. If foreign patent protection is part of a company’s IP strategy, then it is important to file a patent application before a disclosure in order to preserve foreign rights.

4. Understand and comply with the terms of your open source software

Open source code is often an efficient and cost free solution for emerging companies. Although use of open source software may be free of monetary cost, it is not free of responsibility. As a general rule, users may not use or distribute software without a license from the owner. And this rule applies equally to open source software despite its being publicly available or available for free. Like commercial software, the use of open source software is usually governed by a license agreement that includes terms and conditions controlling use of the software.  It is critical to understand the license terms and also how conditions may apply to open source software usage. In addition, it is important for users to understand the terms of any viral open source software, especially if the open source software is being combined with or integrated into proprietary software. Failure to do so could lead to an obligation to make proprietary source code available under a similar license.