Ted Ullyot, general counsel at Facebook, is leaving the social network to take time off, according to AllThingsD.

Facebook confirmed the departure yesterday. Ullyot, 45, will depart in July. The search for his replacement is going to include outside and inside candidates.

Ullyot had a tough job, overseeing controversial legal issues ranging from Facebook’s ownership battle with the Winklevoss twins to investor lawsuits over the company’s initial public offering. He also had to stand guard on privacy issues related to the company’s giant social network.

Ullyot joined Facebook in the fall of 2008. At that time, he had been a high-powered Washington, D.C. lawyer who previously held senior legal positions at AOL, the law firm Kirkland & Ellis, and the U.S. Attorney’s Office.

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

This is a guest post by startup lawyer Jennifer Berrent

When launching a startup, legal issues often get brushed aside in order for founders to focus on building the product. But making the wrong legal decision early on in the process of starting your company may lead to thorny problems in the future.  Frequently, issues can be avoided by taking action in three key areas: choose the right entity, allocate equity and protect your intellectual property.

Choose the right entity

Once you are ready to move forward with an idea, you should formally form your startup as an entity.  One important benefit of setting up an entity is that you can protect yourself from liability, since, in general, only the assets of the entity (rather than your personal assets) would be at risk. Depending on your business, either a C-corporation or a limited liability company (LLC) would likely make most sense.  Almost all companies that are going to seek venture capital financing elect to be C-corp.

However, more and more companies that expect to have early and significant cash flow are electing to start out as LLCs.  You should discuss which entity is right for you with your tax and legal advisers.

Allocate equity

Startups often have more than one founder or associate who contributes early on to the success of the enterprise.  It is critical to have a clear understanding among founders, other early contributors and key employees regarding how the ownership of the entity will be allocated. This not only prevents misunderstandings that can erupt into messy legal battles, but also assures investors that claims of ownership from early business partners will not impact the value if their investment.

Not only does a frank and early understanding of the ownership of the entity avoid future problems, but if done correctly, vesting and other mechanisms can provide incentives to achieve critical desired goals.

Ideally, you should form your company and issue shares to founders, key contributors and employees as soon as possible to steer clear of any costly taxes or payments involved in acquiring the stock later when valuations may be higher.

Protect your intellectual property

Make sure that all intellectual property is owned by the company. Obtain licenses of any property obtained from third parties, such as a university. Have all founders, collaborators and future employees sign an assignment of invention agreement and a non-disclosure agreement, assigning any IP related to the business — whether developed before or after formation — to the company. You want to avoid disputes over ownership, as well as a potential competitor from a disgruntled employee or consultant down the road.

In order to make sure these agreements are enforceable, you must provide some consideration  in the form of cash or equity. An important and sometimes overlooked step is to document any and all agreements, and properly issue equity.

By taking care of these critical legal matters now, you free yourself and your business partners to concentrate on turning your startup into the thriving company you envision.

Jennifer Berrent is a partner at WilmerHale in the Corporate Practice Group and Emerging Company Group.

She has been working with emerging companies in particular for more than 15 years and is focused on serving as trusted advisor to entrepreneurs and the NYC entrepreneurial community.

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Anyone who thought a sudden wave of peace, love, and joy was going to erupt in the mobile marketplace just in time for Christmas — keep dreaming.

Unlike HTC, Samsung is not planning to pay Apple any patent royalties on its Android smartphone sales, according to the Korean company’s head of mobile. Rather, the fight will continue.

Just this past weekend Apple and HTC buried the hatchet, ceasing all lawsuits and cross-licensing each other’s patents. That settlement is believed to be worth between $6 to $8 per Android phone for Apple, and speculation was — yes, my speculation, too — that Samsung might be next.

But today, Samsung has closed that door, according to the AFP. Executive J.K. Shin, who leads the Korean company’s mobile division, was asked if Samsung would seek a similar arrangement.

“We have no such intention,” he replied.

Whether this is simply negotiation or the dug-in heels of a bitter competition between the two mobile giants is impossible to say right now. Samsung, of course, may be liable for up to $1.5 billion in a legal settlement that is still entangled with challenges and reviews — and potential increases. Both companies have had some legal wins and losses, and the two companies have more than 50 ongoing or filed lawsuits around the globe.

Meanwhile, Samsung is killing it in the marketplace, shipping 57 million smartphones last quarter and expecting as much or more this coming quarter, according to Shin.

All of which means that although Apple may be getting $160 million to $200 million a year in royalties from HTC, the company’s accountants should not yet start anticipating another $1.5 billion from Samsung.

And, that we can expect to see more Apple-Samsung courtroom battles.

photo credit: Dunechaser via photopin cc

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

A reader asks: My co-founders and I are working on a cool new site, and we’ll be ready to launch in a few weeks. I’ve been reading a lot on the web about incorporation and other legal stuff. We have no money, so we’re going to do the legal ourselves. Assuming we might mess something up, are there any mistakes that can’t be fixed down the road? We know that once we get money in we can clean things up, but we’re worried about mistakes that just can’t be fixed. (And please don’t tell us to hire a lawyer.)

Answer: Two potentially troublesome areas that jump out relate to vesting restrictions and intellectual property (IP), either of which could destroy your venture down the road if not handled properly today.

Vesting Restrictions

You need to make sure that all of the shares of common stock issued by the corporation to the founders are subject to vesting restrictions — which means that ownership of the shares would vest over time (instead of all of the shares being owned outright on day one). Otherwise, if one of the founders quits after a few months, he would take all of his shares with him. In short, this is a nightmare scenario — particularly if there is bad blood with the other co-founders.

The only solution in such a scenario is to negotiate a repurchase of those shares, which could be very expensive or impossible (if the departing founder wants to screw with his co-founders). And if the departing founder has a huge chunk of equity, it is unlikely that the company will find many sophisticated angels or VC’s interested in investing.

The most common vesting schedule is an equal percentage of stock (25 percent) every year for four years, on a monthly basis. However, it may be appropriate (for example, if the founders don’t know each other very well) to impose a one-year “cliff,” meaning that the first 25 percent tranche would vest on the one-year anniversary of the issuance date and then monthly thereafter. In addition, sometimes a portion of the shares will be deemed to be vested “up front” — meaning they are not subject to vesting — particularly where a founder has made a significant contribution prior to the company’s incorporation.

Vesting restrictions are addressed in a restricted stock purchase agreement, which each founder would be required to execute, and which would grant the company the right to repurchase any unvested shares (at the initial purchase price) at the time of the founder’s departure.

IP Ownership Issues

There are three deadly intellectual property-related mistakes, which usually surface when the investors conduct their due-diligence investigation.

1. You need to confirm that none of the founders’ prior employers have any rights to the venture’s IP because he or she was “moonlighting” while previously employed. This is a particular concern if the startup is in the same space as a founder’s prior employer.

You should carefully review all employment-related agreements (such as offer letters, non-disclosure and inventions assignment agreements, etc.) and the employee handbook to determine if there are any provisions that may give the prior employer rights to your startup’s IP. If there is a problem, some employers will agree to execute a waiver, which you can show investors down the road.

2. Any IP created or acquired by a founder (such as code, a logo, domain names) prior to incorporation must be assigned to the company. Usually this is done as part of the founder’s restricted stock purchase agreement, pursuant to which the IP is contributed as full or partial consideration for the shares of common stock issued to him or her in a tax-free transaction under Section 351 of the Internal Revenue Code.

Similar to the vesting issue above, a huge problem arises if one of the founders leaves the company prior to incorporation and takes his rights to the IP along with him; or if the assignment of IP is not properly made and the founder leaves prior to this issue being cleaned-up. In both cases, the company is once again in the difficult position of trying to negotiate with a departed founder.

3. Finally, you need to make sure that any IP created by outside developers (i.e., non-founders) is assigned to the company. Sadly, this issue comes-up all the time — just ask the Winklevoss twins. Indeed, had Mark executed an inventions assignment agreement, there probably would be no Facebook; or if there were, the twins’ (or their company) would own the IP.

This is particularly a problem prior to incorporation. The IP created by the developers often never gets assigned to the company, either because there was no written agreement or because the company was not a party to the agreement (because it didn’t exist at the time). Then when it’s time to fix the problem because investors are requiring it, the company needs to chase-down the developers (some of whom may be outside the U.S.) and start negotiating with them.

Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a law firm specializing in the representation of entrepreneurs.

[Image via zimmytws/Shutterstock]

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

(Editor’s note: “Ask the Attorney” is a weekly VentureBeat feature allowing start-up owners to get answers to their legal questions. Submit yours in the comments below and look for answers in the coming weeks. Author Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a boutique corporate law firm specializing in the representation of entrepreneurs.)

Question:  We launched our company about a year ago, and we’re having trouble raising money.  I met a consultant at a conference who said he has a lot of connections and could help us raise about $500K if we paid him 6 percent.  This seems like a pretty good deal.  Are there any legal issues we need to worry about?

Answer: There are, in fact, a number of legal issues you need to worry about. – the biggest one being whether this consultant is licensed as a “broker-dealer”. If he isn’t, I strongly suggest you run the other way.

Securities laws are complex and are a potential minefield for the unwary.  Under both federal and California securities laws, a so-called “finder” (someone who holds himself out as being able to introduce companies to interested investors) must be registered with the Securities and Exchange Commission (SEC) and the California Department of Corporations if he is acting as a “broker-dealer”.

The term “broker-dealer” is a broadly defined one under both federal and California law. It includes any finder who receives some form of commission or success-based compensation (such as in your situation).  Other broker-dealer activities include making presentations to investors, participating in the negotiations between the company and the investors, structuring the transaction between the company and the investors, and/or regularly engaging in the business of finding investors for companies (as opposed to a one-off).

The bottom line is that if a finder does anything beyond merely introducing the company to potential investors, he will likely be characterized as a broker-dealer – and he’ll require registration.

You may be thinking: So what? That’s not my issue.

Wrong!  If he is not registered (which is probably the case since he’s calling himself a consultant, as opposed to an investment banker) and you pay him his 6 percent commission, your company could face the following consequences:

First, the company’s issuance of securities will be in violation of applicable securities laws, which could result in possible SEC and/or state regulatory action, including injunctive relief, fines and penalties – and possible criminal prosecution.  As I have previously discussed, in light of the Madoff affair and other external pressures, the SEC and state securities are significantly stepping-up enforcement of the securities laws.

Second, investors will be able to sue the company to unwind the sale and get their money back, plus interest.  Under California law, they also arguably would have a right to sue for damages up to $10,000.

Finally, the company’s use of an unregistered finder may adversely affect any future capital raising activities – including an initial public offering – and may subject to the company to liability for “aiding and abetting” the securities law violations of the finder.

Tread carefully and make sure you have all the facts before moving forward.

Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.

Photo by vaXzine via Flickr