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 Fifth Edition

The Entrepreneur’s Guide to

Law and Strategy
Selected as one of Business Insider’s
25 “must-read” books for entrepreneurs.

Constance E. Bagley
YA L E L A W S C H O O L

Craig E. Dauchy
C ooley L L P
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 FIFTH EDITION

The Entrepreneur’s Guide to

LAW AND STRATEGY

Constance E. Bagley
Yale University

Craig E. Dauchy
Cooley LLP

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 The Entrepreneur’s Guide to © 2018, 2012 Cengage Learning
Law and Strategy, Fifth Edition
ALL RIGHTS RESERVED. No part of this work covered by the
Constance E. Bagley and copyright herein may be reproduced or distributed in any form or
Craig E. Dauchy by any means, except as permitted by U.S. copyright law, without
the prior written permission of the copyright owner.
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 Dedication

To my son Christoph Alexei,

With love and joy.
C.E.B.
To my wife, Sue Crawford,
and to my children, Philip, Winston and Kendra,
Thank you for your support, encouragement, and love.
C.E.D.

iii
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Brief Contents

ABOUT THE AUTHORS xiii

PREFACE xvi

1 Taking the Plunge 1

2 Leaving Your Employer 16
3 Selecting and Working with an Attorney 38
4 Deciding Whether to Incorporate 55
5 Structuring the Ownership 79
6 Forming and Working with the Board 127
7 Raising Money and Securities Regulation 146
8 Marshaling Human Resources 193
9 Contracts and Leases 261
10 E-Commerce, Sales, and Consumer Privacy 305
11 Operational Liabilities, Insurance, and
Compliance 348
12 Creditors’ Rights and Bankruptcy 392
13 Venture Capital 438
14 Intellectual Property and Licensing 496
15 Going Global 572
16 Buying and Selling a Business 615
17 Going Public 691
NOTES 770
APPENDICES Posted on Companion Website
INTERNET SOURCES Posted on Companion Website
TABLE OF CASES Posted on Companion Website
INDEX 801
iv
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 Contents

ABOUT THE AUTHORS xiii

PREFACE xvi

1 Taking the Plunge 1

Becoming an Entrepreneur 1
Determining Which Ideas Can Become Successful
Businesses 2
Law, Entrepreneurship, and the Value of Legal
Astuteness 6
Putting It into Practice 11

2 Leaving Your Employer 16

Restrictions While Still Employed 17
Postemployment Restrictions and the Covenant Not
to Compete 22
Trade Secrets 30
Invention Assignment Agreements and Works for
Hire 33
Strategies for Leaving on Good Terms 34
Putting It into Practice 36

3 Selecting and Working with an Attorney 38

The Need for an Attorney 39
Choosing an Attorney 39
The Structure of Billing Costs 44
Working Cost Effectively with an Attorney 48
Preserving Attorney-Client Privilege 51
Putting It into Practice 53

4 Deciding Whether to Incorporate 55

Forms of Business Entity 56

v
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 vi Contents

Sole Proprietorships 57
Corporations 57
Partnerships 63
Limited Liability Companies 67
Selecting the Most Appropriate Form of
Organization 70
Choosing and Protecting a Name for a Business 73
Registering to Do Business in Other States and
Obtaining Local Licenses 76
Putting It into Practice 76

5 Structuring the Ownership 79

Incorporation 80
Splitting the Pie 90
Issuing Founders’ Stock 95
Employee Stock Options 105
Tax Treatment of Employee Stock Options 111
Repurchase Rights, Rights of First Refusal, and
Other Restrictions on the Transfer of Stock 116
Shareholder Voting Agreements 119
Proprietary Information and Inventions,
Employment, and Noncompete Agreements 120
Putting It into Practice 122

6 Forming and Working with the Board 127

The Benefits of Having an Independent Board 127
Size of the Board and Frequency and Duration of
Board Meetings 129
Type of Representation Desired 130
The Responsibilities of the Board 134
Compensation of Board Members 138
Types of Information Directors Need 139
How to Make the Most Effective Use of the
Board 141
Putting It into Practice 143

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 Contents vii

7 Raising Money and Securities Regulation 146

Sources of Funds 147
Using Online “Crowdfunding” Platforms and
Placement Agents 158
Pitching to Investors 160
Types of Investment Securities 162
Federal and State Securities Registration and
Qualification Requirements 169
Exemptions from Federal Registration
Requirements 172
Blue Sky Exemptions and Federal Preemption 188
Putting It into Practice 189

8 Marshaling Human Resources 193

Employees Versus Independent Contractors 194
Major Employment Civil Rights Legislation and the
Role of the EEOC 201
Prehiring Practices 223
Other Employment Legislation 229
Employee Privacy, Monitoring of Employee Email,
and Limitations on the Use of Employee Health
Information 234
Employment at Will and Wrongful Discharge 236
The Employment Document 239
Mandatory Arbitration of Employment
Disputes 243
Foreign Nationals Working Inside the United States
and U.S. Citizens and Foreign Nationals Working
Outside the United States 245
Cash and Equity Compensation 247
Other Employee Benefits 247
Employer Liability for Employees’ Acts 252
Reducing Employee-Related Litigation Risk 253
Preventing Employee Fraud 256
Putting It into Practice 257

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 viii Contents

9 Contracts and Leases 261

Sources of Law 263
Negotiating Term Sheets and Other Preliminary
Agreements 263
Types of Contracts 264
Choice of Law 265
Elements of a Contract 265
Oral Agreements and the Statute of Frauds 270
Preparing Written Contracts 273
Electronic Contracts 277
General Contract Terms to Consider 280
Checklist for Analyzing a Possible Contract
Dispute 291
Effect of Bankruptcy 293
Remedies 294
Promissory Estoppel 298
Quantum Meruit 299
Leases 299
Contracts for the Purchase of Real Property 301
Loan Agreements 302
Putting It into Practice 303

10 E-Commerce, Sales, and Consumer Privacy 305

Sales of Goods Under Article 2 of the UCC 306
Electronic Contracts 311
UCC Article 2 Warranties 313
Magnuson-Moss Warranty Act 317
International Sales of Goods and the Convention on
Contracts for the International Sale of
Goods 318
Strict Liability in Tort for Defective Products 320
The Consumer Product Safety Commission and
Other Administrative Agencies 327
Consumer Privacy and Identity Theft 330
Advertising 337
Unfair Competition 340

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 Contents ix

Resolving E-Commerce Disputes: Jurisdiction,

Choice of Law, and Enforcement of Foreign
Judgments 342
Putting It into Practice 345
11 Operational Liabilities, Insurance, and
Compliance 348
Negligence 349
Defenses to Negligence 353
Intentional Torts 354
Strict Liability 360
Toxic Torts 361
Vicarious Tort Liability and Respondeat Superior 362
Tort Remedies 363
Tort Liability of Multiple Defendants 365
Antitrust Violations 366
Environmental Liabilities 371
Bribery and the Foreign Corrupt Practices Act 375
Tax Liability 377
Wire and Mail Fraud 378
Obstruction of Justice and Retaliation Against
Whistle-Blowers 378
Computer Crime and Misappropriation of
Intellectual Property 380
Insurance 381
Strategic Compliance Management 385
Putting It into Practice 389
12 Creditors’ Rights and Bankruptcy 392
Types of Loans 393
Loan Agreements 395
Secured Transactions Under the UCC 395
Security Agreements 397
Perfecting a Security Interest 401
UCC Filing Procedure 402
Types of Creditors and Their Rights 404
Personal Guaranties and Liability of Individual
General Partners 406
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 x Contents

Strategies for Responding to a Financial Crisis

Outside of Bankruptcy 407
Fiduciary Duties of the Officers and Directors of an
Insolvent or Bankrupt Corporation or a
Corporation in the Zone of Insolvency 413
Types of Bankruptcy 414
The Chapter 11 Bankruptcy Process 416
Effect of Bankruptcy on Director and Officer
Litigation and Indemnification 424
Operating a Business in Bankruptcy 425
Chapter 11 Plan of Reorganization 427
Prepackaged Bankruptcies and Plans of
Reorganization 432
Business Combinations Through Chapter 11
Bankruptcy 433
Loss of Control and Other Risks in Bankruptcy 434
Bankruptcy Pros and Cons 435
Putting It into Practice 436

13 Venture Capital 438

Deciding Whether to Seek Venture Capital 439
Finding Venture Capital Investors 442
Pitching to a Venture Capitalist 444
Determining the Valuation 449
Rights of Preferred Stock 454
Other Protective Arrangements 484
Putting It into Practice 487
Getting It in Writing: Sample Venture Capital Term
Sheet 491

14 Intellectual Property and Licensing 496

Trade Secret Protection 498
Copyrights 509
Patents 523
Trademarks 541
Domain Names and Cybersquatting 552
Employee Proprietary Information and Assignment
of Inventions Agreements 553
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 Contents xi

Comparison of Types of Protection 555

Licensing Agreements and Other Transfers of
Intellectual Property 557
Special Issues Associated with Software Licenses,
Open-Source Software, and Online Terms of
Use 564
Putting It into Practice 568

15 Going Global 572

Selecting the Best Overseas Presence:
Representative Office, Branch, Subsidiary, or a
Hybrid Approach 573
International Tax Planning 578
Establishing a Foreign Business Presence 582
Owning and Operating an Overseas Subsidiary 585
Hiring Workers Overseas 590
Distributors, Value-Added Resellers, and Sales
Agents 601
International Intellectual Property Issues 602
Funding Foreign Operations 603
Leasing Property, Acquiring Equipment, and
Setting Up Operations 607
U.S. Support for Overseas Offices and
Facilities 610
Putting It into Practice 612

16 Buying and Selling a Business 615

Business Combinations Versus Initial Public
Offerings 616
Types of Acquirers 618
Forms of Business Combinations 619
Pricing Issues and Types of Consideration 632
Effect of a Business Combination on Preferred
Stock Rights and Stock Options 636
Tax Treatment of Business Combinations 639
Shareholder Approval and Dissenters’ Rights 646
Fiduciary Duties of the Board and Controlling
Shareholders 648
Securities Law Requirements 651
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 xii Contents

Accounting Treatment 658

Antitrust Compliance 658
The Merger Process 663
The Merger Agreement 669
The Closing and Postclosing Integration 681
Putting It into Practice 683
Getting It in Writing: Sample Term Sheet for the
Acquisition of a Privately Held Corporation by a
Public Company 689

17 Going Public 691

A Brief History of Modern IPO Market
Conditions 692
IPO Versus Sale of the Company 694
Advantages and Disadvantages of Going
Public 695
When is the Company a Viable IPO Candidate? 697
Participants in the IPO Process 699
Preparing for the IPO 702
The IPO Process 708
Restrictions on Resales of Shares After an IPO 741
Ban on Insider Trading 745
Liability for Short-Swing Profits 750
Ongoing Responsibilities of a Public Company and
Its Directors and Officers 751
Putting It into Practice 762

NOTES 770
APPENDICES POSTED ON COMPANION WEBSITE
Appendix TOC.1 Internet Sources
Appendix TOC.2 Table of Cases
Appendix P.1 List of Reviewers of the Fifth and Earlier Editions
of The Entrepreneur’s Guide to Law and Strategy
Appendix 6.2 Information to Be Provided to Directors
Appendix 8.1 Getting It in Writing: Sample Independent Contractor
Services Agreement
Appendix 16.1 Franchising a Business
INDEX 801

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 About the Authors

Constance E. Bagley is a Senior Research Scholar at Yale Law

School and was formerly Professor in the Practice of Law and
Management at the Yale School of Management. Before joining
the Yale faculty, she was an Associate Professor of Business
Administration at the Harvard Business School, a Senior Lecturer
in Law and Management at the Stanford University Graduate
School of Business, and a corporate securities partner in the San
Francisco office of Bingham McCutchen LLP.
Professor Bagley received Yale’s Excellence in Teaching Award
in 2013 and 2009. A past president of the Academy of Legal Studies
in Business, she is a recipient of its Senior Faculty Award of
Excellence.
Professor Bagley served on the Financial Industry Regulatory
Authority’s National Adjudicatory Council from 2005 to 2009 and
was on the faculty of the Young Presidents Organization International
Universities for Presidents in Hong Kong and Prague. She is the
business school coeditor (with Josephine Nelson) of eshiplaw.org,
powered by the Kauffman Foundation and the University of
Missouri at Kansas City. Professor Bagley is also the CEO of the
Bagley Strategic Consulting Group LLC. Her clients include CVS
Health, Microsoft, Prudential Financial, PepsiCo, Colson Associates,
and MassMutual Financial.
She has published articles in the Academy of Management
Review, the Harvard Business Law Review, the Harvard Journal of
Law and Technology, the American Business Law Journal, the Stan-
ford Journal of Law, Business & Finance, the University of Pennsyl-
vania Journal of Business Law, the Duke Journal of Comparative and
International Law, the Cornell Journal of Law and Public Policy, and
other journals. Professor Bagley also authored Managers and the
Legal Environment: Strategies for the 21st Century (8th ed. 2016)

xiii
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 xiv About the Authors

and Winning Legally: How Managers Can Use the Law to Create
Value, Marshal Resources, and Manage Risk (2005). She has contrib-
uted to a number of other books, including The Oxford Handbook of
Dynamic Capabilities (David Teece & Sohvi Leih, eds., 2016), and
General Counsel in the 21st Century: Challenges and Opportunities
(Christoph H. Vaagt & Wolf-Peter Gross, eds., 2015).
She received her J.D., magna cum laude, from the Harvard Law
School where she was invited to join the Harvard Law Review. She
received her A.B., with Honors and Distinction, from Stanford
University, where she was elected to Phi Beta Kappa her junior
year. Lund University in Sweden awarded her an honorary doctor-
ate in economics in recognition of her pioneering work integrating
law and management. Professor Bagley is a member of the State
Bar of California (inactive) and the State Bar of New York.

Craig E. Dauchy is a partner at Cooley LLP and head of the firm’s

venture capital practice group. Cooley has 900 lawyers across 12
offices in the United States, China, and Europe. Mr. Dauchy is based
in Cooley’s Palo Alto office, located in the heart of Silicon Valley.
Since 2005, Cooley has been the most active law firm represent-
ing VC-backed companies going public and has ranked as the
Number 1 law firm for technology and life sciences IPOs for the
past three years. Cooley has represented one-third of the market
share of VC-backed IPOs across all industries and has been
involved in 375 public offerings in recent years, including some of
the nation’s most notable securities transactions. Cooley represents
more than 350 fund manager organizations, including many of the
nation’s leading institutional investors, and it has been recognized
as the Venture Capital Department of the Year twice by The
Recorder. For more than 30 years, Mr. Dauchy has represented
many of the most active and influential investors, entrepreneurs,
and startups in the Bay Area and beyond. His representation of
startups ensures they are structured for growth and long-term suc-
cess. He leads a group of lawyers that has formed more venture
capital funds than any other law firm in the world.
Mr. Dauchy is a frequent educator and a distinguished pre-
senter to audiences across the globe on matters relating to securi-
ties law, public offerings, mergers and acquisitions, and venture
capital. Leading journals such as Legal 500, Chambers USA and

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 About the Authors xv

Best Lawyers have recognized him as a national leader in investment

funds, venture capital and emerging companies; the Daily Journal
has named him three times in its list of the Top 100 Lawyers in
California; and Super Lawyers has listed him for 10 consecutive
years. In 2010, Best Lawyers named Mr. Dauchy Corporate Lawyer
of the Year in the San Francisco Bay Area.
He holds a J.D. and an M.B.A from Stanford University, gradu-
ated magna cum laude with a B.A. in history from Yale University,
and is a member of the State Bar of California. He serves on a num-
ber of boards of directors and advisory boards.
More information about Mr. Dauchy is available at www
.cooley.com/people/craig-dauchy and additional information about
Cooley LLP is available at www.cooley.com. Cooley GO, the firm’s
award-winning free legal resource for startups and those involved
in the venture ecosystem, is available at www.cooleygo.com.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Preface

In a time of multiple “unicorns,” private companies with valua-

tions in excess of $1 billion, including Airbnb, Snap and Uber,
entrepreneurship offers opportunities to build something endur-
ing, to create good jobs, and to fill unmet financial, social, and
material needs. Examples abound of entrepreneurs with extraordi-
nary ideas who need to address legal and strategic issues early on
as they seek to translate their vision into a successful business.
Consider Monika Weber, a Ph.D. student at Yale University’s
School of Engineering and Applied Science, who founded
Fluid-Screen, Inc. This biotech startup developed an innovative
system for testing water, pharmaceuticals, and other liquids for
bacteria and other contaminants. Weber successfully negotiated
a licensing agreement with Yale and her doctoral adviser to com-
mercialize the nanotechnology and novel computer chip design
that make it possible for customers to obtain accurate testing
results in less than an hour. She won the Grand Prize in the
NASA Create the Future Design Contest 2011 (1st out of more
than 900 projects and 7,000 participants) then proceeded to patent
the technology, to raise almost $1 million in grant money and pri-
vate investments for her startup, and to partner with a major phar-
maceutical firm to test her product. Like many entrepreneurs, she
now faces many of the issues addressed in this book, including:
Ø Finding the right venture capitalist to help take her company
to the next stage and negotiating the terms of the investment
Ø Building her firm’s human capital by, among other things,
providing equity incentives for key employees
Ø Determining on what terms to license her patented
technology

xvi
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 Preface xvii

Ø Securing additional protection for Fluid-Screen’s intellectual

property
Ø Deciding whether to keep Fluid-Screen independent with
hopes of taking it public or selling the company or combin-
ing it with another firm.
This book identifies many of the legal challenges inherent in
entrepreneurial activities and suggests techniques for meeting
those challenges while seizing opportunities and achieving the
core business objectives. Chris Dixon, successful serial entrepre-
neur, angel investor and venture capitalist at Andreessen Horowitz,
called the third edition (then-titled The Entrepreneur’s Guide to
Business Law) “perhaps the most useful business book you can
ever read.”1 Having our book included in Business Insider’s 25
must-read books for entrepreneurs, which includes classics like
my former HBS colleague Clay Christensen’s The Innovator’s
Dilemma, was a singular honor.2 We have worked hard to make
sure the fifth edition lives up to that legacy.
The Entrepreneur’s Guide to Law and Strategy helps entrepre-
neurs and those who work with them “see around corners,” to
spot legal issues before they become legal problems, and to prac-
tice strategic compliance management. Recent events have
highlighted the negative consequences of failing to heed the law.
In 2016, the Federal Trade Commission announced that InMobi, a
non-U.S. mobile advertising company that provides location-based
advertising, would pay $950,000 in civil penalties and implement a
comprehensive 20-year privacy program to settle charges that it
“deceptively tracked the locations of hundreds of millions of
consumers—including children—without their knowledge or con-
sent to serve them geo-targeted advertising.”3
Yet, staying out of trouble is only part of the picture. The law
offers a variety of tools legally astute entrepreneurs advised by
strategically astute counsel can use to increase realizable value
and grow the business while managing the attendant risks and
keeping legal costs under control. Legal astuteness is a managerial
capability that enables the top management team to work effec-
tively with counsel to solve complex problems and to protect and
leverage firm resources. There are five components: (1) a set of
value-laden attitudes, (2) a proactive approach, (3) the exercise of

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 xviii Preface

informed judgment, (4) context-specific knowledge of the law and

legal tools, and (5) partnering with strategically astute counsel.4
Table 1.3 in Chapter 1 provides a nonexclusive list of techniques
entrepreneurs can use to create and capture value and to manage
risk during various stages of business development and indicates
the chapters in this book where they are addressed.

PURPOSE AND INTENDED AUDIENCE

The purpose of The Entrepreneur’s Guide to Law and Strategy is to
help future and current founders, managers, investors, and law-
yers become more legally and strategically astute so that they can
use the law and legal tools to grow the business and manage the
firm more effectively. This book is intended not only for entrepre-
neurs but also for venture capitalists and other investors, lawyers,
accountants, consultants, advisers, and board members who work
with growing companies.
The Entrepreneur’s Guide to Law and Strategy is suitable for
undergraduate and graduate courses in colleges, universities, busi-
ness schools, and law schools. In recognition of the growing
demand for undergraduate and graduate courses on entrepreneur-
ship and venture capital, Professor Bagley has made available
to instructors the syllabus for her course “Legal Aspects of
Entrepreneurship” as well as teaching cases she has authored or
co-authored. To access them, instructors will need to register (it’s
free) for the faculty section of eshiplaw.org, a site powered by the
Kauffman Foundation and the University of Missouri at Kansas
City. The public section of the site contains additional information
for students, faculty and others interested in entrepreneurship. Her
cases illustrate various topics addressed in this book. For permis-
sion to reproduce or post her Harvard cases, go to hbsp.harvard.
edu/product/cases and search under author name “Bagley.”
Instructor-only teaching notes are available for certain cases. The
Academy of Legal Studies in Business also posts a variety of cases
on its members-only site, which can be accessed at alsb.org.
The Entrepreneur’s Guide to Law and Strategy both provides
guidance regarding the legal and strategic issues that entrepre-
neurs should consider when launching a new enterprise and
serves as a reference book and resource for those who are already

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Preface xix

active in the entrepreneurial world. It is not intended to take the

place of an attorney but to help entrepreneurs select one with
whom they can work as a strategic partner in an intelligent,
informed, efficient, and economical manner.5

WHAT DISTINGUISHES THIS BOOK

FROM OTHERS
Numerous other self-help and reference books for entrepreneurs
cover a host of business and legal issues, and many are quite
good. Often, however, the available literature is too general or
too technical, impractical, or incomplete. Frequently, the authors
are not acknowledged experts in their fields and may have
unproven track records. This book satisfies the need for a single
definitive source that covers the main legal aspects of starting
and growing a business, written in a manner that allows the
reader to learn about the relevant law and entrepreneurs’ ability
to use legal tools to create competitive advantage while at the
same time benefitting from practical tips based on the authors’
decades of experience.
In particular, The Entrepreneur’s Guide to Law and Strategy dis-
tinguishes itself from the existing literature in the following ways:
Ø Integration of Law, Strategy, and Management. Much of
the relevant literature treats the legal aspects of business as
distinct from other aspects, such as the articulation of the
value proposition and the identification of the activities in
the value chain. Because we see the law as integral to busi-
ness success, The Entrepreneur’s Guide to Law and Strategy
embeds our discussion in mainstream theories of competi-
tive advantage, including Porter’s Five Forces, the resource-
based view of the firm, and the dynamic capabilities
approach.6 We interweave the law and its business applica-
tions by including real-life business examples that illustrate
how in practice the law directly affects business success.
Ø Transactional Approach. Many legal texts are organized
around specific areas of law, such as tax law and securities
law. Our book takes a transactional approach, starting with
the decision to leave the current employer and culminating

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 xx Preface

with a business combination or an initial public offering.

Readers can easily identify the relevant chapters depending
on their stage of development.
Ø Cutting-Edge Issues that Challenge the Nuances of the
Law. The law is dynamic and it can impact multiple busi-
ness lines that may, at first blush, not seem to be affected,
especially when the laws originate outside the United States.
For example, the European Union’s General Data Protection
Regulation, effective in 2018, gives the EU the ability to
impose a fine of up to 20 million euros on companies that
do not comply with its provisions surrounding information
collected and used by Internet companies, among others.7
The restrictions may be applied to state-of-the-art artificial
intelligence applications incorporating “automated individ-
ual decision-making” functions that companies use to target
their online advertising.8 If so, this regulation could signifi-
cantly affect the way Internet companies in the United
States collect, store, and use personal data from individuals
abroad.
Ø From the Trenches. Throughout this book, a number of
examples appear in a boxed feature called “From the
Trenches.” When the example is based on a reported court
case, we have provided the citation to the legal reporter in
which the case can be found. However, many examples are
drawn from our own practice representing entrepreneurs
and venture capitalists. Sensitivity to confidentiality often
required us to use fictitious names, but rest assured that the
entrepreneurs and companies involved are real and that every-
thing described in “From the Trenches” actually occurred.
Our hope is that our readers will both avoid traps others failed
to recognize and seize opportunities others missed.
Ø Running Hypothetical. A hypothetical presented at the end
of each chapter under the heading “Putting It into Practice”
follows the progress of Alexei Perlitz and Piper Mao as they
leave their former places of employment, start a company in
the 3D printing and manufacturing field, face financial chal-
lenges, raise money from venture capitalists, acquire another
firm, and ultimately take the company public in an initial

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Preface xxi

public offering. Much of working effectively with the law

entails knowing the appropriate questions and when to ask
them. This hypothetical highlights the key concerns founders
need to contemplate as the business progresses. By following
the thought processes and progress of these hypothetical
entrepreneurs, the reader learns how to identify legal and
business opportunities and threats and to “pivot” when nec-
essary to adapt to changes in the regulatory and business
environment by marshaling, utilizing, and redeploying firm
resources.
Ø Companion Website. The companion website for the fifth
edition of The Entrepreneur’s Guide to Law and Strategy,
located on CengageBrain.com, contains a variety of useful
resources, including Internet sources, a table of cases, a list
of information that should be provided to directors so they
can perform their jobs effectively, and a summary of legal
and other issues relating to franchising. Each resource is
keyed in the text to the relevant chapter, so Appendix 6.2,
“Information to Be Provided to Directors,” relates to the dis-
cussion in Chapter 6. To access the companion website on
CengageBrain, please follow these instructions: First, use
your browser to go to www.CengageBrain.com. Second, if
this is the first time you have tried to log into the site, you
will need to register. It’s free. Click on “Sign Up” in the top
right corner of the page and fill out the registration informa-
tion, making a note of the user name and password you have
chosen. Third, after you have registered and logged in for the
first time, go to the “Search for Books or Materials” bar and
enter the author (Bagley or Dauchy) or ISBN for The Entre-
preneur’s Guide to Law and Strategy, 5th ed. (located on the
copyright page in the front of the book). When the title
appears, click on it and you will be taken to the companion
site. There you can choose among the various folders pro-
vided on the Student side of the site. After you have logged
in once and identified your book, just enter your user name
and password to go directly to the companion site for The
Entrepreneur’s Guide to Law and Strategy. If you are currently
using more than one Cengage book, the same user name and

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 xxii Preface

password will give you access to all the companion sites for
your Cengage titles. After you have entered the information
for each title, all the titles you are using will appear in the
pull-down menu in the “Search for Books or Materials” bar.
Whenever you return to CengageBrain.com, you can click on
the title of the site you wish to visit and go directly there.
Ø Getting It in Writing. A sample independent contractor ser-
vices agreement appears in a feature called “Getting It in
Writing,” Appendix 8.1 on this title’s companion website at
www.CengageBrain.com. Other exemplars, including a ven-
ture capital term sheet and a term sheet for an acquisition,
are included in the text. In addition, model organizational
documents are available at www.cooleygo.com.

CONTENTS
This book is intended to encompass all phases of the entrepre-
neurial journey. Its 17 chapters follow the progression of a startup
and anticipate its legal and strategic concerns from inception to
an initial public offering. Each chapter is self-contained and may
be read on its own.
We begin with a brief description of the rewards and risks of
entrepreneurship and introduce the hypothetical that will be dis-
cussed throughout the book. Chapter 2 explores the steps that an
entrepreneur who is contemplating leaving an employer can take
to make the departure amicable, and it offers guidance regarding
the significance of documents (such as a noncompete clause or an
assignment of inventions) that the entrepreneur may have signed.
Noncompete agreements reportedly affect about 18% of U.S.
workers, from senior executives to those in lower-skill jobs, and
companies have recently begun increasing enforcement of the
agreements through litigation.9 The chapter also offers insights
into the intellectual property issues involved in leaving a company
to form a new venture and suggests ways the entrepreneur can
safely (i.e., legally) go about recruiting colleagues.
Chapter 3 focuses on the role of an attorney and provides prac-
tical tips for selecting and working effectively with counsel. The
next two chapters detail the considerations entailed in choosing

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Preface xxiii

an appropriate legal form for the business and offer suggestions

on how to structure the ownership of the business among the
founders and the investors, including problems that can arise
when a “forgotten founder” appears, the pros and cons of issuing
restricted stock and stock options, and the tax and accounting
treatment of equity compensation. Chapter 6 addresses the proper
governance structure for an entrepreneurial venture and examines
the roles and fiduciary duties of directors. Chapter 7 discusses the
pros and cons of different ways of raising money and the steps
necessary to comply with federal and state securities laws.
Chapter 8 considers a growing company’s relationship with its
employees and independent contractors, from hiring to firing. We
discuss the pros and cons of hiring employees versus independent
contractors in the “gig” economy, as well as implications of mis-
classification. We address the split in the federal circuit Courts of
Appeals over the enforceability under the National Labor Rela-
tions Act of mandatory arbitration agreements in employment
contracts that include a class or collective action waiver.10 We
also discuss the laws banning employment discrimination and
suggest ways to promote compliance.
Chapter 9 explains what constitutes a legally binding agree-
ment and highlights ways entrepreneurs can use formal contracts
as complements to trust-building and other relational governance
techniques to strengthen business relationships. Chapter 10 high-
lights special issues associated with the sale of goods and services
and electronic commerce, including liability for defective pro-
ducts, as well as consumer privacy. For example, we address
the 2016 regulations governing the transfer of data between the
European Union and the United States, as well as the European
Union’s “right to be forgotten.” Chapter 11 discusses various busi-
ness torts and regulatory issues that an entrepreneur may face and
suggests ways to manage and insure against certain types of risk.
Chapter 12 deals with creditors’ rights and provides an overview
of bankruptcy and out-of-court workouts. Chapter 13 explores
venture capital in depth and highlights the aspects of the term
sheet and other venture capital documents of greatest importance
to the entrepreneur. Chapter 14 takes an in-depth look at intellec-
tual property, the lifeblood of many entrepreneurial ventures, and
issues associated with licensing. As with previous editions, we

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 xxiv Preface

discuss cutting edge issues, such as the patentability of isolated

gene sequences.
Chapter 15 discusses factors to consider when expanding
internationally, including tax considerations and employment
issues. Chapter 16 explores the processes of buying and selling a
business. Sale of a company is a frequent exit strategy for growing
firms, and acquisitions are often a way to accelerate growth and
increase market share. Chapter 17 concludes the book with
insights on another exit strategy, an initial public offering.

NEW TO THIS EDITION

The fifth edition both updates and improves upon its predeces-
sors. It makes explicit the strategic implications of various legal
choices and their effect on the sensing and seizing of opportu-
nities and the marshaling, deployment, and redeployment of firm
resources.11 This edition includes significant developments in the
legal environment of business and the precepts of business law of
particular importance to growing companies. These include
amendments promulgated by the Securities and Exchange Com-
mission (SEC) in October 2016 to Regulation D and the exemp-
tions from federal securities registration for certain intrastate
offerings; the enactment of Regulation Crowdfunding, which
allows unregistered offerings to the public of up to $1 million con-
ducted on the Internet through certain broker-dealers or funding
portals; and amendments to Regulation A permitting offerings of
up to $50 million in a “mini-IPO” subject to SEC qualification
(Chapter 7). Chapter 7 also contains a discussion of common
terms for the issuance of convertible notes, including so-called
SAFE investments. Chapter 8 discusses the 2015 refinement by
the National Labor Relations Board of the standard for determin-
ing “joint employer status,” which can cause temporary staffing
agencies and the companies that hire their workers to be jointly
responsible for compliance with employment and non-
discrimination laws. Chapter 10 includes an expanded discussion
of consumer privacy, including new “opt-in” rules for the use and
sharing of personal information by broadband Internet service pro-
viders adopted by the Federal Communications Commission in
October 2016. In light of the many instances of identity theft and

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Preface xxv

computer hacking, Chapter 11 includes new information on data

breaches and cyber insurance. Chapter 14 includes the patentability
of isolated gene sequences and an expanded discussion of licensing
arrangements, which is incorporated into the new running hypo-
thetical “Putting It into Practice.”
Many of the “From the Trenches” are new or revised to reflect
recent developments in areas ranging from a violation of the Foreign
Corrupt Practices Act by a bank that provided student internships to
family members of foreign government officials to an employer’s
duty to make reasonable accommodations for an employee’s reli-
gious practices to scandals involving product defects at General
Motors and Volkswagen.
This edition is supported by MindTap® Business Law, the dig-
ital learning solution that powers students from memorization to
mastery. It gives instructors complete control over their course—
to provide engaging content, to challenge every individual, and to
build students’ confidence. Empower students to accelerate their
progress with MindTap. MindTap: Powered by You.

ACKNOWLEDGMENTS
The authors gratefully acknowledge the guidance, comments, and
helpful suggestions provided by a number of academics and prac-
titioners who reviewed this and previous editions of the book.
They are identified in Appendix P.1 on the title’s companion
website accessible at www.CengageBrain.com.
Professor Bagley acknowledges with thanks Christoph Bagley’s
industry research and his creative contributions to the running
hypothetical “Putting It into Practice,” the invaluable assistance
of research associate Sue Schillaci, and the excellent word-
processing support provided by Kaela Heaslip. Mr. Dauchy grate-
fully acknowledges and thanks Erin Walczewski of Cooley LLP for
her superlative editing and Liz Cranford of Cooley LLP for her
word-processing support. Mr. Dauchy also gratefully acknowl-
edges and thanks the following Cooley LLP attorneys who helped
in writing the fifth edition of this book: Frederick Baron, Leslie
Cancel, and Julia Oliver (Chapters 2 and 8); Mark Windfeld-
Hansen (Chapter 4); Aaron Velli (Chapter 5); Jodie Bourdet
and Stephane Levy (Chapter 7); Mike Stern (Chapter 10);

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 xxvi Preface

Bob Eisenbach (Chapter 12); Stephane Levy (Chapter 13); Janet

Cullum, Jim Brogan, Marya Postner, David Wittenstein and
Brian Focarino (Chapter 14); Julie Wicklund (Chapter 15); Craig
Menden and Annie Lieberman (Chapter 16); Charlie Kim, David
Peinsipp and Jonie Kondracki (Chapter 17), and he gratefully
acknowledges the generous support of Cooley LLP. Both authors
would also like to thank Vicky True-Baker, Cengage Senior
Product Manager extraordinaire, for her insightful guidance,
responsiveness, and grace under pressure.

CONCLUSION
This area of the law is exciting and challenging. Law not only con-
strains, it also enables successful enterprise development. We have
done our best to bring to life the power of the law and the legal
and strategic astuteness necessary to make the law work for entre-
preneurs and their partners in value creation. We had a lot of fun
writing this book, and we hope the reader will have just as much
fun using the book as a guide when embarking on the exciting but
sometimes perilous journey of entrepreneurship. Please remem-
ber, however, that the application of law to a given situation may
vary depending on the particular facts and circumstances. As a
result, nothing contained in this book is to be considered as the
rendering of legal advice for specific cases. Readers are responsi-
ble for obtaining such advice from their own legal counsel. This
book is intended for educational and informational purposes
only, but our hope is that it will help entrepreneurs and venture
capitalists work more effectively with counsel as partners in
value creation, resource allocation, and risk management.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 CHAPTER

1
Taking the Plunge

I ndividuals start businesses for a number of reasons: to be their

own boss, to pursue a passion, to help those who are less advan-
taged, to achieve financial rewards, to establish a new livelihood
after corporate downsizing, to fill an unmet need with an innova-
tive product or service, or to create something enduring. Despite
the vast variety of entrepreneurs and their companies, once indi-
viduals decide to become entrepreneurs, they will need to address
many of the same issues. For example, founders must consider
their own strengths and weaknesses and both the resources they
currently control and the resources they can reasonably expect to
marshal.1 Thus, important questions include: “How will I raise the
financial capital necessary for my business?” “Should I incorpo-
rate or use some other form of organization?” “Should I give
equity incentives to key employees?” “How can I protect my intel-
lectual property?” “Who should be on my board?” “Should I sell
my company or try to take it public?”

1.1 BECOMING AN ENTREPRENEUR

Before starting a business, the would-be entrepreneur should con-
sider the sacrifices—professional, financial, and personal—that
will be required. These sacrifices may include accepting years of
low pay and long hours in exchange for a large potential payoff
later. Although entrepreneurs often work on their venture full
time, Patrick J. McGinnis points out that there are ways to be
entrepreneurial without quitting your day job.2 They include

1
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 2 The Entrepreneur’s Guide to Law and Strategy

being an angel investor or an advisor or board member in

exchange for equity in the startup.
Successful entrepreneurship requires a willingness to take risks
and the ability to learn from mistakes. As enterprise software pio-
neer Sandra Kurtzig put it, “Screwing up is part of the process.”3
Most successful entrepreneurs and their backers are not risk
seekers, however; rather, they are risk takers who attempt to man-
age the risks inherent in pursuing new opportunities by making
staged commitments and conducting a series of experiments.4
One key to being successful is to make fewer mistakes than
your competitors and to build in the flexibility to “pivot”—to
change the business plan when new information becomes avail-
able or when the original product or service idea fails or turns
out to be less attractive than originally contemplated. In other
words, it is critically important to learn from each failure and
adjust the business plan accordingly.5

1.2 DETERMINING WHICH IDEAS CAN BECOME

SUCCESSFUL BUSINESSES
A key threshold issue is which products or services to provide to
which markets and at what prices, sometimes framed as, “What
pain are you alleviating?” or “What hole are you filling?” The
answers to these questions will determine the firm’s value propo-
sition and the activities in the value chain.
The value proposition focuses on customers’ needs and the rel-
ative price they are willing to pay for a certain feature or service.6
As Michael Porter explains, “[S]uperior value stems from offering
lower prices than competitors for equivalent benefits or providing
unique benefits that more than offset a higher price.”7 When
selecting an opportunity to pursue, savvy entrepreneurs look for
an attractive risk-to-reward ratio, that is, the set of possible nega-
tive and positive cash flows, and the likelihood of each possible
outcome.8
A “novel value proposition often expands the market” and may
involve targeting a particular customer class or focusing on the
need for a certain feature or service.9 Steve Jobs of Apple prided
himself on creating innovative products, such as iPods and
iPhones, that consumers and businesses did not realize they
needed until they saw them.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Chapter 1 Taking the Plunge 3

From the TRENCHES

In 2005, the founders of the Israeli startup PrimeSense developed a gestural
human-computer interface making it possible for individuals to give commands
to a computer without having to use a mouse, trackball, touchscreen, or oral
commands. Like Tom Cruise in the movie Minority Report, users could use their
hands and fingers in mid-air to enlarge and shrink images, to turn pages, and to
move from one program to another.
Although their invention had obvious military uses, the founders decided to
focus first on the entertainment space. Founder Aviad Maizels commented: “The mil-
itary used to be the ones who were pushing the envelope and the frontiers of tech-
nology but now in the era that is coming, the newest developments are coming from
the entertainment space. Mostly it’s in the consumer space where things are cool.”
Founders of tech companies often first develop a new technology then form
a company to exploit it. “In contrast, the PrimeSense founders first identified the
user experience missing from the marketplace then set out to create the innova-
tions needed to provide that experience.” As Maizels explained, “We first asked,
‘What is the value we are creating, the need we are filling? What are the experi-
ences we want consumers to have?’”
Microsoft incorporated PrimeSense’s system-on-a-chip and proprietary optics
in the Xbox Kinect gaming system. Microsoft then promoted the use of the Kinect
technology in everything from operating rooms (to enable surgeons to review
patient scans without breaking the sterile field) to automobiles (to sense whether
a driver’s eyes were drifting off the road). Apple bought PrimeSense in 2013 for
roughly $300 million.

Sources: Constance E. Bagley & Reed Martin, PrimeSense, Ltd. (A), Yale Sch. of Mgmt.
Case No. 12-023 (2012); Constance E. Bagley & Reed Martin, PrimeSense, Ltd. and the
Microsoft Kinect, Yale Sch. of Mgmt. Case No. 13-016 (2013); Shel Israel, Why Apple Bought
PrimeSense, FORBES (Nov. 25, 2013), http://www.forbes.com/sites/shelisrael/2013/11/25
/why-would-apple-buy-primesense/.

Table 1.1 shows some of the various ways law affects the activ-
ities in a firm’s value chain, that is, “the activities involved in
delivering value to customers.”10
Entrepreneurs must analyze potential markets to determine
whether they are large enough to support the new venture, both
providing a living for the entrepreneur and generating the types
of returns outside investors will demand. Michael Porter identified
“five forces” that determine the attractiveness of an industry:
buyer power, supplier power, the power of competitors, barriers
to entry, and product substitutes.11 The most attractive markets
are those in which there is weak buyer and supplier power, weak
competitors, high barriers to entry, and no substitutes for the
company’s product or service.12
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 TABLE 1.1 Law and the Value Chain

Support Firm Limited liability, corporate governance, choice of business entity,

Activities infrastructure tax planning, and securities regulation

Human Employment contracts, at-will employment, wrongful termination,

resource bans on discrimination, equity compensation, Fair Labor Practices
management Act, National Labor Relations Act, workers’ compensation, and
Employee Retirement Income Security Act

Technology Intellectual property protection, nondisclosure agreements, assign-

development ments of inventions, covenants not to compete, licensing agree-
ments, and product liability

Procurement Contracts, Uniform Commercial Code, Convention on the Interna-

tional Sale of Goods, bankruptcy laws, securities regulation, and
Foreign Corrupt Practices Act
Inbound Operations Outbound Marketing Service
logistics logistics and sales
Contracts Workplace Contracts Contracts Strict
safety product
Antitrust Environ- Uniform
and labor liability
limits on mental Commercial
relations
exclusive compliance Code Warranties
dealing Environ-
Convention Waivers
contracts mental
on the and
compliance
Environ- International limitations
mental Consumer Sale of Goods of liability
compliance privacy
Consumer Doctrine
Strict protection of uncon-
product laws, includ- scionability
liability ing privacy
Customer
protection
Process privacy
patents Bans on
and trade deceptive or
secrets misleading
advertising
or sales
practices

Antitrust lim-
its on vertical
and horizon-
tal market
division, tying,
and predatory
pricing

Import/export
controls

World Trade
Organization

Primary Margin
Activities

Sources: Diagram and text in roman type from MICHAEL E. PORTER, COMPETITIVE ADVANTAGE: CREATING AND SUSTAINING SUPERIOR PERFORMANCE (1985); text in italic
type adapted from CONSTANCE E. BAGLEY, WINNING LEGALLY: HOW TO USE THE LAW TO CREATE VALUE, MARSHAL RESOURCES, AND MANAGE RISK (2005), and M.E. Porter &
M.R. Kramer, Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility, HARV. BUS. REV., Dec. 1, 2006, at 78.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Chapter 1 Taking the Plunge 5

Of course, markets are not static. As Joseph A. Schumpeter

explained, innovation results in “creative destruction,” whereby
established markets are replaced by new product and service
offerings.13 For example, Polaroid’s instant camera and film busi-
ness was supplanted by digital photography. As Clayton Christensen
explains in The Innovator’s Dilemma,14 incumbent firms must
often decide whether and when to cannibalize sales of legacy
products to make room for their substitutes. Mary Barra, CEO
of General Motors, announced in 2015 her strategy of investing
in ride-sharing services and electric cars,15 even though they
could supplant the gas-guzzling SUVs that generate higher mar-
gins as long as the price of oil remains low.
Moreover, firms do not operate in a vacuum. “[T]here is an
inherently interactive and symbiotic relationship between the pri-
vate business organization and the larger society that constitutes
its host environment.”16 As shown in Figure 1.2, the top manage-
ment team is embedded within the dynamic societal context in
which firms operate.17
It is therefore a “critical managerial task” to anticipate, under-
stand, evaluate, and respond to developments in public policy rele-
vant to the business.18 As U.S. Supreme Court Justice John Paul
Stevens wrote in his dissenting opinion in Citizens United v. Fed-
eral Election Commission, “[b]usiness corporations must engage
the political process in instrumental terms if they are to maximize
shareholder value.”19
Entrepreneurs need to ask, “What regulations govern the pro-
posed business and can I work within them or change them as
needed?” It is much easier for a new business to work within exist-
ing law, but sometimes a venture can create greater value by lob-
bying for changes in laws and regulations that affect its business.
For example, the hub-and-spoke system FedEx created to move
millions of packages efficiently overnight would not have been
possible if FedEx had been unable to persuade civil aviation regu-
lators to change their routing regulations.20
Resources, especially dynamic capabilities,21 can provide com-
petitive advantage when they are valuable, rare, not readily substitut-
able, and difficult to imitate.22 Dynamic capabilities include the
capacity “(1) to sense and shape opportunities and threats, (2) to
seize opportunities, and (3) to maintain competitiveness through

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 6 The Entrepreneur’s Guide to Law and Strategy

Figure 1.2 The Systems Approach to Law and Strategy

Public
Law

Top
Competitive Firm
Management
Environment Resources
Team

Value
Proposition and
Activities in the
Value Chain

Societal Context

enhancing, combining, protecting, and, when necessary, reconfigur-

ing the business enterprise’s intangible and tangible assets.”23 As
David Teece explained, sustained competitive advantage requires
the ability to “orchestrate” the company’s activities and its acquisi-
tion, use, and transformation of resources in a unique way.24

1.3 LAW, ENTREPRENEURSHIP, AND THE

VALUE OF LEGAL ASTUTENESS
The rule of law is fundamental to private enterprise. Absent law
and order, secure property rights, and the ability to convert

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 Chapter 1 Taking the Plunge 7

From the TRENCHES

When Joe Gebbia and Brian Chesky learned there was a shortage of hotel rooms
in San Francisco because of a conference in 2007, they decided to rent three air-
beds on their living room floor, make breakfast for their guests, and charge them
$80 a night. They created a website (airbedandbreakfast.com) and booked the
space within a week. In 2008, they discovered another shortage of hotel rooms,
this time in Denver, where Barak Obama was speaking at the Democratic National
Convention. Expansion and multiple financing rounds ensued. By 2016, Airbnb
was reportedly valued at more than $25 billion.
Since its founding, the company has worked with a number of regulators.
For example, in 2014, Airbnb agreed to collect San Francisco’s 14% hotel tax for
rentals. In 2015, Airbnb spent almost $8 million to help defeat Proposition F, a
San Francisco initiative that would have limited short-term rentals to 75 days a
year.

Sources: Jessica Salter, Airbnb: The Story behind the $1.3bn Room-Letting Website, TELEGRAPH
(U.K.) (Sept. 7, 2012), http://www.telegraph.co.uk/technology/news/9525267/Airbnb-The-story
-behind-the-1.3bn-room-letting-website.html; Heather Kelly, Airbnb Restrictions Shot Down in
San Francisco Vote, CNNMONEY (Nov. 4, 2015), http://money.cnn.com/2015/11/04/technology
/san-francisco-prop-f-airbnb-results/; Carolyn Said, Airbnb to Collect Hotel Taxes for San
Francisco Rentals, SFGATE (Apr. 1, 2014), http://www.sfgate.com/news/article/Airbnb-to
-collect-hotel-taxes-for-San-Francisco-5365352.php; Cameron Saucier, Will There Be an
Airbnb IPO in 2016?, MONEYMORNING (May 5, 2016), http://moneymorning.com/2016/05/05
/will-there-be-an-airbnb-ipo-in-2016/.

“dead capital,” such as land, into collateral for loans or working

capital, few individuals will be willing to give up what they cur-
rently have in hopes of creating something new and potentially
more valuable.25 Law provides the “rules of the game,” and “orga-
nizations and their entrepreneurs are the players.”26 Failure to
comply with the rules can result in crippling lawsuits, devastating
fines, and, in egregious cases, the demise of the firm and impris-
onment for the individuals involved. Because legal risks are
among the most important of the many risks faced by a young
company, an entrepreneur can increase the likelihood of success
by understanding and managing legal risk, that is, by spotting
legal issues before they become legal problems.
Yet overcoming legal challenges and staying out of trouble are
only part of the picture. When harnessed correctly, the law and the
legal system can be a positive force that helps entrepreneurs create
options, including the ability to abandon a path that has proved
unprofitable; increase predictability; strengthen relationships; and

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 8 The Entrepreneur’s Guide to Law and Strategy

marshal, leverage, and transform the human and capital resources

needed to pursue opportunities.
The law offers a variety of tools legally astute entrepreneurs can
use to grow the business and increase realizable value, enhancing
the ability of the firm to capture the value it creates while managing
the attendant legal and business risks and keeping legal costs under
control. For example, absent the ability to patent new compositions
of matter, the developer of a new drug would be unable to gener-
ate revenues sufficient to both (1) recoup the costs of research
and development (R&D) and commercialization of not only that
drug but other compounds that had failed and (2) generate suffi-
cient profit to justify investors’ willingness to put their capital
at risk.27
Legal astuteness is a valuable dynamic capability that enables
the top management team to work effectively with counsel to
solve complex problems and to protect, leverage, and transform
firm resources.28 There are five components of legal astuteness:
(1) a set of value-laden attitudes, (2) a proactive approach,
(3) the exercise of informed judgment, (4) context-specific knowl-
edge of the law and legal tools, and (5) advice from strategically
astute lawyers who understand the business and work with the
management team to help the firm win in the marketplace with
integrity. Just as war is too important to leave to the generals,29
the legal dimensions of business are too important to leave to the
lawyers. Legally astute entrepreneurs and managers understand
that firms do not have legal issues; they have business issues
whose resolution requires knowledge of the law.30 This book iden-
tifies many of the legal challenges and opportunities inherent in
domestic and international entrepreneurial activities, and it sug-
gests strategies for meeting those challenges and seizing attractive
opportunities in an effective and ethical manner. Table 1.3 pro-
vides a nonexclusive list of techniques entrepreneurs can use to
create and capture value and to manage risk during various stages
of business development and indicates the chapters in this book in
which they are addressed.
Each chapter ends with a section called “Putting It into Practice,”
in which we describe our fictitious entrepreneurs’ journey and dis-
cuss many of the legal issues and opportunities likely to arise each
step of the way.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Chapter 1 Taking the Plunge 9

Legal Tools for Increasing Realizable Value While Managing

TABLE 1.3
Risk
Stages of Business Development

Evaluating the
Opportunity and
Managerial Defining the Value
Objectives Proposition Assembling the Team Raising Capital

Create and ● Ask whether idea ● Choose appropriate form ● Be prepared to

Capture is patentable or of business entity and negotiate down-
Value otherwise pro- issue equity to founders side and sideways
tectable (Ch. 14). early (Chs. 4 & 5). protection and
● Examine brand- ● Structure appropriate upside rights for
ing possibilities equity incentives for preferred stock
(Ch. 14). employees (Ch. 5). (Ch. 13).

● Secure intellectual ● Be prepared to

property protection and subject at least
enter into nondisclo- some founder
sure agreements and stock to vesting
assignments of inven- (Chs. 5 & 13).
tions (Ch. 14). ● Sell stock in
exempt transaction
(Ch. 7).

Manage ● Determine ● Document founder ● Be prepared to

Risk whether anyone arrangements and sub- make representa-
else has rights to ject their shares to tions and warran-
opportunity (Chs. vesting (Chs. 5 & 13). ties in stock
2 & 14). ● Analyze any covenants purchase agree-
not to compete or trade ment with or
secret issues (Chs. 2 & without knowl-
14). edge qualifiers
(Ch. 16).
● Require arbitration or
mediation of disputes ● Choose business
(Chs. 8 & 9). entity with limited
liability (Ch. 4).
● Comply with anti-
discrimination laws in ● Respect corporate
hiring and firing. Institute form to avoid
antiharassment policy piercing of corpo-
(Ch. 8). rate veil (Ch. 4).

● Avoid wrongful termina-

tion by documenting
performance issues
(Ch. 8).
● Caution employees
on discoverability of
email and provide
whistle-blower
protection (Ch. 8).

Source: Adapted from CONSTANCE E. BAGLEY, WINNING LEGALLY: HOW TO USE THE LAW TO CREATE VALUE, MARSHAL RESOURCES, AND MANAGE RISK
16–17 (2005).

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 10 The Entrepreneur’s Guide to Law and Strategy

TABLE 1.3 (continued)

Stages of Business Development

Developing, Producing,
Managerial Marketing, and Selling the
Objectives Product or Service Harvesting

Create and ● Protect intellectual property: ● Determine whether employee

Capture Implement trade secret policy. vesting accelerates on an
Value Consider patent protection for initial public offering or sale
new business processes and (Chs. 5 & 17).
other inventions. Select a strong ● If investor, exercise demand reg-
trademark and protect it. istration rights or board control if
Register copyrights (Ch. 14). necessary to force IPO or sale of
● Consider entering into licensing company (Chs. 13 & 17).
agreements. Create options to ● Rely on exemptions for sale of
buy and sell. Secure distribution restricted stock (Ch. 7).
rights. Decide whether to buy or
● Negotiate and document arrange-
build, then enter into appropriate
ments with underwriter or invest-
contracts (Chs. 9 & 14).
ment banker (Ch. 17).

Manage ● Enter into purchase and sale ● When doing an acquisition: be

Risk contracts (Ch. 9). mindful of difference between
● Impose limitations on liability and letter of intent and contract of
use releases (Ch. 9). sale; consider entering into no-
shop agreement if buyer; negoti-
● Recall unsafe products. Buy
ate “fiduciary out” if seller (Ch. 16).
insurance for product liability
(Ch. 11). ● Allocate risk of unknown (Ch. 9).

● Create safe workplace (Ch. 8). ● Secure indemnity rights (Ch. 16).

● Install compliance system ● Disclose fully in prospectus

(Ch. 11). or acquisition agreement
(Chs. 16 & 17).
● Conduct due diligence before
buying or leasing property to ● Perform due diligence (Chs. 16 &
avoid environmental problems 17).
(Ch. 11). ● Make sure board of directors
● Avoid antitrust violations: No is informed and disinterested
tying or horizontal price fixing; (Ch. 6).
integrate products; and no illegal ● Ban insider trading and police
tying (Ch. 11). trades (Ch. 17).
● Be active in finding business
solutions to legal disputes (Ch. 3).
● Avoid misleading advertising
(Ch. 11).
● Do tax planning; file tax returns
on time; and pay taxes when due
(Ch. 11).

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 Chapter 1 Taking the Plunge 11

Putting It into PRACTICE

Alexei Perlitz (our fictitious entrepreneur) worked at Empire State Fabri-
cation Inc. (ESF), a Delaware corporation headquartered in New York,
before taking the plunge to start his own venture. ESF manufactures
systems-on-a-chip and other integrated circuits for use in a variety of
electronic products ranging from high-precision medical instruments to
sensors embedded in palm-sized devices used by law enforcement offi-
cers and counter-terrorism agents to detect very low levels of radiation,
anthrax, smallpox, Sarin, and nitrates.
Founded in 2006, ESF was the world’s second largest producer of the
system-on-a-chip used in the counter-terrorism sensors. It had revenues
of more than $1 billion in 2015. Even though ESF increased production
each year, the relatively high manufacture error rate and the cost of
building a second fabrication plant made it impossible for ESF to satisfy
customer demand.
Alexei attended Hamilton College as an undergraduate, then earned
a double Masters in chemistry and material science from the University
of North Carolina in 2010. He began his career in the quality control
department at ESF. Although Alexei advanced rapidly, he soon realized
he needed more than a technical degree to move into management. At
the suggestion of his manager Gianmarco Cavo, Alexei used the com-
pany’s tuition reimbursement program to attend the Stanford Graduate
School of Business from 2013 through 2015. After he earned his MBA,
Alexei returned to ESF to oversee the development of chips for the next
generation of sensors. He spent the majority of his time supervising a
team of engineers designing and testing new materials and configura-
tions in an attempt to find one that would allow the chips to sense
more minute quantities of the various substances.
While at the University of North Carolina, Alexei had worked in the lab-
oratory of a professor doing cutting edge work in “additive manufacturing,”
the manufacture of complex shapes that cannot be manufactured by tradi-
tional manufacturing techniques, such as injection molding or milling.31
Although many such shapes can be created by a 3D printer, it is a very
slow process that uses 2D printing processes “over and over again to build
up a three-dimensional object.”32 Similarly, manufacturers of transistors
and integrated circuits use another 2D technology—lithography—to “build
up a structure several times.” Alexei learned that nano-fabrication works for
integrated circuits less than 10 microns thick, but that the “subtractive tech-
niques” used by the silicon industry to etch wafers “from 10 microns to
1,000 microns, the mesoscale” do not work that well.33
While attending his five-year reunion in 2015, Alexei was surprised
to see how much progress UNC Professor Joseph DeSimone had made
(continued)

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 12 The Entrepreneur’s Guide to Law and Strategy

creating a process for fabricating complex shapes in minutes instead of

hours. The online pre-reunion packet included a link to a TED Talk Pro-
fessor DeSimone gave in March 2015, during which he grew in less than
15 minutes before the live audience “a set of concentric geodesic struc-
tures with linkages between each one.”34 This reminded Alexei of the
hand-carved jade sphere-inside-a-sphere his undergraduate classmate
Piper Mao had brought back from Guangzhou, China, during the spring
break their senior year at Hamilton College. Professor DeSimone told
viewers that he and others in his lab “were inspired by the Terminator 2
scene for T-1000, and we thought, why couldn’t a 3D printer operate
in this fashion, where you have an object arise out of a puddle in essen-
tially real time with essentially no waste to make a great object?”35 He
further explained that growing a product continuously instead of layer-
by-layer would not only be much faster but would eliminate the defects
in mechanical properties caused by traditional 3D printing. “Light can
take a resin and convert it to a solid, can convert a liquid to a solid,”
but “[o]xygen inhibits that process.”36 So by using complex software to
control spatially the “oxygen content, the light, the light intensity, the
dose to cure, the viscosity, [and] the geometry,” it is possible to control
the process and “design chemistries that can give rise to the properties
you really want in a 3D-printed object,” including molecularly smooth
surfaces, all at speeds potentially 1,000 times faster than traditional 3D
printers.37 Potential applications ranged from the manufacture of air-
craft and car parts with higher strength-to-weight ratios than is attain-
able with current technology, to sneakers with vibration control and
high elasticity, to new drug-delivery techniques and digital dentistry, to
customized stents “designed for you, for your own anatomy with your
own tributaries, printed in an emergency situation in real time.”38 Alexei
was particularly encouraged by Professor DeSimone’s closing remark,
“I can’t wait to see what designers and engineers around the world are
going to be able to do with this great tool,” which suggested that it
might be possible to license what DeSimone dubbed “CLIP”: Continuous
Liquid Interface Production.39
While out for dinner with fellow alumni in Chapel Hill, Alexei
bumped into Piper Mao, who had just finished the first year of the
MBA program at the Fuqua School of Business at Duke University.
When undergraduates, Alexei and Piper had expressed a mutual desire
to work for themselves one day. Between college and business school,
Piper had worked for Stratasys Ltd., a large U.S. firm that was one of
the world’s foremost manufacturers of 3D printers. Alexei invited Piper
to attend a presentation at the reunion by Professor DeSimone. Afterward,
they stayed up half the night talking about the cutting-edge technologies
now available for 3D manufacture. They promised to stay in touch and
agreed to meet again at Piper’s graduation from Duke in 2016.
(continued)

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 Chapter 1 Taking the Plunge 13

Alexei spent much of his spare time over the next year testing various
resins for use in 3D manufacturing. Alexei frequently used Skype to discuss
his findings with Piper, and she made several helpful suggestions for tweak-
ing the tests. Alexei was careful not to discuss his outside project with co-
workers, but he and Piper agreed that she would join one of her MBA
classmates Maren Barillas and an engineering graduate student Steve
Asimov to prepare a business plan for a startup that would utilize an inno-
vative process Steve had developed for faster 3D printing. Even though they
did not win the business plan competition, Piper gained valuable experi-
ence thinking through the process of bringing a new product to market.
By the time Piper graduated from Duke, she and Alexei believed they
had a viable design for using several different resins to manufacture a
lightweight but highly absorptive bracket for automobile bumpers. They
knew that if they were going to take the next step with their product,
they would need to test their theoretical design with actual materials
and software code. Faced with the prospect of investing money in addi-
tion to time, the two decided they should commit their business relation-
ship to writing. So they signed a brief handwritten agreement to form a
company to develop what Alexei had taken to calling “Genesis T-2000.”
The agreement stated that they would “divide any profits fairly.”
Alexei took a two-month leave of absence from ESF to thoroughly
test their designs in rented laboratory space. He and Piper split the rental
cost equally.
While Alexei was testing various resins, Piper prepared a presentation
for potential investors and completed plans for commercializing the tech-
nology. She estimated that they would need $15 million to purchase the
necessary licenses, production equipment and materials, and eventually to
hire employees. In addition, they would need to conduct further tests to
ensure that the resins could be used to create a wide range of other products.
Alexei wanted to get their new venture underway as soon as possible,
and he realized that to do so he would have to leave ESF. For economic
and family reasons, Alexei and Piper decided to set up their new business
in the San Francisco Bay area.
In preparation for his departure, Alexei asked to review his ESF per-
sonnel file to determine what agreements he had signed when he joined
ESF. Alexei vaguely remembered being given a stack of papers to sign
and return in conjunction with his post-business-school promotion to
head of chip development for sensors. In his file he found forms for
health insurance and tax withholdings along with a long nondisclosure
agreement that he had only skimmed before signing. After reviewing
the agreement more carefully, he realized that it contained provisions
assigning the rights to his inventions to ESF, a nondisclosure provision,
a one-year covenant not to compete, and a no-raid provision prohibiting
(continued)

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 14 The Entrepreneur’s Guide to Law and Strategy

him from actively hiring ESF’s employees. (For a further discussion of

these provisions, see Chapter 2.)
Before taking any action, Alexei knew that they needed to investigate
these and a number of other crucial issues. Below are some of the ques-
tions our founders will confront in the initial and later stages of forming
their business and the corresponding chapters of this book that address
these questions.
1. Who owns the Genesis T-2000 technology? What rights, if any, can
ESF claim to it? (Chapter 2: Leaving Your Employer)
2. What can Alexei do to make his departure from ESF amicable?
Should he have left sooner? What ongoing obligations does he have
to ESF? (Chapter 2: Leaving Your Employer)
3. Given their limited budget, can Alexei and Piper afford an attorney?
Can they afford not to have one? If they decide to hire counsel, how
do they select the right one? (Chapter 3: Selecting and Working with
an Attorney)
4. What would be an appropriate legal form for the business from a lia-
bility and tax standpoint? (Chapter 4: Deciding Whether to Incorporate)
5. How should Alexei and Piper approach the issue of splitting the
equity in the new venture between them? How should they respond
to a claim by Maren Barillas for a stake in the venture based on her
work with Piper on the business plan contest at Duke? (Chapter 5:
Structuring the Ownership)
6. What are the advantages and disadvantages of having an active board
of directors? Who should sit on the board, and what should the foun-
ders expect the directors to do? (Chapter 6: Forming and Working
with the Board)
7. What are the founders’ options for financing the new venture? (Chap-
ter 7: Raising Money and Securities Regulation)
8. Should the company hire workers as employees or independent con-
tractors? Does the company have to pay laboratory technicians the
minimum wage and overtime? When is the company required to
withhold taxes from their workers’ checks and pay Social Security
taxes? What accommodations must the company make for workers
with physical or mental disabilities? How can the company protect
itself against claims of employment discrimination and sexual
harassment? (Chapter 8: Marshaling Human Resources)
9. What should Alexei and Piper consider before signing a standard-
form lease for office, laboratory, or manufacturing space? (Chapter 9:
Contracts and Leases)
(continued)

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Chapter 1 Taking the Plunge 15

10. What warranties are implied when the company sells a product? Can
the company disclaim all warranties and limit its liability to replace-
ment of the product or refund of the purchase price? (Chapter 10:
E-Commerce, Sales, and Consumer Privacy)
11. How should the company resolve a claim for battery and false
imprisonment arising out of an altercation with one of the com-
pany’s employees, and how can the company protect itself against
such claims in the future? (Chapter 11: Operational Liabilities, Insur-
ance, and Compliance)
12. What happens if the company runs out of cash and cannot pay its
debts? (Chapter 12: Creditors’ Rights and Bankruptcy)
13. If Alexei and Piper seek venture capital financing, how should they
approach the venture community? What business and legal provi-
sions in the term sheet and other financing documents should con-
cern them? What is negotiable? Are any of the terms deal breakers?
(Chapter 13: Venture Capital)
14. How can the company protect its proprietary technology? Does the
company need to worry about violating the patents, copyrights, trade
secrets, or trademarks of others? Should the company license its tech-
nology to a medical device firm interested in using it to make custom-
ized stents? If so, on what terms? (Chapter 14: Intellectual Property and
Licensing)
15. Should the company expand beyond the United States? What are the
advantages and disadvantages of going global? (Chapter 15: Going
Global)
16. What risks are involved in growing the business by acquisition? Is it
better to grow the business internally? What factors should entrepre-
neurs consider when deciding whether to sell their business to a
larger competitor? When is franchising a viable option? (Chapter 16:
Buying and Selling a Business)
17. When is an initial public offering an appropriate exit strategy? What
is involved in going public? What obligations are imposed on a pub-
lic company? (Chapter 17: Going Public)

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 CHAPTER

2
Leaving Your Employer

S ometimes an entrepreneur will start a new business right out

of school or while between jobs. More often, a person decides
to start his or her own company while still employed by a more
established company. The idea for a new business may come from
a project the individual was working on for the current employer.
Depending on the agreements the entrepreneur has with the cur-
rent employer, the entrepreneur’s position, and the nature of the
proposed new business, the entrepreneur may not be free to work
on the venture while still employed or for some time thereafter.
The determination of the validity of restrictions varies greatly
from case to case—and from state to state—and is very fact-
specific. Courts will often apply the statutory or common (judge-
made) law of the state where the employee resides or where the
employment contract was entered into.
Certain employers require employees to sign an agreement con-
taining a no-moonlighting clause, which prohibits the employee from
engaging in any business activities (even after-hours activities) unre-
lated to the employee’s job with the employer. A signed nondisclosure
(or proprietary information) agreement (discussed in more detail in
Chapters 8 and 14) prohibits the entrepreneur from using or disclos-
ing any of the employer’s trade secrets (such as a customer list) unless
the employer authorizes it. The prohibition against unauthorized use
or disclosure of the employer’s trade secrets will continue even after
the entrepreneur quits, and it may be bolstered by statutory or com-
mon law restrictions against misappropriation of trade secrets.
In some cases, the entrepreneur may have signed an agreement in

16
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 Chapter 2 Leaving Your Employer 17

which he or she agreed not to compete with the former employer for
some period of time after leaving the employer (a covenant not to
compete). The entrepreneur’s ability to recruit former coworkers to
join the new enterprise may also be restricted by a nonsolicitation
clause.
Awareness of these restrictions is crucial. A lawsuit arising out
of the entrepreneur’s duties to a former employer can be so expen-
sive and occupy so much management time that it sinks the new
venture. At a minimum, the new company would be greatly
impeded by the threat of a lawsuit by the former employer. The
departing employee should review all signed agreements, forms,
and materials in his or her personnel file for provisions that may
limit future entrepreneurial activities.
This chapter discusses both restrictions that are applicable
while a person is still employed by another company and postem-
ployment restrictions, including covenants not to compete. It then
presents strategies for leaving on good terms.

2.1 RESTRICTIONS WHILE STILL EMPLOYED

The employer-employee relationship is based on confidence and
trust. This gives rise to certain legal duties. For example, the
employer has a duty to maintain a good working environment and
to compensate employees for their efforts. In return, the employees
have a duty to use their best efforts on behalf of the employer and
not to act in any way that is adverse to the employer’s interests. For
example, no employee may use in connection with another venture
confidential and proprietary information provided by the current
employer to the employee in the course of employment and for
the sole purpose of servicing the employer’s customers.1
The extent of an employee’s duties to an employer or former
employer depends in substantial part on the position held at the
company and whether the new venture will compete with the
employer. In addition, the employee needs to consider whether it
is permissible to solicit coworkers or former coworkers.

Position with the Company

Absent a covenant not to compete and a no-moonlighting clause,
the employee’s position will largely determine what he or she can

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 18 The Entrepreneur’s Guide to Law and Strategy

legally do while contemplating starting a new business. In large

part, employees’ rights and duties depend on whether they are
classified as key employees, skilled employees, or unskilled
employees. Key employees (such as officers, directors, and man-
agers) and skilled employees (such as software engineers, market-
ing specialists, and sales representatives) owe a duty of loyalty to
the company. This duty, which exists regardless of whether there
is an employment contract, prohibits an employee from doing
anything that would harm the employer while the individual is
still employed. This includes operating a business that competes
with the employer or that usurps any business opportunities that
the employer might be interested in exploring. During the period
of employment, a key or skilled employee may make plans to com-
pete with an employer but may neither actually compete nor
solicit employees to work for the new business.
The duties of unskilled employees and other employees not in
positions of trust are generally confined to the period of time
during which they are actually working. Their off-hour activities
are not restricted unless these activities are detrimental to the
employer’s interests. However, even unskilled employees can be
restricted from competing with the company during their non-
working hours by a covenant not to compete or a no-
moonlighting clause in an employment agreement. Further, in
certain states, such as New Jersey, even unskilled employees
have a duty not to compete with their employer during the
period of employment.2

Type of New Venture

The activities in which an employee may engage to further a new
venture while still employed also depend on whether the venture
will compete with the current employer. If the new enterprise is a
noncompeting business, the employee (whether a key employee,
skilled employee, or unskilled employee) is essentially free to estab-
lish and operate the new venture as long as it does not interfere with
current job performance or violate any provisions (such as a no-
moonlighting clause) in an employment agreement or the employer’s
policy manual. An employee may make telephone calls, rent an
office, hire employees (but not coworkers, except as explained

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Exploring the Variety of Random
Documents with Different Content
trained to the art by masters, not unlike the painter and the
bard.
To the immortal genius of Shakespeare does the world owe
its inexpressible appreciation of the artistic development,
realizing to the fullest degree the possibilities, and
subsequently the mastery, of the art, placing it at once on the
highest pinnacle of achievement and according to it the laurel
of universal popularity.
To this genius is added that of others, each attaining a
greater degree of appreciation, until to-day the art of the
player encompasses the highest attributes of the allied arts.
The player is one who loves, and understands, nature. To
do so he must feel, in the highest sense, the emotions of the
artist, the poet and kindred spirits, because from each he
must cull the choicest petals—the inspiration of the poet, that
he may portray the character; the genius of the artist, that he
may imbue it with life, and the passion of the bard, and to
this the sympathy of a Madonna, the tenderness of an angel,
the love of a mother and the strength of a giant.
The development of the art of the player records the
development of civilization itself. The player and his art
obtains wherever there is civilization. In its highest form it is
at once Literature, Art and Music in harmonious arrangement.
In its possibilities it is Religion, teaching the whole world by
its power:
“I’ve heard that guilty creatures at a play,
Have, by the very cunning of the scene,
Been struck so to the soul, that presently
They have proclaimed their malefactions.”

The player, supreme in his art, is master of every emotion.

 “ Little Betty’s. ”
Drawn by Nell Brinkley.
 Venetian Twilight
by Carter S. Cole.
Illustration by Thomas Fogarty.

Y gondolier lazily makes his way,

Threading along, humming a song,
While glorious tints of a dying day
Fill me with rapture; and earth, sky,
and sea,
In their aureole robes, are a mystery
Hidden from none, priceless, but free!

The swish of the oar in the dark, quiet stream,

Rhythmical, clear, soothing to hear,
Scatters the mist as a little moonbeam
Kisses the lips that are mine by right,
And caresses the form with its mellow light
For which I am yearning to-night.

This world is a place full of trouble and pain,

None of us know, why this is so;
In fancy, at least, when you suffer again,
Ride in my gondola, dismiss all care,
Hear the soft music that floats through the
air,
At twilight, in Venice, so fair.
“My gondolier lazily makes his way,
Threading along, humming a song. ”
 Best Bets of a Bachelor
by Dixie Hines.
Illustrations by Charles Roy Bowers and A. J. Bjornstad.

EAUTY is only paint-deep at times.

Only the brave can handle the fair.
A pretty girl envies but one girl—a prettier one.
Many a poor husband is created from a rich
man.
While there is an engagement there’s hope—of liberty.
Men can persuade a woman to do anything she wants to.
Men can be classified; women cannot even be pacified.
A woman’s idea of happiness is to be ideally miserable.
A woman will break a heart as readily as she will crack a
smile.
No married man ever was a fool without being told of the
fact.
The grass widow is not alone in making hay while the sun
shines.
A bachelor is a man who has given serious thought to
matrimony.
Bachelors form their opinion of marriage by experience—of
others.
There is nothing new under the sun except hat styles for
women.
 “ A woman imagines she can cover up her imperfections
by pointing out those of other women. ”

Every girl would love to be a thing of beauty and a boy

forever.
 When a woman proves equal to all a man expects she is a
sur-prize.
It isn’t nearly so hard to be a fool over a widow as not to
be one.
Every woman secretly admires the wisdom of the man who
flatters her.
A woman may conceal her faults, but a decollete gown is
less deceptive.
The blush of a bashful girl is a flush that takes any hand—
and heart.
“The cup of happiness” with men of experience has a
siphon on the side.
Every woman has a horror of old age, but not so much as
of young death.
Women are never satisfied. First they want a voter and
then they want a vote.
Some men are born to trouble, while others merely
achieve it by marriage.
There is but one kind of love, yet every woman has a
different idea about it.
Men, manners and morals change, but woman, never—
from the changeable.
 A man may be “out front” at the
opera and yet be able only to “see
back”—if he is with her.

Every woman expects a man to think for her, and then she
reverses his opinion.
 When it comes to singing the praises of another, most
women have a sore throat.
Man’s principal safeguard against matrimony is that
widows are made, not born.
Many a promising housekeeping career has been ruined in
an unpromising stage career.
Men have found many antidotes for a woman, but the
surest of all is another woman.
A woman spends one-half of her time telling lies for men
and the other half to them.
Women often know a man is in love with them when the
man never discovers the fact.
Men often find it necessary to choose between the
inconstant and the unattractive woman.
A woman keeps a man running all the time—first it is after
her and then it is from her.
If women did not know that men could overcome their
resistance they would seldom resist.
There are two ways in which a woman may win a man: Her
own brilliancy and his inanity.
When a man is at the feet of woman it is pretty sure that
another woman threw him there.
Every woman wants a man to be real devilish before
marriage and real angelic afterwards.
Anyhow, there was one woman who was never jealous.
Adam didn’t have troubles about that.
A woman imagines she can cover up her imperfections by
pointing out those of other women.
Some men are born wise, some achieve wisdom by
experience, and some just don’t marry.
Two kinds of women make trouble in the world—those that
are married and those that are not.
 There is but one class of women who are not interested in
the fashions and they are the dead ones.
The philosopher said a woman could not argue—he was
too wise to say that she could not talk.
The reason so many men find marriage unattractive is
because life was so attractive before marriage.
It isn’t a hard matter for a woman to make a man love her.
The difficulty is in making him keep it up.
A woman can make up two things at the same time—her
face and her mind; but her face lasts longer.
The world has no sympathy to waste on those reckless
enough to wed when both have been married before.
If a man does not tell a woman he loves her she thinks
him impossible; if he does, he knows himself foolish.
When a woman says that all she wants is what she
deserves she really means she deserves all she wants.
When a girl reaches that uncertain age and is yet
unmarried, she is often worse than she paints herself.
Sometimes there is more truth than sentiment when a man
tells a woman a thing is as plain as the nose on her face.
No one has ever yet discovered why a woman is afraid of a
mouse and tackles a six-foot man with confidence.
A woman will start a flirtation in fun and then wonder why
a man won’t follow her when she gets serious.
If a man wants to make a fool of himself he can find many
opportunities, but the surest way is over a woman.
Men and women both agree that it is inadvisable to live
without each other and impossible to live with each other.
Whether a married man pities or envies his bachelor
friends depends entirely upon how long he has been married.
If a man really wants to start something with himself, let
him try to love a woman just as a woman wants to be loved.
 The best way to find out what a girl who is in love with a
man thinks of woman suffrage is to find out what he thinks.
A man may escape the measles, or automobiles, or even
being indicted, but no man has ever been known to escape a
widow.
No woman ever told a man she hated him without meaning
it; some women have told men they loved them and meant it.
Rather than a man should be right and belong to another
woman, a woman would have him wrong and belong to her.
The reason widows are so attractive to men is because
they will allow themselves to be taught things they already
know too well.
A girl will gaze for three hours and a half at the moon and
then wonder why she hasn’t time to sew a button on her
brother’s vest.
The happiest man is he who will take a woman’s
protestations like he does a dose of medicine—with celestial
faith in the giver.
When a woman fails to see an opportunity to be generous
to another woman it is not necessarily a sign of defective
eye-sight.
Don’t misunderstand a man when he tells a woman she is
sweet enough to eat—maybe he is thinking of the
forthcoming restaurant-check.
Between the ages of sixteen and thirty a woman is a
general practitioner in the field of love; after that she is
satisfied to become a specialist.
A man is willing to worship at the shrine of a woman with
whom he is in love until he meets another woman—then he
changes his religion.
The question will never be settled between women as to
which will win a man quicker, a pair of silk stockings or an
ability to bake a good cake.
If ever the fact that there are no marriages in Heaven is
generally believed by women, half of the preachers will be
obliged to seek other employment.
If a woman were obliged to express a preference, she
would choose the man who pleases but does not love, to the
man who loves but does not please, her.
Women are said to be more “clean-minded” than men. Men
might meet feminine competition if they resorted to the
stratagem of changing their minds as often.
The greatest disappointment after marriage comes to a
man when he realizes that his wife does not look like the
models in the shop windows during a white-goods sale.
A man can protect himself from the things said about him
by the women who don’t love him. It’s the things said about
him by the woman who does love him that keep him worried.
Women, says a sage, are like books: No man can judge
the inside by what is displayed on the outside. It is a poor
rule that won’t work both ways. Women are unlike books:
When one has finished with a book it can be closed up.
Drawn by E. M. Ashe.
 The Missing Rhyme
by Henry Tyrrell.
Illustration by E. V. Nadherny.

HE trouble was, no word would

rhyme with month .
And that was why my lovely
birthday sonnet,
Meeting this obstacle, was
wrecked upon it.
“Oh, fairest day of springtime’s fairest month”—
Thus I began, and there I stuck at “month.”

Her birthday is the first of May.

“Dog-gone it!”
I cried, “I can’t go on, now I’ve begun it—
Unless, perchance, I write of May the one -th.”

Then went I to my lady love, with all

The story of my tenderness and trouble—
Explained how words in Poetry must double,
And how my sonnet’s sweetness turned to gall
Because I couldn’t find a rhyme for “month.”
She laughed, and lithped the answer—“You’re a
dunth!”

“ She laughed and lithped the

answer—‘You’re a dunth!’ ”
 To His Heart
by Richard Le Gallienne.

O many times the heart can break,

So many ways—
Yet beat along and beat along,
So many days.

A fluttering thing we never see,

And only hear
When some stern doctor to our side
Presses his ear.

Strange hidden thing that beats and beats,

We know not why,
And makes us live, though we, indeed,
Would rather die.

Mysterious, fighting, loving thing—

So sad, so true!
I would my laughing eyes some day
Might look on you.
A K i l l i n g
by Wm. B. Green.
Illustration by Harry C. Edwards.

A shot rings out in the

forest’s side;
Its signal of death strikes
the Moose King’s
heart,
And the Indian hunter
views with pride
How his skill as a hunts­‐
man has won its
part.
But the Shadow that falls
on the ground below
Foretells the time
when he, too,
shall go.
 Naming the Baby
by John Harrison.
Illustration by Kingston Hengler.

My hair is gray, but not with years,

Nor grew it white in a single
night,
As men’s have grown, from sudden
fears—
But gray all the same,
Just over a name—
A name for the baby;
Which I wish to remark,
And my language is plain—
Or may be
Ornate—if I try to explain
The trouble, anxiety,
Crass contrariety,
Strain on one’s piety—
He wouldn’t be quiet—he
Cooed to satiety—
 (Cute little one)—
Yes—it was pitiful,
In a whole city-full
Name he had none.
“ Now let there be a merry time throughout all
Christendom,
For the mother set her foot down—and the boy’s named
‘TOM!’ ”

Cousins to right of us,

Uncles to left of us,
Gran’ma in front of us,
Mentioned a hundred;
Neighbors, and friends as well,
Aided the din to swell,
Talked, until out of breath,
And, when the dinner-bell
Rang, they all wondered.

A simple child,
That cries and holds its breath,
And kicks with either nether limb—
What shall we call him? S’ death!
Wait till he’s seven.

Now glory to that wife of mine, from whom

all glories are:
Add “Hallelujahs” freely, for I’m not
particular;
Now let there be a merry time throughout all
Christendom,
For the mother set her foot down—and the
boy’s named
 “T OM .”

Drawn by R. F. Zogbaum.
The Rackelty - Snackelty -
Gagelty - Guz
by Anthony H. Euwer.
Illustration by the Author.

HE awfullest thing that ever yet wuz

Is the Rackelty-snackelty-gagelty-guz,
That don’t eat nothin’ but little boys—
A crunchin’ their bones with the
terriblest noise.
If ever I see him floppin’ around
I’ll dig a big hole down into the ground
And crawl away in till he loses the scent,
Not even breathin’ until he has went.
I guess that’ll fool Mr. Guz all right—
But I hope he don’t come when it’s late at
night!
“ The awfullest thing that ever yet wuz
Is the Rackelty-snackelty-gagelty-guz.”
 Paul, the Piano-Mover
OR,

GRAND, SQUARE AND UPRIGHT!

A Tale of an Artistic Temperament
by Roy L. McCardell.
Illustrations by H. Methfessel.

CHAPTER I.
MUSIC AND MYSTERY.
APA can stand no more! How, then, can I break this
to him?” The speaker, a radiantly beautiful young
girl, stood sobbing in the great musical emporium
of Harry M. Daly & Co.
“Consider me a policeman and not a piano-
mover.” As he said these words, Paul Postelwaite came
forward with his hat in his hand. For all he knew the damsel
in distress might be a carriage customer, and, besides, he
was afraid if he left his hat in the shipping department a
member of the firm might steal it.
“Oh, sir,” replied the beautiful young girl, “I saw a pianola
advertisement some time ago which said: ‘ With this
instrument anyone can play the piano. ’ And I, taking all my
little savings, bought one for papa!”
“Yes?”
“It arrived to-day. Too late, I perceive that a pianola is an
instrument from which music can only be extorted by the
feet, and poor papa was run over by an electric car and lost
both legs.
 “ As he said these words, Paul Postelwaite came
forward. ”

“It was all my little savings, as I have said. The firm will
not take the pianola back, and my poor papa has no visible
means of support.”
 “But you can sue the street railway company for damages,”
said Paul, soothingly.
“We threatened to do that, but the railroad company only
said papa should consider he was sufficiently damaged and
they did not see why he should sue for any more. However,
they said we might bring the matter into court and they
would see what they could do to his character.”
“Go home, little one,” said Paul Postelwaite, kindly, “and I
will come around this evening and play the pianola for your
papa myself.”
The foregoing will show that although Paul moved in
musical circles he was neither a sharp nor a flat. His worst
predilection was that he continually talked shop, for his last
words to his distressed young confidant were, “Compose
yourself!”
Paul Postelwaite had long resolved upon a musical career.
He knew the pitfalls of the profession. On every side of him
he saw and heard the unfortunates who played the piano to
excess. A hater of discord, he resolved to save the victims of
piano-playing from themselves. To this end he studied piano-
moving.
Most pianos are bought on the instalment plan. Most
payers for pianos bought on this plan fall behind in their
instalments. It was Paul’s duty to call and take away the
pianos of those who had been remiss.
He bore abuse and vituperation, not with stolid
indifference but with the conscientious feeling that he was a
public benefactor.
He had the reward of public appreciation. People afflicted
by proximity to those who played the piano to excess no
longer complained to the Board of Health. They ascertained if
any payments were overdue on the instrument of torture, and
then they sent for Paul.
Paul’s father had been a piano-maker. But he had been
overtaken by misfortune. He made pianos for the big
department stores.
 But while he only made one grade of piano, he was
compelled by the exigencies of his trade to stencil them with
so many different names that he forgot his own. And one day,
while suffering from loss of memory in this regard, he signed
a name not his own to a check and was compelled to retire
from business to Ossining-on-Hudson.
His father’s parting advice had been, “Never forget who
you are, my boy!”

CHAPTER II.
HARMONY IN A FLAT.
That evening, carrying with him a pair of wooden legs, as
a pleasant surprise for the abbreviated parent, Paul called at
the cosy Harlem apartment where dwelt the young girl who
had so attracted his attention that morning.
As the young girl opened the door for him with a glad cry,
Paul proffered the wooden legs. “These are for your father,”
he said; “he has a heart of oak, I know, and now he will have
legs to match.”
“Bless you, young sir,” cried the father of the girl. “This
will place me on a better footing with the world! And should I
die they will be a legacy for both of you. And now, thank
gracious! I can play the pianola!”
 “ The grateful father adjusted the artificial limbs and was
soon playing Handel with his feet. ”

So saying the grateful father adjusted the artificial limbs

and was soon playing Handel with his feet, extracting from
the music chords of wood, as it were, of a timbre most
surprising.

This was not all. Paul secured the old man a political
position as a stump speaker, at which he was doubly
successful, and how he stood on public questions is well
known; his physical disability, of course, stood in the way of
his ever running for office.
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