Start Ups & Doing Business Online

It’s become an annual tradition to re-post this at this time of year.

As my Gray Reed colleague Michael Kelsheimer explains in a prior post on his Texas Employer Handbook blog, you have to be careful when using unpaid labor.

 

UNPAID INTERNS, VOLUNTEERS AND TRAINEES

Who, What, Why . . .
Who does it apply to: Every employer who has or intends to hire unpaid interns.
When must an intern be paid: All “employees” of a business must be paid at least minimum wage unless they are a “trainee” under the law, regardless of whether they are called an “intern.”  So, what makes a trainee? The United States Department of Labor (DOL) has established a six-factor test couched in terms of – you guessed it – training – to determine whether an unpaid intern should be considered an employee or trainee under the Fair Labor Standards Act (FLSA):
  • the training is similar to that which would be given in a vocational school (even though it includes actual operation of the facilities of the employer);
  • the training is for the benefit of the trainees;
  • the trainees do not displace regular employees, but work under their close observation;
  • the employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion operations may actually be impeded;
  • the trainees are not necessarily entitled to a job at the conclusion of the training period; and
  • the employer and the trainees understand that the trainees are not entitled to wages for the time spent training.
When can I hire an unpaid intern or volunteer: The six-factor test is primarily used in the, “for profit,” private sector. State and local government agencies and non-profit organizations can generally utilize interns or volunteers without an obligation to pay them under the FLSA. It is important, though, that the volunteers understand they are not to be paid for their time. Volunteer work at non-profit, religious, charitable, and civic organizations have specifically been cleared by the Texas Workforce Commission.
What about true student interns: Student interns are not evaluated differently by the DOL. They should easily meet the trainee test. That said, there are special rules for individuals who have completed a professional degree like physicians, attorneys, and therapists, generally allowing them to volunteer their time as they choose.
What do these factors really mean: The more an internship program can be structured around a classroom or academic type experience the better. It is better if the employer can provide the individuals with skills applicable to various employment settings, not just skills particular to the employer’s business. Essentially, the employer needs to provide the intern or volunteer with valuable training. Ideally, the training would make them more marketable in the open job market. The employer must pay any intern or volunteer that is used as a replacement for a regular employee or to reduce their workload. The intern or volunteer should receive more supervision than a regular employee.  If the employer would have to hire additional employees if the intern or volunteer were not performing certain work, the intern or volunteer would be considered an employee. Don’t rely on unpaid interns to do work of any real significance to your business. The work done by an unpaid intern should be secondary to their training. An intern that is hired by an employer on a trial basis with the expectation that they will eventually be hired full time will likely be considered an employee under the FLSA. Employers should indicate prior to the start of the internship that there is no guarantee or expectation of hiring the interns upon completing the internship. A written agreement indicating this is advisable. Employers should indicate prior to the start of the internship that there is no intention to pay the intern. A written agreement indicating that the intern will not be paid and does not expect to be paid is advisable.
What happens if I don’t follow the test: An employer violating the rule is subject to the same damages available to an employee who is not paid all of the wages they are owed. This may include minimum wage and overtime for all hours worked, plus an equal amount in liquidated damages for all interns over the past two or three years.
What about discrimination laws: It depends on whether the person in question receives “significant remuneration” for their efforts. The EEOC has stated that things like a pension, group life insurance, workers’ compensation, or access to professional certifications constitute significant remuneration. However, Courts have determined that things like academic credit, practical experience, and scholarly research do not constitute significant remuneration. Because this point is subject to interpretation, however it is best to treat all interns and volunteers as though they are employees with respect to discrimination laws.
Common Situations:
Required training: Safety First is ready to hire a new class of security guards.  The company requires that security guard trainees receive 40 hours of training prior to performing any regular work under their service contract.  According to their contract, the training is focused on “company practices, policies, and rules.” Does Safety First have to pay the trainee security guards even though they are not yet performing regular work?  Yes. These trainees would be considered employees because: (1) the employer is directly benefiting from their training, (2) the training is given to security guards who will work on contract, and (3) Safety First can only employ specifically trained guards.
Homegrown hiring: Maverick Finance hires interns each summer.  Maverick’s intern program is structured much like an academic program.  The interns do not do the work of regular employees and are heavily supervised.  The interns are not paid and are aware there is no guaranty of employment.  However, Maverick hires its first year analysts almost exclusively from the unpaid interns it has each summer. Does the FLSA require Maverick to pay these interns at least minimum wage? Probably.  Although Maverick substantially satisfies the six factor test, its practice of hiring analysts from the intern pool is likely enough to tip the balance against the company in the face of a DOL audit.
What should I do:
Good: Paying minimum wage to all interns probably is the safest bet. You avoid the risk of an audit of all your employment practices because of one dissatisfied intern that calls the DOL.  If you go the trainee route, be sure to meet all the factors.
Better: If you have true “trainees” taking into consideration all the factors, it makes sense to put that understanding in writing in a short half-page agreement outlining the factors. If you use volunteers, it makes sense to have them sign a one-paragraph agreement acknowledging their status as a volunteer without expectation of pay or other “significant remuneration” to avoid the possibility of an EEOC complaint.
Best: In addition to the items above, require that the trainees keep track of their hours so you have a record of how much they might be entitled to if the DOL audits and rules them employees. Be sure they do not work more than 40 hours to avoid increasing the risk to include overtime. Have the trainees and their supervisors keep a log of their activities so that there is no confusion regarding the type of work they did.

Regular readers know I am a fan of Last Week Tonight with John Oliver.  The show has done multiple segments relevant to our topics of discussion.  They recently did a segment on patent reform.

The guys over at Mintz Levin’s Global IP Matters Blog, suggest John Oliver’s information is outdated and that the proposed Innovation Act, H.R. 9, may not be the best solution writing:

Far from providing the solutions its proponents claim, that legislation would do little or nothing to limit the sending of bogus demand letters to unsophisticated targets in hopes of extracting nuisance value settlements – a practice that many decry as the most egregious example of patent abuse.  

Congress and the Supreme Court have taken steps to address some of problems with the patent litigation process and there has been some reduction in cases already.  We’ll monitor additional developments.

The State of Texas Gets in the Act

In typical Texas style, the Texas Legislature has decided it will take its own steps to protect Texas citizens.  SB 1457 passed the Texas Senate and is now being considered by the Texas House.  The bill allows the Texas Attorney General to recover fees from people who make “bad faith” patent claims to end users.

An end user means a “person that purchases, rents, leases, or otherwise obtains a product, service, or technology in the commercial market that is not for resale and that is, or later becomes, the subject of a patent infringement assertion due to the person’s use of the product, service, or technology.”

A communication is in a bad faith claim if it claims there is  an infringement and:

(1)  the communication falsely states that the sender has filed a lawsuit in connection with the claim;

(2)  the claim is objectively baseless because:

(A)  the sender or a person the sender represents does not have a current right to license the patent to or enforce the patent against the end user;

(B)  the patent has been held invalid or unenforceable in a final judgment or administrative decision; or

(C)  the infringing activity alleged in the communication occurred after the patent expired; or

(3)  the communication is likely to materially mislead a reasonable end user because the communication does not contain information sufficient to inform the end user of:

(A)  the identity of the person asserting the claim;

(B)  the patent that is alleged to have been infringed; and

(C)  at least one product, service, or technology obtained by the end user that is alleged to infringe the patent or the activity of the end user that is alleged to infringe the patent.

The remedy is expressly limited to the attorney general and does not create a private right. This proposal addresses the worst of the worst not apparently addressed by the federal proposal in the Innovation Act.

fcc_logoAs expected, the FCC passed the net neutrality rules today.  Other than spokesmen for the large telecoms (and perhaps some politicians who listen to that lobby), you don’t hear much reasoned opposition to net neutrality.

I have to admit that my views have been changing on the issue from a position of: (1) a solution in search of a problem; (2) to a desire to help make sure start-ups have a fair shake and access to the consumers; (3) to let the market take care of any ISP’s that throttle content; (4) to what about the people who don’t have more than one option for an ISP?

Now, I feel like we are at a Hobson’s Choice.  Do we trust the Government, or do we trust Big Business?  More precisely, who do we trust not to be a jerk in the future?

  • Do you think the likes of Comcast would throttle competitors’ content or force the big content providers into fast lanes leaving all start-ups back at dial-up speed?
  • Do you think the Government can stay at this minimally invasive level of regulation whereas before the Internet has thrived, at least in part, because of the lack of government regulation.

Leave it to the BBC Radio to have Mark Cuban on as a guest to provide additional interesting arguments as to why the new regulations are bad–by focusing on the future?  Listen here.  In effect, Cuban asks whether we want companies to be able to manage their networks as we start to see more driverless cars and online virtual reality applications.  Will the next new thing have to ask the government for permission to run online?

The regulations, as currently written, take a soft hand approach.  But, we should be vigilant to make sure they stay that way.  You know the story of the cooked frog, right?  If you put him in boiling water, he will jump out of the pot.  You put him in cool water and gradually turn up the heat, you will end up with a cooked frog.

For a good analysis prior to today’s release, read this.

Today, we have a guest post from Gray Reed & McGraw attorney Cleve Clinton (the one on the far left).  He is one of the writers of the enlightening and entertaining blog over at Tilting the Scales where they share common sense, practical insights and a little humor, all to help clarify interesting and timely business legal issues that pop up.

Their most recent post fits in perfectly for what we cover here — intellectual property rights of out-of-sync dancing costumed sharks and 3D printing.  You can check out the original post and more of Titling the Scales here.

Left Shark and Lawsuits – Who Gets Bitten in the End?

By Cleve Clinton on February 10th, 2015 
Halftime was just the Beginning: A backup dancer in Katy Perry’s Super Bowl halftime show goes viral upstaging the singer, Tom Brady and Russell Wilson for MVP. Thanks to social media, “Left Shark” became a “thing” overnight and an enterprising entrepreneur (Frederick Sosa) sells internet 3D printed figurines to cash in on the immediate success of the carefree creature.

The Real Shark? Katy Perry’s lawyers issued a cease and desist letter claiming copyright violations and threatening a lawsuit. No surprise there.

The Victim?  Protecting some 10 sales of a $24.99 “Left Shark Desk Figurine” versus litigation threatened by a 1,000+ attorney law firm?  No contest – Frederick Sosa of Orlando. Even assuming he did have the resources to fight, it’s not worth the time or the argument. At $24.99 a pop, the economics are obvious. The good news is that Sosa got a lot of airtime for his 3-D online printing business. In the social media world he and Left Shark upstaged everyone on the big stage.

Legal Issues? Plenty to go around on Copyright Law and 3D Printing.

Copyright. Generally speaking: Can a non-generic animal costume be copyrighted? Probably. But, who owns the right to the copyright? If used before, it may be in the public domain. If not, it depends. Who designed the shark costume? What do the contracts say among any number of possible claimants – a third party designer, Perry’s team, the NFL, NBC or someone else? Finally, if it is protectable, was it properly perfected? For the real answer to any specific copyright questions, our very own Gray Reed copyright, trademark and patent experts David Lisch and David Henry can provide the right answers to the hard questions.

Last Bite? After removing the figurine for sale from Shapeways.com, Sosa put his Left Shark figurine design on MakerBot’s Thingiverse site as a free download for anyone with a 3D printer. A modified version is still available as “Blue Drunk Shark.”

3D Printing. The more novel question? Can a 3-D printing-on-demand company be liable for the infringements of its users? The 3D printing industry blog notes that federal law provides a safe harbor for websites and services that provide a platform for users to publish their own works. Manufacturing-on-demand services could be considered analogous to sites such as YouTube and Tumblr; the only real difference is that their products are physical, not virtual. Yet a federal judge ruled last year that CafePress, which makes T-shirts and coffee mugs on demand, didn’t qualify for that safe harbor, allowing a photographer’s infringement claims against the company to proceed. A year ago, Tilting wrote about 3D printing of guns, the fact that the innovative emerging ideas of 3D printing is a disruptive technology and its likely impact on copyright issues. No doubt, more to come.

Tilting the Scales in Your Favor. Evaluate the risk. Be realistic. Identify the opportunity and the near term goal. In this case, better to use sound judgment at the beginning and maximize the social media limelight, then be prepared graciously bow out.

Previous Tilting Articles: There’s a Printer for That!

 

5.  Using Images Without Permission is No Monkey Business

From the Wikimedia Commons website

This was one of the more interesting stories of the year – does the photographer who set up everything to allow for a monkey to take a selfie own the copyright to that selfie?  This year we learned that no, the photographer does not.

 

 

 

4.  Infographic: The Use of Images From The Web on Your Site, Newspaper or Broadcast – Enough Said:

3.  The Law on Unpaid Interns – This post makes the list almost every year because I repost the guest post by Michael Kelsheimer of the Texas Employer Handbook every year as tech start-ups look to hire unpaid interns.  It’s a little more complicated than you may think.

2. #SMH-butnotacontestorasweepstakes – Check your online promotion hashtag or face scrutiny from the FTC – This post covered the surprise investigation of the Wandering Sole contest by Cole Haan.  The FTC basically said if you are going to have customers “endorse” your products by and through a contest, you better make sure the connection between the endorsement and contest is disclosed.  The legality of online contests is a popular topic with an older post Is Your Online Sweepstakes or Contest Legal still remaining popular.

1.  When Online Behavior Crosses the Line – The Law on Threats, Libel and Just Being Rude – Online defamation and related topics continue to be popular.  In fact, this post from 2012, remains one of the most popular on the site, How to Identify the Anonymous Online Defamer.  My suspicion is that SEO on these topics leads to more page views.  Nevertheless, it continues to be a very important issue for individuals and businesses and will likely continue in 2015.

 

1. You Haven’t Lawyered Up.

OK, that may be a little dramatic, but the worst case scenario is that you have a handshake deal with your co-founders. After all, we are all buds, this won’t go wrong. Even if it never goes wrong, you need to have your agreements done and done correctly. Too many times, people come see us because there is a fight about who owns what or some software or web developer claims they own a piece of the company based on a conversation at the bar. Having proper shareholder or operating agreements is not a pleasant experience because sometimes it is the equivalent of a prenuptial agreement for an engaged couple – not exactly the romantic way to start things. The old adage, however, is often true . . . you can pay me a little now to get this done right or pay me a lot later to help try and clean up the mess. Once you grant an interest in the company and it vests to the co-founder, it is his forever without the proper agreements. The co-founder decides to chase his dreams of being a professional fisherman in Cabo and you are stuck slaving away trying to create value for him. You can easily avoid this with vesting and repurchase agreements.

2. Don’t over lawyer.

I know I just told you to lawyer up, but this is the internet so I can contradict myself with impunity. If you are a sole founder without any partners and are still at the stage of trying to figure out if you have a marketable product or idea, then go to a website and set up your company on the cheap (don’t tell anyone I said that was OK). Even if you have partners, you don’t need overly-complicated documents and financing as if you were already a multi-national company. You don’t need employee handbooks and agreements, complex vesting structures, ESOPs. If you are bootstrapping, get your product on the market first and then decide whether all this other stuff will be needed. The odds that you are the next Facebook are slim – you don’t need to act as if you will be attracting millions of VC money three months from set up. If it looks like that is a possibility, it is not that expensive to put the shine on your corporate documents and structure. Don’t pay for that until you need it.

3. Protect Your IP.

Just because the Secretary of State said you could use the name and the domain name was available does not mean you are free and clear. You may be infringing on someone’s trademark. You may need to take additional steps to protect your own trademarks. The last thing you want to do is invest in product launch only to get the cease and desist letter a few months later. If you are doing this on the cheap, Google the name and several close variations. Don’t use a generic or geographic name. Do your own search on the USPTO TESS search found at www.uspto.gov. This should help you sleep a little better at night although it is not foolproof. Also, if you can’t afford to get a patent (timing is important so don’t wait too long to visit with a patent lawyer if you have truly novel product) or you are not eligible for patent protections, don’t forget about trade secrets. If you keep the secret sauce from being disclosed contractually, you may get all of the protection you need.

Is all the IP owned by the company or the individuals who created it before the company was formed? Do the contract web designers or coders own the IP? Do the founders’ prior employers have any rights to the IP? If you don’t know the answers to those questions, you need to find out–now.

4. Don’t Over Protect Your IP.

I know, I did it again. Most start-ups do not really have earth-shattering IP. If you are approaching serious investors or VC’s, you are often only going to have one shot with them. Take it. Don’t demand a non-disclosure agreement unless there is really some secret sauce worthy of protection and be prepared to explain it. Investors don’t sign blanket generic nondisclosure agreements. You can still talk about the business, what it does and protect the secret technology or algorithm. Truth be told, you are probably not the only person to think of the idea and not the only one working on it. Your job is to be first to market and be the best. Demanding nondisclosures from investors may prevent any investors from showing any interest.

5. Don’t Go Asking Everyone For Money.

Despite what you may have heard about crowdfunding, general solicitation of anyone and everyone is not legal. Even if it becomes legally acceptable, it may not be the best idea for your company. There are securities laws and they can get complicated. Before you start seeking investors, visit with counsel and do it right.

6. Don’t Turn Away Good Money.

Are you sensing a pattern? The friends and family that want to support you really want to support YOU. They will often entertain convertible notes so you don’t have to value the company early on or invest in large legal fees. Having ten friends and family invest in you (preferably accredited ones; hence the “good money”) should not turn off future investors.

7. Don’t Go Chasing Money.

I don’t know how many times I have seen the entrepreneur spending all of their time chasing money rather than improving the product. Yes, some companies thrive in a very short time frame and there is a financially rewarding exit. You read about the latest one in the newspaper, right? You read about it, because it does not happen often. It is not likely to happen to you and most investors are turned off by the entrepreneur who thinks they are going to sell off in three to five years and move on to the next thing. Unless you are someone who has already sold off a handful of start-ups for millions, investors want someone that is passionate about the project they are investing in—not someone looking for the early exit. While not exactly legal advice, this misguided mindset can cloud your legal strategies. I’ve heard numerous entrepreneurs tell me they have to be Delaware corporations because that is what the venture capital firms want. If you are good enough, your state of incorporation won’t matter and if the money is right, it is something you can fix. In the meantime, you have made your start-up costs more expensive and your administrative burden worse. Others disagree with me, but don’t let the one-in-a-million chance take you away from focusing on your product and overcomplicate matters. You don’t plan your life on winning the lottery, you should not plan your business life on winning the lottery either.

8. Get a good accountant.

A lot of the times I tell entrepreneurs to ask their accountants. Lawyers deal with risk mitigation, accountants are more attuned to tax and accounting advantages. The right accountant can help with vesting strategies and 83(b) elections. The accountant should be one the primary persons to decide whether you should form a corporation, an LLC or limited partnership and what the effect and cost of conversions down the road and the administrative cost of each is in the meantime. You have probably figured out by now that just because you read online that Silicon Valley VCs prefer Delaware corporations, it does not mean it is the right fit for you. If your company and idea are strong, you will find money. If you are told no because you are not a Delaware corporation, that is simply a cop out.

9. Get your e-commerce protections in place.

If you are primarily an e-commerce site, get your terms of service in order and make them enforceable through a click-wrap agreement. You may think many of that is boiler-plate, but when it is applied to a dispute, it very well may save your company. Make sure you are DMCA compliant so that you don’t get sued because someone violated copyrights when they posted comments to your site. Make sure you are complying with any applicable FTC or other regulations. While this sounds expensive, experienced counsel can easily spot the issues and has probably handled them before.

10. Take Your Lawyers/Accountant to Lunch.

I didn’t include this because I am hungry or lonely. It is the little-known industry secret. Lawyers have to eat lunch. I would rather eat lunch with you than by myself and it is a convenient time “off the clock” to hear about everything that is going on in the company and get the quick diagnosis. We really are interested in you and the company and enjoy these conversations without having account for every minute.

 

As you probably read, the Texas Securities Board approved intrastate crowdfunding yesterday without limiting it to accredited investors.  You can read the rules here.

For those wanting to issue equity through intrastate crowdfunding:

  • Companies may raise up to $1 million per 12-month period
  • Offerings must be carried out online through a registered dealer or crowdfunding portal.
  • The company must be a non publicly-traded Texas entity (see below) and can only offer the securities to Texans (see below for more specifics).
  • The company must have a defined business plan, investment goals and list disclosures.  This means you will have to post a summary of the offering on the portal at least 21 days before any securities may be sold. The disclosures must include risk factors, a description of the issuer’s business, operations, and management, a description of the securities and other material information.
  • Customary bad actor disqualifications apply.
  •  Non-Accredited investors may contribute up to $5,000 per offering.
  • To obtain more than $5,000 from accredited investors, the company must verify the investor qualifies as “accredited.”
  • Investor funds must be placed in escrow until the specified minimum offering amount has been raised.
  • You are allowed to provide a limited notice about your efforts and provide a link to the portal, but you can only distribute this to investors located in Texas.
  • You do not have to publish reviewed or audited financial statements unless audited financial statements are already available for any of the three years prior to the offering. Instead, the CEO can certify the financial statements are accurate and complete as of the date of the offering.

With regard to the portals:

  • Fill out a Form 133.17 with the State Securities Board, complete a background check and pay the registration fee for securities dealers in Texas registering as a restricted dealer.
  • You are not  required to pass the General Securities Registered Representative (Series 7) Exam or the Uniform Securities Act State Law (Series G5) Exam.
  • You have to limit access and trading activity to Texas.
  • The portal must confirm residency before allowing access by the investor.  The portal also has to conduct  background and regulatory checks for bad actor compliance.
  • You cannot offer investment advice, manage investor funds, or facilitate secondary market transactions, along with other restrictions.
  • You will be required to maintain certain records for five years and you will have post-registration reporting requirements and renewal fees.
  • All communications between the investors and the company raising the money must take place on open forums on the portal.
Some of the Details

Now, for those that like to dig into the details, intrastate crowdfunding in Texas is made possible because Section 3(a)(11) of the Securities Act of 1933 exempts from federal registration securities offered and sold only to persons within a single state or territory, in which the issuer is also a resident.

To issue stock as a Texas entity, you must:

  • be organized in and have your principal place of business in Texas;
  • have at least 80% of your gross revenues during the most recent fiscal year prior to the offering be derived from the operation of business in Texas;
  • have at least 80% of the your assets at the end of its most recent semiannual period prior to the offering located in Texas; and
  • use at least 80% of the net proceeds of the offering for your operations in Texas.

To invest, you must be a Texas resident which means, you must be:

  • A corporation, partnership, trust or other form of business organization with its principal office in Texas.
  • An individual who,  at the time of the offer and sale, has her principal residence in Texas.
  • If an entity is set up for the specific purpose of buying the stock, all of the beneficial owners have to be residents of Texas.

We will follow up with a more thorough analysis of this method as we digest the new rules.

 

 

I’ll admit, General Mills did not go that far.  What they did, according to The New York Times was notify customers that if they downloaded a coupon, joined a forum or entered a sweepstakes, the customer would waive their right to sue in court and would have to go through an online “informal negotiation” or arbitration.

Since the story broke, General Mills is trying to backtrack.  For example, General Mills admitted it would not apply if you interacted with the company on Facebook or simply purchased one of its products at a store, but that the company could enforce it if you interacted on the company’s website.

However, there was a pop-up notice on the company’s home page that “require[s] all disputes related to the purchase or use of any General Mills product or service to be resolved through binding arbitration.”  Consumer watchdogs were concerned General Mills was trying to escape all liability for mislabeling claims or damages related to product recalls just because you “liked” a Facebook page or purchased a product at your local grocery.

In two recent cases, the Supreme Court has held related clauses to be enforceable.  In June 2013, in American Express v. Italian College Restaurant, the Court enforced an arbitration clause between AmEx and the merchandisers.  Two years before that in AT&T Mobility vs. Concepcion, the Court upheld a class action waiver.

Yet, there is still, and always will be, the issue of consent.  When I buy Lucky Charms for my kids (I know, Dad of the Year), I am not consenting to a long list of terms of conditions.  I am buying cereal.  A court would be hard-pressed to find I consented to a long list of terms and conditions on the General Mills website.  That would not be magically delicious in the least bit.

On the other hand, if I download a coupon, or enter a sweepstakes, I would not be surprised to have a pop-up that requires me to agree to terms and conditions no one reads. I might waive my rights to file a class action or a jury trial as it relates to that particular transaction.  In fact, I would not be surprised if this practice becomes more prevalent.

There may be some issues as to whether downloading a Cheerios coupon means I agreed to waive claims against Haagen Dazs in an unrelated transaction.

Despite the fact social media and the internet have made things a little more complicated and hard to keep up with, the basics of contract law still apply.  To bind a consumer, you need to show they consented to the terms which is why a click-wrap agreement is preferred over a browse-wrap agreement.  On top of that, especially when it comes to jury and class action waivers, you need to satisfy both procedural and substantive conscionability.

 

Open source software sounds like a good idea.  Your create some code and then put it out there for the public to use and let people build on it and improve.  The only condition is that if someone improves on it and build from it, they often have to share their improvements with the world.  Everyone wins right?  Everyone except anyone trying to sell software or a company with proprietary customized software.

Great for inhouse customization

There is much more open source, also known as General Public License or copyleft software, than you may imagine.  According to a 2010 PC Magazine survey, 98% of companies use open source software.  Often times, companies customize the the open source software to fit their needs with in house programmers building from the publicly-available code.  These improvements are often valuable to the company.  Under most general public licenses, you don’t have to share the code when you are only using it in house.

Now we are selling, so do we have to show everyone our code?

But, what happens when there is a sale?  Under most general public licenses, once the improved code is used by anyone else other than the creator, it has to be shared with the public.  For private companies who go through major transactions, you can see the problem — disclosing what is a valuable proprietary asset to the world.  In most large transactions, there is going to be a code audit that will reveal the code subject to GPL’s.

What to do?

So, what do you do about this?  The best practice is to be proactive.  If you are working on a commercial proprietary customization, many GPL’s allow for dual licensing.  You can buy the commercial license of the GPL that gives you greater rights including the ability to keep your improvements secret.  You need to review the GPL and the dual license carefully.

You can try and keep the proprietary part separate from the open source software.  This is an extremely technical issue along with an analysis as to what is a modification versus an aggregation.   You need to have the development team work with legal if you plan on going this route.

I wish I called you back when I started.

What if it is too late?  You are probably not surprised that we get that a lot.  If you have been using software in house but now need to transfer it, what do you do when you discover it has GPL code?

You can go back and try and get the dual license from the last creator of the open source software.  Under the right circumstances, that will prevent you from having to disclose your improvements to the world.

You can also do a reversion.  That means going back to the software before the introduction of the open source software and then rebuilding it.  This, sometimes, is the only option.

When private companies are involved, you can see why some refer to open source software as a cancer.  Its innocent inclusion on a basic building block of software can destroy all the commercial value of what you have spent years building.

Because copyleft is relatively new, there are few cases interpreting these licenses.  You can read about a recent case here.  You need to think about these issues while building software and certainly when you are in the acquisition stage.

 

I’m proud of the city where I grew up and am now raising my own kids.  Although not a popular tourist destination, there are a lot of great things happening here, and here, and here, and here, and here–including a burgeoning start-up scene.  Houston Tech Street is just more evidence of that.

Houston Tech Street is an event that will have an open and collaborative platform for the community to learn, share, showcase and promote their creative and innovative ideas, expertise and technologies for better living.  The inaugural event will be November 20, 2013.    You can learn more about it here.

They are already putting up content on their blog, including a piece I recently wrote on crowdfunding.  Go check it out.