Many of the Founders I have met with have asked me about New York State's Start-Up NY program. The program is fairly new and could offer some companies a significant tax savings should they found/move/expand their company to designated zones within the State and partner with a designated University in the area. However, the program has many limitations. For instance, many businesses are ineligible for the program, including:

• Retail and wholesale businesses
• Restaurants
• Law and accounting firms
• Medical or dental practices
• Real estate management companies/brokers
• Hospitality
• Retail banking
• Utilities and energy production businesses

It should be noted that because the program is fairly new, there is limited information on its efficacy, or lack thereof. However, the program is worth keeping an eye on as it grows over time. 

For comprehensive information about Start-Up NY, how to apply, and to find out if the program is right for your business, click here: http://startup.ny.gov/ 

Crowdfunding has been a popular platform for start-ups and small businesses to raise money on the internet. Given the success of crowdfunding platforms, such as Kickstarter, and the costs of playing sports, it was only a matter of time before platforms were introduced solely directed at crowdfunding athletes.  Now, several platforms for crowdfunding athletes exist, including:

• RallyMe
• Sportfunder
• Pursu.it
• MakeAChamp
• Sqor (Here is an interesting article about Sqor)

These platforms allow athletes, teams and organizations to raise money for specific sports-related goals, like funding an athlete's trip to a competition, a professional athlete's charity, or helping to fund organizations who represent their countries in the Olympics. 

Although these crowdfunding platforms can be vital for organizations, olympians, professional athletes, or some amateur athletes, crowdfunding is an attractive and potentially unknown danger for athletes with collegiate eligibility. 

NCAA Bylaw 12.01.1 states that "Only an amateur student-athlete is eligible for intercollegiate athletics participation in a particular sport." However, Bylaw 2.9, the NCAA's core principle of amateurism, states "student-athletes should be protected from exploitation by professional and 
commercial enterprises." Although the NCAA's definition of amateurism has shifted over the years, receiving any form of compensation (including having something paid for) has been violative of the NCAA's amateurism principles, and has resulted in fines as well the loss of athletic eligibility. For example, Georgia running back Todd Gurley is currently suspended pending investigation into whether he received payment for autographs. 

With the increasing prevalence of costly training camps and showcases for young athletes, meaning those who are not yet college eligible, it is easy to see how crowdfunding can be an attractive means of funding attendance at training camps and showcases. Although young athletes may be aware that they cannot be "paid," crowdfunding raises the following questions:

• Will young athletes recognize crowdfunding as being paid to play or train?
• Are parents aware that their kids cannot be paid to play?
• If so, will parents recognize crowdfunding as being paid to play?
• Will young athletes be disciplined, upon acceptance to a college team, for any violations their parents commit in support of them?
• Should athlete crowdfunding websites have any legal responsibility to protect eligibility?

Young athletes and their parents, assuming they are aware that athletes cannot receive compensation, may not inherently view crowdfunding to attend specific events as compensation. Taking a simplistic view, the young athletes and their parents may assume that the rule barring payment prohibits salary-like payments for on field performance. Therefore, those athletes and parents may believe that crowdfunding for a specific event is not violative of NCAA regulations.

This dangerous assumption could be problematic when the young athlete attempts to play in college. Should the NCAA become aware of previous crowdfunding, the player could be fined an amount equal to the funding received and/or suspended. Such a fine could be prohibitive to a college athlete if they used the crowdfunding service several times. 

Potentially, the NCAA could hold the young athlete accountable for his or her parents' crowdfunding in support of their athletic endeavors. The NCAA's prohibition against players receiving extra benefits also extends to their parents. The NCAA's investigation into Reggie Bush and his family is a good example of this, although the investigation took place after he turned pro. 

While attending USC, Bush's family rented a home from Michael Michaels, who at the time was establishing a sports agency that hoped to sign Bush. Throughout their time in the house (approximately a year) Michaels provided multiple impermissible extra benefits and inducements, including rent free housing, transportation, and money to pay off debts. Although it was alleged that Bush was aware of Michaels providing the benefits to his family (under the purported agreement that he would repay Michaels when he turned pro), Bush's knowledge was immaterial as parents are also prohibited from receiving extra benefits and inducements. The NCAA found multiple violations to have taken place (including violations not mentioned here), and retroactively sanctioned Bush, as he was now a pro player. Bush's experience should serve as a cautionary tale to crowdfunding parents, as an athlete can be sanctioned for their parents' actions as they relate to the athlete. 

Lastly, there is a question of whether athlete crowdfunding sites should be responsible in some way for the potential repercussions of athletes utilizing their service. Although there is little, if any, legal recourse against such a site for an athlete unknowingly committing NCAA violations, there is no question that the websites should include a warning regarding college eligibility when signing up for the service, especially if the websites are hosted domestically. That warning should not be buried in their terms of service agreement, but should be explicit. If these sites are truly supporting the advancement of athletes, then they should seek to protect their aspirations by at least providing a warning. 

Of course, crowdfunding for athletes is only problematic from an NCAA perspective if the user plays an NCAA sport. For those that don't play such sports, crowdfunding could be instrumental to their amateur and/or professional career. It is unfortunate that NCAA regulations would stand in the way of future NCAA athletes going to specialized camps, or showcasing their abilities, that will help them reach the next level. However, it makes sense. Allowing crowdfunding for future college athletes would create a vehicle by which highly touted young athletes could be financially swayed by colleges, professional teams, and agents. Such inducements are not only banned by the NCAA, but also the professional sports leagues. 

Crowdfunding can be positive for many athletes, just not those athletes who plan on playing in the NCAA.

Last week, my blog post regarding equity for endorsements focused on the benefits and disadvantages of the athlete/celebrity endorser. This post will focus on the companies, and why they should or shouldn't offer equity for endorsements.

Startups have long sought celebrity endorsements under the misguided notion that the endorsement will equate to the company's success by harnessing the celebrity's star power. In fact, there are many articles on how to attract celebrity endorsers (See here and here) Not surprisingly, offering equity for endorsements is a common suggestion on these "How To" articles. But, companies should be mindful of how they distribute their equity, as a celebrity endorsement does not always work out well for the company (see here). 

Benefits

• Does not require available cash- Many startups are strapped for cash during their first few years, and few can afford the high prices of celebrity endorsements for money. Offering equity for celebrity endorsements may be the only way the company can secure such an endorsement. 
• Potential synergy- A well selected celebrity endorsement will create a synergy between the company and/or its products with the celebrity, allowing the endorsement to come across naturally and potentially harness the endorser's fan base. This could lead to greater sales figures.
• Perceived credibility- Let's face it. Customers are more likely to attribute credibility to a company that is endorsed by a celebrity they "trust." 

In sum, all of the benefits of getting endorsements for equity necessitate sales increases and discount the loss of equity.

Disadvantages

• Being tied to the celebrity- Giving equity for celebrity endorsements, and the extensive marketing campaign required to utilize the celebrity endorsement, ties the company to the celebrity for better or worse. Should the celebrity become embroiled in a scandal, or engage in some manner which hurts their image, the company could also be damaged through its association with the endorser (unless the endorsement agreement contains a well-drafted morals clause). 
• Divestiture- Equity for endorsement deals are investments to the celebrities, which can eventually be cashed in. Granted, a well drafted endorsement for equity agreement will have provisions as to how and when the endorser can divest their equity, the sale of the stock can occur at a bad time for the business, ultimately damaging it.
• Less equity can be used for other purposes- By offering equity for endorsements, the company is limiting the amount of equity it can distribute to other channels, which may be more beneficial. For instance, companies can offer equity to woo experienced employees or for venture capital funding. Granted, both of those equity offers have their own benefits and disadvantages, each company is unique, and may be better served by using the equity they would exchange for celebrity endorsements in a different manner. 
• Risk- Although some companies have found success with celebrity endorsements, not all celebrity endorsements result in a financial boon for the company. Further, should the celebrity breach their endorsement agreement in some way, the litigation costs could quickly mount for a cash-strapped startup. 

Equity should be carefully guarded by a company, especially a startup, because there is a limited amount to distribute. Some founders may wish to distribute as little equity as possible, and/or retain a greater amount of equity for themselves. Before agreeing to anything for equity, especially endorsements, the proposed agreement should be carefully vetted to determine if it fits with the company's plan moving forward. 

Celebrity endorsements of products and companies have long been commonplace. However, where these celebrities were once paid with money, many are instead accepting equity. This is particularly true when it comes to celebrities endorsing start-ups and their products. 

Last week, The New York Times ran an article which stated that equity for endorsement agreements are gaining in favor with celebrities due to the recent explosion of the start-up scene, especially in California, and the deal's ability to create substantial income should the company become successful. This is especially true for professional athletes.

Professional athletes have particularly taken to equity for endorsement agreements. This is likely due to the potential of receiving a windfall and the players' understanding that athletic careers can be lost at any time. In recent years, several athletes have made headlines by entering into equity agreements. One of the most notable equity for endorsement agreements was David Wright's acquisition of .5% of Glaceau, the creator of Vitamin Water. When Glaceau was bought in 2007 by Coca Cola for $4.1 Billion, Wright's .5% was worth an estimated $20 Million. In 2010, Tom Brady entered into an equity deal with Under Armour, a now ubiquitous athletic apparel company. Most recently, in June, 2014, Richard Sherman entered into an equity for endorsement agreement with BODYARMOR SuperDrink.

However, accepting equity for endorsements has significant benefits and disadvantages for the endorsing athlete. 

Benefits

• Wealth building- Athletes have short playing careers and therefore have a short period of time to maximize their profits by capitalizing on their on-field success. Equity for endorsement agreements while the athlete is still playing can provide substantial income even after the athlete's playing days have ended. 
• Favorable tax treatment- Standard endorsement agreements for cash are taxed as income. However, equity for endorsement agreements are taxed as capital gains, which is generally a much lower rate than income tax, when the endorser sells the stock. 
• Potential windfall- As with David Wright, there is always the potential that the equity for endorsement agreement could result in an extremely large payday for the endorser. Of course, there are many factors involved in such an occurrence, most of which have nothing to do with the endorser. Researching the company and examining its financials (if possible) should allow the athlete a better prediction of the company's success.
• Risk of investment- There is no question that any investment involves some level of risk, and that many athletes' financial investments have previously led them to financial ruin. However, equity for endorsement agreements carry a fairly low level of financial risk because the athlete would not be investing money. Instead, the athlete is only investing the time necessary for the required appearances and commercials. Therefore, even if the company folds, the athlete would be in the same financial position as he started. The low risk-high reward potential of endorsement for equity agreements is a substantial benefit to the athlete.

Disadvantages

• Delayed payment- Equity agreements may not be suitable for athletes who aren't financially stable or otherwise require immediate payment. These agreements can require that the endorser hold the stock for a period of time (several years) before it can be sold, thus delaying when the endorser can receive money for their endorsement. 
• Stocks are subject to division at divorce- In many states, stocks acquired during a marriage are considered community property, or are otherwise subject to distribution upon a divorce. Therefore, a portion of any equity in a company gained during marriage can be lost through divorce. Of course, this may not be a problem if a prenuptial or postnuptial agreement is in place. By contrast, a standard endorsement agreement for money raises the endorsers income, which could have other effects within a divorce proceeding, but does not directly alter property distribution. 
• Risk of investment- Although the risk of investment can be partially mitigated through careful planning and research, it must be noted that there is a chance that the company can fold, leaving the endorser with nothing. This does not leave the endorser in any worse of a position than prior to the endorsement, but ultimately receiving nothing for the endorsements is certainly a disadvantage that must be weighed. 
• Being tied to the company- Equity agreements associate the endorsing athlete with the company for better or worse. These agreements can require a vesting period of several years, with little means of canceling the contract (unless a reverse morals clause is present) should the company or its founder do or say something which damages the business and its reputation. Potentially, the damage to the business' reputation can hurt the endorsing athlete's established brand through their association. 

Although athletes and celebrities may be agreeable to equity for endorsements due to the low risk/high reward potential, companies do not freely offer such opportunity. Many companies are protective of their equity, and within good reason. My next post will discuss the benefits and disadvantages of equity agreements to companies, who bear a much bigger risk when offering equity for endorsements.

Protecting one's intellectual property online can seem like an onerous task. This is especially the case with copyrighted content. However, content creators can help protect their copyrights by taking several actions.

Keep in mind that according to the U.S. Copyright Office, a copyright is a "form of protection grounded in the U.S. Constitution and granted by law for original works of authorship fixed in a tangible medium of expression. Copyright covers both published and unpublished works."  Notably, copyrights protect the expression of ideas, and not the ideas themselves. Additionally, copyrights attach immediately when the work is fixed in some form of tangible medium of expression (like a book, recording, painting, blog post, etc.) Although it is not necessary to register a copyright for protections to attach, a registered copyright has additional benefits should someone infringe. For more information on what a copyright is, see my earlier post here.

So what steps can you take to protect your creative, copyrighted works? 

Place a copyright notice on your work. In the context of protecting copyrights online, you can place a copyright notice alongside your work. This need not be complicated, and can simply state "Copyright 2014. All Rights Reserved." Although this isn't necessary, it informs potential infringers that you are aware of your rights with respect to the work, potentially discouraging them from infringing. For photos, this can be effectively accomplished by watermarking your images. 

Define others' rights in utilizing your work. Create a policy (and place a link to it on your site) that tightly defines how people may use your content with and without your permission. Effectively, this creates a route for potential infringers to utilize your work in a manner that respects your copyrights by offering them a limited license under terms you decide.  Even better, these terms establish how other people can freely advertise your work.

Consider registering your copyright. Some content, especially if used as a means of generating income, may warrant a Federal Copyright Registration. This is purely optional, although there are benefits to registering a copyright which primarily manifest during litigation. Some of the added benefits of registration include: the ability to sue for attorney's fees; the ability to sue for statutory damages (which is easier to prove than actual damages); a presumption (after 5 years) that the copyright is valid and all facts in its registration are true;  the registration itself constitutes notice that said content is copyrighted. Additionally, registration may allow you to transfer copyrights easier. 

Find out if your copyrighted material is being infringed upon. Once you are aware that your work is being infringed upon, you can take steps to have the infringing work taken down, or at least attribute credit to you, whichever you deem appropriate. There are many different tools you can use to find out if your works have been infringed upon. Not surprisingly, a Google search is a great place to start as the search engine has both text and image search capabilities. Sound recordings are much more difficult to police as there can be multiple copyrighted elements, in addition to the technical difficulties of searching audio recordings. 

Contact the infringer. Generally, there is some manner available to contact someone that improperly posts your content, be it via email, comment, or message. Utilize whatever method you believe to best contact the infringer and request that they remove your content, or point them in the direction of your use policy and request that they abide. If they fail to remove the content or fail to adhere to the policy, locate the website's ISP information. To do so, you can use this site or this site. Once you have the ISP's information, send a Takedown notice (free samples can be easily found through a Google search) to the ISP, which states that one of the sites it is hosting contains infringing material. The Digital Milennium Copyright Act allows for an ISP to be held liable for hosting infringing content. Generally, once the ISP is notified that they are hosting an infringing work, the website will be taken down so the ISP can avoid liability. 

When to hire an attorney. If the ISP fails to remove the content, or take down the website, then you may wish to hire an attorney to prosecute your claim of intellectual property infringement. If you have yet to register the copyright of your protected content, then you may have to do so before any litigation may commence. 

Following these steps will help you protect your copyrighted content online, allowing you to only worry about creating more content to share with the world. 

Yesterday, an article appeared in the New York Times which discussed the declining use of Non-Disclosure Agreements ("NDAs") among startup companies.  The article centered on two main points:

• idea sharing has become prevalent between startup founders, for better or worse
• Venture capital firms ("VCs") are refusing to sign NDAs when investing in companies

The second point is particularly troubling for business owners. If the startup needs funding from VCs who refuse to sign an NDA, whats to stop them from sharing one business' idea or concept with another company they invest in? Simply put, nothing.

I was speaking with the founder of a startup last night who shared with me his uneasiness about VCs refusing to sign NDAs. He echoed a sentiment that I'm sure many other start-up owners feel "What can we do? We need the money." The unfortunate reality is that VCs refusing to sign NDAs only benefits the VCs. However, that does not mean that businesses should not request that an NDA be entered into with anyone that will be privy to proprietary information/materials. 

So what does a non-disclosure agreement do? An NDA protects confidential information, materials or knowledge that is to be shared with another business or person (including employees.) The agreement establishes not only how the receiving party may use the confidential information, but also the remedies should a breach of the agreement occur. Of course the disclosing party is entitled to damages for a breach of the agreement, but the agreement can spell out how the damages are to be calculated or whether injunctive relief is appropriate. 

NDAs also help establish the protection of a business' confidential information, which is a necessary element to any litigation challenging whether or not the confidential information qualifies as a trade secret. Simply put, a business must take steps to protect its proprietary information to qualify as a trade secret, and routinely entering into NDAs helps establish that. Even if a VC doesn't sign an NDA, it is in a business' best interests that they require other parties to enter into NDAs to help ensure trade secret protection. 

In my discussion with the founder last night, he asked me "Even if the VC doesn't sign an NDA, aren't my ideas protected some other way, like by copyright?" The short answer to that question was no. Although this was already the subject of a blog post, copyright protects the expression of an idea, not an idea itself. 

Upon learning that without an NDA, his business has no control over the proprietary information shared with a third party, the founder was rightly uncomfortable, but repeated "What can we do? We need the money." I told him what I would tell any business owner, that an NDA should at least be offered. Some VCs may sign it, some may not, but the few that do will at least give some piece of mind that the business' proprietary information is protected. 

Although a business may make the decision that VC funding without an NDA is acceptable, NDAs should still be extended to all others with whom proprietary information is shared. No matter who a business is sharing proprietary information with, an NDA should be proposed. 


(Photo used under Creative Commons License from Flazingo.com)

Recently, several startups I've spoken with have informed me that they use independent contractors instead of traditional employees. However, many startups are not aware that independent contractors can still be deemed employees by the Courts. 

So why are the startups hiring independent contractors as opposed to employees? Here are some of the benefits: 

• Independent contractors cost less- Although generally paid a higher hourly salary than employees, businesses save money because they don't have to pay benefits, Social Security and Medicare taxes, unemployment compensation insurance, and worker's compensation insurance.
• Decreased lawsuit liability- In certain circumstances, businesses can be found liable for the actions of their employees. However, as independent contractors are not employees, a business is protected from being sued for the contractors actions. Also, independent contractors are not protected by the totality of employee protection laws, thus protecting the business from getting sued by the contractor themselves. 
• Hiring and firing- Independent contractors can be hired for specific tasks, as well as for a duration of time. This allows a business to staff itself on an as-needed basis, and allows for flexibility.

Due to these benefits, some businesses abuse the label of 'independent contractor.' For that reason, New York courts have employed two different tests to determine whether a worker is an independent contractor or employee.

The Economic Realities Test is as follows:

• The degree of control exercised by the employer over the workers
• The workers' opportunity for profit or loss and their investment in the business
• The degree of skill and independent initiative that is required to perform the work
• The permanence or duration of the working relationship 
• The extent to which the work is an integral part of the employer's business

This test looks at the totality of the answers to the above questions to determine whether an employee/employer relationship exists. 

The Common Law Test is as follows:

• Whether the worker works at his/her convenience
• Whether the worker was free to engage in other employment
• Whether the worker received fringe benefits
• Whether the worker was on the employer's payroll
• Whether the worker was on a fixed schedule

The factors of the Common Law Test are not exhaustive, and the Court will explore additional inquiries if it feels necessary. An example of an additional factor that could be considered is whether the worker is required to wear a uniform. In the Common Law Test as well, no single factor itself is dispositive of an employee/employer relationship.

Effectively, this means that workers who are classified by a business as being an independent contractor may not be classified as independent contractors by the Court. Should the Court find that an employee/employer relationship exists, then a business loses all benefits of hiring the independent contractor (with respect to that person only) and is subject to the totality of laws involving employee/employer relations. Therefore, the business incurs increased costs and liability. 

If your business decides to use independent contractors, ensure that the written agreement with the worker incorporates the factors the Courts could use in determining whether an employer/employee relationship exists.