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ECONOMICS, BUSINESS, FINANCE Legal Missteps in Technology Ventures

Copyright © 2009 Dmitri Dubograev (femida.us). All rights reserved.

The global financial crisis, despite heavily affecting each and every busi- ness, presents unique opportunities for international technology compa- nies, and security, communications and software companies in particular. The technology consumers are clearly focused on value propositions seek- ing, products that bring the most effi- cient results at the lowest costs. Unfor- tunately, tech companies preoccupied with the struggle for survival often fail to recognize the legal pitfalls that could haunt them in the future. Tech compa- nies’ legal budgets are shrinking, but there are ways to prioritize legal tasks in order to avoid the venture’s “birth defects” and to prevent larger troubles in the future. Of course, nobody’s per- fect, but there are degrees of “errors,” and we would like to point out sever- al key issues which, in our practice of representing high-tech companies, ap- pear to pose the biggest problems and cause the most painful legal quagmires.

current economic circumstances force enterprises to jump at each and every opportunity for building busi- ness. however, if the management fails to adequately address the legal issues at the outset, it may lose the foundation required for the company’s growth and expansion. among the key elements that high-tech companies should value (but forget to effective- ly protect) are legal rights in intellec- tual property, competitive information about key technologies, exclusive use and protection of its know-how, copy- rights, trademarks, and patents, which in turn means loss of opportunities, time and, ultimately, money. however,

the most painful consequence of legal sloppiness is the loss “in success” or, in other words, in the opportunity to enjoy the fruits of the technological accomplishments despite the competi- tive edge of their inventions. as we see it, the legal dangers of tech ventures come from three “cs”:

  • 1)


  • 2)

    co-owners, and

  • 3)


The first “c” stands for “co-cre- ators.” at the early stages of develop- ments struggling high-tech companies scramble for resources and quite often shortcut the typical production cycles of intellectual property by hiring free- lance developers, scientists and “starv- ing students,” often without much legal documentation. The problem arises because, under the laws of most countries, creators of iP are deemed owners or co-owners of such iP in the absence of employment relationship, specific “work for hireagreement, or an assignment. consequently, when the company then approaches success, the co-creators” come to claim their share of profits, royalties or demand multiple payoffs, citing lack of any written agreements to the contrary.

in addition, the co-creators” have to be reckoned with when a compa- ny tries to sell a particular iP or en- ters into a large deal requiring a clearly defined chain of title to this iP. Thus, no matter how small the legal budget is or how impatient the founders are, it would be imprudent to ignore the agreements with anyone that partici- pates in the creation of the most valu- able assets of the high-tech company

International Life Magazine

Dmitri I. Dubograev is a manag- ing partner of femida.us (aka int'l legal counsels Pc), a law firm headquartered in alexandria, Va, with affiliated offices in Washing- ton, D.c., Paris and Moscow. The firm focuses on representation of clients in the information tech- nology, software, telecommunica- tion and entertainment industries in cross-border transactions, gov- ernment contracts, technology transfers, licensing and corporate structuring and financing.

www.legal-counsels.com www.femida.us

  • its intellectual property. The man-

agement should always keep track of the iP creation process, making sure that anyone that has any relationship to the iP signs “work for hire” or as- signment agreements in addition to confidentiality and non-circumven- tion commitments.

With the financial system in sham- bles, most tech start-ups are back to seeking investment from the “triple F:” friends, fools and family. as a re- sult, the money typically comes to the company with little or no paper trail, creating ambiguity as to the nature of the funds and the related rights and obligations. Strangely, among the most common lapses is the misunder- standing of the nature of the percent-

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