Legal Topics Every In-House Should Know
In-house lawyers are required to be well-versed in a number of distinct areas of law. Regardless of the industry or company size, companies face a wide range of legal issues. These issues span areas such as employment law, intellectual property, property law, tax structuring, corporate entity formation, stock compensation, and securities law.
Photo by Israel Andrade on Unsplash
Basics of Intellectual Property Law
Understanding how to protect a company’s unique patents, trademarks, domain names, and other intellectual property is essential knowledge for every in-house lawyer. The company’s legal counsel should encourage the company to protect its IP rights by filing applications with the U.S. Patent and Trademark Office (USPTO). Before discussing an invention or novel idea with other another party, the company’s legal counsel should make sure the other party has signed a nondisclosure agreement (NDA). This can help avoid legal disputes down the road.
Most patents are utility patents, meaning that they protect the functional attributes of a device. A patent application can be filed with the USPTO within the first 12 months of offering the invention for sale or disclosing it publicly.
Employment Matters Law
Employment lawsuits are bound to arise at some point in the life cycle of a company. These conflicts often arise after an employee is fired or when there is ongoing discontent in the workplace environment.
In-house lawyers should understand the basics of employment law including at-will employee, severance terms, and the distinction between “consultants” and “employees.” It is also important to keep in mind both federal and state level employment laws. There is notable variation in the employment laws across states.
Different Types of Corporate Structures
Tax considerations are often a key underlying factor behind decisions to use a particular corporate entity structure. Three types of corporate structures are particularly important to keep in mind—C Corps, S Corps, and LLCs.
The C Corp structure results in double taxation. Meanwhile, the S Corp offers greater tax benefits and the flexibility of a partnership while retaining the liability protection of a C Corp. However, the C Corp is the preferred structure for a startup to raise venture capital funding. This is because the C Corp structure permits multiple classes of stock, whereas the S Corp only allows a single class of stock.
A limited liability company, or LLC, has similar legal characteristics to an S Corp. However, LLCs use membership units instead of stock options. This can create complications for granting equity awards to employees. The LLC structure is optimal for companies with a small number of owners. Using a corporate entity makes it easier to grant stock options to a larger pool of individuals.
U.S. Securities Law Filings
The U.S. Securities and Exchange Commission (SEC) requires public companies to file a number of reports on a periodic basis or upon the occurrence of certain events. On an annual basis, public companies must file a 10-K disclosing the operational and financial results of the most recent fiscal year. An 8-K current report must be filed upon the occurrence of certain events such as the appointment of a new director, entering into a material agreement, or undertaking new financing arrangements. Finally, a proxy statement is filed by public companies to provide shareholders with information on matters that will be brought up at an upcoming meeting of shareholders.
Accredited Investors Under U.S. Securities Law
Under U.S. securities law, certain sophisticated investors, referred to as “accredited investors,” are allowed to purchase stock in private companies. It is particularly important for in-house lawyers at startups to understand the accredited investor rules. If a private company sells shares to people who fall outside the accredited investor definition, they could face penalties for violating U.S. securities laws.
Section 409A Valuations Under the Tax Code
Under Section 409A of the U.S. tax code, the IRS requires all stock options granted to employees to be at fair market value. There are severe penalties for the incorrect valuation of stock options. Therefore, in-house lawyers should have a basic understanding of 409A valuation issues. These penalties can generally be avoided if the company hires a professional valuation firm to determine fair market value.
Stock-Based Compensation and Section 83(b) Elections
When a company issues an individual restricted stock, the recipient has the option to elect to be taxed on the date the equity was granted rather than on the date the equity vests. This starts the clock for the individual’s long-term capital gains holding period earlier.
The 83(b) election takes the form of a notification letter to the IRS. This letter must be submitted to the IRS within 30 days of the restricted stock grant. In-house lawyers should be able to field questions from individual recipients of restricted stock grants about 83(b) election and related tax implications.