Delaware is a popular forum for organization and operation of publicly-traded corporations and is also the state of incorporation often chosen for companies looking to secure venture capital financing even though they are operating from another state. One reason that Delaware is so popular is the extensive statutory and case law in that jurisdiction regarding indemnification of directors and officers and a client formed and organized as a Delaware corporation will generally seek guidance on drafting a directors’ indemnity agreement that sets forth the terms and conditions upon which the corporation will indemnify the director against certain claims made against the director as a result of serving as a director. See Specialty Form at § 9:226 of Business Transactions Solution on Westlaw Next. Such an agreement should include provisions that make clear the circumstances under which the corporation will indemnify and hold the director harmless from any claims attributable to the director's alleged misconduct, and the procedures which the director must follow in order to assert a claim for indemnification. The drafter should consult the current version of the Delaware statutory provisions establishing the rules and procedures for indemnification of directors, officers, employees, and other agents of a corporation.
In some cases an indemnification agreement of this type will not be entered into unless and until the corporation reaches the point where it is reasonably anticipated that it will become a publicly-traded corporation and that the directors will be exposed to the additional risks of claims asserted under the federal Securities Act of 1933, Securities Exchange Act of 1934, Sarbanes-Oxley Act of 2002 or Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. While authority for such agreements may be specified in the corporation’s charter documents, it is prudent to seek and obtain the explicit consent of stockholders given that claims that may be subject to such an agreement are often brought by stockholders concerned that directors and/or officers violated their fiduciary duties to the corporation and/or its stockholders.
For a sample of a stockholders’ written action approving a directors’ and officers’ indemnity agreement, see § 9:227.50 in Business Transactions Solution on Westlaw Next.
The marketing group within an emerging company plays a crucial role in the development process for the company’s initial products. Unlike established firms, emerging companies have no existing product line or track record and thus have no room for error as they develop their products and look to introduce and sell them to customers that have no familiarity with the company or any brand reputation upon which to base their purchasing decision. It is therefore essential for emerging companies to seek and obtain feedback from prospective customers as soon as possible to make sure that there requirements are recognized and integrated into the product development process at an early stage. The marketing group should take responsibility for identifying and qualifying potential lead customers that can be part of the feedback process. Qualification is an important point since listening to the wrong customers at this point can send the development process off in the wrong direction and lead to an emphasis on features that are ultimately perceived as having little value by most of the parties in the target market.
The marketing group serves a valuable purpose in keeping an emerging company focused on identifying and vigorously pursuing carefully defined product niches in order to gain a foothold that can ensure early survival and provide the company with the freedom to eventually expand into newer and larger markets using the core competencies developed during the launch phase. Emerging companies lack the financial and technical resources, as well as the time, to satisfy all of the needs of all of its potential customers and the key to success is to concentrate on one segment of the market at a time. From a marketing perspective this means getting to know customers in that segment intimately and discovering the product specifications that meet their needs and which can be readily and efficiently distinguished from competitors. Differentiation is essential since a small company that simply offers essentially the same product as entrenched incumbents cannot hope to compete on price or reputation. Of course, differentiation alone is not sufficient unless it touches on a feature that is valued by the customer.
Finally, the marketing group should use the information that it collects from prospective customers to develop strategies and tactics for distributing and supporting the company’s products, both areas that are often dominated by opinions from the sales group. While obtaining feedback from the marketplace on product features the marketing group should also survey customers to determine their preferences with respect to the procurement process and their expectations regarding service and support once the decision has been made to purchase and use the specific product. Without having appropriate channels and support system in place even the most innovative product will prove to be a hard sell and may lead to erosion or complete loss of any advantage the emerging company might have had by being the first to market with new technology and/or features.
Even after a corporation is legally in existence, it is still necessary to “organize” it to do business. Organizing a corporation usually means the election of officers, the subscription and payment of the capital stock, the adoption of bylaws, and such other steps as are necessary to give the legal entity the capacity to transact the legitimate business for which it was created. Most of the organizational steps will generally be taken at an organizational meeting of the board of directors of the new corporation; however, an actual meeting may often be dispensed with if the directors are able, and willing, to take the necessary actions by unanimous written consent. Even if the actions are taken by written consent, you should have a meeting with all of the initial directors, in person or by phone, to briefly go over each of the key steps that are outlined in the consent action. A template you can use to guide your clients through the organizational actions can be found at §9:156 of Business Transactions Solution on Westlaw Next.
While companies have traditionally relied on employees for the development of inventions and other proprietary information it is increasingly common to use consultants to perform similar services. Such arrangements provide companies with more flexibility to tap into specialized skills available through consultants without the added expense of creating an employment relationship. If a client will using consultants for technical work on a regular basis it will be useful to create a comprehensive consulting agreement that is tailored to engagements in which the consultant will be creating and/or receiving confidential information to be owned by the client and will be developing inventions and other items eligible for protection under intellectual property laws that will be assigned to the client by the consultant. The agreement will be similar in many ways to an employer-employee relationship; however, the agreement should clearly lay out guidelines for provision of the services that are intended to fall within the definition of an independent contractor relationship even though the consultant may receive equity in the client as part of the compensation. The confidential information and assignment of inventions agreement should include restrictions on the consultant’s activities with respect to solicitation of the client’s employees and other consultants, as well as restrictions on the consultant’s ability to provide services to other organizations that might be deemed competitors of the client. Westlaw Next subscribers can access a template for a consultant's confidentiality and inventions assignment agreement at § 51:141.50 of Business Transactions Solution.