Scene Magazine Columns – The Business of Creativity

If You Insist

If You Insist
© 2007 Kevin E. Houchin

In the past month I’ve had several people in the office with messed-up corporate situations. I’m not going to preach (much) about how it costs way more to get out of trouble than to have avoided it in the first place, but just know that the legal bills to sort out these messes are probably going to be ten times the price of correctly forming a company from day one.

Most of the time, companies are easy to set up. The buy-sell agreement is usually the most challenging part. However, to effectively set up a corporation, you need to jump through more formal hoops, and the companies I’ve been talking with lately simply didn’t make the right jumps.

So, if you insist on forming your own corporation without the assistance of a lawyer, here are my thoughts on the minimum amount of work you need to complete.

1. Set up the entity on the Secretary of State Web site.
This is the easy part. The filing fee is only $25.00. The biggest mistake people make on the form is messing up the authorized shares listing. Your initial authorization of shares is an important decision and it depends on a bunch of factors relating to the number of owners involved at incorporation, or expected in the near future. I suggest authorizing 100,000 shares. This gives you some room to work, as I’ll discuss below.

2. Get an EIN number from the IRS.
Again, this is easy. Go to www.irs.gov and follow the instructions.

Unfortunately, most people stop here and head to the bank. The bank doesn’t care about many of the details and formalities. If you insist on conducting business in the corporate form, you need to complete the next several tasks.

3. Adopt a set of corporate by-laws.
These are the rules about how your company will be managed. The way you go about adopting these agreements is by holding an initial meeting of incorporators in which you make resolutions to play by these rules.

4. Adopt a buy-sell agreement.
This document regulates the purchase and sale of your corporate shares. It should include a valuation formula for the business and the rules for leaving or pushing someone out. This document is critical. Getting into business with someone is like a marriage except the owners generally can’t kiss to make up. The buy-sell agreement is the business equivalent of a pre-nuptial. Don’t go into business without it.

5. Create and accept subscription agreements.
These letters are the written offers from the initial shareholders to purchase shares of the corporate entity for some amount of value – usually cash. I have all the initial shares issued to the initial owners add up to LESS than the full number of shares authorized in the Secretary of State filing. Having some shares that are not “issued” at formation makes it way easier to bring in future owners, because then you just have the new shareholders buy their shares directly from the corporation rather than from the initial individual owners. Doing this also saves making another filing with the Secretary of State to authorize additional shares.

6. Create share certificates.
Share certificates are proof of your portion of ownership in the company. It’s hard to prove you own “shares” of a corporation when you don’t have the actual “share certificates.” Amazingly, people have been known to invest a lot of money as an “owner” of a corporation without ever seeing a share certificate. Don’t let that be you. (Of course the exception to this rule is buying shares in publicly traded companies. Your brokerage firm holds those share certificates.) You can order corporate kits online with a seal, share certificates, and standard by-laws that allow you to just fill in the blanks. Be careful just filling in the blanks, because standard forms might not fit your specific situation, but filling in the blanks is usually better than ignoring the document completely.

7. Elect a Board of Directors.
Your Board of Directors runs the company on behalf of the shareholders. In most small “closely held” corporations, the list of board members and the shareholders are virtually identical. As the company gets bigger you might have shares held by folks who are not actively involved in the business. Remember, in a corporation, the Board makes the decisions on the day-to-day management. The Board can be one person, or as large as you want (as specified in the By-laws you adopt). If you have several shareholders you should have at least a President, Secretary, and Treasurer as officers of the Board of Directors. At least two of these people should be required to approve any serious action of the corporation. There are additional rules for certain corporate actions that require shareholder approval, such as selling the company.

8. Bank Accounts
I’ve seen several situations where there was no direction or restrictions put on the bank accounts, which resulted in one person transferring all the money out of the corporate account or taking another owner’s name off the account. If you want to protect the corporate money, then protect the corporate bank account. Require corporate action signed by two directors (President, Secretary, and/or Treasurer) before someone’s name can be taken off an account. Require two signatures for transfers over certain dollar amounts or for transactions that would bring the account to a zero balance. Talk with your banker to effectively establish these practices right up front. Don’t get burned by finding out your co-owner has just cleaned out the funds and taken your name off the corporate account.

If all this sounds like too much work, reconsider your venture, or hire professional help.

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Kevin E. Houchin is principal of Houchin & Associates, PLLC – a copyright, trademark, arts & entertainment, business development, and branding firm located in Fort Collins, Colorado. To contact Kevin, call 970-493-1070 or email kevin.houchin@houchinlaw.com. Download Kevin’s FREE ebook: “Strange Fire: 5 Winning Principles” at www.guidingvalue.com.

October Scene Magazine Article

Contract Top 10
© 2007 Kevin E. Houchin

Contracts. Boring and complicated right? Many times yes. But, if you look at a contract as simply a document stating the solution to a mutual problem, like “I have a house that I need to rent or I lose money, and you need a place to live…” then they can be pretty interesting and straight-forward agreements. Remember that a contract is simply the statement of what your mutual promises to each other were when you came to agreement. The rest is easy if your remember these 10 rules.

10. Who?
Are you contracting with one person, a company, several people, several companies, or what? The document needs to identify the people in the game – specifically. It helps to note their form of entity (individual, LLC, corporation, etc.) right up front. I like to also give them a shorter more “normal” name right up front too, like “Kevin” instead of “Kevin Houchin, an individual with business address of…” because it makes the document easier to read than “landlord” or some other alias you normally find in a stock form agreement. If you’re not simply filling in the blanks, saying “Kevin will…” instead of “landlord will…” makes everything easier to follow for everyone.

9. What?
This is the meat of the agreement. What is each party going to do? You know what you promised, so make sure it’s well documented.

8. Where?
If a specific location is at issue, then include it. However, most of the time the “where” refers to where any dispute will be resolved. You generally want a dispute to be resolved in your home state (so you don’t have to pay to travel) using the laws of your home state (so you lawyer doesn’t have to spend as much time researching). Sometimes, it makes sense to have the location in your home state, but applying the law of another state, like California, New York, Delaware, or some other state where the law relative to your situation is better defined, or better for your side of the agreement.

7. When?
What are the deadlines? Is there one, or several? Again, make sure to document the agreement you’ve discussed and have in mind. Try to eliminate assumptions. Don’t just assume your customer/client understands an “industry standard.”

6. Why?
Most of the time the “why’s” aren’t binding and get included at the front of the agreement under a bunch of “whereas” statements. I like to use a bunch of these to set the stage for a smooth negotiation. For example, “Whereas X is a highly respected expert in Y industry…” set the stage for X to feel good about going into the details of the agreement. Buttering someone up a bit always helps because you DO catch more flys with honey.

5. How Much?
Again, be specific. Use flat rates or formulas. If there’s a formula involved, give an example of how something seemingly confusing is easily resolved through the formula. If you can’t figure it out now, you won’t be able to agree on it later.

4. How Often?
Lots of times people agree to contracts that pay them something like 10% of net receipts of widget XYZ. That’s fine, but how often are the payments made?

3. What if?
What if we decide this was a stupid deal and we hate each other? How do we get out? If we kill the deal, how much notice do we have to give. If someone has lied and we end up in court, do they have to pay our damages and costs (called an “indemnification” clause)?

2. Writing.
Verbal agreements are binding in most cases. The issue is proving the TERMS of the agreement. That’s what the writing is all about – proof. The writing doesn’t have to be in a special font, on white paper, notarized, or much of anything in most cases, so get SOMETHING down on paper and have the other person give some sort of written assent to the terms. An email will work in most cases. Just make sure you have some form of record that the person you’re agreeing with has agreed to the terms you expect. A formal, but unsigned document is NOT going to help much – in fact, an unsigned document might arguably prove that the other side did NOT agree to the term in dispute.

1. Purposeful Ambiguity.
“Purposeful Ambiguity” is a technique I use to get past a term in a deal that has a very low probability of happening, but could pooch the deal if we can’t get past it. The word to remember here is “reasonable” for instance, “Kevin will use reasonable efforts to sell the widgets.” This let’s us get going on the project, without arguing over something that we don’t need to fight over now. Granted, it’ll be the lawyers, judge, and/or jury defining what “reasonable” means, but that’s a risk we might be willing to take.

Contracts don’t have to be complex or difficult. They don’t even have to anticipate every detail. They just have to document the agreement so that all parties understand what’s on the other party’s mind.

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September 2007 Scene Magazine Article: TM Myths

OOPS! I forgot to post this earlier this month…

Trademark Myths
© 2007 Kevin E. Houchin

There’s a lot of misinformation floating around the business world about trademarks. Smart business people are waking up to the fact that this area of LAW is critical to successful BRANDING, which as we all know is the foundation of sales, revenue, and ultimate business success or failure. It doesn’t matter if you are selling widgets, houses, luxury cars, guitars, or brooms – your brand is one of your biggest assets, and trademark law is the protective mote around your brand. Here are top mistaken assumptions business people tend to make about trademarks.

10. I changed a letter and got the domain name, so I’m OK.
Wrong! The test for trademark infringement is not if a letter or word is different. It’s whether or not consumers would be confused as to the source of the goods and services.

9. Someone else is already using the name, but they haven’t filed a registration, so if I file first, I’ll be OK.
Wrong! The tests for trademark infringement isn’t who registered first, it’s who used the trademark in commerce first.

8. Just using the “TM” symbol gives me all the protection I need.
Wrong! While it’s smart to use the “TM” symbol next to anything you want to claim as an indicator that your company is the source of the goods and services, just using the “TM” will not give a generic or merely descriptive trademark any protection unless you can prove the trademark has achieved what’s called “secondary meaning” in your marketplace.

7. I can use my competitor’s brand in my Google Adwords buy without any problems.
Wrong! Just because Google doesn’t check for trademark infringement and will let you place the ad doesn’t mean your competitor won’t be ready to slap you with an infringement suit if you use their name as a keyword to distract consumers from their site and lead them to yours.

6. I own the domain name, so I can stop anyone else from using something similar.
Wrong! Even if you got there first to register a domain name, the test is who USES the mark first. Sitting on a domain name doesn’t count. Launching a Web site that includes the name for a product, but not actually selling the product, doesn’t count. You have to use the name appropriately to get protection, which means if you’re offering a product, the name has to be on the actual product. If you’re offering a service, then a Web page is usually good enough.

5. I filed the LLC papers with the Secretary of State on this name, so I’ll be OK.
Wrong! Filing your name with the Secretary of State is basically the same as getting the domain name. Their test is just if the string of letters is different. Again, trademark infringement is about consumer confusion, which is a much more difficult standard than just changing a letter or two.

4. As long as I’ve used my product or company name in commerce, nobody else can use it for anything.
Wrong! You could have a great trademark for a marketing firm, but I could potentially use that name for my line of clothing – as long as we’re marketing to different people and my customers wouldn’t be confused about whether you are the source, sponsor, or are otherwise affiliated with my products. Again, it’s about consumer confusion, and that’s sometimes hard to define.

3. I paid the $50 to register my trademark with the secretary of state, so I’m covered.
Wrong! You’re probably covered in Colorado (or whatever state), but that does nothing for your business with people in any other state. State-specific trademark filing is practically a relic from the pre-internet days when it took more than just launching a Web site to have an interstate or international business presence.

2. I’ve invested a lot of money in this name, logo, stationery, and marketing materials, they can’t just make me toss it all and start over.
Wrong! This is exactly what a prior user can make you do, and make you pay damages and/or profits on top of that. It’s just this risk that makes investing a branding strategy that doesn’t include a trademark plan such a dumb move.

1. I have the domain name and I use the “TM” on my stuff, so it’s not worth the expense to register my trademark.
Wrong! Having the domain name is a good indicator these days that you’re the first user of the mark, and using the TM is very effective at putting potential infringers on notice that you’re claiming the mark as an indicator of source for your goods or services. However, in today’s competitive market place, registering the trademark with the United States Patent and Trademark Office is in most cases worth the expense if you think you will ever need to enforce your rights. The power of the registration will both increase the chance of a quick resolution, and lower the litigation costs of an infringement suit.

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August 2007 Scene Magazine Article

Thank you. Thank you very mush…
© 2007 Kevin E. Houchin

With our local film festival, the TriMedia Film Fest (www.trimediafilmfestival.org) coming up September 7-9, I thought it would be fun to take a look at some of the legal issues that go into making a film, believe me, there are plenty, but the ones that are most fun involve copyright. Let’s take a look at an issue facing one of the festival’s entries from last year. The film in question (we’ll call it G&A) includes a female Elvis impersonator as one of the characters. It uses some Elvis tunes as part of the soundtrack. Simple enough one would think–just pay the Elvis estate the licensing fee for the music and get permission to use Elvis’s likeness in the form of the impersonator.

Not so fast hound dog. The Elvis estate won’t release the music rights unless the backers pay royalties anytime an Elvis image shows up in any of their projects. (It happens that the backers of G&A also finance a lot of other projects as a major broadcaster.) Long story short: the film stays in the can. Feeling pissed off? So am I.

As a copyright and trademark lawyer, I understand the need to protect people’s rights to their creative work (copyright and patents), and to protect their investment of time and money in building a distinctive brand (trademark). But there has to be a balance, and I don’t think the Elvis estate is not honoring that balance. The framers of the US Constitution gave Congress the right to establish Patent and Copyright policy balancing advancement of society though the arts against individual rights of artists and inventors.

The creative rights of authors and inventors are offset in several ways. First, copyrights and patents expire on a certain date and “fall” into the “public domain.” Once the term expires, everyone can freely use those works directly in new work and thus advance society. The second balancing point is the free expression rights granted under the First Amendment. These free expression rights inform and motivate the final balancing theory, known as “fair use.” Fair use is a good thing for everyone in the creative industries to know about.

Remember the point of intellectual property law is to advance society and society doesn’t advance unless creativity is shared–we can’t hide our lights under bushel baskets and expect our community to prosper. Yet, we can’t just rip the financial incentive to create away from authors by allowing everyone to use whatever they want whenever they want. So, when is it “fair” to infringe?

Trademark, Patent, Copyright all have fair use “doctrines,” but we’ll focus on Copyright. Copyright fair use is covered by section 107 of the Federal Copyright Act and states explicitly that it’s fair to infringe for purposes such as criticism, comment, news reporting, teaching, scholarship, or research subject to four inter-related factors. As you can see, these uses generally help advance society through intellectual debate and discussion.

The four factors are subjective, meaning there is no percentage or word count or other such objective measurements for what is fair. The first factor is the nature and character of the infringing use–is the infringer a professor quoting a passage in a scholarly journal, or a popular musician grabbing a riff to help sell records? (Think of Vanilla Ice’s “inspiration” for the rhythm in Ice Ice Baby vs. Queen and David Bowie’s Pressure). The second factor is the nature of the original work–was the original created for general use, or was the creative act how the author makes a living? The third factor is the “amount and substantiality of the portion used” in relation to the original work as a whole. This is where people get stuck on the idea of word counts or percentages. Obviously, the less you “take” the more “fair,” but if you take a CRITICAL element of the original you’ll get in trouble. The fourth factor, the “effect of the [infringing] use upon the potential market for or value of the original work.” Remember that a judge or jury that may have no creative sensibilities at all will ultimately make this subjective decision.

So, let’s get back to the Elvis impersonator. Could G&A run without permission from the estate? The practical answer is that the filmmaker would probably prevail on the issue of the impersonator as long as no endorsement of the Elvis estate is inferred. But, if the filmmaker wants to run the film with the actual Elvis recordings as part of the sound track, she needs permission for at least the music. In this case, as in most films, the music is a very important creative and emotional element. So, the film is canned until the Elvis estate backs off. Any bets on when that’ll happen? I didn’t think so.

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Creative Power – Scene Magazine Column – July 07

As an intellectual property and business development attorney, creative people surround me. I want it that way. I love it that way. I’ve been surrounded by creative people all my life, from the farm I was raised on (it takes creativity to get a few tons of tractor out of a mud hole), the guys in my fraternity house (engineers mostly), my fellow fine art undergraduates, the advertising pros I worked with before going to law school, my fellow law students, and now my clients. You’re surrounded by creative people right now too–just look around and notice all the creative energy filling the air around you.

Some people think creativity and successful business are opposites. They’re wrong. Creativity is the life-blood of business. Creativity is the POWER behind success in business and in life. You are probably no stranger to this, but sometimes things like invoices and deadlines distract us all.

Look around again. Look beyond the walls of your cubical, office, or studio. The business of creativity is changing. Look at Google. Look at YouTube. Look at MySpace. Visit CreativeCommons.org. The change may not seem that obvious, but it’s there and it’s very POWERFUL. The change is simply this – the face of creativity is leaving the fear-and-scarcity-based model of “protecting” creative work and moving toward an open-and-abundance-based model of “sharing” creative work. This is a profound shift enabled by digital technology. Those who understand, embrace, master, and BALANCE this shift first will make a living being creative and sharing the fruits of that creativity at the same time. That seems like true freedom to me…not a bad way to go through life.

While this is a profound shift, I think it’s very important to understand that this is not a new goal. The framers of the US Constitution understood that for society to advance, creativity (inventions and art) had to be shared. Each successive person must have access to the previous generation of creativity to build new ideas. Humanity advances through creativity. This truth goes back further than the Constitution. Check out the words of folks like Solomon, Jesus, Mohamed, and Buddha, and don’t forget to read the text of the Tao. It’s not just being creative that matters–it’s sharing that creative “fruit” with others that brings reconciliation and power.

In my law practice it’s easy to spot the people filled with this power. They’re the one’s who have easily committed everything they are and have to the idea, process, gizmo, or other form of creative expression. They’re “all-in.” They aren’t scared. They’ve surrendered their fear of being ripped off. They know that whatever they do in the future, they’re ALREADY successful. The only reason they’ve come to me is to make sure they are building the right balance of giving to society vs. receiving enough benefit to enable creation of the next contribution–be it painting, song, architectural work, cooking widget, branding package, or whatever fuels their passion.

I have some other clients who are wonderfully, prolifically creative, but sometimes get a bit caught up in the fear of getting ripped off. Obviously, one doesn’t want to invest literally years of one’s life in a creative effort, only to have the blessings of that effort redirected to someone who hasn’t invested the energy. Yes, there are people out there who are like creative vampires–sucking the benefits of the creative effort away from the artist or inventor, and sometimes those people can be hard to spot. Your lawyer can, and should, be a channel for your fears, allowing you to release that negative influence and concentrate on the true creative power of your natural calling. You should focus your creative energy upon sharing the fruit of your labor.

Sharing is the key to the successful creative business. It always has been, and it always will be. Whoever shares the most, will receive the most. Whoever provides the most value will receive the most value. You might say “Houchin, that’s crazy. Look at Microsoft.” Yes, for years Microsoft has zealously protected their brands and inventions. Some say the company has been a creative vampire, resulting in huge profits. One can also look at this company and say they have provided a great deal of value at a very reasonable price to a huge number of people. I CHOOSE to use MS Word on my Mac because it gives me the most value for my money. In one sense, this is a perfect example of sharing and receiving. But you don’t have to look far to notice things are changing. The open-source concept is starting to get real traction in the software industry. Royalty-free models have been working in music, photography, and art for years. Google Alerts may be putting traditional clipping services out of business. It doesn’t cost anything for a MySpace page or to watch videos on YouTube. CreativeCommons.org gives away intellectual property licenses that help people share. The process of sharing evolves, just like the results of creativity.

The power of creativity is found in sharing the results. How powerful are you now? How powerful will you be in the future?

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Kevin E. Houchin principal of Houchin & Associates, PLLC – a copyright, trademark, arts & entertainment, business development, and branding firm located in Fort Collins, Colorado. To contact Kevin, call 970-493-1070 or email kevin.houchin@houchinlaw.com.