Case Study: Sheila Mason and Craig Shepherd

Nov 22, 2012 932 Words  by WeChat:bbwxnly



1. Evaluate the situation in which Mason and Shepherd find themselves with respect to their existing employers. What legal and ethical issues do you see and how would you advise them to proceed?
  
Mason's endeavor for the venture creation is strictly bounded by her employment agreement with ATS.  That is to say, she will be in clear violation of the Noncompetition, Nonsolicitation, Nondisclosure and Development provisions, if she plans to pursue the venture within one year by utilizing the information and social network she gained from the company.  So the first barrier she need to tackle is to prove this new business is not in competition with ATS at all. Also she cannot speak with any current customers of ATS. These limitations will probably strangle the venture in embryo. Also, Mason had recently played golf with a colleague, who told her that if she ever left the company or came upon an idea. he wanted to be involved. Yet, because she signed an employment agreement with a non-solicitation clause, she was very skeptical.  Another possible sticky situation is that ATS claims ownership of the data in her office computer, which contain many resources and information useful for her and accounts about her new venture. First aid for this situation is to remove all the incriminating data and information about the venture as soon as possible. Beyond that she can hire a legal consultant and lawyer to negotiate with ATM.

Shepherd's problem is more about intellectual property law. In his agreement with NOVA, he is mandated to inform the company of all his invention. However, this doesn't mean he is not allowed to own his invention. Therefore I suggest he patent the translation engine as soon as possible before Nova does. Even though patent process may take some years, the invention is protected, probably even better protected, in pending status. As long as he owns the invention the hope of the venture creation is preserved, and they can always continue marketing and financing the program when the situation is stabilized.

2.     Evaluate the Non-Disclosure Agreement and its potential impact on venture capitalists considering an investment in Intlisoft. If you were a venture capitalist, why would or wouldn’t you sign? (Ge Tian)

If I were a venture capitalist, I would not sign the Non-Disclosure Agreement (NDA). As a matter of fact, most of the venture capitalists would not sign such kind of agreements. Entrepreneurs sometimes request the venture capitalist to sign Non-Disclosure Agreement because they are worried about the security of their intellectual properties. As a result they are seeking protection from the NDA to comfort themselves in that way they think their intellectual properties are protected by law. However, this kind of thought is naive in reality. If venture capitalist signed NDA, it could put them under the risk to face prosecution. NDA will also severely limit the amount and type of transactions, VCs will have to reevaluate their portfolio; as a result their interests will be badly damaged.
Besides the potential risks and interests loss that might incur by signing NDA, there are some other reasons for VCs not to sign NDA. Nowadays, VC need to read thousands of business plan every year, if they hire lawyers to spend time reading thousands copies of NDA, they would not have extra money and time to do other things. The opportunity cost is huge. Furthermore, many entrepreneurs when they start their first company want to seek protection from law by asking VCs to sign NDA. VCs will meet many of them who have very similar business ideas, products or even operation models but they can only pick one of them to support. If they sign the NDA, they could face prosecutions from several other companies that are similar to the one they invest.
However, this does not necessarily mean entrepreneurs will not be protected at all. When comes to intellectual properties, most of the VCs will follow the unwritten rules. It is their responsibility to protect the company’s information. If they break the rules and the word has gotten out about their misconducts, they as investment companies will lost their credits in the industry and so they will not be able to maintain their business anymore.

3. Do Mason and Shepherd need a lawyer? How should they select one?

I would highly recommend Mason to hire a lawyer because she is highly susceptible to litigation from ATS.  Noncompetition, nonsolicitation, nondisclosure and development provisions limited her action during the firs year. If she wants to develop her startup by utilizing the information and social resources that she gained from ATS right away, she needs a lawyer to protect her against potential litigation.

Shepherd also needs a lawyer, even more badly and urgently than Mason, because he has to protect the core value of the venture, the translation engine. As his agreement with nova states, he should “communicate” all the inventions made or conceived to the company. However, from my understanding, “communicate” doesn’t mean “give”.  The company is legally permitted to control the information and resource he gained previously, but not necessarily granted the right to own the idea and invention that is formed out of his own creativity. Therefore He should patent the invention as soon as possible, and use a lawyer to protect his ownership of the program.

I suggest both of them hire an independent and relatively small law firm exclusively for their venture. That is to say, the law firm should have nothing to do with their previous companies and the VCs, to ascertain the lawyers’ loyalty and avoid possible collusion that will destroy the venture.