How Not to Do Website Terms of Use

Client: Hi Paul, we need website terms of use and a privacy policy. We want to save money, so we’ve copied the terms of use and privacy policy for XYZ company, which has a similar product. Please review it for us so we can post it when we launch next week.

Me: [facepalm repeatedly]

This is the classic and all-too-common scenario, and it’s completely the wrong way for a startup to do their website terms of use and privacy policy. First, it’s blatant copyright infringement. Just swapping out your company name for their company name isn’t exactly going to fool anyone.

Second, just because XYZ has a similar product, or operates in roughly the same space, doesn’t mean that they operate exactly how you operate in every single respect. Nor does it mean that their policies and practices will suit your tastes. So unless you plan on copying all of XYZ’s internal policies and practices and operating procedures, much of what is in that terms of use and privacy policy simply won’t be an accurate reflection of your company.

Third, who’s to say that the terms of use or privacy policy that you copied from someone else’s website is any good? It could be a hot mess. They could have copied their terms of use from some company that’s completely unrelated in every way.

As the CEO of a startup, your job is much bigger than just writing software code. You have to run the company. That means putting the time into things like what will go into your terms of use, and developing information collection and handling practices that are accurately reflected in your privacy policy. You have to be intentional about this. When you just send me a terms of use that you copied from someone else, I’m going to push back, and ask you to describe your business model and practices. If you can’t do that, it tells me you haven’t put the time into it yet.

This is an important process, and you cut corners at your risk, and the risk of your investors. Terms of use, if done right, form a binding contract between your company and its customers, a contract that favors you and puts your company in a strong position. Done poorly, and you’re litigating with a customer in a court in Fairbanks, Alaska in February. Privacy policies are increasingly important as states like California, with 38 million residents, pass more and more restrictions on how you can collect and use customer data. You don’t just face the risk of class-action lawsuits, you also have to worry about FTC investigations and fines. Spending your time and money to do things right from the start will save you money, time, and headaches down the road.

 

New California Independent Contractor Law Takes Effect January 1

Several months ago, the California Supreme Court established a new test for determining whether a worker should be classified as an employee or an independent contractor. Now that test will be enshrined in law on January 1, 2020, as the California legislature has passed AB-5.

Here is the standard classification test under the new law:

A worker will be considered an employee, rather than an independent contractor, unless the hiring entity can demonstrate all of the following:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the work and in fact
  2. The person performs work that is outside the usual course of the hiring entity’s business
  3. The person is customarily engaged in an independently-established trade, occupation, or business of the same nature as that involved in the work performed

A couple of points are worthy of emphasis. First, the presumption is that a worker is an employee. That is the default classification. Second, as I pointed out in my earlier post on the subject, a lot of companies are going to get hung up on the second prong – that the worker must be performing work outside of the usual course of the hiring entity’s business. So delivery companies like Fedex and UPS are going to have a hard time classifying delivery drivers as contractors, and software companies like Google and Facebook are going to have a hard time classifying software developers as contractors.

As you might expect, the lobbyists were working hard on this bill, and there are a lot of exceptions. One of the biggest exceptions is for business-to-business contracting relationships. The standard test will not apply if all of the following are satisfied:

  1. The business service provider is free from the control and direction of the contracting business in connection with the performance of the work, both under the contract for the work and in fact;
  2. The service provider is providing services directly to the contracting business, rather than to customers of the contracting business;
  3. The contract is in writing;
  4. If the work is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required license or tax registration;
  5. The service provider maintains a business location that is separate from the business or work location of the contracting business;
  6. The service provider is customarily engaged in an independently-established business of the same nature as that involved in the work performed;
  7. The service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
  8. The service provider advertises and holds itself out to the public as available to provide the same or similar services;
  9. The service provider provides its own tools, vehicles, and equipment to perform the services;
  10. The service provider can negotiate its own rates; and
  11. Consistent with the nature of the work, the service provider can set its own hours and location of work.

Finally, there are a number of exemptions based on occupation. Here are some examples:

  1. Physicians, surgeons, dentists, podiatrists, psychologists, veterinarians
  2. Lawyers, architects, engineers, private investigators, accountants
  3. Securities broker-dealers or investment advisors
  4. Direct sales salespersons
  5. Certain professional services – marketing, human resources administrators, travel agents, graphics design, grant writers, payment processing agents, licensed estheticians, licensed electrologists, licensed manicurists, licensed barbers, licensed cosmetologists, freelance writers

Please note that for some of these occupation-based exemptions, there are additional requirements that must be met. If you need further information on how a worker should be classified, please contact us.

 

 

This post is an advertisement for legal services.

 

 

New California Law Requires Disclosure When Using A Chatbot

Beginning on July 1, 2019, a new California law will require websites that use chatbots to clearly disclose that it is a bot communicating online, and not a person.

The use of online chatting with ecommerce and other types of websites is becoming more widespread on a daily basis. Online chat tools allow potential customers to ask questions about products and services and get answers on a real-time basis. These tools also enable companies to address service and support issues on a real-time basis. I’ve used these tools to get help from wide spectrum of websites, ranging from the Delaware Secretary of State, when I needed guidance on a corporate filing on behalf of a client, to Goulet Pens, when I dropped an expensive fountain pen and needed guidance on a replacement nib.

The new California law makes it “unlawful for any person to use a bot to communicate or interact with another person in California online, with the intent to mislead the person about its artificial identity for the purpose of knowingly deceiving the person about the content of the communication in order to incentivize a purchase or sale of goods or services in a commercial transaction or to influence a vote in an election.”

However, there’s no liability if the person using the bot discloses that it is, in fact, a bot. The disclosure must be “clear, conspicuous, and reasonably designed” to inform persons that they are communicating with a bot. While the law doesn’t provide any more specific information on how a disclosure can comply with that standard, we can look to some general principles and Federal Trade Commission (FTC) guidelines that have evolved over the past few years. For example:

  1. Placement and prominence of the disclosure
  2. How close the disclosure is to the related claim
  3. Whether the disclosure can be avoided
  4. Whether other parts of the advertisement distract from the disclosure
  5. Whether the language is understandable

 

Considering that more than 39 million people live in California, it is highly likely that some California resident is using your website, no matter where your company is based, and no matter whether you sell to businesses or consumers. Consequently, we strongly recommend that all companies that sell goods or services and that use online chat tools comply with the California law. As mentioned at the top, this law goes into effect on July 1, 2019.

Legal Cannabis and Immigration

This is my very first repost of another lawyer’s material. I’m sharing a blog posting by Christopher Pogue, an immigration attorney, on the intersection of legal cannabis and immigration law, particular with respect to immigration from Canada:

U.S. Customs and Border Protection (CBP) enforces the laws of the United States and U.S. laws will not change following Canada’s legalization of marijuana. Requirements for international travelers wishing to enter the United States are governed by and conducted in accordance with U.S. Federal Law, which supersedes state laws.

Although medical and recreational marijuana may be legal in some U.S. States and Canada, the sale, possession, production and distribution of marijuana or the facilitation of the aforementioned remain illegal under U.S. Federal Law.

Consequently, crossing the border or arriving at a U.S. port of entry in violation of this law may result in denied admission, seizure, fines, and apprehension.

Generally, any arriving alien who is determined to be a drug abuser or addict, or who is convicted of, admits having committed, or admits committing, acts which constitute the essential elements of a violation of (or an attempt or conspiracy to violate) any law or regulation of a State, the United States, or a foreign country relating to a controlled substance, is inadmissible to the United States.

A Canadian citizen working in or facilitating the proliferation of the legal marijuana industry in Canada, coming to the U.S. for reasons unrelated to the marijuana industry will generally be admissible to the U.S.

HOWEVER, if a traveler is found to be coming to the U.S. for reason related to the marijuana industry, they may be deemed inadmissible.

Reposted with permission from Christopher Pogue

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One of the points Attorney Pogue stressed to me today is this – if someone involved in the legal cannabis industry has an immediate family member (parent, spouse, child) or member of the household who is not a US citizen, their immigration status could be in jeopardy. When applying for residency in the US, the non-citizen is at serious risk because even if cannabis is legal under certain states’ laws, it remains illegal at the federal level. Consequently, if you are a stockholder, director, officer, manager, or employee in a legal cannabis business, or are contemplating being involved, and you have an immediate family member or household member that is not a US citizen, it is recommended that you raise this issue with an attorney.

Cap Table Math for Startup Founders

“We want to give Barbara 4% of the company. How many shares is that?”

I get questions like that frequently, and once you understand the math, the solution is pretty simple. Hey, I’m a lawyer, and I can understand the math. If you are going to run a successful startup, you need to master your cap table and understand basic cap table math.

First, you have to decide what is the total universe of stock that you are talking about. Is it all the shares of stock that the company could have outstanding, or is it only the issued and outstanding shares? This can provide very different results, so it is really important to use the right language. My default is that our universe is the issued and outstanding shares, unless I’m specifically told to do otherwise.

So let’s imagine a typical early stage Delaware corporation startup, with 10 million authorized shares. There are two initial cofounders, and they collectively hold 7 million shares. Their 7 million shares are 100% of the total issued and outstanding shares. That’s our starting point. If you are going to issue Barbara enough shares so she has 4% of the total, then how many shares is that? Well, after you issue Barbara’s shares, whatever number that may be, the initial cofounders will hold 96% of the total issued and outstanding shares. So 7 million shares is now 96% of X, the new number of issued and outstanding shares. Divide 7 million by 0.96. That should give you 7,291,677. Subtract 7 million from 7,291,677, and voila! You have the number of shares to issue to Barbara.

That’s how I normally do it. However, let’s say that your universe is going to be all the shares that the company could have outstanding. Maybe someone promised Barbara 4% on a “fully-diluted basis,” meaning we assume that all stock vests, and all options, convertible notes, and warrants are exercised. This is going to be a higher number. If you have 7 million shares outstanding, and options and convertible notes for another 2 million, then our total universe is 9 million shares. So now you divide 9 million by 0.96, and you get 9,375,000. Subtract 9 million from that, and the different – 375,000 – is what you need to issue to Barbara. So, depending on how you define your universe, Barbara could get approximately 84,000 more shares.

One final tip: it’s better to say “I’m going to grant you X number of shares, which will be Y% at the time of issuance,” than to say “I’m going to grant you Y% of the company.” The reason is that when you say “I’m going to grant you Y% of the company,” the recipient hears “I’m always going to have Y%, and the company will have to issue new shares to me from time to time, so I can maintain my percentage.” They think they are getting anti-dilution protection, and you want to avoid that at all costs.