Having taken stock of the main legal documents and actions involved in forming and operating a new startup, let’s crack open the “case” (disregarding the warnings about voiding your warranty) and examine a few of the steps, documents and key decisions to be made in getting a new startup ready for business.
Most startup lawyers have checklists (at least in their heads) and will interview a new client to gather a wide range of relevant information before moving forward with business entity formation, documentation and so forth. Sometimes this is done in the form of a questionnaire. I prefer a hybrid approach because founders come from all kinds of backgrounds, and while some may have a strong point of view on every question in the startup questionnaire, others want or need more guidance in answering the questions that call for decisions to be made.
Let’s start with your name. Most new startups have a name in mind, or have even taken various steps to secure rights to the name, but some are on the fence or still developing a brand name when we first meet. Don’t let naming issues stop you from incorporating and taking care of other legal housekeeping; a corporate name change is a simple matter that can be handled inexpensively, at least in business-friendly states like Delaware.
It bears mentioning that a startup’s corporate name doesn’t necessarily have to be identical or even similar to the product or domain name. Historically, most bricks-and-mortar businesses were named after their founders, and large corporations often have a publicly traded parent company that holds all of the stock in many operating units that have familiar or famous names (e.g., AMR as holding company for American Airlines). Even technology companies followed this tradition in the early years; for every IBM, Intel or Microsoft there was a Fairchild, Hewlett-Packard or Wang.
Nevertheless, in the era of Internet and mobile services, in which companies tend to have a very direct relationship with end users, most founders want to name the company after the first (or only) product or service around which the startup is built. Building brand awareness is a key challenge for most startups. For a startup that becomes a successful growth company, the name becomes its core identity as it “crosses the chasm” to mainstream adoption. This comes in handy for things like business press coverage, corporate PR, and ticker symbol if and when the company goes public. It also has its downsides if the primary product or service is such a powerful brand that consumers wrongly associate the corporate name with only that product. For example, during my tenure at eHarmony, Inc., we gave considerable thought to branding issues as the company branched out from its flagship eHarmony online dating service, adding other services under names like Compatible Partners and Jazzed.
Assuming the company will be named after the product, the most common step founders have taken before we meet is to acquire one or more domain names. As the consumer Internet has matured, it can be a major victory to acquire any decent-sounding name in the core .com top-level domain. Nevertheless, many startups launch under a different (less expensive) domain such as .co, .ly or .to, deferring the expense of acquiring the coveted .com name until after a funding event.
It can be a painful and expensive mistake to acquire a highly valuable domain name intending to use it as the foundation for your startup’s new brand, only to discover that there are show-stopping legal conflicts. In fact, some domains for which brokers would charge a fortune are virtually worthless, as I’ll explain below.
To cut to the chase, for the typical startup we work with from inception at my firm, there are four levels of name clearance needed to ensure smooth sailing:
- The corporate name is available in Delaware (or other state of incorporation);
- The corporate name is available in California (or any other state in which the company’s operations will be based)
- One or more acceptable domain names are available that incorporate the brand name; and
- There are no serious trademark conflicts with existing brands.
Most entrepreneurs focus on #3, and perhaps are also aware of the ability to search state business entity databases online (as with Delaware or California). Perhaps they even know about the US Trademark Office online service called TESS that allows anyone to search the federal trademark registry for free. In my experience, the most common traps for the unwary are:
- Nearly identical corporate names already registered in the relevant state(s)
- Identical names registered in other states or countries, for Internet businesses and others that cross boundaries
- Confusingly similar domain names that will divert valuable traffic if the service scales
Perhaps most importantly, trademarks – whether or not registered – already in existence as of the date the startup begins doing business.
My trademark lawyer colleagues could write several articles on this last point alone. Here is my shot at an abridged, TL;DR version:
- Trademark is a noun, not a verb. The legal action is called registering a mark. This can be done at the state, federal or international level (country by country). Territory matters, as does class of goods or services covered.
- In the US, actual use of a name, phrase, logo, tagline, etc. as a trademark in commerce is usually enough to begin accruing common-law trademark rights, regardless of whether the company registers the mark. (Things work differently in many other countries.)
- That said, even if they were first to use a particular name, most businesses of any scale want to protect their brands by filing an application to register it as a federal trademark in the US, at a minimum, and possibly in other countries.
- You don’t know what the trademark registry doesn’t tell you – i.e., even if you diligently search the TESS database, it won’t reveal that company in Tajikistan that started selling an Android app six months ago under the exact same name you want to use for a similar iPhone app that hasn’t launched yet – which may not ever register the TM in the US, but may have common-law rights to the name.
- Similar-looking or –sounding marks are easily missed in a search: Hyphens or other punctuation, deliberate misspellings, “C” vs. “K,” etc.
- Trademark law is notoriously subjective, and reasonable minds can differ about whether two names are confusingly similar, or whether two companies’ products are similar enough that having the same name is likely to create confusion in consumers, and so forth.
Alert readers may wonder why I’m discussing offense (enforcing your company’s exclusive use of a name) together with defense (determining the ability to use a name at allwithout getting sued). Trademark law is one area in which the best defense truly is a good offense. The process of searching for and registering your own trademark flushes out conflicting names, and may even reveal competitors you didn’t know existed, along with other benefits. More on registration and domains in our next installment.
This article is for general informational purposes only, not a substitute for professional legal advice. It does not result in the creation of an attorney-client relationship. All opinions expressed are those of the author, and do not necessarily represent those of Gust.