Tel: 804.864.1100

Tel: 804.864.1100

business law

Ideas are Just That: Part 1

That moment you realize you have an idea worth a business is a great moment. Sometimes it’s an epiphany on the road to Damascus. Sometimes it’s a slow dawning after a grind lasting several years. But however it happens, it’s time to sit back and go “huh.” It’s an achievement.

Most large corporations interested in continuing to exist generate ideas all of the time, as a matter of course. These ideas, generated by scientists or creatives, are noted, catalogued and vetted. With the promising ones, perhaps the inventor/employee fills out a patent disclosure form and a provisions patent application is filed.

But the rest of the ideas? They are just embodiments of the old adage that you have to kiss a lot of frogs before you find your prince or princess. You never get to the good ones unless you generate a lot of bad ones.

The fact is, most ideas suck.

I’m not writing to talk about bad ideas, though. I want to write about what high-potential start-up technology companies should first do with their good ideas.

Joseph Lassiter of Harvard Business School says a high-potential technology startup is one that plans to hit the $50 million per year mark in new product/service sales within 5 years.”
A new one-off auto battery retail store down the road, no matter how impressive the owners are, is not a high potential technology startup. But, the company that holes up in a garage in an industrial park developing an electricity storage product that is based on an idea that came out of a major university technology transfer office and could disrupt the solar energy marketplace probably is one. It almost certainly wants to sell its products to every big or small solar energy producer anywhere in the world and will do whatever it takes to get there.

Ideas are just that: Ideas. Even the ones that are good are worthless – at least on the day they’re are created. You can’t patent an idea, you can’t trademark an idea, you can’t copyright an idea, and your idea by itself doesn’t make a very valuable trade secret.

We tend to focus on ideas, on genius and creativity, the light bulb, the “Eureka” moment. But let’s be honest. There’s very little more poignant than the unfulfilled “Idea Person,” the person who thinks she could have been a contender in business if she’d just had the time/just had the money/just had the team to fulfill all of the dreams in her head. You have to do something with an idea, and chances are our “Idea Person” just didn’t stick with it – if only to get to the liberating point of understanding that the idea was not, really, in fact a contender.

I’ll be posting a series of blogs laying out five top things a high potential technology founder needs to do immediately if she wants to deliver on all of the high potential her idea might possess. I’ll be addressing the founder as “you.”

Number 1: Decide if you want a co-founder.

The direction here may have something to do with just how big is your idea. If this is the big idea, and if your high potential idea means someone has to develop the app and someone has to sell the product and someone has to be able to do the magic that quants can do with Excel, and this is all starting from scratch, then maybe you don’t want to start off alone.
This very first decision – whether to go it alone or bring one or more trusted folks into the founder’s tent – ties in completely to what resources you have available to you.

When founding a company, there are three basic assets you can make use of: human capital, social capital, and financial capital.

  • Human capital means knowledge derived from formal education and the skills derived from prior experience. A founder with a great amount of human capital can reduce the chances he will get blindsided by something he really should have known could happen. Some call it “wisdom.” I believe you can have a lot of wisdom even when you’re 24 if you’ve studied a lot and worked a lot and kept your eyes open. And there are loads of people my age (which is older than that) who are don’t have wisdom. Point is, if you don’t have it, your human capital is less than optimal, and you may want access to it from someone else.
  • Social capital means the benefits that come from your place in information and communication networks. A startup must project itself outward, whether it’s to hire people, raise money, sell, or any number of other things. If you are an industry insider, or if you just know a lot of people, or you just love networking events, then you might have a lot of social capital. If you’re someone who just doesn’t get out much, then maybe your own social capital is, shall we say, lacking.
  • Financial capital means, well, I think we know what that means. For a founder, if you have “screw-you money,” if you can quit your job and pay for all of the costs of the new company until its projected time to become successful or not, then that’s a blessing. It’s a fairly rare blessing.

A major reason you co-found is to make up for the kind, or kinds, of capital you lack.

One researcher’s long-term study found that solo founders accounted for less than 20% percent of technology startups.
If you are a person with an idea, a sober-minded business plan might lead you to the conclusion that you need one or more cofounders if you are going to create a real business, and you might already know who they are. Or you might need to go looking. Either way, there’s someone close to coming up with the same idea in Portland, so best to get moving.

I’ll follow up soon with the 2nd action a founder needs to take after deciding to make a go of their great idea. Meanwhile, if you have any questions about the content of this article or on any business startup issue, please contact me or any of our business lawyers.

Classification of Employees under the IRS Guidelines

In our last post, we discussed analysis of the employer/independent contractor relationship through the lens of the Fair Labor Standards Act (“FLSA”). Employers who hire individuals as independent contractors – because it seems less often the case that an independent contractor is errantly classified as an employee – should keep in mind that the Internal Revenue Service (“IRS”) has its own set of standards for classifying employees for tax purposes. Thus, any analysis of employee classification under the FLSA should be, likewise, scrutinized through the lens of the IRS guidelines, of which there are many.

As a general rule, an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done: think of relationships with vendors and others who are retained for services but perform work without input from the payer. Whether a worker is an independent contractor or employee depends upon the circumstances of the parties’ relationship, with particular focus upon behavioral, financial, and other relationship-based factors (i.e. Are there written contracts or benefits? Does the relationship have a set term/duration?)

Businesses must evaluate the above factors when analyzing whether a worker is an employee or independent contractor. Many employers find especially challenging the common situation where some factors indicate that an individual is an employee, while other factors indicate that the individual is an independent contractor. Further complicating the issue, IRS guidelines make clear that there is not one factor in particular that unequivocally dictates the outcome of such analysis. Factors that are of great interest in one relationship may have no relevance to other employer/employee or payer/independent contractor relationships.

Fortunately, the IRS’s website provides additional guidance concerning the three largest categories of classification factors. To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.

  • Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
    • Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving instructions in these examples may indicate a worker is an employee.
    • More detailed instructions may indicate that the worker is an employee. Less detailed instructions demonstrate less control, making it more likely that the individual is an independent contractor.
    • Evaluation systems to measure the details of how the work is done suggests that a worker is an employee. However, evaluation systems measuring just the end result point to either an independent contractor or an employee.
    • Training a worker on how to perform a job — or periodic or on-going training about procedures and methods — is viable evidence that the worker is an employee. Independent contractors ordinarily implement their own methods of performing work. (More detail is available here).
  • Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:
    • The employer’s (or putative employer) investment in the equipment the worker uses in working for someone else. This can lead to an inference that a worker is an employee.
    • Independent contractors more often incur unreimbursed expenses than employees.
    • If there exists an opportunity for profit or loss, it can be indicative of an independent contractor relationship.
    • Independent contractors are generally free to seek out business opportunities, whereas employees may be restrained in some way from working simultaneously to provide the same services for other clients/employers.
    • An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee. (More detail available here)
  • Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
    • Written contracts can cut both ways in an employee/independent contractor analysis under IRS guidelines. However, the most critical point for any employer to understand is that a contract stating a worker is an employee or an independent contractor is not dispositive on the issue of worker classification. If a relationship appears to be employer/employee driven (more control and direction over areas beyond the results of the work) despite being categorized on paper as an independent contractor relationship, the facts will rule the day.
    • Businesses generally do not grant benefits such as vacation, health insurance, sick pay, pensions, etc., to independent contractors. Therefore, the presence of such benefits militates strongly for a conclusion that an employer/employee relationship exists.
    • The longevity of the relationship is also a crucial factor. A relationship that is somehow limited in duration may contribute to a conclusion that a worker is an independent contractor. However, if the relationship’s temporal scope is not defined, it is more likely suggestive of an employer/employee relationship. Other facts that suggest the intent of the parties in the initial phases of the relationship may influence analysis of this factor.
    • If the worker performs services that are vital to the regular function of the business or a critical component of its work, this factor may lead to a conclusion that a worker is an employee of the business. (More detail available here).

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

In addition, the IRS also applies a 20-factor-test that can be utilized to aid in the differentiation of employees from independent contractors. The factors include:

  1. the employer’s right to require the worker’s compliance with instructions;
  2. the employer’s training requirements;
  3. the integration of the worker’s services into the employer’s business;
  4. the worker’s personal rendering of services;
  5. the employer’s hiring, supervision, and payment of assistants;
  6. a continuing relationship between the employer and the worker;
  7. the employer’s setting of hours;
  8. the employer’s requirement of full-time service;
  9. performance of work on the employer’s premises;
  10. the worker’s performance of services in a sequence set by the employer;
  11. the employer’s requirement that the worker submit oral or written reports;
  12. payments on an hourly, weekly, or monthly basis;
  13. the employer’s payment of business or travel expenses;
  14. the employer’s furnishing of materials or tools;
  15. lack of significant investment in the facilities by the worker;
  16. lack of realization of loss or profit by the worker;
  17. lack of work for multiple firms by the worker;
  18. lack of availability of the worker’s services to the general public;
  19. the employer’s right to discharge the worker; and
  20. the worker’s right to terminate her or his services.

Consequences of Treating an Employee as an Independent Contractor

Misclassification of employees can have serious consequences. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker, as applicable relief provisions, generally, do not apply to “unreasonable” misclassification.

With the assistance of legal counsel and their tax or accounting professionals, employers should, periodically, examine employees’ classifications and duties to determine whether employees and independent contractors are properly classified. If you have questions about the content of this article or wish to discuss any employment law issue, please contact Laura Musick or any of our employment lawyers.

Employer Basics: FLSA Classification of Employees

There is seldom a bad time for employers to reevaluate employee classifications. While some occasions are less optimal than others, for example, reevaluation upon an employer’s receipt of a complaint from the United States Department of Labor (“DOL”), employers should carve out time each year to scrutinize changes in employee assignments and relationships, along with other factors that impact classification.

The Fair Labor Standards Act (“FLSA”) offers minimum wage and overtime pay protections to almost all workers in the United States. Assuming for the purposes of our discussion that an employer is subject to the FLSA, there are certain factors that necessarily impact the independent contractor versus employee-employer analysis. At base, “In the application of the FLSA an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.”1

The critical determination is, perhaps based upon the most nebulous standards – as the U.S. Supreme Court has, time and again, indicated that no single rule, test or standard, alone, dictates classification. Rather, the current standard applied by the Court looks, on the whole, at the “total activity or situation.”2 Factors included in this analysis are:

    • The extent to which the services rendered are an integral part of the principal’s business.
    • The permanency of the relationship.
    • The amount of the alleged contractor’s investment in facilities and equipment.
    • The nature and degree of control by the principal.
    • The alleged contractor’s opportunities for profit and loss.
    • The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
    • The degree of independent business organization and operation.3

The Court adds clarity by highlighting certain factors which are immaterial in determining whether there is an employment relationship.4 For example, the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government are not considered to have a bearing on determinations as to whether there is an employment relationship.5 Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.6 What happens next in the analysis is (typically) an evaluation of the relationship in which courts will consider the above-factors, while taking into account the industry, the nature of the work, and other situation-based considerations. Because these situations are routinely fact-intensive, it is worthwhile for employers to revisit classifications when making changes in their workforce.

Despite the oft-repeated refrain, “everyone in our industry classifies workers this way”, common industry practice is insufficient to excuse employer misclassification of employees – whether or not willful. Employers should be especially careful about taking cues from their competition. Simply because other employers in your industry classify employees as independent contractors, does not make it accurate. Equally unpersuasive in misclassification cases is an employee’s “agreement” to be misclassified, whether informally or via written employment agreement – even if the employment contract specifically defines an employee’s relationship to the employer as that of an independent contractor. Employers should also be aware that while an employee may be an independent contractor pursuant to state law or Internal Revenue Service standards, the FLSA may still create an employer/employee relationship where, for tax purposes or under state law, the analysis produces a different result.

What do you risk by failing to properly classify your employees? Employees may file complaints with the Wage and Hour Division of the DOL. Employees may also file private lawsuits to recover back pay, and liquidated damages, in addition to court and attorneys’ fees. The Wage and Hour Division of the DOL is also empowered bring its own enforcement actions. A two-year statute of limitations applies to actions to recover back pay. However, if a violation is “willful”, a three-year statute of limitations may apply.

The takeaway: Employers should make time before the end of the year to reevaluate their employee relationships and policies. Should you have any questions about this article or labor and employment law, please contact one of our employment lawyers.


1 “Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA)”, https://www.dol.gov/whd/regs/compliance/whdfs13.htm (last accessed 9/12/2019).
2 Id.
3 Id.
4 Id.
5 Id.
6 Id.

Five Essentials To Bring an Idea to Life

Jared Burden leads a session in the business track at Valley TechCon 2019.

Jared Burden, Harrisonburg partner, led the kickoff session in the Growing Your Technology Business track at Valley TechCon September 25, held at the Hotel Madison and Shenandoah Conference Center in Harrisonburg, attended by about 160 company executives and entrepreneurs. His presentation laid out the five essential things a founding team needs to do immediately in order to turn an idea into a company. His slide deck is here.

If you’d like to have Jared reprise his presentation for your company or organization, please contact him. If you have questions about this topic, Valley TechCon or any issue of business law and growth, contact Jared or any of our business lawyers.

GreeneHurlocker Welcomes Business and Employment Attorney Laura Kight Musick

Laura Kight Musick, a business and labor and employment attorney, has joined the business, corporate, and regulatory law practice as Counsel at our firm, Eric Hurlocker announced today.

“Laura brings a well-developed set of skills in commercial and employment law which our clients increasingly need as their businesses grow and become more complex,” Hurlocker said. “Additionally, her significant litigation experience dovetails nicely with our firm’s growing regional regulatory practice,” he explained.

Laura practiced in Illinois and Virginia in her prior firms, and has counseled clients in employment matters, including hiring, severance and transition agreements, employment policies, and risk management and avoidance. In addition, she advised her business clients regularly about contracts, financing agreements, and corporate formation and governance.

“I’m delighted to be joining GreeneHurlocker and offering our clients the benefit of my employment law background while advising them as they grow and expand their businesses,” she says.

Laura graduated summa cum laude from the Honors Program at Murray State University in Kentucky, receiving a dual degree in English Literature and Philosophy. She earned her J.D. at the Robert H. McKinney School of Law, Indiana University, and was the inaugural recipient of the Baker and Daniels Public Interest Law Fellowship in 2008.

Knowing Where to Start

Clients wonder sometimes what they are getting into when they ask a lawyer to draft a contract. Maybe their fear is that their attorney will sharpen up his metaphorical pencil, lean his chair back to think deeply on life and law for an hour or two (on the clock), and then pull out the laptop and sit down to drafts things up from scratch, like a composer writing out each note to a (very boring) symphony. The client may fear that the lawyer views every deal is different, that everything about every deal is new every time, that everything needs to be tailored like a bespoke suit.

Every deal is different, it’s often said – I’ve heard myself say it a hundred times. That’s because the facts are different, and that’s because no two people and no two companies are alike or have the exact same priorities. But that doesn’t mean that two deals – say, two leases of refrigerated warehouse space, or two agreements for the purchase of the assets of small businesses — happening 500 miles apart (or 5000 or 5) — can’t be done with forms of contract that are 90% the same.

In fact, they probably should be done that way.

And your attorney shouldn’t be spending a whole lot of time going for the Pulitzer Prize for creative nonfiction and drafting that 90% (just a percentage used for illustration purposes) from scratch.

Unless we are speaking of some sort of business deal where the industry is utterly new, the parties are utterly idiosyncratic, and the risk tolerances are off the charts (one direction or the other), or all of the above, the same basic forms work across the board. I remember Internet 1.0 – the days of AOL and Pets.com — and the ways that lawyers were trying to draft “application service provider” contracts that expressed the concept of software programs being accessed over the Internet (what we now call Software as a Service (SaaS)). But even in that time, when the Internet was beginning to utterly change the way the world operated, the contracts were pretty much built right on top of software, consulting, joint venture and financing contracts that had been around for decades before that.

The majority of the text in a contract from 1975 (the year of the room-sized computer) – for example, events of default, remedies on default, representations and warranties, indemnification, assignment, the boilerplate at the end, and the general flow and sequence of the document — was essentially the same as the text in a contract drafted in 2000 (the year of the Pets.com sock puppet). The same is even more true for commercial real estate contracts, and even holds true for many types of intellectual property agreements.

And it goes without saying that 90% of the text in an accounting SaaS services agreement from 2017 is going to be the same as a payroll SaaS services agreement from 2019.

Anyone who tells it differently is trying to create mystery where there really should be none.

That’s my candid and honest observation How does this insight relate to you?

As outside corporate general counsel, under our OPENgc service offering, GreeneHurlocker is keenly focused on saving a client time and money while still delivering the legal assistance a client needs, when they need it. We avoid reinventing wheels. We’ve been practicing enough years, in widely varying industries and for companies of all sizes, to have an experienced, intuitive sense of what works and what doesn’t, and how the work we’ve done before may apply to the work we are doing for a client now. When a client picks up the phone and asks for an individual contract to be done or an entire deal to be quarterbacked, the client can rest assured we are not starting from scratch. Instead, we’re applying all the knowledge and work we have already done.

We’re here to guide you to the end of your deal. But we also know where to start.

Welcome Creighton Boggs, our First Spring Internship

Creighton-Elizabeth Boggs, a third-year student at the University of Richmond School of Law, has joined us as an intern/law clerk working across the firm’s practice areas, Eric Hurlocker announced recently.

“Creighton will be helping us with research, document preparation and client communications in our business, regulatory and energy law areas,” Eric said.

We’ve been growing steadily since being founded in 2012 by Eric and Brian and now have seven full time lawyers. We added a partner, Jared Burden, and new office in Harrisonburg in January of 2018.

Creighton is a pending graduate of the UR law school, and earned her political science bachelor’s degree magna cum laude at the University of South Carolina. Prior legal internships have placed her in the disAbility Law Center of Virginia and the South Carolina Environmental Law Center.

“I am particularly interested in demand response, energy storage and renewable energy,” she points out.

In law school, she has been Lead Articles Editor & Manuscript Editor of Public Interest Law Review, has served on the University of Richmond School of Law Honor Council and was recognized with the CALI Award for Excellence in Animal Law, among other accomplishments. A non-profit she started as a middle school student in South Carolina raised funds to help animals in need and earned her Presidential Service Awards from Presidents George Bush and Barack Obama.

“We’re delighted to be able to offer this inaugural firm internship to a law student as talented and accomplished as Creighton,” said Eric.

The internship runs through April 2019. We’d like to introduce you to Creighton if you come to the firm’s Richmond office to meet with our business lawyers or our energy lawyers.

Great Client, Great Coverage

The Washington Post’s coverage on Sunday of our good client Shenandoah Growers of Harrisonburg affirms their rise from a small, family-owned herb farm to a national leader in flavor-forward produce selling in 23,000 stores, including 16 of the country’s top 20 food retailers. Take a look at this profile in the Washington Post Business section last Friday. The company’s process innovations and tight focus made them a great subject for the Post and an ideal client for our OPENgc legal expertise. Relentless innovation and a profound understanding of the market are the main reasons they have been successful — and among the many reasons we have been glad to serve as their general counsel for several years

If you have any questions about the services we provide to entrepreneurial and growing businesses, contact Jared Burden or any of our Virginia business lawyers.