Business Transactions

Website Audits for Internet Companies

In my last posting, I talked about a Time Magazine article in which Josh Quittner discussed the new internet boom in which founders of low-cost internet start-ups can get rich slowly with nothing more than a good idea, a laptop, and hard work.

As the business transactions attorney that I am, I of course could not resist highlighting legal issues to which even a low-cost internet start-up should pay attention. I previously discussed the necessity of (i) an agreement among the co-founders, (ii) a web host development agreement, and (iii) securities law compliance. In this posting, I’ll finish my discussion of website audits.

Website Audits

You’ll want to verify that nothing offered through your website is going to get you in trouble. A website audit might include a review of the following issues:

• Website Terms of Service. Your Website Terms of Service or Website Terms and Conditions can form a binding contract with visitors to your website if properly formatted. If your website takes subscribers or licenses information, your TOS might take the form of an end user license agreement (EULA).
  
• General Privacy Policy. There are currently no federal requirements to post a privacy policy as long as your site does not take personal information from children under thirteen. However, some states are becoming more aggressive in demanding privacy policies and procedures of websites. Hence, it may be prudent to post a privacy policy if you will be collecting, using, and/or selling personal information about your online visitors.
  
• COPPA. Sites targeted to children under thirteen must comply with the Children’s Online Privacy Protection Act. Failure to comply has generated fines from the Federal Trade Commission of up to $1 Million.
  
• Copyright. Analysis of any copyright or other legal issues raised by images, written materials, and other content provided by third parties.
  
• User-Generated Content. If your website invites visitors to submit content, you will want to take steps to minimize the risks of user generated content (UGC) including taking advantage of the safe harbors offered by the Digital Millennium Copyright Act.
  
• Trademark. Analysis of whether your domain name raises any legal concerns (e.g., trademark infringement) and whether it can or should be registered as a trademark.
  

The Internet Booms for LILO Start-Ups; Some Legal Work Still Highly Recommended

Getting Rich Slowly in the New Internet Start-Up Boom

We’ve all heard that the current economic climate has motivated venture capitalist to scale down their investments in internet start-ups. In all this gloom, internet entrepreneur hopefuls can find encouragement in a recent Time Magazine article by Josh Quittner, "The New Internet Start-Up Boom: Get Rich Slow".

Quittner refers to our era as The New Internet Start-Up Boom in which savvy internet entrepreneurs with a great idea can get rich slowly. Quittner talks about internet start-up companies that cost little or nothing to start but can eventually yield substantial profits. He refers to these internet companies as LILOs which stands for a little in and a lot out.

The article cites the examples of MotorMouths.com, a car review site started with less than $10,000 that may grow into a $250,000 revenue company within 18 months of opening operations. The article also includes the case study of AirBnB.com, a website that matches visitors with accommodations in private homes. AirBnB.com currently produces enough revenue to support its three founders.

Even Low-Cost Internet Start-ups Shouldn’t Skimp on Certain Legal Issues

Since this is a legal blog about business transactions, I must highlight some legal issues which even a LILO internet start-up should not ignore:

• Agreement Among Co-Founders and Business Partners. I’m frequently consulted by people who find themselves in business relationships that no longer function. The situation is at its worst when the partners have not documented their relationship in a written agreement that hopefully includes steps for an amicable parting. I talked about how business people can protect themselves and their businesses from relationships that go south in an interview on “When Business Partnerships Go Bad” with Steve Mullen of Start-Up BizCast.
  
• Web Host Development Agreement. Don’t hire a web developer without a proper web development agreement. Important contractual provisions include intellectual property ownership rights, development schedule, and the developer’s maintenance obligations. See an example of the problems that can develop if you forego the written web development contract.
  
• Securities Law Compliance. If you take money from someone who will share in future company profits but will not actively participate in the operation of your company, you have sold a security and you must comply with state and federal securities laws. It doesn’t matter if the investment is $500 or $5,000,000. Non-compliance triggers potential criminal and civil penalties that you don’t want to encounter. For more information on securities compliance, see my postings about Financing a Business.
  
• Website Audit. You’ll want to verify that nothing offered through your website is going to get you in trouble. I’ll talk more about website audits in my next posting.

Don't Hire a Web Developer without a Proper Web Development Contract

You might outsource or hire a freelancer to develop your website. That’s fine. But you shouldn’t do so without a proper written agreement.

Important Provisions

Important factors to be addressed in your web development agreement include the following:

• A full and clear description of work to be performed
• Your ownership and intellectual property rights in the work
• A date for completion of the work and the consequences, if any, for the contractor missing the deadline
• Post-delivery maintenance obligations
• Your rights in any components of the product if you’re dissatisfied with the work and terminate the company or freelancer prior to completion of the project.

Not having the proper agreement can lead to problems down the line even if the development itself goes smoothly. Such problems frequently revolve around intellectual property rights.

More on Intellectual Property Rights

When a web designer or web developer does the work as a freelancer (versus as an employee), the copyright in the website is owned by the web designer/developer unless the web designer/developer signs a written document indicating otherwise. A written agreement with a freelance web designer might convey the entire copyright to you or the freelancer might retain the copyright and simply license to you certain uses.

When there is no written web development agreement or the agreement is silent on the issue of ownership, the web designer and company can easily get into a dispute regarding who owns the website and what rights the hiring company has to use it.

Chaos in Action

In one reported Pennsylvania case, a computer consultant hired to update and host two websites filed a copyright infringement action after the client moved the websites to another server. While the computer consultant and client had no formal written agreement, the consultant had confirmed the arrangement in a letter to the client. Although the letter did not address ownership or licensing issues, the court decided that the client had an implied, irrevocable, non-exclusive license in the website. Ultimately, a good result for the client - but note he had to go through a lawsuit to get it. The case is Attig v. DRG, Civ. Act. No. 04-CV-3740 (E.D. Pa., March 30, 2005).