Electronic Rights and the Writer

July 31, 2012

I recently gave a talk on Electronic Rights and the Writer at the Pacific Northwest Writers Association 2012 Writers Conference. My handout from that talk is available as a free download on the resources page of my law firm website.

This handout provides a guide to the ever changing world of electronic rights for writers. Like many other businesses, the publishing market is moving away from physical distribution and increasingly towards electronic distribution through the Internet to computers, e-Book Readers, cell phones, iPads and other types of mobile electronic devices. In a way, this is the new wild west for writers. Because it is a market that is expanding rapidly and changing all the time, the rules regarding electronic rights are also changing all the time.


Sources of Venture Capital (VC) equity financing documents and information

April 5, 2012

As a follow-up to my previous blog, there are many sources of Venture Capital (VC) equity financing documents and information available on-line. Here are my favorites.  

1. TechStars Model Seed Funding Documents (Techstars.org)

TechStars and Cooley Godward Kronish, LLP put together a set of “Model Seed Funding Documents” that anyone can use.

There are five primary documents in the set:

2. Wilson Sonsini Term Sheet Generator

The Wilson Sonsini law firm has a term sheet generator. The website describes itself as: 

“This tool will generate a venture financing term sheet based on your responses to an online questionnaire. It also has an informational component, with basic tutorials and annotations on financing terms. This term sheet generator is a modified version of a tool that we use internally, which comprises one part of a suite of document automation tools that we use to generate start-up and venture-financing-related documents.” 

You need to go through the exercise to generate the forms.  

3. Wilson Sonsini Series AA equity financing documents 

Wilson Sonsini Series also offers a series of AA equity financing documents on ycombinator 

4. Veri course on Understanding Term Sheets 

Veri offers an on-line course called Understanding Term Sheets.   

 

I welcome comments and additions to this list.  

If you are going to obtain VC financing, I strongly recommend that you use an attorney experienced in this area. I do not recommend that people use legal forms in lieu of legal counsel. Legal forms are good for giving you a sense of how the documents might look and what language is typical. And they can be a good starting point for drafting purposes. But they should not be used as is. Every situation is different and only a good attorney can assess how well a particular legal form will work for you, what language might need to be changed, and what additional language should be added.  

And consider using two attorneys, one for the company and another for the founders. In some cases it would be best if each founder had their own attorney. The interests of the founders are closely aligned with the interests of the company, but they are not always the same. Often the VC will direct the company to use a law firm that has worked with the VC on funding many other startups. This law firm may not keep the best interests of the founders in mind.


Some Very Useful Advice for Startups from Guy Kawasaki

April 4, 2012

In case you missed it, Guy Kawasaki, a former Apple success story and now a successful venture capitalist, has posted a three-part series of excellent articles for entrepreneurs on his blog http://blog.guykawasaki.com. They are very informative, and come with downloadable templates for Microsoft Office. They are

 1. How to Create an Enchanting Pitch (includes a sample PowerPoint presentation)

 2. How to Create an Enchanting Business Plan (includes an outline of a business plan in Word)

 3. How to Create an Enchanting Financial Forecast (includes sample Excel files)

 I also really like two of his earlier blog articles:  

 The Top Ten Lies of Venture Capitalists

 The Top Ten Lies of Entrepreneurs

 There are many other excellent articles on his blog that are worth checking out.


Death by Internet? (Tyler Clementi’s suicide)

March 12, 2012

In the news this week, Dharun Ravi is on trial for several crimes in connection with college freshman Tyler Clementi’s suicide. The news reports originally claimed that Ravi secretly taped Clementi making out with another young man and broadcast the video live on the Internet and that this act drove Clementi to commit suicide. Should there be a specific law to cover harassment over the Internet that results in suicide?

Because Ravi used the Internet to broadcast his harassment and because the victim of his harassment later committed suicide, it seems like what he did was worse than other thoughtless school pranks.

Should we make a distinction between youthful pranks that harass but do not involve the Internet and those that do? Both are bad, and both should be punished. But should the fact that the prank is broadcast on the Internet mean it should be treated more severely than other pranks? This case raises these issues. Ravi is not actually being charged with causing Clementi’s suicide, but I do not believe that he would have been charged at all if Clementi had not committed suicide.

The Clementi case is actually more complex than it at first seems. Let me make this clear. What Clementi’s roommate Ravi did was wrong. But how wrong was it from a legal point of view?

There is very little law concerning Internet harassment and its consequences. So the police and prosecutors in this case had to turn to existing law and apply it to the Internet. Ravi is being charged with two counts of criminal invasion of privacy, one for making the sex tape, and the other for distributing it. The prosecution has added a charge of bias intimidation as a hate crime, along with hindering apprehension and witness tampering.

Is Ravi guilty of any of that? Even Clementi said on his on-line posts that the video of him did not really show anything. Is it a crime to attempt to show sexual conduct, or does one have to actually succeed to be guilty?

The invasion of privacy claim seems weak. Did Ravi invade Clementi’s privacy by showing him in a gay encounter on the Internet? Maybe, maybe not. Apparently the video did not show any nudity or other private matter other than that Clementi was gay. Clementi did not hide his sexual orientation from his roommate. He had openly talked about being gay on JustUsBoys.com. Somehow his roommate had seen his posts there and on August 22, a month before the video incident, tweeted “Found out my roommate is gay,” and linked to the JustUsBoys.com thread.

On the nights in question, Clementi told Ravi that he wanted to use the room that night to make out with another man. (From his entries on JustUsBoys.com: “so the other night I had a guy over. I had talked to my roommate that afternoon and he had said it w/ be fine with him.”) How much privacy can one expect in a dorm room that he shares with another person? His roommate did in fact walk in on him during one such encounter. That was to be expected.

Is there a difference between being open about your sexual orientation to your roommate and having your roommate announce it to the entire world on the Internet? Is a secret still a secret if it gets out to one person, knowing he might tell other people in your dorm, but no longer a secret when that person then turns around and uses the power of the Internet to tell a million other people on the Internet? I don’t think that Clementi’s sexual orientation can be considered a private matter. Therefore there can not be any invasion of his privacy by the mere announcement to the world that he is gay.

The bias intimidation claim is a little stronger. Ravi apparently invited his friends to view his gay roommate making out. But how intimidating could it have been to Clementi for Ravi to openly accuse him of being gay when Clementi publicly acknowledged that he was gay?

I have come to the conclusion that the Internet does not introduce new concepts to the law. But it does magnify existing legal issues. There is a concept that lawyers call the slippery slope. An act which may seem reasonable when done to a small degree, becomes less and less reasonable when done to a larger degree, until at the other extreme, it seems totally unreasonable. When an activity takes place on the Internet, you can go very quickly from a slippery slope to jumping off a cliff. This is a theme that I expect to be talking about a lot on this Blog.

In this case, if Ravi had just told some people in the dorm that Clementi was gay, we probably would not be talking about the incident. He would not even get in trouble. If he had handed out leaflets on school grounds announcing that his roommate is gay, he might have gotten in trouble with his school, but it would probably not be a crime. The fact that he broadcast the information on the Internet where it was viewable by millions seems to make it worse. But is it that different?

Of course, if he had succeeded in video taping anything revealing and had broadcast that on the Internet, it might have been different. I suspect that it has always been quite common for college kids to photograph each other in compromising situations. In the old days when a single copy of a photo, often a low resolution blurry image, was handed around a school or a dorm, this seemed like no big deal to most people. The fact that that photo or video now gets recorded in high definition with automatic focusing and then is sent to hundreds or thousands or millions of people by telephone texting or on the Internet makes the consequences much more serious. The actual act is still the same – it is still just a stupid thoughtless school prank. Such acts should be punished, not condoned. But should the same act be punished more severely because it is seen by more people? Maybe or maybe not.

I suspect that prosecutors will have a hard time proving invasion of privacy. They are not even trying to prove that Ravi contributed to Clementi’s suicide. Should they try? Since what Ravi did was reprehensible, it is likely the jury will find him guilty of some of the charges. But should they?

I have not heard of any school action against Ravi. Why was there no school punishment? If there had been school punishment, should that have been enough? Would it have been enough if Clementi had not committed suicide? Would it have been enough if Ravi had not tried to broadcast his video on the Internet? Should these factors be taken into account?

This is the fourth case in recent years that I am aware of where a young person committed suicide after being harassed on the Internet.

In 2007, 13-year old Megan Meier thought she had made a new friend when a cute teenage boy named Josh contacted her on MySpace and began exchanging messages with her. When he abruptly ended their on-line friendship a month later she committed suicide. It turns out she had been corresponding with several members of the same family that included a so-called friend of hers, and her mother, all pretending to be Josh. The mother was charged with violating various federal laws related to computer fraud and abuse, and was convicted. Her convictions were reversed on appeal. http://en.wikipedia.org/wiki/Suicide_of_Megan_Meier

In May 2008, high school student Jessica Logan broke up with her boyfriend. She had previously sent him nude photos by telephone. After the break-up he sent her nude photos to hundreds of students at their school. Logan faced harassment, abuse, humiliation, and stereotyping as a bad girl. Two months later in July 2008, Logan committed suicide. No one was charged.

In 2009, the story repeated itself. In June Hope Whitsell, just 13 years old, sent a semi-nude photo of herself to a boy she liked. He or possibly a friend of his forwarded it to his friends and the photo ended up being widely distributed at her middle school and the local high school. She was also harassed by school mates and committed suicide in October. Again no one was charged.

What distinguishes these cases from other teenage suicides is that the harassment took place over the Internet. Does that require an entirely new legal paradigm? I think we are fascinated by these case because the Internet is still relatively new and we are amazed by the power of the Internet.

Unfortunately teenage suicide is not uncommon. The Centers for Disease control report that approximately 4,400 teenagers commit suicide each year. Suicide is the third leading cause of death, behind accidents and homicide, of people aged 15 to 24, and the fourth leading cause of death for children between the ages of 10 and 14. http://www.cdc.gov/violenceprevention/pub/youth_suicide.html

I am sure that every one of those suicides has a story to tell. But we do not hear most of them.

Do we really need a new set of laws to deal with four cases of teenage suicide over a four year period? What are we doing in the meantime to prevent the other 3,399 teenage suicides each year?

Will we stop being shocked by youthful pranks that go viral on the Internet once the Internet has been around for a while, or will we hold this generation’s youth to a higher standard than their parents, because they have more technological power to publicize their pranks? Most stupid school pranks are best handled as a minor criminal matter in very serious cases, and subject to school discipline in less serious cases. Should the fact that Ravi used the Internet mean that he should be charged with multiple felonies and up to ten years in jail? Should we take into account that Clementi committed suicide, when Ravi is not actually charged with that?

I have some thoughts, but will save them for a later post.

I wish people would start discussing these issues on my blog. What do you think?

 

Update March 9, 2012: The prosecution has rested its case. Commentators said they put on a stronger case against Ravi than was expected. The Defense starts today.

Update March 12, 2012. The defense has rested. It does not sound to me like they put on a good defense. Every case has good facts and bad facts. You need to embrace the bad facts and convince the fact finder that you deserve to win despite the bad facts. Ravi’s actions were reprehensible. His attorney should have admitted that and then tried to explain why they did not rise to the level of a serious crime. Instead the attorney tried to convince the jury that Ravi did not do anything wrong – he was merely trying to protect his expensive equipment that was in the dorm room. No one is gong to buy that.


Why the MegaUpload Arrests Bother Me

January 31, 2012

Last week a consortium of U.S. federal agencies, working with police forces from around the world, shut down a series of file sharing/file storage sites best known as MegaUpload. They also arrested the senior executives of the companies behind the sites — including the flamboyant apparent leader of the group Kim Dotcom — and seized various assets of the company and the individuals. MegaUpload and its senior executives are not particularly sympathetic characters. But the arrests bothered me. I did not initially know why.

Many sites have been shut down for offering illegal goods, whether it be counterfeit goods meant to look like the original (fake Rolex watches for example), or illegal copies of software, But this one felt different. So I decided to write a blog piece about it. While writing this piece, I figured it out.

There are people who use technology to steal. Whether it is bank account balances, credit card numbers, knock-off copies of famous brand products, or digital content, it is clearly stealing. The technology is just the means to an end. I have no problem with arresting these types of people.

Then there are people who try to push the limits of the law using current technology. Sometimes these efforts lead to new uses of the Internet. For example, in the early days of the Internet I remember that the very first commercial Internet spam came from a law firm. The law firm got blasted for what was at that time seen as an outrageous attempt to commercialize the Internet. Ah the good old days when there was only one spammer. Yet commercial email advertising has become a major part of the Internet experience.

I do not see people who push the limits as criminals. Some of them may be bad people, and they often get sued, and they often lose, and I am fine with that. But I would leave it to the civil courts to define what appropriate technology behavior is. I would not make it a criminal issue.

The concepts of file sharing and on-line file storage on the Internet are still fairly new, and the law around what is allowed and what is not is still in flux. Several early cases, particularly A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (2001) and MGM Studios, Inc. v. Grokster, Ltd. 545 U.S. 913 (2005), established that if the file sharing company encouraged people to share copyright protected files through its site, then the site itself was liable for contributing to the infringement.

The current area of uncertainty involves the 1998 Digital Millennium Copyright Act (DMCA). Under the DMCA, service providers are protected from copyright infringement liability if they follow certain procedures. When they are notified by copyright owners of infringing material on their site (called a take down notice), they must promptly take down the copyright infringing material.

So far, courts have held that service providers do not lose the protection of the DMCA simply because they are aware that their site is being used to store copyright infringing material. See Viacom International, Inc. v. YouTube, Inc., No. 07 Civ. 2103 (currently on appeal although likely to settle) where the court found:

“[I]f a service provider knows (from notice from the owner, or a “red flag”) of specific instances of infringement, the provider must promptly remove the infringing material. If not, the burden is on the owner to identify the infringement. General knowledge that infringement is “ubiquitous” does not impose a duty on the service provider to monitor or search its service for infringements.”

The heart of the government’s case against MegaUpload seems to be that the owners of MegaUpload were aware that its site was being used for the exchange of copyright infringing material. Case law suggests that this knowledge is not sufficient for civil liability. It is hard to imagine that it would then be sufficient for criminal liability.

The government then seems to admit that MegaUpload removed offending files when it received a DMCA takedown notice. But the government also seems to be saying that MegaUpload was slow to remove files and did not do a very good job. Again, this does not appear to constitute criminal liability.

I have already discussed the problem that the sheer size of today’s major file sharing and file storage sites makes it impossible for companies to be in 100% compliance with the DMCA. See Copyright Enforcement on the Internet – Where should we draw the line? Even Apple does not maintain 100% compliance.

MegaUpload made some effort to remove infringing materials after it received take down notices. MegaUpload is a huge site. MegaUpload itself claimed that it had 50 million daily visitors and traffic on its sites accounted for 4% of all Internet traffic. The site could not possibly maintain 100% compliance with the DMCA. Does that make the owners of the site civilly liable for copyright infringement? Does it make them criminals? Those are tough question and ones where I do not think there has been any case law yet.

It is important for technology innovation that we let people push and test the limits. One of the founders of Napster, Sean Parker, took what he learned from Napster and became one of the key people in developing Facebook. If Parker had been branded a criminal instead, I would not say that social media would not exist, but social media might have developed much more slowly than it has.

By attacking MegaUpload before the limits of the DMCA have been established, theU.S.government is likely to scare off companies and new products and services that would otherwise provide legitimate technological innovation in on-line data storage (cloud storage) and file transfer services. TheU.S.government should have waited until case law was settled on this issue before using its full force to arrest and detain the MegaUpload individuals and seize their assets all over the world.

The criminal indictment quotes from many emails that suggest that the individuals who were arrested did participate in uploading some individual copyright infringing files to their own sites. Although these charges are minor, they may be the strongest part of the government’s case.

Even though the government’s case appears weak overall (and I say appears because we really do not know all the facts yet), I predict that the U.S. government will attempt to save face by putting so much legal pressure on MegaUpload that the executives will be forced to plead guilty to some minor charges and to forfeit their sites, seized property and money.


Comments please

January 24, 2012

I was hoping to generate some interesting discussions around my blog topics. But there have been very few comments even for the limited number of readers that I have so far. I encourage you to add comments. If you agree with me, that is good, if you disagree, in most cases that is better. If you want to say you like my article, that is good, if you want to say that you do not like it, and are willing to offer a good reason why, that is better. I want to hear from you.


Well Written Website Privacy Policy May Backfire

January 24, 2012

I know that I should be writing more short blog entries rather than just a few long blog entries. But as you can see, I have trouble keeping my entries short. There is so much to say about any topic. In this entry I will try to keep it short. Here goes.

I recently came across a website privacy policy that was well written and easy to understand. In this case, that may not have been a good idea.

I read an email post where someone said that he had read about the Nextdoor website in the news. He was excited to give it a try in his neighborhood. Here is how the website describes itself:

“When neighbors start talking, good things happen. Nextdoor is the private social network for your neighborhood. It’s the easiest way for you and your neighbors—and only you and your neighbors—to talk online and make all of your lives better in the real world. And it’s free.”

He added that he glanced at the Privacy Policy, but didn’t see anything “out of the ordinary” to his untrained eye. When he invited some of his neighbors to join, a storm of email erupted around the Privacy Policy. Neighbors feared the sale of all of their personal information and the storage of their data forever and responded that they “would never sign up on a site such as this!”

I was curious about his comment so I read the entire Nextdoor privacy policy. (I would think that only a lawyer would actually do that, but apparently people actually do read these things.) It is well written and is in plain English, rather than in difficult to understand legal jargon. I like that. I try to draft my agreements that way as well. But that may be the problem. Most people do not realize just how little privacy they have. Because the agreement is very clear, someone who reads the agreement will better understand how their data will get stored and used. It is not that the Nextdoor site will use their data any differently than other sites, it is that Nextdoor is more honest and more open and clear about how the data will be used. Even when a website does not share information, it often stores that information for a long time and uses that information on its website in various ways. The Nextdoor privacy policy explains all of this quite well. I suspect that their data retention and use policies are not unusual. What is unusual is how open and honest they are about it. As a result, people who read the privacy policy may be more concerned about this particular site than they should be. That is a strange case where being open and honest about what you do may not be the best policy.

As a side note, one of my themes in this blog is how little privacy we now have. Here is a good example. Even without joining the Nextdoor site, much of your neighborhood information is already quite public. Where I live, in King County Washington, if you want to know who owns the house across the street from you and how much they paid for it, all you have to do is look up the address on the King County Assessors office website. You can find a history of sales including the parties and the price paid, tax value assessments by year, pictures of the house, floor plans, statistical details about the house, and lots of other data. All of that is already public information.

I am not sure telling your neighbors that their privacy is already gone will help convince them to join the Nextdoor website. But it is largely true.

Update May, 2013:

Instagram had a similar reaction from its customers when it tried to simplify its terms of use contract. The newer terms were easier to understand and protected the customer more, but because the customer could now understand the contract, many of them complained. Instagram ended up reinstating its older terms of use contract. See Why
the Instagram debacle just taught every tech company to be shadier than ever
.

 

 


Top Ten Intellectual Property (IP) Law Traps

November 2, 2011

Intellectual property (IP) law is a deceptively complex area of law. IP law is very rules based, and the rules vary depending on the type of IP protection. Non-IP attorneys and individuals who attempt to practice IP law without the assistance of an IP attorney often run into trouble. Here are ten common traps.

Copyright

1. Copyright law is one of the few areas of law where transfers of rights must usually be in writing (real estate is the other obvious example.)

2. The owner of the copyright is the person who created the work, not the person who paid for it. You hire someone to design a website for you. It is your website. You paid for it. But absent a written agreement to the contrary, the website developer owns the copyright in the website.

3. It is deceptively easy to end up accidentally jointly owning the copyright instead of owning it outright. Say you write a software game program, but you hire an outside firm to handle the sounds. It is quite possible for the outside firm to own part of the copyright in the entire software game program. (This is called joint authorship.) This is easy to fix with a written agreement that covers copyright ownership.

Trademark

4. The right to register a federal trademark belongs to the person who used the mark first in interstate commerce, not the person who filed a registration first. But if the first person to use does not object to the other person’s improper federal registration within five years of registration, they may permanently lose the right to object.

5. You do not lose copyright rights by not policing your rights, but you can lose trademark rights by not aggressively policing your rights.

6. One way you can fail to police your rights and lose your trademark is if you license someone to sell your widgets under your trademark and the license agreement does not allow you the right to police the other party’s use of your mark.

Copyright and Trademark Registration

7. Copyright rights and trademark rights are both created automatically. Copyright rights exist as soon as you create something. Trademark rights exist as soon as you use a trademark in commerce. But in each case, you gain considerable additional protection by registering your rights. People often neglect to register.

Copyright registration is only at the federal level. It is fairly straightforward and can usually be done by a non-lawyer. (Practice Tip: Have you registered the copyright in your website and other marketing materials?) Trademarks can be registered at both the state and federal level. State trademark registration is also fairly straightforward but does not help much. Federal trademark registration is deceptively complex. Sometimes a federal trademark registration will be approved as submitted, but quite often it will not. You may need to negotiate with the Trademark Office, and there is a specialized technical language that they use and expect you to use as well. When trying to register a trademark federally, it is best to use an attorney who is familiar with the federal trademark registration process.

Trade Secret

8. A customer list is considered a trade secret. An employee cannot take a physical copy of the list with them when they leave a company. If the employee memorizes the list, that is considered the same as taking a physical copy.

Non-Compete Agreements

9. In Washington, where I practice law, a non-compete agreement entered into after the employee has started working for a company is not enforceable unless the employee is given new consideration for signing the agreement. The right to continue working for the company and to not get fired is not considered new consideration. Labriola v. Pollard Group, Inc., 152 Wn.2d 828, 834,100 P.3d 791 (2004).

Family Law and Estate Planning

10. Intellectual property is property. Yet I often see a divorce property settlement agreement or a will where there is no mention of intellectual property. Have you written a book, or painted a picture, or created other intellectual property? If so, it should be accounted for in the legal documents.

 

(These examples are oversimplified. Although they apply most of the time, I omitted all of the caveats for when they do not apply. Do not rely on these rules without seeking specialized IP law advice first. )

 


Copyright Enforcement on the Internet – Where should we draw the line?

October 26, 2011

In this week’s news a woman is suing Apple for copyright infringement because two of the iPhone apps it sells are using pictures that belong to her. She complained to Apple but they did not remove the pictures. Details here.

.When should we hold a company liable for contributing to copyright infringement by others on its web site? I am not talking about direct infringement, when the company itself uses someone’s copyright protected work without their permission. That one is easy. They should be liable. But what if somewhere on the company’s web site someone else has posted material that violates someone’s copyright? In the early days of the Internet we still held the company liable, although we usually gave them a chance to fix the problem. They were not liable unless they were notified of the infringement and we gave them an opportunity to correct it, and they still failed to fix the problem. (See in particular the Digital Millennium Copyright Act (DMCA)).

These days web sites are so large, and the databases that drive the web sites are even larger. We have a company like Google that is trying to put every book ever written on its web site. Now we are starting to see cloud storage of music, and important files, and perhaps eventually cloud storage of everything. Has the Internet become too big to expect individual companies to be able to police their own web sites?

I was talking to an attorney from Facebook recently. I am paraphrasing what he said. If Facebook had to search its own web site for all the instances of a particular item, it would take months, or perhaps even years, even at computer speeds. Their database is that large.

In the case in the news, the woman used an iPhone app to take pictures which she then uploaded and posted on a picture sharing web site with the appropriate copyright notice. The iPhone app she had used copied her pictures, after removing the copyright notice, and posted them on the Apple App store web site to help market its app. She claims to have notified Apple at least six times prior to filing the law suit. I am not privy to the actual details of the case, but I find it hard to believe that Apple would intentionally ignore her complaints. I suspect they just have too much ‘stuff’ out there, and can no longer effectively police it all. According to Wikipedia, as of May 2011 the Apple App store had over 500,000 third-party apps officially available. That number is growing all the time.

So what is the answer? Do we let Apple get away with contributing to copyright infringement? Do we require that companies with large web sites/databases develop new techniques to police their sites? Or do we require companies to keep their web sites/databases small enough that they can effectively police them with today’s technology? I suspect that the answer will come from new technology, not from new laws. These companies will get better at policing their sites, and we as a society will get more tolerant when they do not do so as effectively as some people would like.

I would have advised this woman that once she posts something on the Internet, her ownership and control is effectively gone, no matter how aggressively she tries to police its use. That may not be fair. That may not be legal. But that is the way it is.


The Lesson from Skype: Don’t Count Your Stock Options Before They Hatch

August 30, 2011

Founders of startups and senior executives who join startups often place too much value on their stock options. Stock options are extremely risky. You may count on your stock options as a possible way to make you rich some day, but you should be very careful if you are counting on them to be part of a reasonable compensation package.

There is the obvious problem that the stock in the company may never be worth anything. But there are many other potential problems with stock options as well. A recent case is illustrative.

It was rumored that one or several senior executives of Skype lost their stock options when Skype agreed to be acquired by Microsoft earlier this summer. As best I can tell many employees of Skype had the right to purchase shares of Skype in accordance with a stock option agreement. That agreement was subject to the terms of the standard company-wide Stock Option Agreement. This is very common. The company-wide stock option plan in turn was subject to the terms of an investor stock plan. There was a provision in the investor stock option plan that allowed the investors to buy back the vested stock options of former employees of Skype at the stock election price. So if you had a vested option to buy 100 shares at $1 each, and the shares were now worth $100 each, the investors could buy back your stock options at $1 per share, wiping out any value you had gained in the stock options. At least one former employee appears to have lost his stock options this way. It is also rumored that a number of senior executive were recently fired and that they too will lose their stock options.

Yee Lee, the individual who appears to have lost his stock options in Skype had written about his experience in a blog. The letter Ricardo Velez, Skype’s associate general counsel, sent him is available here, and his stock option agreement is available here.

(Mr. Lee might still have legal recourse. It is possible that Mr. Lee could argue that the contract terms that forfeited his stock options were unconscionable, or that he had an implied contract right to the options that superseded. I am interested to see if he fights for his options.)

I have read blog comments that this situation is unusual. I do not agree. I have reviewed many stock option plans for clients. The company-wide Stock Option Plan is often subject to the terms of one or more other documents. I always ask the clients to get me a copy of those documents so that I can review them. Sometimes the client thinks I am just trying to run up my fee. But as the Skype case demonstrates, it is important to follow up on the details. In my experience it is rather common that the Stock Option Plan or the additional documents contain one or more legal conditions that could potentially make the client’s stock options worthless. It has also been my experience that the company is not gong to make any changes in these documents for just one person. It is a take it or leave it offer. My standard advice to clients is to insist on enough salary or outright stock grants to make the job worth taking, and consider the stock options as a potential bonus that may or may not come to be. Or accept the risk that you are taking a large risk and that the risk factors are mostly beyond your control.

Do not rely on the fact that you are friends with the people in charge of the company. They may be your friends now. But when there is a large amount of money at stake, friendships tend to fade fast.

If you think the company has value, you should try to stay with the company until you can cash out. As one Skype representative has been quoted as saying in response to the Skype situation,

“You’ve got to be in it to win it. The company chose to include that clause in the contract in order to retain the best and the brightest people to build great products. This individual chose to leave; therefore he doesn’t get that benefit.”

Of course every situation is different. There is less risk if you are receiving stock options in a public company with a large number of shareholders, positive financial track record, and is not likely to undergo a major change in order to raise capital. There is more risk in a start up that has yet to make a profit, and has no market for its shares, and is likely to restructure itself through a merger or sale, or other stock manipulation, in order to raise capital.

Stock options are still a great way to get rich. But they also remain a very risky way to do so. If you go the stock option way, be aware of the high degree of risk involved.