Proprietary software licenses normally take the form of end user license agreements (EULAs) and are often attached to major commercial software, like Microsoft Office or Quickbooks. Typically, proprietary software license only grant the user the right to use the software in a specific way; the ability to modify, copy, or redistribute the software is usually very limited, if allowed at all, and access to the source code is also usually restricted.

Conversely, free-and-open source software licenses give users access to the source code and permit users to use and redistribute software. Some free-and-open source software licenses are known as recursive or copyleft, which require users to release any derivative software under the same license as the original software, whether as a whole (meaning all of the derivative software operates under the same license) or in part (meaning that only the parts of the derivative software that came from the original software still operate under the original license, while the new parts can be licensed in any way). Finally some free-and-open source software licenses allow users to do whatever they want with the software, even including it in new proprietary software (although copyright permissions and credit to the original software’s author usually must be included as well).

If your startup is building new software off of and incorporating free-and-open source software, you will want to check to see what the specific rights and responsibilities of the original software are. You or your developers will want to avoid covering something with a proprietary license that is required by the base software’s license to be covered in part or in total by the original software’s fre-and-open source software license.

1) Instructions the business gives to the worker (such as where to do the work [like the business' office], what tools or equipment to use, or what sequence or procedure to use in doing the work) — the more detailed the instructions, the more likely the worker is actually an employee

2) Training the business gives the worker — employees typically receive training from the business, whereas independent contractors obtain their own training

3) The extent to which the worker has unreimbursed business expenses — in particular, fixed ongoing costs whether or not work is being done; independent contractors are not generally reimbursed for expenses

4) The extent of the worker’s investment — independent contractors often make investments into their worker, such as equipment purchases or the renting of workspace

5) The extent to which the worker makes services available to the relevant market — independent contractors should regularly advertise their services to the broader market and have multiple clients at once or over a period of time

6) How the business pays the worker — independent contractors are paid on invoice, whereas employees are paid at regular intervals (e.g. biweekly)

7) The extent to which the worker can realize a profit or loss — independent contractors can realize a profit or loss from work performed for a business, whereas employees don’t contribute to the cost of doing business and are paid a wage or salary regardless of the work being done

8) Written agreements describing the relationship the parties intended to create — for example, did the parties use an independent contractor agreement? Was the worker given an employee manual? (it should be noted that although the actual nature of the relationship is what really matters, in particularly close cases the intent of the parties can factor in)

9) Whether the business provides the worker with employee-type benefits — such as insurance, pension, vacation, and sick time

10) The permanency of the relationship — if the relationship is commenced with the understanding that it will continue indefinitely or be permanent, rather than terminate upon the completion of a project, it points to an employer-employee relationship

11) The extent to which services performed are a key aspect of the regular business of the company — if the worker is providing critical services or the company is presenting the work as the company’s own, it is more likely that the company is directing the activity of the worker like that of an employee

It is important to note that not every factor has to tip in the direction of indicating an employer-employee relationship, nor is there really a bright line for that can be crossed for every factor — even one factor can overwhelmingly point the analysis one way or the other, so it doesn’t work to try to “beat the system” by structuring the relationship in certain ways in order to avoid classifying workers as employees. Moreover, as previously stated the concern is not what the parties consider the relationship to be, but rather what the nature of the relationship actually is in practice, so it is even possible to unwittingly treat an independent contractor like an employee.

Here are a few tips to better ensure that you don’t accidentally end up treating independent contractors like employees (and risking a reclassification by the IRS), most of which can be gleaned from the 11-factor test above:

1: Issue a Form 1099

2: Did you issue a Form 1099? Stop reading this and go issue a Form 1099 (then come back and read the rest of this article). Not issuing one is a very serious oversight that at worst could be a fatal error or at best lead to additional scrutiny from auditors.

3: Avoid giving too many detailed instructions to contractors, in particular concerning having the contractor work at your place of business (unless it is necessary to the project) or working certain hours (although you can set deadlines or milestones).

4: It is better to hire contractors that have or have had other clients; if you are their first client, make sure they are actively advertising their services. In the same vein, it is ideal if the contractor is performing their services as a corporation, LLC, or DBA, although some contractors obviously operate as sole proprietors under their own name, so it is not a necessity.

5: This one seems a little obvious, but don’t give or have contractors follow your employee handbook, or refer to them or let them refer to themselves as employees of your company.

6: Make sure you’re getting invoices from your contractors, and aren’t simply paying them on a regular basis.

At a basic level, an independent contract is a business you hire to handle a task or project for your business — contractors should be treated accordingly. If you do have a serious question regarding a course of action to be taken with a contractor, you should certainly consult with your attorney or tax advisor.

I’ve seen founder teams get a little off-track when I bring up the issue of officer positions during an entity formation and structuring matter. In Massachusetts at least, a corporation must have someone holding at least the President, Treasurer, and Secretary positions on the board. Although I tell clients that those are the only positions that need to be filled, sometimes they begin to delve into CxO positions, so I have to gently remind them that they aren’t necessary for a company that is just being formed.

As for using CxO positions, Batson believes that having a CEO is fine, since someone needs to be readily identifiable as “the person” in the startup (although since someone has to be President, that can be used in lieu of CEO as well). It may also be acceptable to have CFOs and CTOs from the get-go, if those founders have the experience and skill to remain in those positions once the company expands, starts doing significant business, and begins hiring professional CxOs. Any other CxO positions, Batson argues, are really unnecessary in a company that at best only has a few employees.

I should first probably clarify that there is technically nothing wrong (in every state as far as I am aware) with paying legal fees with company equity. However, the major issue with paying your attorney with an equity interest in your company is just that — your attorney now has an interest in your company. A startup normally relies on its attorney for impartial legal (and even general business) advice, but if the attorney has its own interest or agenda in the startup, how can the founders truly trust the advice, or at least not wonder about the attorney’s advice? Even if an attorney who took equity remained impartial (I know I would), if a client were to become unhappy with the result of a matter I could nonetheless be open to a malpractice claim solely on the appearance of possible impropriety.

There generally is no conflict of interest in routine business/corporate matters such as drafting up sales contract templates or employee handbooks. The possibility of conflict of interest generally comes in with financial transactions such as Series A rounds or acquisition. On one hand, in such transactions the interest of the shareholders does not always align with the interest of the business, whose interests the attorney represents (but if given equity is now also a shareholder). Moreover, an attorney equity holder has a direct financial interest in seeing such transactions consummated. In those matters, the attorney should be recusing themselves, leaving the company to have to bring in new counsel to handle that transaction.

This would appear to defeat the effort in building a long-term relationship with legal counsel from the inception of the business. Therefore, it seems that it really only makes sense to compensate attorneys with equity when they are handling isolated matters for your business. As I outlined above, it can constrain the relationship with your company’s regular attorney, which is why I choose not to accept equity for payment — it is my hope to build a regular, long-term relationship with all my clients, so I do not want to create a situation where I would have to withdraw at some of the most important events in the startup’s development, or give my client a reason to question my advice.

More specifically, employees are generally considered agents for their employers; however, that agency only extends to the scope of their employment. Therefore, when asking if an employee’s actions or omissions can bring liability upon the employer, it is necessary to ask whether the employee’s action or omission was in the course of employment. Generally, any act or omission that occurs during the employee’s execution of work-related tasks or assignments, or anything else that might fall within the natural scope of the employee’s position.

Two other important concepts to consider are “detour” and “frolic”. A detour is only a minor deviation by an employee from explicit instructions or job responsibilities; conversely, a frolic occurs when the employee deviates so far from performing his or her instructions or responsibilities that any action or omission that occurs falls outside of the scope of employment.

For example, if a startup hires a sales manager who visits prospective clients and while driving to a client meeting the manager stops for gas, if the manager hits a pedestrian at the station the gas stop may well be considered a “detour” (since it was a minor deviation in the course of going to a client meeting) for which the employer is liable. On the other hand, if the manager uses his lunch to run a series of personal errands and in the midst of that hits a pedestrian, it may likely be considered a “frolic” since running personal errands (even in the middle of the work day) is not within the scope of employment.

However, an employer can sometimes be liable for frolics under the theory of negligent hiring. As another example, let’s say an employee assaults someone in the office. Although the assault is certainly not within the scope of employment and can be considered a frolic, if a background check would have revealed that the employee has previously been convicted of assault, the employer might be held liable for negligent hiring for hiring someone with a violent disposition without a proper background check.

Generally, no one who is not, at the very least, an employee of an issuer (in many cases, it should be officers or directors) should be doing the following unless they are a registered broker or associated with a registered broker: 1) acting as an independent consultant; 2) actively soliciting investors on behalf of a company issuing securities; 3) receiving transaction-based compensation for consultation or soliciting investment; or 4) sending prospectuses, subscription documents, or other due diligence materials to other investors.

Startups in particular should be wary of enlisting the services of a “finder” in their fundraising efforts. Utilizing an unregistered or unlicensed broker may invalidate the company’s use of many state and federal securities registrations exemptions (in fact, some exemptions do not permit the use of a broker, registered/licensed or not, at all). If the use of a “finder” invalidates an issuing company’s claimed exemption (with no safe harbor available), purchasers will normally be entitled to a right of recision (that is, a right to have the transaction reversed and their money returned), and the company (and potentially its principals) may be subject to fines and/or barred from further use of certain securities exemptions.

Much of the controversy in the federal court case surrounding whether the options were discounted stems from the fact that the company which granted the options was a publicly traded company, and as a result the fair market value of its stock varies from day to day. Conversely, startup companies have the benefit that the fair market value of their stock does not vary so wildly. However, Section 409A and the issue of discounted stock options can be something to consider even for startups who utilize stock options, especially if the startup is in the midst of some sort of valuation or liquidity event, such as a Series A round, which can alter the fair market value of its stock.

The federal court ruling stresses the importance for every company, including startups, that grants stock options, to properly document the fair market value of its stock upon the grant of options, lest there be an issue of whether the options were discounted. If the tax liability of the grantee under a Section 409A violation would be a significant amount, without documentation to back up the fair market value, it could catch the attention of the IRS.

I’ve previously discussed both ISOs and NQOs, but to recap, ISOs and NQOs are IRS classifications, each of which has tax benefits flowing to a different party. For ISOs, the benefit flows to the employee — the employee need not pay income taxes on ISOs; instead, assuming the employee holds the options and the stock for the requisite minimum period and meets other conditions, the employee is only taxed on the difference between the exercise price and the fair market value at the time of exercise at the long-term capital gains rate (which is lower than the income tax rate). Conversely, holders of NQOs must include the value in their income (and must also pay the capital gains tax upon exercise); however, the issuer (employer) may deduct from its own taxes the amount that the option holder must declare in his or her income.

So what happens in the event an independent contractor is accidentally granted ISOs? The response from the listserv was that, generally speaking, because ISOs and NQOs are tax treatments, the options granted are really only NQOs, since the IRS will not recognize ISOs treatment for options granted to an independent contractor. Of course, there may be conditions in the actual offer letter or options themselves that may render them void in the event they are mislabeled, but in any event the contractor and company will want to clear up the confusion as quickly as possible. For one thing, the independent contractor needs to include the value of his or her options in his or her income; in addition, the company will certainly want to take advantage of the tax advantages granted to it by NQOs.

Moreover, the company will want to clear up the confusion in the event a question comes up regarding the independent contractor’s actual employment status; it is possible that the on-paper issuance of ISOs could be potentially used as evidence that an independent contractor was being treated by the company as an employee, especially if there are other factors that point to a misclassification. As I’ve previously discussed, misclassification can lead to significant back taxes, interest, and penalties for the employer.

In any event, this serves as a lesson to be careful when drafting stock option grants — ISOs can only be granted under certain requirements, so you will want to make sure that those requirements are met.

However, securities laws are a two-tier system, with laws at both the federal and state level. States are of course perfectly free to adopt their own equity crowdfunding laws — although the JOBS Act appears to create a Rule 506-like exemption from state securities laws for equity crowdfunding offerings, until equity crowdfunding becomes fully legal at the federal level states are pretty much free to treat equity crowdfunding however they want.

Washington state has been considering adopting its own equity crowdfunding laws (although the matter has been pushed off until 2014). Perhaps the biggest hurdle to states adopting their own laws is the uncertain demand for equity crowdfunding — there has been vocal demand for it, but no one is really certain if that vocal group is the majority or a minority of startups and small businesses. Securities regulators also have a difficult time trying to balance making the process easy for entrepreneurs (or their legal counsel, reducing costs to the entrepreneur) without also making the system an easy target for fraud.

States with sizable entrepreneurial communities, such as Massachusetts, may want to consider adopting its own equity crowdfunding laws as a stopgap measure until the federal laws become fully legal. Of course, a state law only has effect within its borders — if Massachusetts were to pass a equity crowdfunding law, a Massachusetts startup would only be able to solicit investment from Massachusetts residents. But perhaps giving the option for state residents to invest in and propel local startups is what states like Massachusetts needs to take their entrepreneurial communities to the next level.

1) Privacy policies might not be necessary — Technically, not every website or online business needs a privacy policy. With certain industry exceptions (discussed below), a website needs to have a privacy policy only if it actually collects information from users — the policy should inform users what information is being collected, how it is being used, and how it is being protected. However, for reasons that will be discussed below, for practical reasons most web companies should post privacy policies.

2) If you deviate from your policy, it may be a breach of contract — Simply by posting a privacy policy, a website becomes subject to Federal Trade Commission regulation, since the FTC considers privacy policies “advertising”. By acting as advertising, privacy policies could be interpreted as part of the “basis of the bargain” between the website and the user; having users click to agree to policies upon arriving at the site or upon account signup more definitively create an agreement. Failure to adhere to the policy afterwards can be construed as a breach of contract; generally, a website’s privacy policy should include a clause that grants the website owner the right to amend the policy unilaterally, so that before a website changes its operating procedures it can amend its privacy policy accordingly.

3) Certain industries are *required* to have privacy policies — Websites in certain industries or with certain focuses are required to have privacy policies under all circumstances — banking/financial websites, health-related websites, and websites directed to children under the age of 13.

Banking and financial websites are governed by the Gramm-Leach-Bliley Act. Websites must publish annual notices of their privacy policies and give users the ability to control who their information is shared with, in addition to stricter security requirements for protection of users’ data.

Health related companies must comply with the Health Insurance Portability and Accountability Act. The spectrum of health related company now includes not only healthcare providers, but also web companies that provide services to healthcare providers.

Finally, websites that collect information from children under the age of 13 must comply with the Children’s Online Privacy Protection Act, which prohibits sites from collecting or disclosing information collected from children under the age of 13 without verifiable parental consent (the standards for verifiable parental consent have recently become more strict). Even if a site doesn’t collect or disclose information from children under the age of 13, its privacy policy should explicitly state so (including methods to prevent children from transmitting their information to the site) in addition to giving parents the ability to have their children’s information deleted in the event it is found to have inadvertently been collected by the site.

4) In addition to federal privacy laws, every state has its own set of laws — In addition to federal laws and regulations governing privacy, each state may have its own set of laws that govern both web companies based within the state and the collection of information from the state’s residents (whether or not the company is actually based in the state). For example, California (which is regarded to have the strictest laws) requires app developers that collect information from California residents to have a privacy policy. Since many websites and apps have a national focus, as a practical matter most companies that collect information from users will need to include a privacy policy on their website or app.

5) The E.U. has its own that companies must comply with or face fines — The European Union is considered to have stricter privacy laws than the U.S. In particular, any company anywhere in the world that transfers user data out of the E.U. needs to comply with the E.U. Data Directive; however, U.S. companies have the benefit of the Safe Harbor Program set up by the Department of Commerce, which the E.U. considers an acceptable substitute for their Data Directive. U.S. websites and apps that collect information from E.U. citizens should ensure that their privacy policies comply with the Safe Harbor Program.