What are Registration Rights?

To many investors, registration rights are one of the most important issues in a financing. If an investor is in a minority position in a nonpublic company, his exit possibilities depend on decisions made by others. Thus, some founders are proud that they have turned down entreaties from investment bankers to take their companies public. They claim that public shareholders might cramp their style and interfere with their ability to run the company according to their own tastes. Well and good for the founder, but not so comforting to a minority investor locked into the founder’s company. Even if the investors as a group are in control of the company, there may be differences of opinion as to when an exit strategy should be implemented; indeed, each investor may have a different sense of timing on the issue, based on facts peculiar to that investor.

The decision to sell the company as a whole is almost always dependent on at least a majority of the shareholders approving the sale. To be sure, the shareholders could by contract agree to sell out at the election of the minority, but such contracts, while common in Shareholders Agreements styled on drag-along rights, are seldom enforced in practice, in accordance with their terms. [1] The shareholders, however, can implement one primary exit strategy, in theory at least, singly and seriatim. The company can only sell its assets once, but it can have as many public offerings of its securities as the market will bear, and a public offering will eventually make the investors liquid.

However, the decision to go public in the first instance is often difficult; there are considerations on both sides. Moreover, even if a company is already public, the election to float another offering requires thought and discussion; any offering “dilutes” existing shareholders. Some shareholders may feel the currently obtainable price accurately reflects value and some may violently disagree.

As a technically legal matter, the decision to affect an IPO is a majority decision. Even if the company is not planning to sell any stock, only the company can file a registration statement; [2] a minority shareholder cannot register his stock for sale without the company’s consent. As the registrant, [3] the company sets the terms of the offering, including the question of how many insider shares to include. Accordingly, investors seek to bolster their position by securing that consent in advance, by insisting that there exist, as part of or allied to the Stock Purchase Agreement, an agreement called the Registration Rights Agreement. It is important to recall that a company “going public” does not undergo an instant transformation, with all its stock ipso facto turned into liquid instruments; the only shares which become truly public-that is, are released from resale restrictions [4] -are those registered for sale [5] and sold at the time. And the company ordinarily issues those shares; the investors’ share of the “action” in an IPO is severely limited because the market’s appetite for stock in an IPO is generally confined to those transactions in which most of the money raised is going to work inside the company. Nonetheless, an IPO is the most significant step on the road to liquidity, even for those investors not selling in the offering.

[2]-Categories of Registration Rights

Registration rights fall into two categories: “demand” and “piggyback.” Piggyback rights, as the name implies, give the shareholders a right to have their shares included in a registration the company is currently planning on behalf of itself (a “primary” offering) or other shareholders (a “secondary” offering). [6] Demand rights, as the name implies, contemplate that the company must initiate and pursue the registration of an offering including, although not necessarily limited to, the shares proffered by the requesting shareholder(s). Since demand rights are more controversial, the following discussion focuses principally (but not exclusively) on that variety.

It should be noted that there are various types of stock issuances, albeit registered, which should not be subject to piggyback rights by their nature-that is, issuance of shares in the course of acquiring another company or the registration of shares pursuant to an employee stock benefit plan. Moreover, the practical difference between demand and piggyback rights can be slight; the investors make a noise about demanding an IPO, the issuer (thus prodded) elects to go forward on its own and then the investors seek to piggyback on what has been, in effect, an offering they “demanded.” Thus, the discussion of “haircuts,” stand asides,” and “lock-ups” applies to all types of registration rights, not just demand rights.

[3]-The Principles Underlying Registration Rights

To comprehend adequately the various issues involved, a discussion of basic principles is in order. The first is that registration rights are seldom used in accordance with their terms, and yet some investors and their counsel view them as a central element of the deal. The actual use of the demand rights, for example, could prove very awkward: a group of minority shareholders insisting on registration, the CEO agreeing only because he has to, but saying, in effect, to the minority, “Find your own underwriter; conduct your own road shows; [7] do not bother me with questions from large institutional purchasers; in a word, sell the stock yourself.” Such would make for a disorderly marketing effort, and the price per share would suffer.

On the other hand, as stated, registration rights are often the only exit vehicle, which, as a practical matter, the minority shareholders can compel. A start-up may issue shares redeemable at the option of the holder, but the instances in which that privilege has been successfully exercised are few. A company still in the development stage may not have the legal power, let alone the cash and/or the agreement of its creditors, to redeem stock. If a controlling founder is content to sit in his office, play with his high-tech toys and does not need more money from his investors, the investors need leverage. Other than through the threat of enforcing the registration rights agreement, there is no legal way to compel the company to go public. Therefore, it is important to keep in mind that liquidating the investors’ shares through a public offering can be not only a promise but also a benchmark, meaning that the remedy, if the founder refuses to cooperate, need not be a lawsuit. Reallocation of stock interests can be triggered if an IPO fails to materialize on time.

The second interesting feature of the registration rights agreement is that it is a three-way agreement, but only two of the three parties negotiate and sign it. With a minor exception for “self-underwritten offerings,” a primary or secondary offering of securities requires an issuer, selling shareholders and an underwriter, either on a “firm” or “best-efforts” basis. However, the underwriter is usually not present when the registration rights agreement is signed, and the parties themselves have to anticipate what the underwriter will require. Following that point, underwriters as a rule do not favor secondary offerings for early-stage companies.

Given a choice, the market likes to see the proceeds of the sale go into the company’s treasury to be used for productive purposes, rather than released to outsiders. Moreover, whenever stock is being sold, the underwriter wants the number of shares issued to be slightly less than its calculation of the market’s appetite. An underwriting is deemed successful if the stock price moves up a bit in the after-market. If the price goes down, the buyers brought in by the underwriter are unhappy; if it moves up smartly, the company is upset because the underwriter underpriced the deal. Consequently, the underwriter does not want to see new shares coming into the market shortly after the underwritten offering is sold, creating more supply than demand. These imperatives account for terms in the registration rights agreement known as the “haircut” and the “hold back.”

Finally, including one’s shares in a publicly underwritten offering is not the only way shares can be sold. A holder of restricted securities can sell his shares, albeit at a discount attributable to illiquidity, in a private transaction; more importantly, he can “dribble” out the shares into the market once the company has become public, under Rule 144. Registration rights for the holder of restricted shares in an already public company are, therefore, redundant unless the holder wants to sell before the required holding period in Rule 144 has expired or the block is so large that it cannot be “dribbled” out under the “volume” or “manner of sale” restrictions set out in that Rule.

The “points” in a registration rights negotiation (points being a slang term for contested issues) [8] are of varying degrees of intensity. Some are standard. Thus, the issuer rarely agrees to register convertible preferred stock, convertible debt or other rights to purchase common stock. The market in the hybrid securities themselves can be messy and confusing to analysts of an emerging-stage issuer‘s IPO; indeed, the mere existence of a class of senior security may cloud the outlook for the common stock‘s participation in future earnings. [9] Hence, the holders of convertible securities must convert before they can include their stock in the offering and/or must convert in any event so as to “clean up” the balance sheet. Some “points” on the other hand, are potential battlefields. For example, a minority shareholder will want the right to threaten exercise of his rights (and thus bully the company into registration) at any time of his choosing. The company will fight to limit the permissible timing of the shareholder’s election-no less than, say, five nor more than seven years after he makes his investment. The shareholder will want to be able to transfer his registration rights if he transfers his shares-they are part of the bundle of rights for which he bargained. The company will fight to keep the rights personal to the holder-a right to force registration is a formidable weapon if the timing is totally inappropriate. A disgruntled shareholder-for example, a founder recently terminated as president-may wave the rights around like a club to win some unrelated concession.

Following that thought, the company needs to limit the number of fingers on the trigger, so to speak. Assume, for example, 10 investors who each hold 10 percent of the class of convertible preferred stock. If each investor enjoyed his personal trigger-that is, could demand registration-the company might find itself in the path of a stampede, helping neither itself nor the investors generally. Moreover, if the company agrees to pay all or a part of the cost of the registration, multiple demands could be expensive. It is, therefore, in the interest of the company and the major investors to vest control of the trigger in the shareholders acting in concert, at least to insist that most of them agree internally before the issue is brought before the company. In addition, the amount of stock they are willing to sell should also be substantial, both because of expense (a small registration is almost as expensive as a large one) and because a buoyant public market depends on “float,” enough shares in circulation to interest institutional investors. From the investor’s standpoint, of course, the situation is reversed. He wants the trigger to be one share less than the shares he holds. This issue becomes more difficult when an issuer goes through multiple rounds of financing, selling off registration rights in each round. If all the shares are of the same class and series, what does one do with a 51 percent shareholder in round one who becomes a 35 percent shareholder when round two is completed? Does he “lose” his solo finger on the trigger because he did not elect to participate in the second round or because the second round involved the acquisition of another company for stock in a transaction in which he was not eligible to participate?

Indeed, the question of inconsistent registration rights provisions occasioned by separate agreements for each round is a thorny one. If the company’s norm is that the rights are not meant to mature for three years from the date of investment, what is to be done with investors in earlier rounds who have held shares for almost three years? Will they have first and exclusive chance at the gateway to public securities? If series A preferred was sold last year (with a 51 percent trigger) and series B preferred is being sold currently, is there any way to compel the series A holders to join in with the series B (assuming the number of shares in each series is the same) to avoid a situation in which the trigger is suddenly held by 25.1 percent (versus 51 percent) of the outstanding preferred stock? Is the language of the agreement such that investors in the earlier rounds can claim to have a first priority for including their shares in a piggyback registration?

The fact is, when the later round occurs, most practitioners attempt to induce the prior holders (who often overlap with the investors in the later round) [10] to cancel the earlier agreement and accept a new provision that affects all the existing holders, old and new, equally. Alternatively, counsel for the early-round investors may bargain for provisions that constrain the issuer in agreeing to register shares of subsequent purchasers-either an absolute prohibition without the consent of the earlier investors or a priority in their favor.

[1] There is nothing conceptually impossible in the notion of “drag along” rights. If all the stockholders agree in advance, the board could be bound, at the instigation of the minority, to retain an agent and authorize it to negotiate the best terms possible for a sale or merger of the entire company. There could be problems in binding the board in advance to vote for a transaction to occur well in the future-one which passes a given hurdle, for example-but, if the majority refuses the agent’s recommendations, there could be other remedies: a control “flip,” for example, or more stock for the minority.

[2] Section 6(a) of the ’33 Act provides that the issuer, the CEO, the CFO, the comptroller or principal accounting officer, and a majority of the board must sign the registration statement.

[3] The term ‘Registrant’ means the issuer of the securities for which the registration statement is filed. ’33 Act, Rule 405.

[4] Even publicly registered shares may not be freely resold; the privilege of investors holding nonregistered shares in a public company to “dribble” out shares pursuant to Rule 144 is limited by the provisions of that Rule and may be further limited by a “hold back” imposed by underwriters, the NASD, and/or state securities administrators.

[5] ’33 Act, Rule 415, adopted in November 1983, permits underwritten shelf registrations, i.e., the registration of shares for later sale at the option of the holder for (1) mature public companies and (2) for secondary issues. See, e.g., Palm, “Registration Statement Preparation and Related Matters,” in Mechanics of Underwriting (PLI Course Handbook Series No. 547, 1987). The problem is that underwriters are reluctant to allow investors to include their shares in the registration statement for delayed sale under Rule 415 since that creates an “overhang” over the market. If the investor’s stock is registered “on the shelf” under Rule 415, it must be “reasonably expected” it will be sold within two years. Rule 415(a)(2).

[6] A “reverse piggyback” right occurs when the investors exercise a demand right, compel a registration that (under the agreement) is at their expense, and the company seeks the right to “piggyback” some newly issued shares on the investors’ registration. See Frome & Max, Raising Capital: Private Placement Forms and Techniques, 673 (1981).

[7] Road shows are meetings between the company, the underwriters, and potential buyers of the company’s stock held around the country after the registration statement has been filed and before it becomes effective. If a CEO wants to be obstreperous, not agreeing with the concept of an IPO, he can be less than enthusiastic about the company’s near-term prospects at the road show, thereby effectively chilling the offering.

[8] When negotiators want to show an increase in the fervor that they or their clients feel about a given issue, they label it a “deal point” or a “deal breaker.” The way experienced negotiators respond to a litany of “deal points” is to create an “escrow file,” meaning that the issue is left for later consideration. After a deal point sits in the escrow file for a bit, it often defuses itself. See generally, Fisher & Ury, Getting to Yes: Negotiating Agreements Without Giving In (1981).

[9] Since the existence of a convertible senior security can muddy the investing public’s perception of the common stock, conversion is usually mandated no later than the evening of an IPO.

[10] Investors in the early rounds are expected to follow on with fresh capital in late rounds to show their faith in the company; however, the existing investors often insist that the founder find at least one new investor, “new blood,” to join in late rounds, if only to avoid a situation in which the investors are negotiating on price and other issues with themselves.

Business Plan Forecasting: Valuation Effects

The art of preparing forecasts in a business plan–and it is an art, not a science–involves the founder in a delicate balancing process. On the one hand, a forecast is a representation of a fact–the founder’s state of mind–and an intellectually honest founder will represent his state of mind accurately, for careless, let alone dishonest, preparations may involve liability. [1] On the other hand, the forecast is a critical element in the negotiation process. Thus, as one prominent source on business plan preparation has noted:

The entrepreneur should be careful to avoid negotiating in the business plan. For example, the entrepreneur who indicates he or she will sell 20 percent of the company for $200,000 has just established the upper end of the negotiating range. Sophisticated reviewers will realize that at worst they can acquire 20 percent of the venture for $200,000, and that they might be able to negotiate a better price. [2]

The problem is that the forecast is an “indication” of price and value since it drives valuation, even though the business plan says nothing about “20% for $200,000.” Potential investors, reading the forecast as an offer by the founder to value his company at a given number, will decode the standard language of venture capital valuation. Consequently, it would be ingenuous to prepare a forecast without at least knowing how the investment community will read it. To be sure, if the founder does nothing more than work backwards in the forecasting process, targeting the valuations he wishes to achieve and then filling in the forecast behind that number, he may have made less than a bona fide effort to be candid. Nonetheless, ignorance of how the audience will react to a forecast is not bliss in the venture universe.

The answer, then, is that the forecast should be prepared with two considerations in mind. It should represent the founder’s best thinking as to likely future events. But, at the same time, the founder should not close his eyes to what the consequences of his forecast will be; accordingly, he should at least understand how venture capitalists approach the forecasts in the context of the valuation process.

Most venture capitalists contemplate a five-year time horizon on the theory an exit strategy is feasible at the end of five years. Therefore, the founder’s forecast should go out as far as the investors are looking. [3] Depending upon the maturity of the company and the ability of its product to excite, an informed founder can usually estimate what kind of compounded rates of return the venture capitalists are looking at over a five-year period. If the founder “guesstimates” that the venture capitalist will be looking for a 38 percent compounded rate of return, a quick calculation shows the venture capitalist will be anticipating its investment will quintuple in five years. If the founder is planning to raise $250,000 from the venture capitalists, then the founder knows a forecast which shows anything less than $1 million in net after-tax earnings in year five will mean he has to surrender more than 12.5 percent of the company. To illustrate, the venture capitalist can then be counted on to multiply 1 million times a price/earnings multiple (and that usually is somewhere around 10 because, among other reasons, that number appears often in the marketplace and is easy to work with); once the venture capitalist comes up with a $10 million valuation, he will then calculate that his $250,000 should be worth $1.25 million in year five and find himself agreeing to take 12.5 percent of the company for $250,000 in year one if, and only if, he sees (and believes) forecast earnings of $1 million or more in year five.

A final word on this point. Borrowing from the speech of Kenneth Olson to the 1987 M.I.T. graduating class, [4] the forecast is both a prediction and a target. If you don’t shoot high, the Law of Self-fulfilling Prophecies dictates that you won’t reach high. Exuberance in preparing one’s forecast, if intellectually honest, is an integral part of a founder’s mental terrain.

Lest one get the impression that the previous discussion baldly suggests the forecast should come out exactly where the founder wants it to, it should be remembered that professional venture capital investors are not stupid. They will test the forecast and explore thoroughly the assumptions used, smoking out numbers that are intellectually dishonest or, to put it in the vernacular, do not pass the “red face” test. A very steep climb in earnings in some remote period, for example, will be suspect. Because it is easier to kibitz a forecast in the early years, a spike upward in year five, when anybody’s guess is as good as anybody else’s, will reveal itself as result-oriented. Moreover, an intellectually dishonest set of projections may provoke a negative reaction or outright rejection without further investigation. Furthermore, many investors view the forecast as a quasi-promise [5] by the founder, a representation that he proposes (albeit not legally bound) to make the forecast come true. The forecast is not so much a prediction of the future–five years is too long a time frame for precise predictions [6]–but an undertaking by the party in control to accomplish a given objective. Indeed, a confident forecast of summary results may become a critical issue in the financing negotiations. Experienced investors are accustomed to confront the founder with his rosy forecast, agree to a valuation based thereupon, and then insist that a system of penalties be institutionalized, taking equity away from the founder if and to the extent he fails to achieve the projections he authored. As elsewhere noted, most venture financing’s entail multiple rounds and, accordingly, are of the benchmark variety even if not explicitly so provided in the Purchase Agreement. The second-round investors, generally the same parties who invested in the first round, will be influenced in their pricing decision (in turn driving the founder’s dilution) by the founder’s record measured by the forecast. On occasion, the inability to meet an overly optimistic forecast may be the trigger for a control “flip”–ousting the founder from office.

[1] In the public venue, the case of Beecher v. Able, 374 F Supp. 341 (S.D.N.Y. 1974), suggests that the forecast must be based on facts that would lead one to conclude the results are “highly probable.” Id. at 348. The overall atmosphere has changed since that case was decided, spurred by the SEC’s more tolerant attitude toward forecasts and the Private Securities Litigation Reform Act.

[2] Siegel et al., The Arthur Young Business Plan Guide (1987). The art of forecasting is sometimes known as the “bull’s eye” theory. Under this theory, one shoots the arrow first and then paints the bull’s eye around the arrow wherever it happens to land.

[3] See generally Haslett & Smollen, Preparing A Business Plan, in Pratt’s Guide 31 (1994).

[4] Olson, Learning the Dangers of Success: The Education of an Entrepreneur, New York Times, July 19, 1987.

[5] See White, The Entrepreneur’s Manual: Business Start-Ups, Spin-Offs, and Innovative Management 147-48 (1977).

[6] In Regulation S-K, Item 10(b)(2), the SEC, while it “encourages” forecasts in public disclosure statements, appears to endorse the conventional view that long-term forecasts are misleading. The Commission is correct, of course, but that view is not apposite in a venture placement. The investors know the forecast results will not come true unless the founder somehow makes them come true.

The Entrepreneur’s Shares: A Balanced Approach To Founder’s Equity

Guest post by Daniel I. DeWolf, Evan M. Bienstock, Samuel Effron, and Ilan Goldbard – Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

When accepting money from outside investors, entrepreneurs are generally asked to give up some degree of control over their start-up, exchanging equity in their company for cash. In an effort to minimize the control they relinquish, upon formation of their company entrepreneurs can grant themselves equity that comes with special rights. These rights, such as special voting privileges or guaranteed board seats, allow founders to maintain control of their company in spite of a dwindling ownership percentage. They may also include special rights that make it possible for a founder to cash out some of his equity prior to an IPO or other exit event.

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Ten Tips to Magnetize Your Business Plan

It is a rare entrepreneur who can raise money beyond the seed round without a well prepared, thoroughly research business plan. It maps out the road to success. The business plan must convince investors that you know the best route to get there and that if there are twists and turns in the road, as there inevitably will be, you can navigate them. Typically, venture capitalists (VCs) and angels focus primarily on the management team, the idea, market opportunity, and the financials, but other factors play into the final decision of an investor to fund a business. Here are ten tips that will magnetize your business plan making it more attractive to investors.

1. Hook them Immediately

Investors are deluged with business plans, rejecting most within a few minutes of beginning to read them. How do you stand out from the rest? Open with a couple of sentences that grab the attention and imagination of investors and entice them to want to read more. These first few sentences must tell the reader what you do, why you are unique, the size of the market, and the share of market you expect to capture and when.

2. Project Solid Management Expertise

The strength of your start-up’s management team is absolutely critical to your success and your ability to raise venture and angel financing. A start-up doesn’t need to have a complete team to raise funding, but it should, at the least, have key players on board who have the experience and the vision to make the company a success. VCs and angels invest in people, not just ideas on paper, and they want to make sure that your team can deliver. Investors look for an effective management team that:

  • Has successfully started and run other companies
  • Works cooperatively
  • Consists of members selected to provide a range of industry knowledge and functional skills
  • Has integrity, passion, flexibility and reliability

Corporate and advisory board members can help enhance the expertise, experience, and network of the managers of a start-up. Marquis names impress investors. Choosing well-represented professional resources such as accountants and lawyers will not only expand your network but also increase your credibility with investors.

3. Develop Captivating and Believable Financials

Investors will want to know how you arrived at your projections. These assumptions should be clearly spelled out. If you have an existing business, you have a pretty good sense of how much things will cost, how much staff you’ll need, and the sales, you’re likely to make. But when you’re just starting out, these projections are difficult to make. Instead, develop your financials from the bottom up.

  • Examine different distribution channels and the opportunities and costs in each
  • Source manufacturers and suppliers
  • Project staffing needs with salaries and start dates

Investors will expect numbers to be more or less aggressive depending on the stage, level of risk of the company and whether they are a VC or an angel. Angels tend to have less aggressive goals than VCs.

Know your numbers and be ready to explain how each item in your projections has been calculated, because any serious investor is likely to grill you on the detail. You’ll also be expected to know your brake event point, burn rate, when you are going to run out of money and what the investor’s exit strategy is (buyout, IPO, merger/acquisition).

4. Target a Significant Market With Opportunity

VCs in particular are looking for big opportunities – they want to know that your business will serve a large market (at least $1 billion) and possibly become a market leader. They want to understand what the market situation is that needs to be addressed and how you plan to exploit it. Is the consumer frustrated, perhaps the industry is plagued by poor quality control? Is it an untapped market niche? Are you consolidating a fragmented market? Have you developed a technological or medical breakthrough?

5. Include a Well-Researched Market Analysis

Part of targeting a significant market opportunity is knowing everything about the market, not just is size and opportunity. Provide a full analysis of the market, its characteristics, growth potential and all relevant trends. Include a competitive analysis, which describes the strengths and weaknesses of the competitors within your market and your competitive advantage.

6. Create Competitive Barriers

You must have a sustainable competitive advantage. Do you have patents, copyrights, a proprietary process or technology, exclusive licenses or agreements? Are you the first to market? How long can you protect that lead if a big company enters the market? Do you have the best people or the best strategic partners?

7. Forge Strategic Alliances

Securing strategic alliances with key players in the industry, distributors, vendors, etc., shows venture capitalists and angels that others trust you, want to work with you and establishes proof of concept, which is particularly important for a start-up. This definitely increases an investor’s confidence in you.

8. Set Realistic and Achievable Milestones

Investors don’t give a large sum of money in one chunk. You’ll need to address how much will be needed, when each contribution will be made and what the goals are to be accomplished in that period. If you don’t achieve your goals you may not get the next contribution so make your milestones realistic.

9. Show Management’s Commitment

For start-ups, a personal investment on the part of the entrepreneur demonstrates his or her seriousness and willingness to take on part of the risk and shows investors the entrepreneur’s commitment to the project.

10. Attend to the Details

VCs and angels don’t have a lot of time or patience. The business plan should be:

  • Concise – about 30 pages
  • Consistent – numbers in particular need to be consistent throughout the text of the plan, the
  • Financials and the assumptions
  • Well documented – footnote where appropriate
  • Accurate – don’t make things up
  • Easy to read
  • Well laid out
  • Written in an acceptable business plan style
  • Handsome – use of color on the cover and graphics can be beneficial

Be sure the cover page has the name of your company, logo, its address, phone and fax numbers and company URL, plus the name and title of the contact with email address. Include a table of contents that provides a logical arrangement of the sections of your business plan, with page numbers. Believe it or not entrepreneurs sometimes overlook these small details.

Final Points

Getting funding is no easy task. Hard work, persistence and following these tips will improve your chances of success.

How to Use and Protect Your Trademark without a Registration

Guest Post by:  Kristin Cornuelle /Senior Associate at Orrick

Many companies are interested in protecting their brands, but are sometimes unclear about how to protect a trademark, and most importantly, how to use it properly.  Trademarks do not have to be registered with the U.S. Patent and Trademark Office (USPTO) in order for the owner to have rights.  Even if you do not have a state or federal trademark registration, you may have common law trademark rights – at least with respect to the geographical area you are operating in – if you are using your mark in connection with your product or service and providing it in commerce.

Although you cannot use the circle R symbol ® until the trademark is registered with the USPTO, you can use a TM or SM superscript to indicate that you are claiming common law rights in your mark.  When you are using a trademark in your advertising material or on your website, consider using the TM or SM superscript in the upper right hand corner.  Try to use the TM or SM superscript in the first or most prominent use of the mark on the web page or collateral. In other words, the first time the trademark appears in the collateral, advertisement or web page.  No need to use it every time, but the most prominent usage will put viewers or readers on notice that you are claiming common law rights to that mark.  The TM or SM superscript can be a great deterrent to other individuals or entities who are considering the same or similar mark for their product or services.

It is also important to highlight your trademark in some way to set it apart from the rest of your advertising language.  You do not need to capitalize the trademark, but it is a good idea to highlight it in some way to pull it out from general text, either through bold, underline or italics or a different font or stylization.  You can also use it consistently on each webpage in a prominent location, such as the header or footer, in a different size than your other web content.

Another common mistake many make is using a trademark as a noun or a verb.  Make sure that you only use the trademark as an adjective, not as a noun or verb, or as a plural or possessive.  For example, “Our ORRICK legal services support start-up companies who are looking to….”

Of course, you can always file a trademark application with the USPTO and obtain some wonderful benefits, and you should definitely consider this option.  In the meantime, these tips should give you a start on protecting your brand without one!


If you have questions about trademarks and how to protect or enforce them, please contact Kristin Cornuelle at kcornuelle@orrick.com

For more information as presented in our August 24th Trademarks session, please click the image to the left.

Kristin Cornuelle, a senior associate in the Portland office, is a member of the Intellectual Property Group and the Trademark, Copyright and False Advertising Group. Kristin has experience with both intellectual property and general commercial litigation matters.