02 Legal organization in digital projects

Worst Case

Currently I represent in one case two software developers who have started a project together with two economists, whose idea was that the partners buy up start-ups of the digital industry, push them with their common know-how and later sell them at a profit. Effectively, the partners bought a company. During the next two years, however, the company did not really get off the ground and other companies were not added. Since the partners could not pay their wages during this time and the assets of the two software developers were practically exhausted, they left the project.

As a result, the software developers demanded a reward from the economists for their two-year commitment. For their part, the economists claim that the software developers illegally copied the source code of jointly developed software and took it with them. For 5 years now (sic!) the software developers have been litigating against the economists. An end is not yet in sight … A clear legal organization and clear agreements could have prevented this fiasco and thousands of francs in costs. The case is exemplary for many start-ups that do not succeed or where some of the partners leave the project already at the beginning.

This chapter is also concerned with showing how a digital project should be legally organised and what agreements the partners must reach with each other in order to prevent a disaster as far as possible.

Typical emergence of start-ups in the digital world

In the Silycon Valley we visited a private project of Eric Schmidt, former CEO and President of Google, in the context of a study trip. Start-ups are formed “on the greenfield”, as it were, by teams with people from different areas, in particular economics, computer science, technology, design and marketing and these interdisciplinary teams then have to develop a business idea within three months and then implement it as part of a start-up.

This is a great, but probably rare project. More frequently, start-ups are likely to develop in such a way that someone has a business idea and an interdisciplinary team gathers around them to implement it in a start-up. This business idea is the starting point of the start-up and thus also the starting point of its legal organization and the agreements between the partners.

Legal organization of a digital project

Innovation protection, non-disclosure and non-use agreement

As soon as a start-up entrepreneur reveals his business idea to potential business partners, there is obviously a danger that they will steal the idea and realize it themselves as a product. For this reason, it is particularly important at this stage of a star-up to take the right legal action. The best protection against the theft of an idea would be the protection of innovation, i.e. the registration of the business idea as a trademark, patent or design. A copyright does not have to be registered. The problem, however, is that it is precisely the idea that cannot be protected by the aforementioned rights, but only its expression; as a two- or three-dimensional trademark, as a disclosed idea in the form of a patent specification, as a design and copyright in various forms, from art and literature to software. After all, a general theft of an idea is unfair or unfair behaviour according to the law against unfair competition (UCA). According to Art. 5 of the Unfair Competition Act (UCA), anyone who, in particular, a) makes unauthorised use of a work result entrusted to him, such as offers, calculations or plans, b) makes use of a third party’s work result, such as offers, calculations or plans, although he must know that it has been unauthorisedly handed over to him or made available to him, and c) takes over and makes use of the marketable work result of another party without reasonable effort of his own by means of technical reproduction procedures (but not manual ones!) as such acts unfair. Art. 5 UCA may, for example, also cover concepts and thus projects at the idea stage. Unfair conduct according to Art. 5 UCA is even punishable according to Art. 23 UCA, but only as an offence with an application deadline of 3 months (!). Practice shows, however, that it is usually difficult to proceed on the basis of the UCA. It is much easier if the person concerned has an intellectual property right. Thus, the principle is to register ideas as trademarks, patents or designs if possible and as soon as possible. As mentioned above, those who produce innovations that are protected by copyright have the advantage that they are already protected without registration when they are created.

With regard to innovation protection, reference is made in detail to Chapter 08 Innovation protection of digital products.

Legal organization of the project

As mentioned, start-ups usually start as sole proprietorships (“enterprises” in the true sense of the word: doing something). Subsequently, further persons are added to the project. This already raises the question of whether the other persons are subordinate to the sole proprietor and thus probably become employees (see chapter 03 Employees in the digital world), or are on an equal footing and thus become partners in some way.

If the other persons are employees of the start-up entrepreneur, the latter may in principle continue the project as a sole proprietorship. As long as there are no major risks for the individual entrepreneur in his project and the project is managed on a smaller scale, this form of enterprise is suitable. However, if the risks increase, which is particularly the case with growth, a sole proprietorship becomes a risk for the entrepreneur himself, whom a sole proprietor is liable to third parties with all his private assets, and that without limitation (!).

If, however, the partners are treated equally, the start-up becomes either a simple company in accordance with Art. 530 et seq. of the Swiss Code of Obligations (CO), as long as the company does not yet appear externally.

However, as soon as the partners appear under a common company name (name of the company), the individual company or the simple partnership changes into a general partnership according to Art. 552 CO. In my opinion, this is a very problematic form of company, since the partners, if the company no longer has any assets of their own, are also liable without limitation with their private assets, in addition also in solidarity for the business partners (!). “Solidarity” sounds nice to people who don’t think anything bad, but it is brutal in this context: a creditor can demand the entire debt from any shareholder.

For this reason in particular, in the case of major risks, the company must be converted at this point into a form with which direct personal liability can be blocked. In the English-speaking world, these companies are therefore referred to as “Limited” (liability limited to company assets). In practice, a limited liability company (GmbH) in accordance with Art. 772 et seq. of the Swiss Code of Obligations (CO) or a public limited company (Aktiengesellschaft) in accordance with Art. 620 ff. of the Swiss Code of Obligations, is usually used for this purpose. The GmbH is suitable for smaller companies and the AG for larger ones. The form of the AG should be chosen in particular if investors are to participate in the company. In the case of a GmbH, the transfer of the so-called ordinary shares is rather laborious. In addition, the shareholders of a GmbH must be published in the commercial register, while the AG, as it is called in French, is a Société Anonyme, i.e. a company in which the shareholders are not entered in the commercial register (only the organs). In this context, it is important to know that a GmbH can be converted into an AG at any time (and vice versa) in a single step at any time and based on the procedure according to the Merger Act (MerG). And for those who already have big plans as start-up entrepreneurs: an IPO is only possible with an AG.

In particular, projects for crypot currencies, such as Bitcoin or Ethereum, are also organised as a foundation according to Art. 80 ff. of the Civil Code (CC, not CO!). When a foundation is established, assets are transferred to the institution which may only be used for the purposes mentioned in the foundation statutes. The purpose of the foundation can only be changed under certain conditions after it has been established. In addition, these assets become absolutely independent. This means that a foundation has no partners. The assets become absolutely independent with the foundation. The only organ of a foundation is the foundation board. Depending on the geographical orientation of the foundation’s purpose, this board and the entire foundation are also subject to cantonal or federal foundation supervision. This makes it possible to establish that the form of the foundation is as rigid and thus, of course, as stable as the blockchains it organises and is therefore only suitable for very specific projects.

Prof. Dr. Roland Müller from the University of St. Gallen has produced a very good overview of the types of companies, which can be downloaded as a PDF under the following link: www.advocat.ch/fileadmin/user_upload/know-how/gesellschaftsrecht/Uebersicht_Gesellschaftsformen.pdf. The booklet “Gesellschaftsrecht in a nutshell” by Lukas Handschin is also suitable for a quick, summary overview.

Agreements between the partners of a digital project

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