The SAFE(ER) Option for Entrepreneurs

By: Alexa Esposito

December 2016

Introduction

            As home to some of the biggest pop culture hubs in the world, the West Coast is viewed as a trendsetter for East Coast social and economic development. The West Coast is where celebrities are seen wearing the latest fashions, attending the coolest music festivals, and sauntering down the red carpet of the latest movie premiers. Therefore, it is no surprise that another West Coast-born trend is currently making its way to the East Coast, and no, unfortunately it is not In-N-Out Burger.  However, for start-up entrepreneurs seeking investors in early-stage “seed round” financings, this new trend might turn out to be just as appetizing as the prospect of the famous burger establishment. The “SAFE” Agreement, short for Simple Agreements for Future Equity, is the latest West Coast trend making its way East, providing a new investment option for entrepreneurs and investors in the start-up community.

The Traditional Convertible Note

            Popularized by the Silicon Valley accelerator Y-Combinator, SAFE agreements provide an alternative to the more traditional convertible note option for entrepreneurs seeking seed round financings. Convertible notes are debt securities issued by start-up companies in exchange for capital from investors. Although convertible notes technically operate as debt, the ultimate goal for an investor noteholder is to turn his/her debt into equity in the company, that is of a value equal to the value of the preferred stock initial investors received in the company’s Series A round, or first round of financing with venture capitalists. As debt instruments that carry the prospect of future equity for investors, convertible notes characteristically contain traditional debt terms and conversion events and prices. Traditional debt terms include: a principal balance, which refers to the amount invested by the investor; a repayment or maturity date at which the note becomes immediately payable by the demand of the noteholder; an annual rate of interest, which may either be added to the principal balance when the note converts into equity, or be paid to the noteholder in cash at the time of conversion or repayment; a discount rate, referring to the lower price per share used when notes convert in the next round of equity financing as opposed to the price per share of the preferred stock the company issues to the new equity investors; and priority ahead of the company’s equity holders in liquidation, meaning noteholders have a claim to the company’s assets senior to other equity holders.

Conversion events specify occurrences that automatically convert an investor’s debt into equity, the most common being a Next Equity Financing Conversion, which is the closing of a subsequent equity financing of a certain minimum size. Once a conversion event occurs, noteholders receive their equity at a conversion price, which is based on the principal and interest balance of their notes, but is a price that is lower than the price paid by the new equity investors. A valuation cap, or a maximum price at which a note may convert into a Next Equity Financing, is often included in a convertible note. This cap is to ensure that noteholders, who contributed a small investment to a company that has subsequently received a high valuation and will be able to support a Series A roundin its Next Equity Financing, will retain a meaningful stake in the company. Because receiving equity in the company is the ultimate goal for investors, conversion events and conversion prices are the most important terms for investors to consider when negotiating their investment instruments.   

The SAFE Alternative for Founders

            Y-Combinator unveiled its SAFE agreement, which was drafted by attorney and Y-Combinator partner Carolyn Levy, in 2013. The purpose of the SAFE agreement was to create a standardized set of funding terms between start-ups and investors “while deferring decisions about valuation, liquidation preferences and participation rights until later-stage rounds of financing.” The crucial difference between convertible notes and SAFE agreements is that SAFE agreements do not operate as debt instruments. This means that unlike convertible notes, SAFE agreements do not come with a repayment or maturity date, and do not contain many of the debt terms that convertible notes require such as an interest rate. Therefore, the principal amount invested by a SAFE agreement holder does not need to be returned to the investor by a set date in the future. Instead, SAFE agreements remain outstanding until a “liquidity event;” this means that an investor’s investment made via the SAFE agreement will only convert into equity on an unspecified date in the future when a conversion event such as a subsequent funding round, or acquisition occurs.

            The absence of a maturity date is one of the reasons why the SAFE agreement has gained traction on the West Coast, and why entrepreneurs and investors on the East are beginning to choose SAFE agreements over convertible notes. Not including a maturity date in an investment agreement helps wary entrepreneurs avoid the dreaded scenario in which a convertible note matures according to its maturity date, ahead of the company’s Next Equity Financing, but before the founders are prepared to repay the investors. Founders in this situation are thereby left to negotiate an extension with noteholders who may try to leverage better terms for their note in exchange for the extension.

The brevity of SAFE agreements is another reason why an entrepreneur may choose to enter into a SAFE agreement, rather than a convertible note. Because SAFE agreements do not operate as debt instruments, the only terms to be negotiated for the agreement are the conversion event and price. Therefore, the SAFE agreement streamlines the investor funding process by shortening the negotiation process and agreement length, and arguably makes the attorney costs for drafting such agreements cheaper as well.   

The Not-So-SAFE Alternative for Investors

            Investors have become increasingly willing to invest in SAFE agreements instead of convertible notes in an effort to follow the example of Y-Combinator’s popular accelerator program and invest in hot new start-ups. However, while these trendy SAFE agreements provide the benefit of a streamlined process and a lack of debt for entrepreneurs and founders, investors should realize that the SAFE agreement comes with several uncertainties. Because SAFE agreements do not have a maturity date, investors must wait indefinitely for a conversion event to occur in order to receive equity in the company.  Furthermore, because SAFE agreement holders are not debt holders and have no right to repayment, investors have no legal claim to the start-up’s assets if the company fails and is forced to terminate operation before a conversion event occurs if the cessation of business is not itself the conversion event. The lack of a maturity date, as well as the lack of an interest rate also raises potential tax issues for SAFE agreement holders, because these are two key characteristics in determining the tax treatment of an equity instrument.  Therefore, seed-round investors should consider structuring their investments as convertible notes until the tax treatment of SAFE agreements becomes more certain. Despite the uncertainties that come with investing in company through SAFE agreements however, recent trends have shown that investors are willing to take the risk, in exchange for the opportunity to invest in what could be the next big company to take a particular market by storm. 

Linking Your Reader To An Article, Potential Copyright Infringement?

By: Entrepreneurship & Innovation Clinic Student

December 2016

News aggregation services that are offered on smartphone applications or internet sites have recently become a popular startup business model. Thanks to open-source publishing platforms and inexpensive internet technology training services, most start-ups launch news aggregation services without much worries about operating cost. Companies such as News360, Flipboard, and News Republic are a few of the successful news media aggregators that began as a startup company and later attracted more than $100 million dollars in investments.

These startups typically provide features such as the ability to link to articles from other publishers and the ability to save the link for offline reading. In most cases, however, the service provides such features without getting any licenses from publishers for news clipping and link sharing.

Copyright of news articles and media content is protected under U.S. Copyright law. The Copyright Term Extension Act of 1998 protects the copyright life of the author plus 70 years. The Act also protects works of corporate authorship 120 years after creation or 95 years after publication, whichever endpoint is earlier. See 112 Stat. 2827. In other words, most news articles published in 1922 are still protected under U.S. Copyright law.

Fair use doctrine may be used to prevent copyright infringement claims. In determining whether the use in any particular case is a “fair use,” the factors to be considered include—(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. 17 U.S.C. 107.

News media aggregators have been relying on the “fair use” defense against claims of copyright infringement on the news articles. Copyright and cyber law regarding published material on the internet has been murky and without clear guidelines distinguishing copyright infringement from a fair use. After the 2013 Meltwater case where the Associated Press brought suit against Meltwater for news clipping and link sharing under copyright infringement, however, news media aggregators have faced difficulty using the fair use defense for providing search and link services. Associated Press v. Meltwater U.S. Holdings, Inc., 931 F.Supp.2d 537 (S.D.N.Y. 2013).

Providing search and link services without a license from the publisher may cause legal problems under U.S. copyright law, but not if a news hyperlink is used. Instead, copyright infringement issue would stem from the display of the headline, lede, and accompanying photos of articles. In the Meltwater, the court held that the Meltwater's copying of headlines, lede, and excerpt along with photos was not protected under the fair use doctrine and it was infringing on the Associated Press's copyright. In other words, using small portions of the lede or pictures from the article or the headline for the thumbnail could be considered a copyright infringement.

Storing the news media contents of other publishers on a server and listing it on a feed for offline reading without a license may also cause a legal problem under U.S. copyright law. The fair use doctrine already failed in the Meltwater case, and would likely fail to defend the business model of storage of offline reading as well.

The U.S. has adopted the “notice and take down” procedure, more popularly known as the safe harbor provision, through the Online Copyright Infringement Liability Limitation Act (1998). 17 USC § 512(c). Section 512(c) applies to online service providers that store copyright infringing material and provides limited liability for such online service providers.

AP and Meltwater settled before the final verdict, and the negotiated license fee was not disclosed. Despite the safe harbor provision under the Online Copyright Infringement Liability Limitation Act, most established online news aggregating companies start to negotiate the license with publishers. For instance, News360 launched the Publisher Partnership Program with 30 publishers, including the Chicago Tribune, CNBC, and Fox Sports.

Mark Potts, founder of Newspeg, said “start-ups are easy to do and very hard to do” as competition is fierce to attract a limited audience. News media aggregator startups try to distinguish their service from others by providing unique features like a customized view with thumbnails or offline reading. However, they must be careful not to ruin their business model after putting all of their effort into it. Conventional news publishers will come and demand their shares on the profit through copyright claims once news aggregating services start to make any profit. Obtaining a license is expensive for most startups. In the end, however, negotiating a license in the early stage may be more economical as a long term business strategy.

Crowdfunding 101: Get On The New Financing Bandwagon

By Ramona Barrett

December 2016

When a startup is newly formed, there is a laundry list of activities to be accomplished.

Among other things, they often need to purchase equipment, rent office space, and hire employees.

But where will these imaginary funds come from?

Beyond the initial capital raised to get the company off the ground – commonly referred to as “seed capital” – startups often require additional capital to grow.

For many startups, financing poses a significant and continuous challenge.

Usually, they would resort to some combination of the traditional options: self-­‐funding (dipping into their personal savings or getting a traditional business loan) and venture financing (offering equity or convertible debt to angel investors or venture capitalists).

However, a new financing alternative has been all the rave in the startup world: crowdfunding.

Crowdfunding, raising funds from the general public, is a popular trend that has been the new go-­‐to financing solution.

Its revenue went from $530 million in 2009 to a whopping $1.5 billion in 2011 – in just two years, it tripled.

With the help of online tools and platforms such as Fundable, Kickstarter, Gofundme, and Indiegogo, startups are now raising capital through the collective efforts of friends, customers, and individual investors.

The startups receive capital with the added bonuses of greater exposure and a sense of demand for the company.

In return, investors either receive nothing (“donation-­‐based”), a product or service offered by the company (“rewards-­‐based”), or part ownership / a stake in the company (“equity-­‐based”) return).

This funding source in its equity-­‐based form gained legislative support in 2012 when President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act (commonly referred to as the “crowdfunding bill”) into law.

Under the Securities Act of 1933, the offer and sale of securities must be registered with the Securities and Exchange Commission (SEC) unless an exemption is available.

The registration process is costly, which can be particularly burdensome on startups looking to raise capital through the sale of equity in the company.

Title III of the JOBS Act, in conjunction with the SEC’s adoption of Regulation Crowdfunding, is an attempt to support the fundraising efforts of startups through a crowdfunding exemption from the costly registration process.

Of course, the exemption is subject to certain requirements.

Limitations are placed on each of the three primary parties involved, i.e., the startup, the investor, and the intermediary.

Startups, for example, are not permitted to raise more than $1 million in a 12-­‐month period. They must also meet some eligibility requirements.

Investors are limited in the amount they can give in a 12-­‐month period.

Intermediaries are limited to one online platform and must be a broker-­‐dealer or funding portal registered with the SEC and Financial Industry Regulatory Authority (FINRA).

As one would expect, since the passage of the JOBS Act, crowdfunding has grown tremendously.

The number of platforms offering crowdfunding jumped from 308 in 2013 to 1,250 in 2014, when they raised $16.2 billion globally.

Forbes reported that it is expected to surpass venture capital financing in 2016.

By 2025, the global crowdfunding market potential is projected to be between $90-­‐96 billion.

Notably, though it is beneficial for startups within any industry, it has been particularly beneficial for nonprofit organizations and charities.

To startups considering jumping on the crowdfunding bandwagon, we’ve offered 10 useful tips below to get you started:

(1)          Choose your platform wisely: Not all crowdfunding platforms are created equal. Be sure to read the fine print to understand the pros and cons of each platform. Do a cost-­‐benefit comparison and make your final choice wisely.

(2)          Develop and execute a robust marketing plan: Develop an organized and robust marketing campaign. Your crowdfunding campaign will not be successful if people do not know about it. Make use of social media platforms such as FaceBook, Twitter, Instagram, and SnapChat.

(3)          Determine your target audience, and engage your friends, family, and supporters first: Research to determine your target audience. And don’t forget your likely upfront supporters, such as friends and family.

(4)          Determine your target monetary goal: Research to determine how much you need to like to raise and develop your campaign accordingly.

(5)          Develop your pitch / story (and make it personal): Come up with a compelling, genuine story.

(6)          Lower the minimum investment amount to lower risk exposure per investor: Instead of depending on a large investment from a few investors, lower the minimum investment amount per investor. This may up your chances.

(7)          Communicate developments often: Communicate to your current and potential supporters often about accomplishments and upcoming plans.

(8)          Adequately flesh out your product/service idea beforehand: Consider planning six months ahead before putting your campaign out there. Prepare!

(9)          Do research similar campaigns (many are not taken down afterward): Many platforms keep both their successful and unsuccessful campaigns up and do not take them down. Research similar campaigns to know what you should (or should not) do.

(10)        Stay strong and stay in the game – this financing alternative is here to stay.

Sources:

https://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf  

https://www.sec.gov/spotlight/jobs-act.shtml

https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm

http://www.themacro.com/articles/2016/01/how-to-raise‐a‐seed‐round/

https://www.fundable.com/learn/resources/guides/crowdfunding-guide

https://www.fundable.com/crowdfunding101/history-of-crowdfunding

https://www.entrepreneur.com/article/248122

http://www.businessnewsdaily.com/7506-crowdfunding-trends-tips.html

http://ignitiondeck.com/id/10-crowdfunding-secrets/

The Rise of Food Tech Start-Ups and the Legal Issues They Face

By: Catherine O'Neill

November 2016

A new trend in the food industry has the potential to transform the trillion dollar U.S. food economy with its novel approach to dinner preparation. This fad is the meal-kit start up industry, a space with over 150 brands competing in a $1.5 billion market of consumers eager to make healthy meals with pre-prepared, farm-fresh ingredients. Many brands in the industry, such as Blue Apron and HelloFresh, operate by allowing consumers to choose several meals per week from pre-set menus. Those meals are then shipped to the consumer in kits which have all the ingredients necessary to make the recipes.

Companies in this industry are attractive to investors because they have little overhead, aside from the costs of operating food distribution centers, and only bear shipping costs to the consumer. In fact, meal-kit start-ups have raised a reported $650 million in venture-backed capital in recent years while earning revenues of $500 million in 2015 alone. The industry’s revenues are expected to increase tenfold in the next five years. The tremendous amount of growth in this sector is impressive, but it has not come without growing pains. Few meal-kit start-ups are cash-flow positive, which reflects the reality that only those in the industry who are able to produce meals on a massive scale are able to survive the competition. The start-ups also offer deep discounts to entice consumers to try the products, while spending nearly $100 in marketing expenditures per consumer in hopes of educating consumers about the meal-kits.

One company in particular, Blue Apron, has emerged from the competition and is so successful that it is considering an initial public offering for next year. The company is purportedly projecting $1 billion in revenue over the coming twelve months, and would be valued at $3 billion if it were to go public. These estimates follow Blue Apron’s most recent valuation of $2 billion after receiving $135 million in investments in 2015. The industry leader has over 4,000 employees at three fulfillment centers and is growing rapidly. But Blue Apron, like others in the industry with venture-backed financing, has run into legal trouble keeping up with the pace of demand and the pressure to scale rapidly. The company in particular has had health and safety violations, violent incidents at its fulfillment centers, and poor working conditions reported by employees. On top of that, Blue Apron’s co-founder is a chef and has had no experience running warehouses before, adding to the chaos.

The governmental agency that oversees working conditions for meal-kit start-up employees is the Occupational Safety and Health Administration (OSHA). The Administration aims to ensure healthful workplaces by setting and enforcing standards for employers, while also providing training and education for employers. To that end, OSHA has created guidelines that food manufacturing facilities should implement for their workers which center around the prevention of work-related musculoskeletal disorders. The disorders often come from employees working in repeated and sustained postures while performing highly repetitive tasks, which is common in the meal-kit industry because of the chopping of food that occurs in fulfillment centers. Buzzfeed recently investigated the fulfillment centers of Blue Apron and found that the company in the past year alone had nine violations with California’s Division of Occupational Safety and Health for unsafe conditions that put workers at risk for both fractured bones and chemical burns. On top of that, earlier last year, Blue Apron was given another $13,050 penalty for an employee forklift accident.

In addition to OSHA regulations, the meal-kit industry also has to abide by USDA guidelines and Department of Labor employee working hour regulations. The USDA imposes a rule that proper storage temperatures for food commodities must be set at forty degrees Fahrenheit, so meal-kit fulfillment centers and workspaces must all be kept at that temperature. At Blue Apron, employees wear jackets, hats, thermals, and neck warmers at all times because of the cold temperatures. With regards to working hours, Blue Apron relies on employees to work over twelve hour days, hiring temporary workers when business is in high demand. Meal-kit companies like Blue Apron are clearly trying to piece together all of the regulations surrounding food items and employee safety conditions, but since the industry is so new and product is in such high demand, it seems as though they are cutting corners to deliver for consumers.

Now is the time for meal-kit companies to succeed in the marketplace, if they are able to abide by all federal regulations governing worker safety and food products. The idea is exciting to consumers,  especially millennials, who want healthy, farm-sourced recipes right at their doorstep. However, the companies must act fast to meet demand because other industry giants, including the grocery industry, will soon be moving into the meal-kit space. Whole Foods Market and Amazon are both planning on launching meal-kit lines later this year, while Giant Food Stores already rolled out its own service last December.

Although more and more companies are moving into the meal-kit space, it is still unclear of whether the industry is actually profitable. Recent studies have shown that only ten percent of those who subscribe to meal-kit companies are still with the companies after six months. The risks of the business, although low compared to other industries, include packaging, shipping, delivery of fresh food, ingredient costs, and a weighing of high and low costs to attract consumers away from supermarkets. These risks are on top of the hardships of educating consumers about the product, marketing so that consumers will buy from one company and stay with that company, and market differentiation when there is so much competition in the industry.

The meal-kit niche of the American food economy is a rapidly expanding area filled with regulations and business risks. It remains to be seen what the future of the industry is, given that increasing competition is entering the marketplace and that no company is confirmed to be profitable at this point. But, the industry is revolutionizing how consumers buy food and will have an impact on consumers in the coming years if it continues growing at the pace it currently is growing at now.

Protecting your Brand

By: Entrepreneurship & Innovation Clinic Student

November 2016

One of the best ways to protect your brand is to get a trademark. A trademark is a form of intellectual property that can help protect a business's brand. A trademark itself is a mark of some kind, generally a word or design, that denotes the source of a good and is used in commerce. If these conditions are all met, the mark can be registered as a trademark. An example of a trademark would be the brand CocaCola. This is a word mark that denotes a specific product (a cola drink) that comes from a specific producer.

Most states have some sort of trademark protection. However, the best way to completely protect your mark is to register the trademark with the federal government at the US Patent and Trademark Office (USPTO). A registration here will give your mark trademark protection throughout the entirety of the United States, while most state protection is only within the state or local area. Therefore, although generally states give common law protection at a lower rate, possibly without any cost, the cost of registering a trademark with the USPTO could be outweighed by the national benefits received, particularly if a business plans on having a presence in multiple states.

Most start-ups and small businesses should consider getting trademark protection as it prevents other people from using your mark. Determining what you want your trademark to be may be one of the first things a start up wants to consider, even before deciding on and creating an entity. This is because a company (or other entity) can trademark its name, its products, services, and anything else that is used in commerce. A great first step is to look up the name you want to use and to see if it has been trademarked already. The USPTO allows individuals to search through already taken trademarks. If your mark is not there, then you are free to register and use it. Although a trademark needs to be used in commerce before it can actually be protected, the USPTO also lets individuals pre-register their mark with an intent to use registration. This gives you some time to create your entity, start developing and producing products, etc. while still having the mark protected.

Unfortunately, early trademark protection may not be financially feasible for some start ups. Therefore, it is advisable that start ups continuously check the USPTO to see if their trademark has been registered by someone else. Although there is no way to predict whether or not it will be taken soon, it is useful to know whether or not it has been taken for future planning. This will allow you to adjust how you brand other things, such as products or services down the road.

So what should you do if your trademark has already been taken? The first step is to determine whether or not what you plan on using the trademark for is what the trademark has already been registered for. When registering with the federal government, a trademark must be assigned a class of use, generally a type of product or service. For example, imagine a company named King sold headphones. If someone who sold fruit wanted to name their business King and trademark it, they would be able to. Trademarks can only protect the type of goods they are registered for. If, however, King that sold headphones decided to also start selling fruit before the other King sold fruit, and added an additional registration, they would be able to use the mark and the second company couldn't. Therefore, if your mark has been taken but it is in an unrelated class of goods or services, then you are free to register the mark and use it for yourself.

Sometimes though, you will run into a circumstance where you've already got your business formed, a product idea ready to go, and branding all set before you realize that the name and trademark you actually want has been taken. There are several ways to remedy this situation. The first thing to think about is your business name. If the name has already been trademarked by someone else, you may wish to change your name in order to protect yourself from infringement liability. This is not a particularly difficult process. Although it varies state by state, most, if not all states, have methods of changing an entity's name. This may not be ideal, but it does help to protect against infringement and allows you to develop a new way to protect your brand.

Ultimately, if you do end up losing out on the trademark race, the best solution is to change your own branding, unless you've already started to sell your product and have a growing user base. In that case you still might be able to get some protection. Most states have some sort of common law trademark protection, at least for the area that you've been selling in. These protections occasionally carve out limitations on federal protections if you can show that you've been in the area longer and have generated enough goodwill and brand recognition. Thus, even if someone trademarks your mark, as long as you've been using it before and stuck to a geographical area you should still be able to use the mark.

For those who are less averse to risk, if the trademark has already been registered and you have not yet used it in commerce, you may wish to simply go ahead and use the mark in your geographical area. You may still be able to get protection if the registered trademark owner has not yet breached the market in your area. Of course, this method has significantly more risk associated with it, and you may not win on an infringement case here. 

Serving Soup on a Plate - When good ideas suffer from the wrong business model

By: Alexa Esposito

November 2016

Introduction 

ABC Network’s hit reality show “Shark Tank” gives budding entrepreneurs the opportunity to pitch their business ideas to a panel of business tycoons and investors dubbed “Sharks”. On the Season 8 premiere, the Sharks were fed with a product that they believed tasted good, but not good enough for a second taste.

Founded in 2008 by CEO Marti Wymer, Spoonful of Comfort is a gift basket service website providing customers with a way to send “sick or struggling” loved ones “homemade soup gift baskets.” Wymer was inspired to start the company in 2007 when her now deceased mother was diagnosed with lung cancer. At the time of her mother’s diagnosis, Wymer was living in Florida but her mother was living thousands of miles away in Canada. Wanting to comfort her mother in a way that transcended their geographical distance, Wymer scoured the Internet for an appropriate gift to send her mother. Faced with an array of chocolate and flower options, Wymer could not find anything that seemed appropriate for her particular situation. Wymer wished that she could send her mother what she, and, and so many others take to be the ultimate panacea and source of comfort for any illness: a warm bowl of chicken soup. It was at this moment, when she realized that the gift basket delivery service market was failing to provide appropriate options for occasions like this one, that Wymer says that Spoonful of Comfort was born.

Spoonful of Comfort, operating under a business model similar to that of an online flower ordering service, now provides other individuals in situations similar to Wymer’s with the option of sending 4-6 servings of chicken, or tomato soup along with rolls, cookies, a card and a ladle, wrapped and shipped in customized packaging to their sick loved ones. In a gift delivery service market full of flowers, candy, and assorted fruit whose exemplary customers are traditionally a husband sending his wife a surprise on their anniversary, or a customer wanting to send a token of gratitude to a business for their services, Spoonful of Comfort seems to fill a clear gap in the market. A gift basket full of soup and baked goods provides an option for mothers with a sick child away at college, or individuals like Wymer, with a sick relative miles away to send their loved ones the gift of solace that comes with a home-cooked meal. Although the Sharks acknowledged Wymer’s great idea, they didn’t bite when Wymer and the company’s investor and 60% owner Scott Gustafson served their soup to the tank, demonstrating that simply filling a gap in the market is not enough for a business’ success.   

The Flawed Business Model – The Business is Hungrier than the Customer

Each Shark provided different explanations for their decision not to invest in Spoonful of Comfort, but the driving force behind the majority of the Sharks’ decisions was the same: Spoonful of Comfort’s business model was flawed. The business model of an organization refers to the way a business creates, delivers, and captures value. Business models may be flawed or fail for a variety of reasons, the most common being an entrepreneur’s underestimation of how difficult and expensive it will be to acquire customers. Difficulties in acquiring customers may occur due to the cost of acquisition, the cost of the product itself, and limited need for the product.  Acquiring customers can become expensive for businesses when the “Cost of Acquiring Customers” (CAC) exceeds the “Lifetime Value” (LTV) of the customer, when the costs of operating under the company’s business model exceeds the revenue actually generated from customers buying the company’s product or service. In his article “5 Reasons Why Start-Ups Fail,” entrepreneur David Shok states business can calculate their CAC by taking the entire cost of sales and marketing functions, such as salaries, marketing programs, lead generation, and travel, and dividing this cost by the number of customers attained during the period of time those costs were accrued. Shok goes on to state that in order to calculate the LTV of a customer, entrepreneurs should consider the gross margin associated with the customer, which is the net of all installation, support, and operational expenses, over the customer’s lifetime. In order for a business model to succeed, their CAC must not exceed the LTV of the customer.

Although the Cost of Acquiring Customers seems like an obvious factor for entrepreneurs to consider when launching a business, many entrepreneurs overlook this cost, an oversight that often leads to the business’ failure. The Sharks determined that Spoonful of Comfort had fallen victim to this common oversight and flawed business model. Wymer and Gustafson noted in their pitch to the Sharks that it costs the business $18 to acquire customers, and $31 to make the packages, which then sell for $69.99 with a shipping cost of $14.99. Shark Kevin O’Leary noted that under their current business model, the company is losing approximately 40% of their company’s profit margin because of their Customer Acquisition Cost, and if this continues, will make the business’ road to acquiring customers a slow and difficult process. Furthermore, O’Leary, Shark Barbra Corcoran, and Shark Daymon John pointed to two factors that aggravate Spoonful of Comfort’s difficulties in customer acquisition: the business does not lend itself well to repeat customers because the service is only needed at time when someone is sick, and the hefty price tag for these packages may act as a sales deterrent. The Sharks also noted that the gift service will only be valuable insofar as it reaches the sick individual when they are sick, and overnighting a package adds an additional $14.99 to the already high price of $69.99 for the basket itself. Simply put, Spoonful of Comfort is spending more on securing customers than it is actually generating revenue through sales, and for these reasons, the Sharks smelled blood in the future of the company.

Food For Thought

Spoonful of Comfort is an example of how wary entrepreneurs should be about starting a business solely on the basis of a good idea, or an apparent gap in the market for a particular type of service or good. Entrepreneurs also must consider the CAC and the likelihood of attaining a returning customer base. The combination of an expensive price tag and the limited need for a good or service may act as deterrents to attaining a returning customer base or in the worst-case scenario, customers at all. This in turn may cause a business to fail if the cost of customer acquisition is higher than the revenue being generated by the company.

The prudent entrepreneur should consider the CAC, and consider a change in business model if it becomes apparent that the CAC exceeds the LTV. To assess the viability of their business model, entrepreneurs should take the time to calculate their CAC and LTV in order to make sure the CAC is lower than the LTV. Furthermore, entrepreneurs should also consider whether their product is likely to fill an ongoing need, or a short-term need, and given the need, whether the price tag attached to the product or service will deter customers. Keeping these factors in mind when deciding to launch a business can help entrepreneurs satisfy customers’ hunger for longer. 

Naming Your Beers: Legal Risks

Starting a Brewery?

Remember You Aren’t “Crafting” in a Bubble.

By: Entrepreneurship & Innovation Clinic Student

November 2016         

I will start by saying-- lawyers are not evil beings trying to stifle your creativity! I think intellectual property lawyers get a bad rap sometimes for shutting down your “brilliant” ideas. Lawyers do not dispute the brilliance of your idea; they are merely telling you that your idea is so brilliant that others may have already thought of them. Lawyers simply want to protect you from the potential legal consequences of infringing on someone else’s mark. They are not looking to shut down every idea you have.

Now that we have gotten that out of the way, let me tell you why you can’t use that brilliant name for your beer.

The craft beer industry has recently come upon a dilemma—they are running out of beer names! According to the Brewers’ Association’s mid-year report, the craft beer industry continues to grow—in the past year, the total number of breweries (4,656) has grown by 917 breweries and there are approximately 2,200 breweries that are in the planning stages. With each of these breweries creating multiple varietals, there are a crazy number of catch pun names that have flooded the market. According to The Wall Street Journal, there are at least 25,000 active trademarks registered or in the application stages with the U.S. Patent and Trademark Office in connection with the beer industry. As such, new brewers looking to enter the market should be wary when it comes to “crafting” beer names. 

How You Can Protect Yourself Against Litigation

1. Search the web.  Seems simple, yet many business owners forget this step.  Make sure someone within the beverage industry isn’t already using your name.  Trademark protection is based on use.  The first person to use a mark in commerce, owns the mark for the particular class they are using the mark within.

You should not limit your search to your exact name- look for variations.  Trademark infringement is based on likelihood of confusion. The important question to ask is—would a consumer believe this company who is using a name similar to mine produces my product? Trademarks do not have to be identical in order to be found confusingly similar.

If your search results in multiple uses of the name, then it is likely that this name is within the public domain and free for you to use.  Just remember, if the name is in the public domain then you will not be able to trademark it, which means other breweries will also be able to use that name. This is probably not smart if you are trying to build branding around the name. Proceed with caution.  

2. Run a trademark search within the federal and state registries.  If a mark is registered with the USPTO or Secretary of the State, you are on notice regarding its existence. This is important. Should a company decide to bring a suit against you for trademark infringement, the court will presume you knew of the prior trademark when you crafted your own name.

It is also important to check the registries because companies may have registered an intent to use application. This means the mark is reserved and the company intends to use it in the immediate future. The only way of discovering these marks, in some cases, is through a trademark search with the USPTO and Secretary of the State (should the state allow Intent to Use filings).        

You can search the trademark registry at USPTO.gov.  Remember to search both for your mark and any variations on your mark.  You are able to limit your search to a particular class of goods.  If a mark is being used in a similar industry, it is more likely that a consumer would be confused as to the origin of your product.  You should play particular attention to other beverage or food companies using your name or a variation of it.      

3. Parodies of Famous Marks.  You may be tempted to create puns off famous trademarks in the world, such as Captain Crunch or Twinkie. A brewery should think twice before using a famous trademark in the name of their beer. There are certain fair use exceptions. One exception is the parodying of famous trademarks. But, this is a tricky exception to navigate. Famous trademarks are entitled to protection against dilution by blurring and dilution by tarnishment. When a company uses a famous trademark as a part of their trademark, they are not protected by the paradoxical fair use defense because of the dilution that occurs.

4. Use of Famous Names.  Avoid using the names of celebrities in your beer names. Celebrities have a right to publicity that would prevent the use of their name in a way that suggests their endorsement of the product.

5. If you have any questions, consult a lawyer.  Intellectual property lawyers are experienced in running trademark clearance searches and are in the best position to inform you of the risks associated with using a particular name.  Here at the Entrepreneurship and Innovation Clinic, we are happy to guide you through the process and work with you to weigh the risks of using a particular name.   

How You Can Protect The Name You Choose

1. File with the USPTO or Secretary of State.  Please remember that once you decide on a name, it is in your interest to file for a trademark with the USPTO (if you are engaged in interstate commerce) or with the Secretary of State (if your activity is limited to in-state commerce). This will put the rest of the industry on notice that your name exists. 

2. Enforce Your Mark.  Check every so often (i.e. run web searches, read industry magazines) and make sure your name is not being infringed upon. Should you find someone who is using your trademark or another mark in a confusingly similar manner, you should send a cease and desist letter and take any additional steps to enforce your mark. If you do not take these steps, a court may find that you have abandoned your mark through your failure to police.  

NOTE: This blog post is a general overview of the law and is not intended to represent or replace legal advice. Readers should consult a lawyer within their jurisdiction before taking any action or refraining from act based on a reading of this post.