They’re Scary Good: Investment in Sports Startups

by: Kayla Acklin

December 2016

“. . . stolen away, and cleared out to center ice to Pominville. Pominville, into Ottawa territory. Pominville goes around Alfredsson, cuts in front, S-C-O-O-O-O-R-R-R-E-E-S-S-S! JASON POMIVILLE, SHORT-HANDED! OH NOW DO YOU BELIEVE? NOW DO YOU BELIEVE? THESE GUYS ARE GOOD, S-C-A-A-A-R-R-Y GOOD, AND THEY ARE GOING TO EITHER CAROLINA OR NEW JERSEY! THE BUFFALO SABRES KNOCK OFF THE SENATORS IN O-O-O-V-V-E-E-R-R-T-I-M-E!” Every Buffalo Sabres fan remembers the legendary play-by-play broadcaster Rick Jeanneret’s announcement of the 2006 playoff overtime win by the Buffalo Sabres over the Ottawa Senators. With grand enthusiasm and lungs that just won’t quit, Jeanneret’s “Now Do You Believe” sparked a fire that the city of Buffalo hadn’t seen since the early 90’s. That iconic moment signifies the culture that the sport of hockey has brought to the city of Buffalo, NY.

With sports moments like the one above that still send shivers down the spines of hockey fans, it’s no wonder that investors are looking to sports startups for their next ventures.  Sports are such a vital part of our social and economic culture. When a professional sports team wins a major title for the first time in 108 years, or a “hot-shot” professional athlete controversially dopes during playoffs, that news makes the front page of every major newspaper, and is covered by every major news media outlet. The reach of professional sports on the market is undeniable. As such, startup companies who take advantage of society’s dedication to sports by designing efficient, easily accessible sports-based applications and programs find quick success and high valuations from interested investors. Evidencing the high value of sports and sports fans, in 2015, venture capitalists alone invested more than $1 billion in venture deals with sports startup companies.

What Makes Sports Start Ups Successful?

 TechCrunch detailed four major reasons for why sports startup companies are “scoring big.”

1.      “Obsessed” User Base: It would be an understatement to say that sports fans are passionate; many, arguably, are obsessed. Sports fans dedicate a lot of time to watching games, researching their favorite athletes, and tracking the success of their sports teams. For this reason, a technology service or product that allows sports fans to more efficiently monitor the success of professional and collegiate sports players and teams comes with an automatic user base. These “obsessed” sports-fans become long-term users who will “opt into notifications, click through suggested links and, most importantly, be engaged and interested.” With such a dedicated sports-fan user base, sports startups have been able to avoid retention problems that plague other technology-based startups. A study by Flurry indicated that sports-related apps are the third highest in user retention, at 67 percent retention, falling behind only weather and reference apps.

2.      Controlling Sports Stats: The increasing popularity of fantasy sports has led to more fans paying attention to sports statistics. Particularly with daily fantasy sports, fans carefully analyze each sports player and team, watch for trends in performance statistics, and select which specific athletes and teams to invest in. For example, DraftKings, one of the largest daily fantasy sports companies in the United States, raised $375 million by 2015, with an active daily user count of over 50,000. Fans care about even the smallest statistics regarding professional players and teams. Therefore, a sports startup company with an application that provides in-depth analysis of sports statistics is almost guaranteed to be successful.

3.      Riding the Backs of Partnerships: For many technology startups, partnership with successful companies is often too difficult because of the slow nature of business cycles. That is not the case in the sports world. When one company signs a partnership deal with a professional sports team, other companies are eager to follow suit to reap similar financial benefits off the success of other professional sports teams. For example, when the MLB released MLBAM, a video streaming platform, the NHL saw a great opportunity to offer their fans the same experience, and signed a deal with MLBAM. Sports leagues and companies in particular are constantly looking for ways to enhance their fans’ sports interaction experiences. A sports startup with an app that provides increased opportunity for fans to engage with their favorite sports players and teams will undoubtedly garner the attention of sports leagues and companies.

4.      Who’s Ready to Rumble: The World Series, Super Bowl Sunday, March Madness Week, and the Stanley Cup Playoffs are on every serious sports fan’s calendar from the start of the sports’ season. During these big games, fans are on every social media site, are watching all major media outlets, and are reading as many sports articles as they can to stay engaged with their favorite teams. Fans look for any opportunity to win seats to the big games or purchase specialty merchandise to show their undying support. Startup companies should take advantage of these big games by planning promotional events, offers and contests in conjunction with these major sports events.  

Sports Start Ups Grab Investor Attention

Sports are not a fad, and sports fans are not going anywhere. As such, sports startup companies have found great investment success because venture capitalists recognize how “scary good” the sports market is.  For the second year in a row, in March, TPG Sports Group hosted a Sports Tank to provide sports startup companies the opportunity to pitch their business plan to a group of five investors, a Sports Advisory Panel and successful entrepreneurs. The goal of the Sports Tank was to give sports startup companies face-time with major investors to continue to grow the sports technology market. Ten sports startups were selected to pitch during the Sports Tank, including: Brizi, a company that uses in-stadium, fan controlled cameras to enable teams to grow sponsorship revenue by allowing teams to create fan-generated content; Bubbl, whose technology allows audiences to clip fifteen-second moments from online video streams; Dasdak, a company whose technology allows fans in stadiums to use their cell phone to order food and beverage or retail for delivery directly to their seat; IdealSeat, a company who focuses on all aspects of a fan’s experience, including ticket discovery, game-day decisions, and in-game experiences; and Matcherino, a platform that brings together spectators to play games against one-another, or watch their favorite matches together via a live stream.

The success of sports startup companies has also caught the eye of Silicon Valley venture capital funds and accelerators, meaning that the market for new sports technology is going to continue to grow. Most notably, 500 Startups, a venture capital fund and accelerator founded by Dave McClure and Christine Tsai that has incubated over 1200 companies since 2010, added six sports-based companies to their spring 2016 cohort. Those companies included: YouStake, a marketplace where fans can invest in their favorite players and profit from the winnings; OpenSponsorship, a company that democratizes access to sports sponsorships via a two-sided market; Phenom, a platform for young athletes to showcase their athletic achievements; Ader, a marketplace that connects brands to eSports influencers on Twitch; Mars Reel, a sports network for this young, network-driven generation; and ArrowPass, an integrated payment, vendor management, and ticketing system that helps arena operators eliminate lines and grow sales.                           

Boston Sports Start Ups to Watch

            In the words of Rick Jeanneret, sports startup companies “are good, s-c-a-a-a-r-r-y good,” and investors, both at the venture and individual levels, should pay attention. For those sports fans in Boston, here is a list of sports startup companies to keep an eye on:

1.      Ubersense – a mobile app that helps people improve at sports through video coaching

2.      Jokkspot – a location based sports management platform for athletes, coaches and fans

3.      BeeInPlay – enables users to find and book indoor training facilities (fields, turfs, rinks, etc.)

4.      Go Pro Workouts – provides digital and mobile pro athlete workout and nutrition plans

5.      Sports Lion – a social sports betting platform where players bet against one-another

6.      Spogo – rewards users for making correct predictions during live games

7.      LeagueNation – a mobile fantasy sports platform

8.      PlaybackID – the LinkedIn for athletes

9.      WhattaPlay – enables fans to post their sports opinions on a social sports page like the experts

10.  Fan Cred – provides live streaming, instant scores and the hottest sports takes

Healthcare and Startups

By Entrepreneur & Innovation Student

December 2016

Since 2010, there is probably no topic that has been more hotly debated than “Obamacare.” Obamacare, also known as the Patient Protection and Affordable Care Act (ACA) was designed to provide affordable health care to as many U.S. residents as possible. Over the last six years, the ACA has been slowly implemented to give individuals and businesses in America the time they need to adjust to the new health insurance industry standards and requirements. Almost the entire bill is nowimplemented. That means that businesses across the country could be facing big changes in regards to the health care coverage that they offer their employees and the costs associated with those changes. Whether you are starting a business or growing a successful one, it is important to understand the costs and obligations associated with choosing to offer health benefits to your employees.

1.      Understanding The Employer Mandate

Maybe the most frequently discussed feature of the ACA is the employer mandate. The employer mandate requires companies of a certain size to provide health care benefits to its full-time employees. Specifically, the ACA requires that “large employers” provide “minimum essential coverage” to at least 95% of its full-time employees. With the latest provisions of the ACA being rolled out this year, the federal definition of a “large employer” is one that employs 50 full-time equivalent employees.

Counting to 50

This number is a bit misleading on its face, as 50 full-time equivalent employees is a more complicated calculation than simply counting to 50. To start, an employee who works an average of 30 hours a week will be considered a full-time employee. In addition, part-time employees’ hours will be counted as fractional hours towards the large employer trigger. To calculate these fractional hours, a company must take the average number of hours worked by part-time employees and multiply that by the number of part-time employees. Dividing the product of those numbers by 30 will give you the additional number of full-time employees that the company must count towards the large employer trigger. If math isn’t your thing, TriNet provides an online calculator for employers to determine whether or no they are a “large employer”. The consequences of this kind of calculation means that employing a lot of part-time employees could lead to putting you over the 50-employee minimum for large employers and thus trigger your company’s obligations under the employee mandate. It is important to note, however, that the employer mandate simply requires an employer to provide minimum essential coverage to 95% of its full-time employees, not the part-time employees whose hours counted towards the employer mandate trigger.

Consequences of Non-Compliance

For a growing start-up that is constantly hiring new talent, this issue could pop up sooner than one might think. So, it is important to understand that non-compliance with the employer mandate can result in financial penalties for your company. If an employer is subject to the employer mandate but does not offer health coverage to its employees, it can be subject to a $2,000 fine for every full-time employee, so long as one-full time employee is receiving a federal subsidy for coverage on one of the ACA’s healthcare exchanges. Obviously, if you have many full-time employees this could be a huge fine. Yet, due to the way this fine is calculated, many smaller to medium sized companies with full-time employees have found it more cost effective to simply pay the imposed fines rather than taking on the costs of providing healthcare to its employees.

2.      Professional Employer Organizations (PEOs)

For the growing startups in places like Silicon Valley, employers are using Professional Employer Organizations (PEOs) like TriNet which are human resource companies that are attempting to help growing startups with the administrative hassle and costs that come with managing functions such as employee benefits. As most entrepreneurs would attest, they do not want, nor do they have the time to manage an employee benefits program. Companies, like TriNet, are there to ensure that entrepreneurs are in compliance with all the federal and state laws governing employee benefits. PEOs can also help entrepreneurs focus on their core business while allowing the PEO to implement a competitive benefit package to attract better talent to the company.

3.      Talk to Your Employees

So what is the deal for small companies that are not anywhere close to having 50 full-time employees on their payroll? Well, the answer is simple, those companies are not required to provide healthcare for their employees. In this case, it might be a good idea for the employer to speak to its employees about their options on the ACA’s healthcare exchanges. If you are a small employer and you are not offering a very large salary, it is very possible that your employees could qualify for a federal subsidy on the healthcare exchanges. If the employee’s income falls within 400% of the federal poverty level they would qualify for one of these federal subsidies to receive health coverage. 

Creating a Logo: The Importance of Owning Your Work

By Entrepreneur & Innovation Clinic Student

December 2016

Branding is an important part of building your business. It is a way for customers to quickly recognize your product. As such, a logo is an extremely valuable asset to your company.

Entrepreneurs do not always pay close attention, nor are they fully aware of the legal aspects of creating a brand. This could prove costly as you run the risk of not only lawsuits, but the forced abandonment of any logos or packaging and any associated goodwill. Below outlines some of the most common legal mistakes entrepreneurs make when building their brand.

1.         Hiring a friend or close associate to develop a logo without a written contract.

Lots of new business owners rely on favors. I know many business owners who call on friends to create logos. Such informal favors are lifesavers for a new business that has little to no excess funds. Without a formal contract, however, you are limiting your intellectual property rights to an implied license to use the logo for the limited purposes you originally imagined. For example, Suzie is starting an independent consulting firm, she asks her friend, Lizzie to create a logo for the website. As a result, Suzie will only own an implied license to use the logo on her website.

An implied license is also not exclusive. Exclusivity of rights can only be transferred through a written document. Suzie should have created a written agreement with Lizzie assigning any and all rights to the business. 

Under the work-made-for-hire doctrine, a business will own any copyrighted works created by an independent contractor if they agree to such terms in writing. Such contracts are easily obtainable online. It should be noted that this only applies to collective works (The Copyright Act contains a list of works that are covered under work-made-for-hire contracts). Therefore, it is important that any written work-made-for-hire contract includes a clause assigning any and all rights to the employer in the case that the relationship is deemed not to be a work-made-for-hire.   

2.         Assumed the company owns an employee created logo.

Under the “work-made-for-hire” doctrine, an employer owns any copyrightable work done by an employee within the scope of their employment. Many business owners assume that because an employee created the logo, it belongs to them. This is not always the case.

First, the employee must be an actual employee, not an independent contractor. A court turns to agency law and looks at the totality of circumstances to determine whether or not an individual is an employee. These factors include: who controls the manner and means of creating the work; is there a skill required; how provided the tools to create the work; where was the work done; is the relationship long-term or temporary; does the hiring party have the right to assign additional projects to the individual; who controls the working hours; is the hiring party involved in the hiring of third party assistants; is the work a part of the hiring parties regular business or are they in the business of creating logos; are there employee benefits; does the hiring party pay employment taxes.[1] 

Second, the work must be done within the scope of their employment, i.e. in line with the type of work the employee is employed to do. You must ask yourself whether it is likely that a person with a similar job title would take on such tasks. It must also be done within authorized time and space constraints. It is unclear whether this means during office hours or merely during the employee’s time as an employee. Additionally, it must be motivated at least in part by a desire to serve the employer.[2] 

Since it is not always clear who qualifies as an employee, it is in the employer’s best interest to enter into a contract with the employee.  Such a contract would state that the individual is considered an employee and that any works created are deemed created under a work-made-for-hire arrangement. Furthermore, the contract should provide a clause assigning any intellectual property rights to the employer should the individual be found not to be an employee.  Additionally, it may be prudent to include in your company’s employment contract a clause stating that the employee agrees that the company owns any copyrighted materials created during the DURATION of their employment.

3.         Using Stock Images to Build Your Logo.

There are many websites that offer stock images to graphic designers. If you should use these images, be sure you clearly understand the terms and conditions for the site and the ramifications of using such images.  For example, one site only grants a license for non-commercial use.  Another limits the commercial uses that are licensed or the duration of use. Additionally, the original artist retains ownership of the copyright. It is in your business’s best interest to create NEW art instead of using images with limited licenses. Your trademark logo is valuable, but it is not valuable if you have limited rights. You do not want to find yourself having to abandon a logo, which has become associated with all the goodwill you created.

4.         Only Changing One or Two Elements of A Stock Image or Found Image in An Attempt to Create a “New” Image.

If you or your designer is inspired by one of these images and use it as a basis for your own image, you should make sure that the images are different enough that you will not be seen as infringing that person’s copyright. Under The Copyright Act, infringement occurs in two situations: 1) when defendant had access to the original work and the copied work is substantially similar to the copy; or 2) the original and copy are strikingly similar and some access to the original image is reasonably imaginable. It does not matter whether you intended to copy a work or not. There is no set formula for determining whether the two works are sufficiently similar. Courts use different standards; such as the overall impression of the works and whether an ordinary observer would find the work misappropriated. A new business should avoid placing themselves in a situation where the originality of their logo is questioned. Any questionable works could lead to costly litigation and the possible abandonment of your logo.

[1] See Agency Law Restatement §220(2).

[2] This is the agency test used in Miller v. CP Chemicals. 

The Hardships of Regulation and Lobbying Interests When Breaking into the Market: The Recent Tale of a Silicon Valley Start-up Facing Opposition from an Established Industry

By: Entrepreneur & Innovation Clinic Student

December 2016

Start-up companies often face many issues when first launching their products, including procuring adequate funding and establishing a working business model. Beyond these internal issues, start-ups can also run into trouble with its competition, especially when that competition has enormous amounts of lobbying strength and money to devote to preventing newcomers from entering into the market. This scenario occurred recently when Airbnb, a Silicon Valley start-up company, was recently banned from operating in its biggest market, New York City, after a state regulation was promulgated.

Airbnb was created in 2008 as a marketplace for people to list and book short term rental accommodations, and has since grown to list almost three million rentals in more than 34,000 cities worldwide. The company capitalized on the “sharing economy,” which allows people to profit from monetizing existing assets, such as a spare room in an apartment, as rental space. The start-up has grown so rapidly that in the United States alone, one in ten people have used an Airbnb platform (such as either Airbnb or HomeAway) to stay in someone’s home for a period of time. However, Airbnb has been fighting local rental regulations throughout the United States over the past couple of years due to the fact that it operates in such a gray area. The company’s products, rentals of apartments and homes owned by all different landlords, are not long enough to be considered leases but also do not fall under hotel regulations. Thus, the hotel industry and cities have been fighting Airbnb’s presence in the market due to the fact that both parties stand to lose revenue from hotel occupancy and from occupancy taxes.

The biggest challenge to Airbnb’s success came this fall when the New York legislature passed a law in October that allows authorities to fine Airbnb hosts up to $7,500 if they are found to be listing a property for rent for less than 30 days at a time. The fine applies to dwellings designed for three or more families, so it is aimed specifically at Airbnb apartment rentals. The law would apply to about 22,000 listings in New York city alone and would affect the one billion dollars in revenue that Airbnb’s homeowners would collect in the city. Rentals of less than thirty days were actually illegal under New York law even before the October law was passed, but regulators struggled to enforce the law without access to the company’s rental database. This new law is a workaround that punishes anyone who advertises on Airbnb, which is much more far-reaching and easier to detect online.

The October law was promulgated due to concerns around lack of affordable housing in New York City, as affordable housing advocates worried that the company was making it easier to unlawfully rent apartment units for short time periods to travelers. This is an issue because those units are off the market for permanent residents, which drives housing costs higher. Regulators were also concerned that landlords would prefer to charge high nightly prices on Airbnb rather than making them affordable for residents to stay in long term, which would give preference to visitors over locals and thus change the dynamic of the city. In addition, in 2015 the New York state Attorney General’s office released a report which found that thirty-seven percent of revenue generated by Airbnb hosts came from hosts with three or more listings, which implies that hosts are running quasi-hotels while evading the law. While stating the motivating factors for the law, a spokesperson for Governor Cuomo of New York said that Airbnb’s rentals “compromise efforts to maintain and promote affordable housing by allowing those units to be used as unregulated hotels.”

Airbnb responded to the controversial New York law by stating that “in typical fashion, Albany back-room dealing rewarded a special interest — the price-gouging hotel industry — and ignored the voices of tens of thousands of New Yorkers.” The company’s sentiments reflect its frustration with the lobbying efforts of the large hotel industry, which have successfully mounted opposition to Airbnb in several other smaller cities and countries like Iceland, Barcelona, New Orleans, and San Francisco. The disparity between a start-up’s lobbying expenditures and an established industry’s spending can be substantial, which in turn can have detrimental effects on the future of a start-up’s profits. For example, start-up company Uber also has faced regulatory challenges and opposition from the strong taxi-cab industry, which has lead the company to be banned in several cities across the country, resulting in lost profits for the ride-sharing company.

Hours after the New York law was signed in October, Airbnb filed a federal suit against the New York state Attorney General Eric Schneiderman arguing that the law would cause irreparable harm to the company. The two parties have since settled the case and are currently discussing how to best resolve the case in a way that would benefit both the state and the citizens of New York City. As Airbnb continues to grow, it will continue to face regulatory challenges stemming from lobbying efforts of the hotel industry. This challenge is common among many start-up companies trying to break into an already existing market, which can be detrimental to a company’s profits at a critical point in its growth cycle. One beneficial move that Airbnb can make is to hire as many lobbyists as it can afford to counteract the hotel lobby. The company can also make alliances with similar “sharing economy” companies, like Uber, to create a joint lobbying effort. Lastly, the company can reach out to those in the hotel industry and form partnerships with hotel chains so that the two parties will have a common understanding and will cease their lobbying fights. Airbnb is an innovative and growing company with regulatory issues to sort out, but if it can navigate its legal landscape properly and hire lobbyists to advocate for its products it has the potential to remain successful.

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/