I’m a Start-up: Should I Use Rocket Lawyer to Help Me with my Legal issues?

By: EIC Student

December 2017

The Moment of Truth in the Legal Industry, or Is It?

There are websites, such as Rocket Lawyer, Contractology, Avvo, LegalZoom, and Template Monster that allow entrepreneurs and companies to find legal templates and gain legal advice. These websites bypass the process of retaining the services of an attorney or law firm.

The relationship between the user and the website is akin to several other popular apps and websites: OpenTable allows the diner to make a reservation, instead of speaking to the hostess at a restaurant; Uber allows the rider to find a ride instead of hailing a taxi or speaking to the dispatcher at a car service company; TurboTax allows the tax payer to file taxes instead of consulting with a tax accountant; and WebMD enables a sick person to diagnose his or her ailments remotely instead of heading to the doctor’s office. The parallel is that these websites and apps remove the human element from the equation. Even David Byrne sees the parallels.

The legal profession, as with many industries, is in flux due to the “disruption” emanating from Silicon Valley. A recent New York Times article, “A.I. Is Doing Legal Work. But It Won’t Replace Lawyers, Yet,” provides an overview of this disruption. The article concludes that there are specific and niche legal services that businesses are willing to pay for, yet, some of the more routine legal work can now be completed by A.I.

Where does this leave the start-ups and entrepreneurs seeking legal advice? The below sections of this post outline both sides of the discussion, and provide you with answers to this question.

The Benefits of Legal Advice Websites

As a start-up or a small business, online legal resources are attractive options because googling, “how to form a C-Corp” and finding the answer with the click of the mouse seems more bearable and less time-consuming than contacting an attorney and paying legal fees.

There is a myriad of ostensible benefits to these legal advice websites:

·         Cost savings;

·         No need to be in direct with an attorney;

·         Clearer ownership and control over the process;

·         Provides entrepreneurs with foundational legal knowledge;

·         Free and direct access to legal resources;

·         And again, cost savings.

The cost may be the biggest reason that a young company would want to avoid retaining legal counsel. Especially, at an early stage, a start-up likely does not have the funds to hire a lawyer. Furthermore, these legal advice websites bring legal advice to the masses. Arguably, this creates a more informed body of entrepreneurs. Lastly, these advances also help lawyers: the websites enable lawyers to focus on the gray areas of clients’ issues, while allowing these websites to handle the rote drafting.

Through the advent of these websites, legal advice is a Google search away (and does not break the bank). The question becomes: why do I need a lawyer if Rocket Lawyer provides all the answers?

The Risks Associated with Legal Advice Websites

While these websites provide entrepreneurs with immediate access to legal resources, issues may arise during this process. An entrepreneur may not be versed in legal vernacular, and as a result, the information that the user inputs into the legal service website may be incomplete or inaccurate. In turn, the answer that the website automatically spits out may be wrong. This will place the entrepreneur at a disadvantage.

Furthermore, young entrepreneurs may not know that they may benefit from the services of a lawyer. As such, an entrepreneur may blindly follow the advice provided by these websites, without knowing the nuances that only a discussion with an expert could provide. Lastly, the websites may not be up-to-date on the most recent legal advice, or there may be different state requirements, and the website only provides federal information.

There Is a Balance to Strike

Lawyers are not going away anytime soon. According to a Massachusetts Institute of Technology (MIT) study, the authors, “estimate that automation has an impact on the demand for lawyers’ time that while measureable, is far less significant than popular accounts suggest.”

Instead, according to a McKinsey & Company study, the automation will transform, and not eliminate jobs. This type of change will enable certain tasks to become automated. Furthermore, according to a Harvard Business Review article, these automated systems will create consistent precedents, streamline documents, and allow for routine tasks to be taken on by machines. These developments will ultimately allow lawyers to focus on less menial tasks, and instead, focus their energies on “the tricky stuff that calls for judgment, creativity, and empathy.”

Proceed with Caution:

The Best Ways to Use the Legal Advice Websites

While the legal advice websites may have many benefits, there is a certain way to use them.

Below is a general step-by-step process to follow:

·         First, look at the various websites to get a lay of the legal land. If you are unsure whether you want to form a C-Corp or an LLC, look at the websites to inform you. You will be able to gain a better sense of the language and the issues relevant to your business.

·         Once you believe that you have hit a wall in your research, try contacting a law firm or one of the free local legal clinics listed below.

·         At that point, get the conversation started: you can provide the clinic or the lawyer with the information that you have at that time and let them know your future goals. You want to paint a clear picture so that the experts have all the relevant information.

·         Then, allow the experts to provide you with their analysis and advice.

·         In the end, you can combine your research in conjunction with the experts’ advice to help you land on the best results.

In forming your business, hiring employees, granting stock options, and selling your product, you have put in a lot of time and energy to create your business. Thus, you want to ensure that all your I’s are dotted and T’s are crossed.

In conclusion, this is not the reckoning moment for the legal industry. Lawyers can work in conjunction with automation; and start-ups can work in conjunction with lawyers. There should be a symbiotic and successful relationship amongst these parties.  

Next Steps for Entrepreneurs

If you are an entrepreneur or young start-up looking for free legal advice in the Boston-area, here are some legal clinics at the local law schools:

o   Boston College Law School Entrepreneurship & Innovation Clinic

o   Boston College Law School Community Enterprise Clinic

o   Boston University Law School Entrepreneurship & Intellectual Property Law Clinic

o   Northeastern University School of Law Community Business Clinic

o   Suffolk Law School Intellectual Property & Entrepreneurship Clinic

o   UMass Law Community Development Clinic

o   Harvard Law School Community Enterprise Clinic

o   Harvard Law School Transactional Clinic

Please make sure that the clinic’s type of legal service is relevant to your business.

We wish you the best of luck on the success of your business.

“The Need for Speed” in Regulating Digital Health

By: EIC Student

December 2017

The first half of 2017 saw a record $3.5 billion invested in more than 180 digital health startups.[1]  With seven deals exceeding the $100 million mark, and with an average investment of more than $18 million, investors are putting a considerable amount of capital in digital health.[2]  As the digital health industry continues to mature and more investment floods into the space, the entrepreneurs pioneering these new technologies are ultimately tasked with positioning their startups, and their respective investors, for a handsome exit.  Like other industries, these startups will need to flawlessly execute a product launch and successfully differentiate themselves in order to drive revenue and gain market share.  Yet, unlike other industries, the U.S. health care system is one of the most heavily regulated.  Political risk and regulatory ambiguity can stymy a go-to-market strategy and derail a product launch.  Leaving the former to those on the “Hill,” the FDA has started to address the latter in their recently announced Digital Health Innovation Plan.

What is Digital Health?

Consumers are becoming more engaged in their own health care in many ways—often through technology-enabled innovations that provide new personalized insights.[3]  And, depending on who you ask, the term “digital health” may be defined as a mobile app that counts their steps and tracks their heart rates; an IT solution that enables their family doctor and emergency room physician to view the same medical record; or even, tech-enabled exercise equipment.  In other words, digital health is a term used in a wide range of contexts.  Similarly, the FDA’s characterization is broad and expansive.  Digital health is described as a class of products spanning categories such as mobile health, health information technology, wearable devices, telehealth and telemedicine, and personalized medicine.[4]

The FDA recognizes the power of digital health to reduce system inefficiencies and costs, improve access to care and increase quality, while also making medicine more personalized.[5]  And, in recent years, the agency has designed policies that allow lower risk technologies, such as mobile medical applications and general wellness products, “[t]o be readily available to [consumers] while assuring these connected products continue to be high-quality, safe and effective.”[6]  For example, the agency has stated it will not focus regulatory oversight on products that simply “[p]romote a healthy lifestyle”—which may include exercise equipment, video games, or software programs.[7]  While a step in the right direction, this did not alleviate the regulatory ambiguity entrepreneurs face when their rapidly evolving innovations are subjected to the traditional FDA regulatory framework.

That is, until now.  The 21st Century Cures Act—a bipartisan initiative signed into law late last year—aims to “[a]ccelerate medical product development and bring new innovations and advances to patients who need them faster and more efficiently.”[8]  One way this groundbreaking legislation seeks to achieve this objective is through re-thinking what a “device” actually is.  More specifically, the Cures Act—as those in the know commonly refer to it—amends the term “device” in section 201(h) of the Food Drug & Cosmetic Act (“FD&C Act”) to exclude certain software functionality, such as software for administrative support and managing a healthy lifestyle.[9]  The FDA has recognized that the traditional regulatory approach to “[h]ardware-based medical devices is not well suited for…software-based medical technologies.”[10]  And, pursuant to the Cures Act, the FDA is required to—and is currently in the midst of—implementing new policies to shape the way “[l]ower risk digital health technology including software” will be regulated.[11]

Digital Health Innovation Plan

In response to the Cures Act and the rapidly evolving digital health industry, the FDA has outlined its regulatory approach as a balance between two core policy principles: fostering digital health innovation and protecting public health.[12]  This vision is embodied in the recently announced Digital Health Innovation Action Plan, which takes an integrated approach to refining polices and providing guidance, growing expertise in digital health and software development, and re-thinking digital health product oversight.[13]  As the FDA Commissioner has stated, “FDA’s traditional approach to medical devices is not well-suited to these products.”[14]

The cornerstone to this new regulatory approach is the Pre-Certification Pilot program, which marks a fundamental shift from the traditional regulatory framework.  Instead of primarily focusing on the specific product to be launched into the market place, the FDA will first look at the software or digital health technology developer.[15]  In other words, the FDA will review and approve the company, not the specific product.  Therefore, once a company is “pre-certified”—hence the pilot’s namesake—their subsequent products will be exempt from pre-market review, and will allow for an almost immediate product launch and collection of post-market data.[16]

Tell Me More

Software-as-a-medical-device, or “SaMD” for short, includes software used for one or more medical purposes that are not part of the device’s intended use, and does not control the device’s hardware.[17]  For example, SaMD may utilize a device’s microphone to detect abnormal breathing patterns.[18]  This category of digital health remains subject to the section 201(h) “device” definition, and is the focal point of the Pre-Certification Pilot.[19]

The pilot is designed to be a learning process for all stakeholders.  Staying true to the twin policy underpinnings guiding FDA’s larger digital health plan (i.e., fostering innovation and protecting public health), the pilot seeks to inform the development of a regulatory framework that balances the reduction of time and cost to market entry with ensuring the safety and effectiveness of these technologies.[20]  At first, the FDA will be working with just nine (9) initial participants, ranging from small startups, such as Pear Therapeutics, to large enterprises, such as Apple and Samsung.[21]  Participants will have the ability to get their products to market faster, capture and utilize real-world evidence in product iterations, and gain regulatory predictability, while providing the FDA with feedback on how best to design, test, and evaluate the benefits and risks of digital health products.[22]

The Bottom-line

The recently announced Digital Health Innovation Action Plan and Pre-Certification Pilot provides digital health startups—and their respective investors—with clarity on how the agency intends to regulate the space.  This pilot will continue the trend of industry collaboration and introducing practical policies, which in turn should translate to more predictability for startups—especially with the development and execution of a go-to-market strategy.  And, with the level of recent investment in the space, coupled with the broad and expansive digital health category, this pilot illuminates the agency’s approach to regulating these new technologies.  This brief overview of the evolving digital health regulatory framework highlights FDA’s approach to removing regulatory ambiguity, and the role startups can play in guiding the ever-changing landscape.

[1] Rock Health Mid-Year Funding Report

[2] Rock Health Mid-Year Funding Report

[3] FDA Announcement July 2017

[4] FDA Digital Health overview

[5] FDA Digital Health overview

[6] FDA Digital Health Innovation Plan

[7] FDA General Wellness Products Guidance

[8] FDA 21st Century Cures Overview

[9] FDA Digital Health Innovation Plan

[10] FDA Digital Health Innovation Plan

[11] FDA Digital Health Innovation Plan

[12] FDA Digital Health Innovation Plan

[13] FDA Webcast

[14] FDA Announcement July 2017

[15] FDA Announcement July 2017

[16] FDA Webcast

[17] FDA Digital Health Criteria

[18] FDA Digital Health Criteria

[19] FDA Webcast

[20] FDA Digital Health Innovation Plan

[21] FDA Announcement September 2017

[22] FDA Webcast

Balancing profits and purpose in a marketplace where investors, consumers and talent demand it

By: Benjamin Ruano

November 2017

Social good, it’s in your (business’s) DNA

Social and environmental missions are driving entrepreneurship activity in the United States—in fact, nationally, 12% of entrepreneurs are currently leading and, in many cases, trying to start a social enterprise.1 These entrepreneurs often place social objectives above profits; however economic benefits for investors also flow strongly from creating new social value.  For instance, in marketplaces with increasingly discerning consumers, the ubiquity of often dubious certification marks—such as “all natural,” “made in U.S.A.,” or “fair trade”—has diluted the persuasiveness such marks once enjoyed.  Consumers and swaths of investors, alike, are becoming increasingly conscious of not merely the socially or environmentally additive nature of a company’s products or services, but also of the moral compass and constitution of the entity itself. 

Even our largest institutions feel this cultural shift. When the CEO of Walmart says that “business exists to serve society,” and the CEO of Blackrock, the world’s largest asset manager, says the “interests of business must align with the interests of society in order to generate long-term value,” they are reflecting a shift in the debate about the role of business in society.2 The essence of this trend is in the aesthetic and emotive differences between having a good product and having a good company. 

It is with the aforesaid in mind that social entrepreneurs should strongly consider Benefit Corporations (“B-Corp.” or “B-Corporations,” for short) as a great way to capitalize on socially-conscious consumers and impact investors, stand-out among the cacophonous competition, and differentiate their company to future employees.  Ultimately, meeting the legal and certification requirements for a B-Corp. bakes sustainability and the pursuit of social good into the very DNA of your company as it grows, brings in outside capital, or plans succession.3

Rocking the boat

With a handful of well-worn vehicles available to house your next great business idea—e.g., C-Corporations, LLCs, sole partnerships—why rock the boat?  For starters, rocking the boat is the archetypal role entrepreneurs play in business and the capital markets.  Moreover, your company would not stand alone: there are 2,263 B-Corporations in 50 countries representing 130 industries—all of which share one unifying goal.  Notwithstanding, many prudent entrepreneurs may still feel apprehensive about the downstream effects of such a fundamental decision.

“How will it impact our ability to raise capital and command higher valuations?”

Impact investors generally wish to invest in companies that achieve a certain social or environmental impact, and are structured to maintain their mission after the next financing, sale, or IPO.  Conveniently, the legal requirements for B-Corporations in States that have passed legislation allowing for their creation4 already gear your organization to meet these objectives.  Additionally, numerous investors and financial services firms are currently scouring the marketplace for B-Corporations as part of the due diligence, portfolio management, and portfolio mandates of existing funds or funds raising capital (e.g., Mission Markets, Good Capital, RSF Social Finance, Investors’ Circle, New Resource Bank, and TBL Capital).  Moreover, many Certified B-Corporations already have had sophisticated investors vet and approve the overarching B-Corp. legal framework (e.g., Method, Seventh Generation, IceStone). 

B-Corporations also often command higher valuations since they can more easily foster resilient goodwill with customers and are trusted by their employees and suppliers.  The independent third-party certification, and the transparent legal and performance standards further maintain that trust and minimize the loss of brand equity post-sale.6

Will the legal framework create additional liability for our Board of Directors and Officers?     

By custom, the operating principle of business and of the capital markets is to increase profits, even if it functions to the detriment of society.  The general corporate laws of the various States have often adhered to the same principle. For instance, in Ebay Domestic Holdings Inc., v. Craig the Delaware Chancery Court—a paragon of business-savvy state courts—found that “promoting, protecting or pursuing [considerations other than financial value maximization] must lead at some point to value for stockholders.”  This principle of value maximization is arguably embedded in a Board of Directors’ fiduciary duty to act in the “best interest” of the corporation. B Lab—the nonprofit organization overseeing the certification of B-Corporations—and their lawyers opine that adopting the B-Corp. legal framework serves to expand the definition of the “best interests” of the corporation and should reduce the liability for Directors and Officers by creating legal protection (called “safe harbor”) for them to take into consideration the interests of multiple stakeholders when making decisions, particularly when considering financing and liquidity scenarios.  Adopting the B-Corp. legal framework will, however, give shareholders additional rights to hold Directors and Officers accountable for taking into consideration these same interests when making decisions—and that, of course, is the whole point of a B-Corporation.7

What will current and potential employees think?

Recently, Harvard Business Review found that millennials, which represent roughly 50% of the global workforce, want work that connects them to a larger purpose.  Perhaps this is why companies with higher levels of employee engagement posted total shareholder returns 22% higher than the broader stock market.8  On the other hand, companies with low engagement had a total shareholder return that was 28% lower than the market average. According to Aon Hewitt, brand alignment—which is the harnessing of the whole company to deliver the brand and company promises—was one of the top 3 drivers of employee engagement.  Never doubt that a small group of dedicated people can change the world … while also outperforming the broader market.

Conclusion

Benefit Corporations represent a watershed moment for business.  Companies that exclude from their operating principles social and environmental considerations now risk losing market share and undermining shareholder value.  Those companies that instead balance profit and purpose, however, stand to gain in myriad ways from contributing solutions to some of our most pressing problems.  As Patagonia founder Yvon Chounard has written: “[Benefit Corporations] enable companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs.”9

Entrepreneurship Law Worldwide, Worldwide

By: Esteban Múnera

November 2017

The Pivot

Before ever sitting down and studying for the LSAT, I was warned that the legal market was shrinking.  Not really knowing what this entailed, I proceeded to my logical reasoning and logic game assignments.  Now, as a 3L at Boston College Law School, I am coming to terms with this ominous warning.

The 2017 Report on the State of the Legal Industry, “The Georgetown Report,” as it is commonly referred to, confirms that corporate legal buyers are directing more work away from large law firms, electing to take it in-house or to legal service providers.  The Report provides a broad range of data analytics that confirm the weaknesses in the traditional partnership model, the allure of alternatives legal sources, and an alarming market dynamic.  In short, the Report concludes that the traditional law firm franchise has “eroded.”  I will not dispute this analysis.  Instead, I aim to reinforce the notion that given this predicament, all lawyers must think entrepreneurially.

Both within law school and in private practice, the focus for “start-up” attorneys is on local markets.  This is a no-brainer given the large concentration of human capital in neighboring areas such as Silicon Valley and Cambridge.  However, this myopic approach fails to address the needs of international start-ups.  What if corporate counsel were equally dedicated in nurturing young, international start-ups that may be the next Google or Facebook?

In general, the legal industry is not only ripe for entrepreneurial attorneys but will actually depend upon them for survival.  Accordingly, more U.S. law firms need to think and act entrepreneurially by pivoting towards an untapped international resource.

Coming to America

Countless technology and other companies were founded in the United States by entrepreneurs with strong ties to foreign countries and regions such as Russia, India, Israel, China and Latin America.  For tech companies, many times the decision to incorporate in the United States, and specifically in Delaware, is driven by the preference of U.S.-based venture capital firms and other investors to invest in companies incorporated in Delaware.

After reviewing tax and other considerations, founders may decide to incorporate the company or the parent entity in the United States, while some or all of the founders, employees or services still operate in a foreign country.  According to the U.S. tax code, a corporation is “domestic” if it is “created or organized in the United States or under the law of the United States or of any state.”  Therefore in the U.S., a corporation’s residency is determined by a company’s place of legal incorporation, not by the location of its headquarters, employees or activities.

Foreign operations incorporated in the U.S. present legal issues for companies of all sizes.  First, the new company must comply with the laws of its place of incorporation and where it conducts business in the United States.  While this may seem obvious, some founders and foreign counsel may not be fully aware of local requirements and legal differences between the specific foreign country and the state where compliance is required.  Furthermore, arrangements regarding foreign employees may still be subject to compliance with certain U.S. laws. 

If this seems like a lot to handle for a still wet-behind-the-ears startup, it’s because it is.

Disruptive Emergence of New Tech    

Off the success of its online payments upstart, Stripe, Irish brothers John and Patrick Collison set out to take the complexity out of incorporating in the U.S., and thereby “render geography irrelevant in the process.”  The proposed solution is called, Stripe Atlas, a one-stop-shop startup service toolkit.  Patrick Collison says he was inspired to give non-US entrepreneurs an equal chance and compete on the same playing field as companies based in Silicon Valley.  Atlas’ suite of services offers entrepreneurs the ability to incorporate their business in Delaware, establish a U.S. bank account, and receive a tax identification number.  In addition, they will get access to legal advice from international law firm Orrick, $150,000 in computing services from Amazon Web Services, and tax advice from PwC.  The entire process will take less than a week.

Entrepreneurs pride themselves on solutions, or, in this case, technological work-arounds.  Now law firms, like Orrick, lawyers must act entrepreneurially and recognize disruptive innovations.  Stripe Atlas’ service (and its presumably its forthcoming competitors) allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or skill.  As the Collison brothers recognized, “corporate jurisdictions and headquarters are becoming more fluid in the era of the Internet,” and as such, “physical geography matters less.”  Through services like Stripe Atlas, law firms may now easily counsel international entrepreneurs to get their startups off the ground.

What Now?

It is safe to say that all attorneys want to avoid The Georgetown Report’s apocalyptic prophecy of the legal industry.  Consequently, major changes are needed.

In the short term, there is a dire need to lessen the learning curve faced by young corporate attorneys by teaching about entrepreneurship in law school.  As the legal industry recovers from the recent recession, it is in a fundamentally different place than it was ten years ago.  Yet, despite this radically shifting market place, legal education has remained fundamentally unchanged.

In the long run, the goal is to close the access to legal representation gap.  Through innovations like Stripe Atlas, the legal profession will slowly chip away at his its delivery problem and continue to develop sustainable models for delivering legal services.  As a result, legal entrepreneurs will be able to provide a more efficient and holistic service to both their domestic and international clients. 

The time has come for legal services to be affordable, accessible, and adopted widely. The market for law and technology has been described as an “unpopulated multi-billion dollar industry.”   The question for today’s law students and professional is whether they will be left behind as others fill the gap, or whether they will seize the opportunity for innovation and entrepreneurship, pioneer new legal services delivery models, and help find a solution.

Environmental Lawyering for Responsible Start-Ups

By: Tyler Archer

November 2017

As the modern economy becomes greener and more efficient, environmental considerations are requiring more and more attention. This is especially true as older factories, mills, and manufacturing districts are being retooled and repurposed. To cope with changing priorities, small businesses should consider contracting with environmental lawyers and professionals to conduct an environmental audit, which can be a valuable tool for starts-up in identifying risks, correcting problems, crafting successful deals, and building responsible companies.

The goal of an environmental audit is to reduce environmental exposure. Operationally, this is important because pollution can always trigger potential enforcement, which can be detriment to both the bottom line and public perception. And from a deals perspective, increased risk can reduce bargaining power and can bring down the deal all together. The environmental audit and due diligence process generally includes the following: identify the framework, develop standards, document and analyze results, and establish a follow-up procedure.

For the purposes of this blog, envision a fictional start-up working in light manufacturing and machining. They operate in a centuries-old factory building, regularly use oils and other chemicals, and produce a moderate amount of metals and packaging waste. Assume the manufacturing company is looking to improve its environmental record in the hopes of securing a buy-out from a larger competitor, and approaches a law firm for guidance. (Many of these environmental and considerations would not apply to technology start-ups, unless they manufacture hardware.)

The first step is the most important. Without the appropriate framework, the environmental audit won’t prove successful. It begins by identifying the relevant statutes, regulations, and jurisdictions. Insurance requirements are also worth reviewing. For example, our manufacturing start-up regularly uses metals, oils, and other potentially environmentally risky products which can implicate a range of rules regulating discharge, storage, and disposal.

After establishing the framework, the next stage is all about collecting data. As always, proper documentation is extremely important, particularly if there is a chance of appearing before a court. There are two important steps in this stage: reviewing the start-up’s documents and operations. While the document review is fairly straight forward—and can include state and federal filings and employment and vendor agreements — “walking the land” is vital. Examining the facilities and operations first hand provides valuable context and can reveal problems and inefficiencies that can be overlooked in paperwork.

In a transactional setting, it is important to realize the other party—whether friend or foe—will be conducting their own due diligence for the deal. While they may not have the same access, particularly to facilities and employees, they will certainly review public documents and industry contacts. They will be concerned about inheriting environmental liabilities, and this play out in the structure of the deal. For example, a potential buyer may prefer an asset sale and dissolution, which would erase all liability, rather than a merger, which would transfer liability to the successor.

In the final step, creativity is key. Working with their attorneys and business advisors, the start-up should develop ways of addressing the environmental issues identified by the audit that are both business-friendly and sustainable. Some—such as purchasing more robust oil storage containers—can be simple yet impactful. Others can require a bit more ingenuity—such as redesigning the plant to reuse excess heat in the building rather than as a discharge, thereby reducing pollution and lowering energy bills long term.

Regular environmental auditing can be a valuable tool for managers both from an operations perspective and in the context of a corporate transaction. In general, companies need to consider how the various laws and responsibilities impact their operations (i.e. production) and bureaucracy (i.e. paperwork), and how they can be creative in addressing these issues. This can be particularly important to start-ups, where inefficiency and wasted capital can change the trajectory of a new business. By incorporating environmental responsibly into their business plans from the outset, start-ups can set themselves up for a sustainable and profitable future.

Watering Hole or Money Pit: The State of the Liquor Licensing System in Boston

By: Saba Habte

November 2017

Location, location, location is a well-established mantra emphasized by entrepreneurs, as an integral component for a successful business. If you are a budding entrepreneur planning to open a restaurant in Boston, you may be saying license, license, license—and for good reason. Thanks to an 84-year-old state law from the bygone years following Prohibition, obtaining a liquor license, while a significant determinant of financial viability, is practically unattainable, particularly for small/local and minority business enterprises. Due to the high demand and limited availability, liquor licenses have become a precious commodity for business owners, as a license can cost upwards of $400,000.

Origins of Libation Laws in the U.S.

In 1920, the Eighteenth Amendment banned the manufacturing, sale, and distribution of liquor. As a result, the Prohibition era began, ushered in by advocates who thought a federal ban would lower crime rates and improve the nation’s character and economy. After 10 years of Prohibition, however, the economy began to suffer as breweries, distilleries, and saloons were shut down, projected sales in the purchase of other goods and entertainment dropped, and restaurants could not make enough money without liquor sales.

The government lost valuable excise tax revenue totaling $11 billion dollars. Despite spending over $300 million to enforce Prohibition, crime rates rose with a rise in illegal alcohol distribution (or “bootlegging”) and the spread of illegal drinking spots (or “speakeasies”). Support for Prohibition waned and ultimately lead to the Twenty-first Amendment repealing prohibition.

Origins of the Liquor Licensing System in Boston

Following the repeal in 1933, state legislatures took control of alcohol licensing, wary of the predominantly Irish city council and the stereotypes regarding Irish drunkenness. As a result, an arbitrary cap (or quota) was placed allotting a limited number of liquor licenses to municipalities throughout the Commonwealth and mandating legislative approval for any additional licenses requested. Unfortunately, there has been very little progress on expansion of the amount of license’s granted since the law’s enactment 84 years ago.

Maintaining the Status Quo-ta

Most municipalities in Massachusetts are apportioned one on-premise license for every 1,000 residents, with the option to request additional licenses as the population increases. Boston, however, is not privy to these increases and has an arbitrary cap that has rarely been raised.

According to the Boston Licensing Board (last updated December 2016), there are about 1,100 total liquor licenses available, which are only 130 more than originally allocated in 1933. Once this cap is reached, prospective new restaurateurs face the choice of either purchasing an already issued permit (i.e. from a restaurant going out of business/closing), which can cost up to $400,000 or more or losing potential revenue from not serving alcohol. The latter option, however, creates an uphill battle since the availability of alcohol in a restaurant can either make or break a business.

The cap has only been raised twice since it was set in 1933: 2006 and 2014. In 2014, state legislatures granted the city of Boston 75 new liquor licenses to be issued over 3 years, with 60 of those new licenses restricted to underserved neighborhoods, such as Dorchester, Mission Hill, Roxbury, and Mattapan. Mattapan, however, still has no restaurants that serve alcohol, and has only 2 full licenses in the city: one for a local veteran post and another for a nightclub. Implemented to promote economic growth in the designated neighborhoods, these restricted licenses are leased from the city and cannot be used anywhere else. When a restaurant holding this license closes, the license will return back to the city and be earmarked for the same neighborhood. These licenses cannot be sold on the private market, since the owners do not own them.

Reform

This strict and outdated cap and quota especially impacts small businesses, which rely on alcohol sales for a significant portion of their profits. The financial constraints and the high cost of doing business tend to also affect small/local and minority business enterprises’ ability to bring cultural, artistic, culinary, and economic development to underserved, less affluent neighborhoods, in need of revitalization.

Councilwoman Ayanna Pressley recently introduced a new proposal, which would create over a hundred low-cost licenses. Pressley says, “the proposal is both fair to existing owners and will put us one step closer to creating more jobs, closing the wealth gap, enriching the quality of life for residents, as well as making neighborhoods a destination location.” If approved, the legislation would provide 105 restricted licenses costing about $3,000 for lower-income neighborhoods, in addition to a new bill that would create 30 additional licenses that could be used anywhere in the city. The latter has current restaurateurs very concerned.

Devaluing the Liquor License

Current restaurateurs fear that dismantling the current quota system or allowing more establishments to obtain these liquor licenses will lower the value of their existing licenses. The concern stems from the worry that new restaurateurs with low-cost permits could provide similar services better priced against existing restaurants already in debt to investors or banks for their full-cost licenses, oftentimes the restaurateur’s biggest asset. Massachusetts alcohol attorney, John Connell, believes that many ‘would-be restaurants’ will sit on the sidelines, not finalizing their leases, and wait for the lower-priced licenses to become available. Furthermore, creating additional licenses may diminish an already decreased supply of food workers, particularly in the uncertain setting of immigration policies.

Conclusion

Massachusetts’s old licensing system is outdated and change is needed to rectify the scarcity and astronomical costs of liquor licenses. Councilwoman Pressley’s proposal appears to take a more balanced approach to the licensing system, ensuring that both historically disadvantaged neighborhoods and larger establishments receive a share of the licenses to be issued. Nonetheless, the objective in any licensing system should be to serve the public interest, not to sustain the value of personal investments.

A Select Few: The State of Digital Advertising

By: Stephen Anderson

November 2017

The New Digital Landscape

            In the early days of the worldwide web, digital advertising was straightforward.  Consumers had access to free content and, in exchange, would endure advertisements.  A cursory glance at the industry seems to show this is still the status quo and, consequently, life is good for digital advertisers.  Global spending in 2017 is expected to be around $229 billion, with projections for 2020 north of $335 billion. [1] However, life is in fact not good for the entire industry.  It is good for only a select few.

Where there is growth in an industry, there is typically room for startups.  Although the digital advertising space is undergoing rapid growth, startups are being squeezed out.  This is due to the concentration of earning power in only a handful of companies, namely Google and Facebook, and the emergence of ad blockers. [2]

There are primarily two types of startups that find themselves in the digital advertisements industry: those that specialize in advertising technology (ad tech), and those that rely on digital advertising for necessary capital (content publishers).  While they are drastically different businesses, both are experiencing the difficulties born from this newfound landscape.

Time to Fold

Although content publishers find themselves on uneasy ground, ad tech startups may be watching the floor fall out from beneath them.  Simply put, it is looking increasingly likely that venture capitalist investments into ad tech has already peaked and is now falling off at a rapid pace.  Since the peak of ad tech deals in 2013, the pace of venture capital investments have dropped by almost 80 percent. [3] Many argue that this is direct correlation to the market consolidation that is taking place. [4] Ad tech startups can thank Google and Facebook for this new reality.

Independent ad tech startups are having trouble finding advertisers to do business with because of the Google-Facebook duopoly.  While they are still able to attract business in certain niches, this will not provide sufficient means for most ad tech startups to stay afloat. [5] Google and Facebook began focusing on how to entice consumers to click ads and are now bearing the fruit of their labor.  To give context, together the companies earned nearly two-thirds of the Internet advertising revenue in the U.S. in 2016. [6] Adtech startups do not have enough revenue to share amongst themselves and that fact alone is pointing towards a flood of consolidation.

Blocking out the Haters

            Content publishers, on the other hand, are facing a different type of challenge.  To say that ad blocking companies are divisive would be an understatement.  Extortionists.  Internet killers. Unethical, immoral, and mendacious covens of techie wannabes.  These all are terms that have been used to describe ad blockers. Nonetheless, as much as digital advertisers may disapprove, it is not illegal to block advertisements. [7] Readers have the fundamental right to decide what content and which scripts enter their system.  Specifically, courts have found that Internet users have a legitimate interest in the prevention of undesired advertising, protection from malicious software, and control of their data. [8] By downloading ad blockers they are exercising that right and filtering the content they digest.

            To be frank, the popularity of ad blockers is more than understandable. They slow down the speed of browsers and, aesthetically speaking, make webpages cluttered and unattractive.  For these reasons, it is no surprise that, as of last year, around 600 million devices were using some form of ad blocking software and there was a 30 percent year to year increase in the use. [9] From the publisher’s point of view, if they lose ads, they lose money.

Legality of Ad Blockers

In order to fully appreciate the impact that ad blockers have caused to the advertising industry, it is necessary to understand the legality of the software.  At a basic level, it helps to define the software’s role not as blocking advertisements, but as filtering advertisements.  They are “selective downloaders.”  This distinction is the primary reason they have prevailed in a number of court decisions, both in the United States and Europe.

            Ad blockers, such as the popular and litigious, AdBlock Plus, are considered filters due to their software programs that whitelist select publishers.  In the case of AdBlock Plus, there are two avenues that allow publishers to become part of the list.  They can either meet a set of criteria or, if you are a larger company, such as Google or Facebook, you may pay.  Although many in the advertising industry have described this as a “patronizing and obnoxious form of gatekeeping,” it is perfectly legal. The reality of the situation is that the large advertisers, such as Facebook, Google, and Verizon, will pay to bypass the ad blockers.

            Not all ad blockers, however, are acting legally.  In the United States, the Digital Millennium Copyright Act forbids the circumvention of a technological measure that effectively controls access to a copyrighted work.  The problem is that some ad blockers do precisely that.  They employ circumvention technologies that elude the defensive measures utilized by publishers. [10] The appearance of this software is not beneficial for any part of the advertising industry, and in response there has been a concerted effort, particularly by the Interactive Advertising Bureau, to put forth principles that address ad blocking.  This response legitimized ad blocking as a recognized tool for enhancing the consumer’s experience.  Whether advertisers like it or not, consumers may now voice their displeasure of intrusive advertising.

Room for Startups?

With all of the above in mind, it would seem that these startups face an uncertain future.  Unfortunately, this is their reality.  Ad tech startups will likely have to consolidate or scale their business to the niche they find themselves in.  Content publishers that rely on website traffic and advertising funds are faced with a new ad blocker-insulated world.  Many publishers, likely including your favorite blog, rely on advertising to fund the free content they provide.  Ultimately, advertising and digital publishing industry must adapt to the new digital age.  Although all may seem bleak, not all hope is lost.

One avenue content publishers can pursue is native advertising.  In order to be a native advertisement, the content of the ad has to align websites style and tone, while also providing information that the website’s audience expects. [11] For example, in a blog the advertisement will look, or at least attempt to look, like any other post on the blog.  The difficult aspect of native advertising is the sincerity, or lack thereof, of the post.  Additionally, the FTC requires advertisements to have certain keywords, such as “sponsored by.”  Ad blockers are forcing content publishers, and the digital publishing industry in general, to become more creative and ingratiate advertisements in a way that is ultimately enjoyable for the consumers, such as the advertisements seen on Instagram.

            In spite of the Google-Facebook duopoly, there are examples of ad tech startups still succeeding. Trade Desk, for instance, went public last year and, earlier this year, reported earnings north of $28 million. [12] Additionally, there is a possibility that companies such as Snap and Pinterest could challenge these giants, and ultimately dilute their share of the market.  If so, ad tech startups could, at least in theory, attempt to take back a percentage of the market.  At the very least, they could expand the niche many find themselves in. 

            At the end of the day, the current landscape of the digital publishing industry makes it difficult for startups to succeed.  Whether it is a well-funded ad tech startup or a content publisher that generates consistent viewers, larger companies and market forces are dictating the terms of the playing field at the moment.  Nevertheless, it will be interesting to track the variety means by which these startups attempt to navigate these obstacles.