Founders’ Friday: Top Things to Know as a SaaS Founder

The definition of a founder is “one that founds or establishes.”  Extrapolating from there, a SaaS founder is one that founds or establishes a software delivery model in which software is provided on a subscription basis and centrally hosted.  In simpler terms, it is any founder running a business that involves software as a service (SaaS), platform as a service (PaaS), infrastructure as a service (IaaS), or most things provided via cloud computing (aka the cloud).  As a SaaS founder, there are several things you should be aware of as you embark upon and progress through operating your SaaS business.  Here is a list of the Top 3 things to know as a SaaS founder:

1. A software license is different than a software as a service subscription agreement.  If you are truly running a SaaS company, you are not making software available for purchase or download.  Instead, you are providing authorized users access to the software via the cloud.  Your customer agreement should include subscription service terms rather than software license terms.  Even lawyers can confuse the two, particularly where clients are not certain about their business model and offering.
2. SaaS requires subscription pricing instead of perpetual pricing.   Whereas traditional software licensing carries with it a perpetual license to that which is purchased (with the option to upgrade), SaaS requires renewed subscription in order to maintain access, including access to services.  While perpetual may have been best for the business, customers more often than not are demanding SaaS these days.  This not all bad for business, this means customers are willing to pay recurring subscription fees, which means a SaaS founder can calculate MRR better, use it to raise capital and ultimately have quality data point for calculation of a multiple upon exit.
3.  Successful SaaS companies require ongoing infrastructure, including quality people.  Unlike a traditional software license that is sold without the requirement to provide ongoing service (absent a separately purchased support plan), SaaS requires hosting in the cloud and provision of services, including maintenance, backup and security (though read the fine print) by the company.  When updates are made to a SaaS product, customers automatically get those and access to the necessary people to ensure uninterrupted usage.  The software development lifecycle is thus front-loaded while a SaaS subscription is spread out over time.  SaaS founders must plan (and budget) accordingly.

Bonus 4th Thing to Know as a SaaS Founder: SaaS subscriptions will likely be a major part of your company operation.  Whether it is SalesForce to manage leads and prospect, Slack or Skype for internal correspondence or Dropbox for file storage or an array of others (e.g. Amazon Web Services or Microsoft Office 365), be sure to manage your subscription-based assets.  Software asset management solutions (which may also happen to be a SaaS subscription) can help identify your subscriptions, control costs and manage them.

Make no mistake about it, from startups to the biggest businesses around, SaaS continues to dominate.  A founder should know the business, or at least surround him/herself with those that do.

Founders’ Friday is a series published by Austin, Texas attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups.

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#FTC Compliance Coming to #Instagram

Popular social media outlet Instagram is a known for tastily inserting (obvious) advertisements into users’ feeds, but has also become a breeding ground for influencers, such as celebrities, who post glamorous shots adorned with products from various companies.  Previously, it could be impossible to know which of these influencers were just product enthusiasts or actually getting compensated for their plug unless influencers willingly inserted the #ad or #sponsored hashtags into their post.  Now, Instagram will be rolling out a new tool that would allow influencers to tag their paid posts with “Paid Partnership,” along with the name of the advertiser.

Instagram’s new tool is aimed at establishing compliance with the Federal Trade Commission’s (“FTC”) advertising guidelines, which require advertisers to “clearly and conspicuously disclose either the payment or promise of compensation prior to and in exchange for the endorsement.”  Along with the tool will come enforcement policies to ensure acquiescence with the FTC guidelines.  Before this tool, a study estimated that over 90% of Instagram’s top 50 celebrities had violated the FTC guidelines in regard to sponsorship disclosures, with the FTC recently sending ninety (90) influencers notices related to violating these guidelines.

For example, Scheana Marie, a star from Bravo’s hit series Vanderpump Rules, frequently posts about products on Instagram.  In a recent post, Scheana displays herself wearing sunglasses from Diff Eyewear, along with a product code to receive a discount.  Note that no advertisement disclosure is present:

In another post, Scheana dons a Detox face mask which clearly includes the #ad hashtag:

Scheana is arguably an influencer for both of these Instagram posts, but only disclosed that one of her posts was an advertisement.  Hopefully this new tool helps to clear things up for both influencers and their followers as well.

Instagram’s “Paid Partnership” tool has only been released to a limited number of businesses, but is set to be available to all users soon.  If you are a company utilizing influencers, or are an influencer yourself, on Instagram and want to make sure your posts are legal under the FTC Guidelines, contact a Traverse Legal Internet Attorney to explore your options.

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Founders’ Friday: How to Prioritize Legal Spend

As you launch your start-up, there are so many things competing for your limited dollars.  Whether it is marketing and advertising (e.g. Facebook Ads), website design (including mobile), product development or employee/independent contractor costs, every penny counts.  So how are you supposed to set your legal budget and prioritize your legal spend?  This is particularly true when you are bootstrapping.  Even if you are financed, your investors want quality legal work for a reasonable fee.  Whatever your situation, a legal budget is a prerequisite and prioritization of your legal needs is an absolute must.  Don’t trust me as a lawyer saying it?  Ask a fellow founder.

Just as you must decide how much and where to spend advertising budget, there are many aspects that should be considered when determining the amount for your legal budget and the necessary legal spend items.  An experienced startup or entrepreneurial lawyer can help prioritize legal needs and advise you regarding legal spend, even before you spend your first legal dollar.  A one size fits all “startup package” may not be best for you, despite so may firms beginning to offer the same these days.

My firm has prided itself on curated legal services.  What does this mean?  Rather than providing template documents that may not be applicable (e.g. Proprietary Invention Assignment Agreement where nothing has been done at the time of formation of the entity or an Advisor Agreement that may never be requested or required), the process focuses on the startup and understanding its immediate and long-term goals.  From there, a curated startup package that can provide immediate return on investment (ROI) becomes clear, which may include, among other things, items from the following:

1. Incorporation/Formation – entity type, equity structure and ownership/control
2. Intellectual Property – applicable IP (e.g. patent, trademark, copyright, trade secret)
3. Agreements – customer (e.g. EULA), employee/independent contractor, supplier/manufacturer and other agreements
4. Financing – debt/equity structures
5. Policies – content, BYOD, employee, etc.

So how does it work in practice?  A couple examples are illustrative.  First, a recent SaaS startup that was not initially planning to do a financing came to me, and I recommended the following: Multi-member LLC with equity and ownership reflective of the co-founder arrangement, a Pilot Agreement with NDA for initial beta users, a Software as a Service Agreement for customers and a service mark with the United States Patent and Trademark Office (USPTO) in order to protect the brand.  A patent, provisional or otherwise, was not going to be helpful here.  It was all done on a flat fee.

In another example, a software and operating system related to logistics startup required incorporation in order to secure initial financing from institutional investors, a EULA mindful of the license provided by a university and a provisional patent application.  I identified an initial fee and alternative fee arrangement moving forward.  In both situations, there were additional legal items the company needed, but the initial legal budget would not allow for it.  Therefore, we focused on prioritization and working within the initial budget.  As revenue comes in, additional legal spend will make more sense, thus ensuring ROI.

It is worth noting that I regularly encounter founders, typically first-time founders, who try to project a minimalist legal budget in hopes of getting some free legal work.  They often cite competing “startup packages” that provide them incorporation, a trademark application and a website terms of use, or something similar.  While all those items may ultimately be necessary, and apply in some situations, I always challenge the entrepreneur in order to understand why those items are needed now or prioritized over other items.  Oftentimes, an educated entrepreneur with respect to the scope of legal needs depending upon business type, industry and goals will ultimately see the value in a prioritized legal budget.  I push back, not because I am interested in higher fees but in order to help the founder understand the scope of the legal need, estimate a realistic legal spend and ultimately prioritize those legal needs.  If I ultimately am going to offer alternative fee arrangements, I first make the founder aware that my doing so, akin to any investor, depends on the founder and the startup business itself.

In the end, a successful startup will ultimately be able to secure the “nice to have” legal items.  Before then, however, founders should be wary of any advice, legal or otherwise, or service offerings that fail to prioritize, for example, a trademark for a lifestyle brand business or a Privacy Policy for a online data aggregation business.  A smart founder does not knowingly advertise to the wrong demographic.  Similarly, I submit, a smart founder should not spend on legal matters that do not provide an ROI, now or in the future, particularly when compared to other legal needs.

Founders’ Friday is a series published by Austin, Texas attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups.

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Founders’ Friday: You’ve exited, time for some Fun(d)!

Congratulations! You successfully exited your startup. You are loaded with cash (hopefully) and already contemplating the next venture to sink your teeth into. You’ve likely asked yourself, what should I do now? Retire to a beach and live the rest of your life drinking coconut water out of actual coconuts and having fun? No, you didn’t get to where you are by sitting around on a beach all day. The novelty will wear off, and you can always go on a nice long vacation as you wish. Having worked with startup executives and founders, and recognizing “the kind,” you probably want to take your shekels and make them grow. Funds may be for you.

So, while we can all agree now that you’re not retiring, now what? Start another company? Knowing how much you put into your last venture, you may not be ready to dive back in and do it all over again. So where does that leave you, besides with lots of free time and lots of capital? One option is going to traditional route of growing your wealth: giving your money to a financial planner (they usually take an annual fee of 1%) and earning 4-10% over a long period of time. That sounds easy enough, but let’s face it, you didn’t acquire your capital because you went the traditional route. You’re a risk-taker, a dreamer, a doer, a founder, a creator, a leader and an entrepreneur. You want to find something that utilizes your skill and expertise and provides for big return on your investment. Here’s an idea, you can help other founders get their visions off the ground by investing in early-stage startups. You’d be able to maximize your investment, pass on your knowledge and give back to the community that helped foster your success. Sounds like a win-win, no? Admittedly, it is your call, and deservedly so. Nonetheless, let’s evaluate some of your options for investing in other startups:

1. Invest Directly into Startups

This is a good option if you are looking for a low-cost way to invest in startups. I would recommend creating a single member limited liability company or even series limited liability company and make investments through this vehicle to provide yourself liability protections. However, in this scenario, you’d be responsible for finding your own startups to invest in, doing all of your own due diligence, and taking on all the risk. On the plus side, you’d be reaping all the benefits and not paying any fees to investment managers. If your goal is to make a few smallish investments in a handful of new ventures and you have a good sense of opportunities, this may be a good option for you.

Attorney Tip: Talk to a startup attorney and executives in the space who can give you some further perspective on companies and industries with which you may not be as familiar.

2. Invest in a Private Equity and/or Venture Fund

This is a good option if you want to be hands-off (like with a financial planner) but give yourself the opportunity to make “alternative investments” (investments in private companies that are not available on the traditional market). In this scenario, you’d be giving your money to an investment advisor who would then be pooling your money with other investors and investing in multiple portfolio companies. Private equity funds typically invest in more established companies who are raising later-stage financing, preparing to go public or looking to get bought-out. A typical PE Fund will raise money for a year, invest that money for 3-5 years and then spend 3 years exiting those investments. A Venture Fund is going to make investments in earlier-stage companies and will have similar hold periods to the PE Fund. The typical economic structure of a private fund is as follows: investors get a return of their money, then a preferred return of 6-10% and 80% of the profits after that. The fund manager/sponsor will typically receive a 1-2% management fee on assets under management and take an incentive allocation of 20% of the profits.

Attorney Tip: It is imperative that whether you are making investments directly into startups or through a private fund, you have an experienced attorney review all disclosure and investment documents, including the private placement memorandum (PPM), limited partnership agreement and subscription documents.

3. Sponsor your own Private Equity or Venture Fund

If being hands on is more your speed, which is likely, but starting another company isn’t the right decision now, you could always launch your own Private Equity or Venture Fund. Some benefits of sponsoring your own fund include: (1) the ability to have others invest alongside you; (2) making the asset management fees instead of paying them; and (3) getting a return on both your investment in the fund and the incentive allocation you’d receive as the fund’s sponsor. The downside is that you probably don’t know what you’re doing and will need to be educated on the process. But, if investing alongside friends, family, colleagues and other founders appeals to you, then sponsoring your own fund makes a lot of sense.

Attorney Tip: An experienced fund attorney can walk you through the entire process and handle all regulatory and compliance needs.

If none of those options are appealing, then maybe beach life is the right call. Otherwise, seek the advice of experienced corporate counsel to help you navigate your options post-exit.

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups. This week’s post contributed by startup and corporate attorney Stephen M. Aarons.

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ESPN’s UDRP Complaint for NotSportsCenter.Com Fails

On June 6, 2017, ESPN filed a Uniform Domain Dispute Resolution Policy (“UDRP”) complaint with the National Arbitration Forum against the owner of NotSportsCenter.Com.  As the owner of the registered trademark SPORTSCENTER (Reg. No. 1627702), ESPN sought to have the NotSportsCenter.Com domain name transferred to their possession.  Unfortunately for ESPN, they were unable to establish that the NotSportsCenter.Com domain name was being used in bad faith.

To succeed on an UDRP claim, the complainant must establish that the domain was registered in bad faith, evidence of which can include registering the domain primarily to sell it to the trademark owner; registered the domain in order to prevent the trademark owner from using it; registering the domain to disrupt the business of a competitor; or using the domain name for commercial gain by creating a likelihood of confusion with the trademark owner’s mark.

The UDRP panel here found that no bad faith was present because NotSportsCenter.Com “does not attempt to disrupt [ESPN’s] business, as it offers parody material regarding sports, and does not purport to keep users from visiting [ESPN’s] website.”  Additionally, the UDRP panel found ESPN’s delay in bringing the complaint (six years after NotSportsCenter.Com was created) was material in denying the transfer as well.

Before jumping into a UDRP complaint to regain a domain you believe to be rightfully yours, be sure to consult with a Traverse Legal attorney first.  We can provide a preliminary assessment so that you can understand your chances of success — particularly whether bad faith exists — before you file a complaint.

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Founders’ Friday: Is my Business Legal?

Is my business legal?  This is a question I get all of the time, both at the idea/infancy stage of a business as well as later on as a business iterates over time by offering new products or services.  So, let me give you the quick answer: It Depends.  No, that is not a cop out answer, it is the truth.  Why you might ask, well, because I need to know, at a minimum, the following:

1. What is your business (i.e what product or service are you offering)?
2. Are you operating in a regulated industry (e.g. banking, insurance, pharmaceutical and health, tobacco and alcohol, real estate, etc.)?
3. What specifically are you looking to accomplish (e.g. manufacture a product without infringing a patent, email prospective clients with a marketing campaign, brand a new service and advertise it, post a website comparing your services to that of a competitor, sell aggregated data about your customers, conduct an online sweepstakes, post an endorsement/testimonial via social media, etc.)?
4. What is your risk tolerance, especially when considering what the potential upside could be versus potential legal disputes/liability.

Once I have this kind of information, I am in a position to, as they say in law school, issue spot.  Put another way, I can identify what area of law is implicated by what you are looking to accomplish for your business and, knowing that, educate you about the legalities (e.g. intellectual property laws, privacy laws, truth-in-advertising, etc.) involved so as to provide recommendations/advice.  More often than not, your business or idea is not entirely unique and there is either precedent to provide advice or an ability to draw upon experience in similar situations to provide guidance.

It is rare that an entire business model is illegal (enter the exception of Napster).  However, it is entirely possible that an aspect of the business may be “illegal.”  Regardless, the question should be: “Would this business idea subject me to a credible claim for liability, and if so, how can we mitigate or eliminate that while still allowing my business to accomplish its goal?”  With both the business owner and attorney focused on this question and methodology to arrive at an “answer,” the attorney-client relationship as well as the well-being of the business should be improved.

Founders’ Friday is a series published by attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups.

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