What’s the Deal With the Facebook Settlement?
This past Tuesday Facebook agreed to a settlement with the Federal Trade Commission regarding its ever-controversial privacy policy. The complete settlement can he found here. The charge against Facebook was that that company deceived consumers “by telling them they could keep their information on Facebook private, and then repeatedly allowing it to be shared and made public.” Of the several points that Facebook agreed to, two are most important for other website owners to consider:
• Facebook can no longer make misrepresentations about the privacy or security of users’ personal information.
• Facebook must obtain consumers’ affirmative express consent before implementing changes that are in contrast to users’ privacy preferences.
As Facebook has been on the forefront of internet-based privacy issues in the past few years there are several instructional points for website owners to take away from the suit and settlement.
First, as Jerry Seinfeld once explained, any restaurant can take a reservation, but it’s another thing to actually fill the reservation. Likewise, while most websites have already realized that their privacy policy must actually be tailored to their website (rather than copy and pasting from someone else’s privacy policy), website owners must take the additional step of actually following their policy. A privacy policy not only serves to inform users, but it sets guidelines that the website itself must follow. A company that doesn’t follow its own privacy policy can get into costly trouble.
Second, it is now clear that if you are changing your privacy policy, you must adequately inform your users. While some users may not be that concerned about how public their personal information is, some users will care quite a bit. If you are going to change the policy in a material way, you will need to do more than just change policy on your site and hope users will notice. You must keep your users updated on what you are doing with their information or else there will be no soup for you!
Third, the Facebook settlement may represent the final tidal wave in the sea change from opt-out privacy options to opt-in. Facebook liked to change its privacy options by making users’ personal information public and then asking users to “opt-out,” meaning that the information was first made public, then users had to manually find the option and click the option to make it private. Now, when Facebook wants to change its privacy protocol, the personal information will be kept private until the user chooses to allow the information to be public, thus “opting-in.” Opt-in privacy options are likely to become the privacy norm and depending on your business model and how you use your users’ information, you may be well advised to follow this principle in your own privacy practices.
New gTLDs Offer Updated Approaches to Web Addresses and Branding
In June of this year, the Internet Corporation for Assigned Names and Numbers (ICANN) voted to allow a new program for the creation of new generic top-level domains (gTLDs), the end section of a web address, like .com, .org, and .net. These new gTLDs will offer new opportunities for brand owners and other parties who register them, but at this point should not be too much of a concern for brand owners who choose not to apply for them.
Prior to this new program, the amount of TLDs was limited to just 22 in the US and country codes like .uk and .ca (and yes – .ly was intended for Lybia, although it has taken on a life of its own in the link shortening sphere via bit.ly). However starting in January of 2012, ICANN will begin accepting applications to apply for new gTLDs. During the first year of registration, ICANN plans to allow for the creation of 300 to 1,000 new gTLDs in 2012. The application fee comes in at the very serious figure of $185,000 with additional fees likely further along in the process.
Perhaps the most important aspect of being granted a new gTLD is that once a gTLD is created, the party who was granted it will own it and be responsible for administering domain names with that gTLD extension. For businesses, there are two important types of gTLDs that applicants might consider applying for. First are branded TLDs such as .apple or .hp and second are more general gTLDs like .bank or .car. Because of the high cost of registration and possible ways to use them, each type of new gTLD offers very different incentives and potential value for applicants.
Branded gTLDs
The allure of a branded TLD should be fairly obvious. It would streamline web addresses and a branded TLD would lend a strong sense of gravitas to a brand, as only elite brands would have either the need or money to have their own TLD. Companies with strong consumer identification as forward-thinking, elite, or even luxurious, such as Apple or DKNY might be well-served with a branded TLD. For instance web addresses like as http://ipad.apple or http://menswear.dkny would make for nicely streamlined and brand-centric web addresses – much better than having the cumbersome .com attached to the address. However, consumers are undoubtedly comfortable with extensions like .com and with the high cost attached to obtaining a branded TLD, there is a real question of whether obtaining the TLD would be economically worth it. Likely, it will take one large company to obtain their branded TLD and pioneer the proper utilization of it.
Trademark and brand owners have expressed concerns about cybersquatters or other parties obtaining their marks, especially since there is no reservation process available for the new gTLDs. However, these mark owners will likely have little to actually worry about. First, unlike the very easy process for obtaining domain names, application process for the new gTLDs will be complex, take from 9-20 months, and take into account many variables including worldwide trademark statuses. Second, mark owners can object to filings, although it is likely that the objection process itself will have high costs associated with it. Third, while the high cost of registration will keep most brand owners from registering, that same high cost will likely deter most cybersquatters as the high cost and intense scrutiny will make it unlikely that cybersquatter will be able to obtain the branded TLD in the first place.
Non-Branded gTLDs
The other types of applications will be for non-branded TLDs like .bank or .law. The appeal of owning a TLD like this is that a party that owns the TLD then has full control of all domains within that TLD and can do whatever it chooses with them. A TLD owner could choose to sell domains at a high cost or block any other party from obtaining them. For instance, if Chase Bank obtained the .bank TLD, it could sell domains under it for a million dollars or be the only bank using the TLD. However, it remains to be seen how consumers will react to these TLDs and whether such approach will be worth the high cost of registration. Like the branded TLDs, the popularity and value of non-branded TLDs will likely depend on a visionary owner to show how to properly use and profit from these new types of TLDs.
For those interested in knowing what gTLDs are likely to be applied for in the coming year, dot-nxt.com is keeping a list of all the likely candidates and their corresponding sponsor. Just a few of interesting upcoming generic applicants include .bank, .app, .bike, and .dental. According to the same site, some of the upcoming branded applicants include .canon, .deloitte, .motorola, and .unicef.
Even for brand owners that do not plan on registering for their own gTLDs, it is advisable to keep a watchful eye for registrations that may infringe on domain or trademark rights. New gTLD applicants can be monitored by using services like dot-nxt.com, newtlds.tv, Valideus, or registries.tel. Additionally, brand owners should be prepared to submit comments, objections, and questions to ICANN should they become aware of possible infringing registrations. The possibilities of usage and optimization are wide-open and a prudent website or brand-owner should keep an eye on developments in this area as they occur as the best practice of wait-and-see may change.
“Isn’t My Domain Name Enough?” – The Interplay Between Domain Names and Trademark Protection
There is a common misconception that having a registered domain name is all that is needed to protect a brand identity. However having only a registered domain name will make it much harder and more expensive to protect against infringing domains or other types of infringement. This is where trademark protection comes in. Trademark registration will aid in protecting both your brand identity and domain rights. Simply, registered trademark rights strongly protect domain rights, but domain rights without a registered trademark will offer only minimal protection against both domain name or trademark infringement. Therefore, when economically feasible, a company with a domain name should register the name as a trademark as well.
A registered trademark is the best and most economical way to stop unauthorized domain name registrations or use. This could happen if you own “example.com” and someone registers “example.biz” and is operating in a way that is similar to your website. If you have your name registered as a trademark you can stop the infringing party’s use of the domain name through federal lawsuit or through the independent international organization, ICANN, that oversees domain disputes. This can also be helpful if you somehow forgot to renew your domain registration and another party swoops in to take the registration. Additionally, having the trademark registered will allow you to stop parties from using your trademark in online advertising such as with Google AdWords as well as online auction sites like eBay.
It should be noted that these avenues of protection are available without trademark registration, but if you have a dispute you will still have to prove to a court that you are entitled common law trademark rights based on usage of the mark, which will be difficult and costly. This is true for both traditional trademark infringement situations like somebody using your name as well as for domain infringement issues like cyber-squatting. From an economic perspective, if you end up having a situation where someone is infringing on your rights, it will cost much more to protect yourself than if you obtained trademark rights in the first place.
Having a proper domain name is an important beginning step for a business with an internet presence, however it offers little legal protection. The best bet to protect your company’s brand as well as domain rights is still to obtain federal trademark registration.
Bootstrapper’s Guide to Not Screwing Up – Slideshow
Gillespie Law Group head honcho Dave Gillespie gave a presentation this past week at the Startup Weekend event in Columbus, OH. The presentation was entitled “Bootstrapper’s Guide to Not Screwing Up–Too Badly”, and his slideshow can be viewed below. Questions? Post them in the comment section and we’ll try to answer.
Twitter On its Way to Finally Securing “Tweet” Trademark
After trying and failing to register the term “Tweet” with the USPTO, Twitter will likely soon acquire the trademark rights for the term. Twitter has been in negotiations with the owner of the mark, Twittad, for some time and the parties have finally settled on terms that will transfer the trademark to Twitter. For full details, check out this explanation over at TechCrunch.
What makes this story even more interesting is that Twittad is a third-party developer of Twitter’s API and was able to register “Tweet” before Twitter – even though Twittad was using “Tweet” in reference to Twitter’s use of the term.
There are several take-aways from this story. First, Twitter smartly created language to use on its website, most importantly with the word Tweet. However, it made the mistake of not initiating trademark registration before Twittad. For new products and services, it may not seem imperative to register for trademarks right away, but then real examples like this occur and it ended up costing Twitter an undisclosed, but likely substantial amount of money to obtain the trademark rights.
Second, this story acts as a cautionary tale for technology companies that allow third-party development and then allow those developers to use their trademarks. Those companies have a need to be proactive in what they allow third-party developers to do and how they use their trademarks. Since the “Tweet” trademark issue first began, Twitter has heavily beefed up its protective plan and has published an in-depth trademark usage guide, a highly advisable tactic in the fast-paced world of technology mixed with third-party development.
The Importance of Vesting Provisions For Founders’ Equity in Startups
While it might at first seem counter-intuitive, initial ownership in your startup should not be based on entirely on who had the idea or who has contributed the most so for. The nature of startup relationships are unpredictable, and oftentimes founders have different ideas on what is expected of one another. Ownership should, at least in part, be based on future contributions to the Company. The way to accomplish this is to subject at least a portion of the founders’ initial ownership in the startup to vesting requirements. Vesting works to ensure the company can get back some of the equity initially granted to a founder if that founder does not fulfill their expected contributions to the Company.
The Case of the Lost Founder. The worst-case scenario of this is what can be called a “lost founder” – an initial founder who is granted a substantial ownership interest but then disappears because of either disagreement, a change of circumstances, or even a loss of interest. Without vesting provisions, a lost founder will retain their initial ownership, while contributing nothing to the company’s growth. The lost founder can sit and wait for a payday that is unearned, potentially leading to loss of motivation and resentment in the other founders and killing any momentum the startup had. Furthermore, since sophisticated investors will recognize the potential for that loss of motivation, a lost founder often discourages potential investors. A properly structured founders equity arrangement will avoid this outcome.
Why Not Just Grant Equity Later? Founders often suggest that stock just be issued in the future when tasks are completed or after a founder works for the required time. Although perhaps simpler, the problem with this method is that it can have significant tax consequences for the founder since stock granted at a later date is likely to be worth much more at the time of grant than stock granted when the company is formed (let’s hope so). Since they would receive that stock in exchange for working, they’ll have to pay taxes (at ordinary income rates) on the value of it when they receive it; and often neither they nor the company have cash to pay those taxes. To prevent this result, stock (subject to vesting) is issued at the very beginning to the initial founders (and perhaps some of the first employees) and, provided that the correct tax forms are filed (see previous post on 83(b) election), taxes on that stock will be either very small or nothing at all.
Find the Sweet Spot. Since the ultimate goal of vesting arrangement is to properly align the incentives of the founders, great care should be taken to structure these arrangements in a manner that accurately reflects the expectations of the founders. Don’t rely on what your friend says his startup did or what is in some form you found on the internet. The most important question to ask is what is each person supposed to contribute and when is that expected to occur? Is it related to a specific task such as, perhaps, building a particular product? Or is it leadership or expertise provided over time? Has some of it already occurred? You don’t want too much of the equity to vest until the bulk of what is expected of the founder is completed.
To reach that result, founders can specify exactly what portion of the stock is subject to vesting (the more the better) and then specify how and when the vesting will occur, i.e. either time-based vesting, milestone-based vesting or even a combination of both. Time-based vesting means that vesting will occur with the passage of time. Four-year vesting arrangements are common, but time-based arrangements should be based on the structure and plans of the startup, and not just on industry convention. Milestone vesting involves the vesting of ownership shares by articulated events, or milestones. For instance, if one founder will be writing the code for a website, that founder could have 25% of the shares vest upon the launch of the beta version of the site and another 25% upon launch. Milestone vesting works well for founders actively working on particular projects and helps to provide continuous incentive to complete that project.
Put it in Writing. Co-founders armed with a basic understanding of why vesting is important and the various types of vesting arrangements should be able to think through these issues at or near the onset of them working together. Founders shouldn’t attempt to document a vesting arrangement at home as seemingly insignificant drafting variances can have very significant consequences. Having thought through these issues before going to see your lawyer, however, should help keep costs under control.
What Should Be in a Non-Disclosure Agreement?
NDA’s should be tailored to the situation, covering only what needs to be covered, and doing so clearly. The most important issue to consider when drafting an NDA is to make sure that the agreement would be enforceable by a court. The quickest way to unenforceability is to write the terms of the NDA too broadly. When written without reasonable application to the situation at hand, courts will consider the NDA to be more like a non-compete provision and then more likely to consider the agreement unenforceable.
To keep an NDA from being considered “too broad,” the scope of coverage must not be so overreaching that it impedes on the other party’s ability to accomplish its original objective. Conversely, the provision must not be written so vaguely that a court would consider it unenforceable because it does not put the other party on notice of what types of activities are actually barred by the agreement. The types of information usually covered in the scope of the agreement are business strategies, inside studies and analyses, and certain unenumerated materials that have been marked as “confidential” or “proprietary.” In addition to making sure that the confidential information covered is actually confidential, parties must make efforts to keep the information confidential. Simply, if information becomes public knowledge, it can’t be protected by an NDA.
Additionally, an NDA should include reasonable time limitations and should usually allow disclosure in certain limited circumstances, such as with a judicial order. This disclosure term should be supplemented with a procedure on notification to the other party. Often NDAs include a term providing for the return or destruction of information at the end of the relationship and a term providing for injunctive relief in case one party breaches the agreement. Lastly, agreements that require a large entity to comply with an NDA should provide for additional obligations requiring the large entity to have procedures in place to make sure employees are aware of the confidential nature of information covered by the agreement.
Remember. Tailor the NDA to the specific need. Don’t require secrecy on everything (don’t be too broad) and make sure to identify exactly what should be kept secret (don’t be too vague).
For more check out part one of our two-part series on NDAs: Do We Need a Confidentiality Agreement?
Do We Need a Confidentiality/Nondisclosure Agreement?
Confidentiality (Non-Disclosure) Agreements can be an important agreement between parties who have something to keep secret. They should, not however, be taken lightly. Careless drafting can render them unenforceable when they’re needed; and when used in the wrong situation, they can become a hindrance to an otherwise positive business relationship.
When Are Nondisclosure Agreements Appropriate?
Perhaps the most important consideration about nondisclosure agreements, or NDA’s, is to know when you actually need one. Simply, an NDA is needed when both (a) there is a need to keep information confidential, and (b) that need outweighs other potential considerations. For instance, when discussing a start-up idea to potential investors, some commenters argue that expecting a potential investor or partner to sign a confidentiality agreement is at best an annoyance, and at worst a potential liability to the investor. Most seasoned investors (the best kind) would likely decline to sign the agreement and be repelled enough to reject your idea before even hearing it. While some entrepreneurs with a start-up idea might want to protect their million-dollar idea from theft, some commenters argue that the chance of idea theft is so low, that the need for secrecy does not outweigh the other considerations, i.e. the need to get deals done.
Additionally, a nondisclosure agreement is not necessary when the information is likely to be already, or soon-to-be in public knowledge, or when an an NDA might actually hinder how well one party can do its job. For instance in 2008, Apple dropped the nondisclosure agreement it included in its contracts for third-party developers of iPhone apps. Developers claimed that the NDA prohibited so much communication that developers were unsure if they could even talk to each other about the developing interface. Because of the barrier to product development that the NDA caused, it was in Apple’s best interest to just not even have an NDA.
Of course, there are many times when having an NDA in place is a sound decision. The classic example is the employer/employee relationship where the employer wants to protect certain information from dissemination outside of the workplace. NDA’s are also appropriate between companies that are sharing information as a part of their business relationship when there are trade secrets involved or when dealing with other sensitive information like technology, biotechnical information, or telecommunication issues.
The important thing to remember is that an NDA is appropriate when a need to keep something secret outweighs other potential considerations such as harm to potential business relationships and impediments to business success.
If you have decided you need an NDA, check out What Should Be in a Non-Disclosure Agreement?
A Look at Incubators for Ohio Startups
Over the past year, the tech startup world has seen a significant increase in the number of incubators throughout the country. Incubators – sometimes called startup accelerators – are organizations that work with entrepreneurs to develop their startups. Often, in exchange for a small stake in the startup, an incubator’s staff of advisors and mentors assists the startup in areas such as product development, concept evaluation, capital acquisition, strategic business planning, and technology support. Many also provide their clients a small amount of funding to develop their products. The best incubators may be most valuable for the access they can provide to potential investors and a huge pool of talent.
Entrepreneurs and startups have taken notice of the resources incubators can offer as both supply and demand of the incubator market has increased drastically over the past year. As of August 2011, we’ve counted at least 64 known U.S. incubators. This number has grown from 34 in 2010, and new incubators are springing up from California to Texas to Massachusetts and to most major cities in between. Existing incubators are also expanding their operations and increasing their number of startup clients.
Although the incubator market has undeniably taken off, the recent expansion of the number of incubators has led to questions over whether the incubator market is sustainable. Some critics argue that the increase of incubators has created (or perhaps just indicative of) a bubble that is bound to pop. Under the typical model, an incubator earns money when one of its clients hits it big, and the incubator is able to sell the stake it holds in the company for a profit. Obviously not every startup an incubator works with is going to be the next Facebook, so there is no guarantee that an incubator will profit from working with and investing in a given startup. Since the number of incubators looking to work with startups keeps growing, critics worry that there will not be enough successful startups to keep incubators profitable. Plus, the more startups that incubators produce, the harder existing startups will have to compete to attract investor attention.
In contrast, proponents argue that the current incubator boom is sustainable and has even become a necessity in some areas of the country. With the Obama administration, other government agencies, and private investors pledging billions to spurring startup development lately, supporters of incubators point to the increase of startups looking for professional help. The rise of incubators is simply a response to the rise of startups and the increased focus on small business development. In communities like Detroit that are in desperate need of an economic boost, incubators are needed to rapidly develop and refine startups so that they can start having an impact on the local economy as soon as they are financially viable.
Whether the current incubator boom is sustainable or not, these companies can serve as a valuable resource and guide for tech startups. Leading incubators like Y Combinator and TechStars have paved the way for successful startups like Dropbox and Justin.tv. Incubators have the potential to rapidly accelerate an entrepreneur’s business over a relativity short period of time and can sometimes provide much needed sources of funding and expertise. Not all programs are created equal, however, and as always it’s important to do your homework before entering into any equity sharing arrangement.
Ohio Incubators
The good news for local startups looking for an incubator is that they do not have to travel to the west coast as Ohio is home to a number of established incubators. Three of the most established are highlighted below:
The Brandery, a Cincinnati incubator, was recently rated the 10th best startup accelerator in the U.S. (click here for the Top 15 list). In exchange for a 6% diluting warrant in a startup, The Brandery offers $20,000 in seed funding, free office space, product development, consumer research, legal support, brand identity, and a number of other services. The incubator also maintains a staff of over 50 mentors comprised of chief marketing officers, company executives, attorneys, and marketing experts.
TechColumbus, based in Columbus, OH, focuses on working with information technology, bioscience, and advanced material startups. TechColumbus offers office and lab space, a team of experts, executives, and Ph.Ds, and access to capital from a variety of sources. An incubator with a proven record, TechColumbus has had almost 90 companies gradate from its program, and 75% of those companies have realized sales or commercialization success.
JumpStart, Inc. focuses on startups in Northeast Ohio. A private, nonprofit organization, JumpStart seeks to assist startups who have the potential to generate $30-50 in revenue within five to seven years after working with the incubator and who will be located in the 21-country-area of Northeast Ohio. JumpStart invests in a startup using convertible debt, i.e. providing a loan that eventually converts to equity, and in exchange, the company provides 18 to 24 months of intensive development and $250,000 or more in early-stage investment.
For more information on incubators, see this list of Ohio startup accelerators maintained by The Gillespie Law Group.
The chart is embedded below, but you can access it directly by clicking here.
IT Martini looking for startups to present
If you haven’t heard, IT Martini is a well-attended recurring event offering those in the information technology field an opportunity to relax and meet each other. They also feature startup companies, and provide them with space and time to demo their product. It’s good for the community, so I’m sharing the info here:
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IT Martini is coming back to Columbus! In partnership with Janova, IT Martini is kicking things off at the Tween Brands Campus in New Albany on Thursday September 1st. The theme of IT Martini Hour 19 is: QA or the Highway!
One of the most anticipated parts of the IT Martini event is the early stage ‘start-up’ companies that demo their products, founded by local entrepreneurs and IT professionals. IT Martini has given out fifteen (16) IT Community Choice Awards to a field of over one hundred (100) DEMOs.
The highlights:
· Free exposure – There will only be 7-8 early stage companies that can participate at this event. They will be able to receive exposure as the event is marketed, at the event through a social one-on-one demos with attendees, and ongoing through articles, press releases, etc
· Opportunity to connect and showcase what they do – The demos are not conducted in front of the whole crowd, requires no PowerPoint slides, and are social in nature. Each company will be provided their own space to setup and interact with attendees from the Columbus IT community on a one-on-one basis. Depending on the stage of the company this is a great opportunity to make new connections, find potential prospects, try new pitches on attendees, and more!
· Possible award recognition – The attendees will vote for their favorite startup while at the event and the winner will receive the IT Community Choice Award and the opportunity to attend another event in Cleveland OR the ability to go to another city and gain exposure there!! (currently Columbus, Cincy, Indianapolis, Cleveland)
What we are looking for:
· Innovative tech startups that want exposure
· Startups in all phases – We like to include those that are at alpha stage all the way through to companies about ready to exit. This covers both bootstrapped and funded companies alike!
How to learn more:
· Apply to be a demo – All startups that are interested in learning more can register at: http://itmartini.wufoo.com/forms/demo-participant-registration-form/ Once a registration is submitted I will schedule a short call to learn about them, introduce IT Martini, what to expect, and how to leverage this free opportunity
· Contact Kevin Hiser, Entrepreneurship Director, directly – Anyone that would rather reach out to Kevin directly can do so at Kevin@itmartini.com or 614-446-1548
Stay Informed
