Thursday, February 26, 2015

Next Step: Transporter Beam?

According to recent blogs, articles, items, and tweets, I need to decide where I am going to put my home 3D printer. The technology is booming and costs are coming down.  It is only a matter of time before every household will have one.

While I think about where the machine would reside in my house, I realize that I don’t know much about the technology. I have never questioned the desirability of such a gadget. Because, of course, I am imagining a machine that works like the toy-making machine invented by Grumio, the Toymaker’s apprentice in Disney’s  1961 movie Babes in Toyland. Toss in a little bit of this and a little bit of that, and out pops a doll—in roughly a minute—with soft hair, a beautiful cloth dress and plastic shoes, captivating glass eyes, and a lovely painted smile. Throw in a few different things and you get a tin drum with a tightly stretched plastic drum head and wooden drumsticks.  

3D printing—AKA desktop fabrication or additive manufacturing—actually refers to any of a number of processes that are used to produce a three-dimensional object, such as selective laser sintering, fused deposition modeling, and stereolithography. Using materials generally in powder or sheet form, the object is built in layers of “printing.” The differences in these processes largely relate to the method in which the layers are deposited and in the materials used to produce the object. While early technology primarily used plastics or polymers, objects can be produced from such things as metals, plaster, filament that imitates wood in appearance and texture, paper, rubber, and edible materials. Significant interest continues in developing uses of human tissue.  

In order to create printable designs or models for a 3D printer, one will need modeling software, a 3D scanner and/or a digital camera with photogrammetry software (software that can make measurements from a photograph), and various types of software that will convert the model to a format that will allow the printer to read and print the model, correct errors in the design conversion (gaps, surfaces that do not connect, etc.), convert the model into layers, yada yada yada. Although there are free versions of modeling software (Google SketchUp, Blender, Tinkercad, etc.), and the conversion and processing software will likely be packaged, an investment in the simplest equipment, software, and materials is easily going to be a couple of thousand dollars, and much, much more if considering commercial production.

Admittedly, the complexity and cost has cooled me somewhat to the magic of 3D printing and instilled a more realistic view regarding the “imminent’ presence of a printer on every desk or counter. After all, I would probably use a printer to make new knobs for my kitchen cupboards.

I am nevertheless intrigued by some of the stuff that has already been developed. In addition to component use in the automotive and aerospace industries, it clearly has promise for dental and medical products. The ability to more easily and efficiently create both typical and more complex customized products such as prosthetics, hearing aids, and dentures is exciting enough, but imagine the thrill of being able to print a new foot for a crippled duck. While some contemplate a future of using human tissue to print new organs, others are testing the market for 3D reproduction of the “Left Shark” costume from the Katy Perry Super Bowl half time show.  

So while not yet at the level of the Grumio toy making machine—I haven’t seen any description of a process that works with more than one material at a time—the technology is advanced enough to be used for great complex things, lots of little and practical things, or just-for-fun things, to awake the entrepreneur, engineer, or kid in all of us.

So now I am back to the problem of place—will a printer fit on my desktop or should we plan to take out the refrigerator? Do I have to rewire my house, or just add a few more power strips? Can I put it in a corner or will it need to be in the middle of the room, or do I need to build an addition to the house? Most importantly, can it double as a clothes rack?

Wednesday, February 18, 2015

Seed Capital reVIEW—it’s Survey Time!

It’s Survey time again and we need your help!

Our Seed Capital reVIEW survey for the second half of 2014 is now open! 

Click here for the survey.

In case you haven’t already seen the announcement, Gray Plant Mooty’s Entrepreneurial Services Practice Group has launched its third semi-annual survey regarding seed and angel capital being raised by Minnesota’s start-up and early-stage companies (typically financings between $100,000 and $2 million). Investors and entrepreneurs are being asked to complete this survey regarding deal terms of seed/angel investments during the second half of 2014. Past surveys have revealed relevant and useful information regarding trends in the angel capital community. 

The most recent release of the Seed Capital reVIEW report analyzed seed and angel capital raised by 84 early-stage companies in Minnesota during the first six months of 2014. Please complete the survey by February 28, 2015 to help make sure the data is meaningful. The survey will only take a few minutes per deal to complete! Click here to respond to the survey. 

The next edition of Seed Capital reVIEW report is due sometime late in the second quarter of this year.

Monday, February 16, 2015

Entrepreneurial Axioms: The Language Doesn’t Matter

On my recent vacation in Mexico with my family, I wasn’t surprised to observe plenty of entrepreneurs (empresarios in Spanish) south of the border. It doesn’t matter whether they are locals or foreigners.  They all seem to speak a common language—entrepreneurship.

Take the story of the folks who founded South of the Border Volleyball Vacations. They followed the common wisdom that you should find something you love and are passionate about and turn it into a business. They’ve created an entire business around their passion for volleyball, hosting over 4,000 participants in tropical volleyball trips that combine volleyball, the beach, and more than a few Coronas. 

I’ve learned over the years how important it is to “know your customer.” Yes, I’m a lawyer, but I’m not referring to the regulations that govern banking and brokerage transactions. I’m talking about how understanding your customer is more likely to make for a successful business relationship. I work hard to know my clients, their businesses, and their goals so I can help them be successful. While I’m not sure that the locals in Ixtapa trying to sell something to some gringos are similarly motivated, they clearly are using this axiom to further their prospects for making a sale. A couple quick examples:

When my wife walked down the beach with my girls, she was only approached 
        by vendors trying to sell her braids or, possibly, a henna tattoo. When it was just 
        me, the assumption was  that I’d be interested in fishing (or marijuana). When 
        the whole family was together, we’d be offered snorkeling trips or horseback riding.

The guy working the “information” kiosk trying to get us to stop and talk so he 
        could sign us up for a timeshare presentation (possibly one of the worst jobs in 
        terms of being ignored by potential customers) managed to mention a sea turtle 
        release just as my 11- and 8-year-old girls were wandering by. We couldn’t actually
        just ignore him, right, even though we suspected that it was fabricated to peak our 
        interest. (No, we didn’t sign up for the presentation and, no, I’m not the proud 
        owner of a week in Mexico.) By the way, the release never happened.

I guess that the language you speak may not be all that important when you’re an entrepreneur. Heck, I bet there were probably even entrepreneurs at Tower of Babel—maybe trying to help people with translation services…Regardless, whether you’re an entrepreneur trying to sell your new gizmo (or raise money to develop it) or a local merchant trying to sell your wares on the beach, knowing your audience can be critical to your ability to succeed.

Tuesday, February 10, 2015

Copy or Coincidence? You Be the Judge

Sam Smith, the 22 year old British singing sensation, swept the Grammy Awards  Sunday night, winning best new artist, record of the year, best vocal album, and song of the year. With four acceptance speeches Sam had ample opportunity to thank many—and he did. He even acknowledged the man who broke his heart and for whom he credits the Grammys. The person he did not thank (but probably should have) is Tom Petty.

Smith’s wonderful song of the year “Stay With Me” became a smash hit on pop radio stations. It does sound similar to Tom Petty’s 1989 song “I Won’t Back Down.”  Smith and Petty recently agreed to settle any potential dispute amicably, with Petty receiving songwriting royalties without any admission of copying by Smith.

Listen to clips of Petty’s song and Smith’s song below, and judge for yourself. Copying or coincidence?   

How do the courts determine whether or not a song infringes an earlier melody? The traditional test for copyright infringement is whether an ordinary observer would find “substantial similarity” between the two songs. No need to be a musicologist or expert in music theory and composition or understand the meaning of adagio, allegro, ostinato, or staccato. If you have two ears (or just one) you qualify to apply the legal test of copyright infringement.   

Smith’s awards and his agreement with Petty made me think about other songs that may have been substantially similar to earlier tunes. So have some fun with the following song samples. Are they original or mere rip-offs?

There is no more iconic song then Led Zeppelin’s “Stairway to Heaven.” It is 
        instantly recognizable from just a few chords. But, did Led Zeppelin steal this 
        ethereal melody from Spirit’s 1968 tune “Taurus”? Have you ever even heard of 
        the band Spirit or “Taurus”? Stay tuned - Led Zeppelin is currently embroiled 
        in a copyright infringement lawsuit in the U.S District Court for the Eastern 
        District of Pennsylvania.
        Taurus – Spirit

How similar is Vanilla Ice’s “Ice Ice Baby” to Queen and David Bowie’s 
       “Under Pressure”?

        Robert Matthew Van Winkle (aka Vanilla Ice) never obtained a license,
        gave credit to, or paid any royalties to Queen or David Bowie. He was 
        sued for copyright infringement and settled for an undisclosed sum.

How about the Chiffon’s “He’s So Fine” hit in 1963, followed by George 
        Harrison’s “My Sweet Lord” in 1970?

        In Bright Tunes Music vs. Harrisongs Music the judge found that Harrison 
        had “subconsciously” copied the Chiffon’s tune, resulting in a large payment.

In 2013 Pitbull and Keisha released their hit song “Timber” that quickly soared 
        to the top of the charts. Timber sold over 4 million copies and spent three 
        weeks at the top of the Billboard digital downloads in 2013. 
        Pitbull ft. Kesha –Timber 

        Now listen to San Francisco Bay , a tune written in 1978 by Lee Oskar:
        Lee Oskar – San Francisco Bay

        Lee Oskar and the other two songwriters of San Francisco Bay are seeking 
        over $3 million dollars for copyright infringement. They allegedly never gave 
        Sony the rights to make this recording using their music.

Oskar, one of the founding and original members of the band WAR, is recognized as one of the top harmonica players in the world. It is therefore not a surprise that the producers of Pitbull’s recording of “Timber” reportedly asked their harmonica player, Paul Harrington, on the “Timber” recording to emulate Oskar. In this case, while there may be no argument that copying took place and was deliberate, the legal question is whether Sony had obtained the necessary rights from Oskar and the other songwriters.

So copyright infringement or mere coincidence? What do you think? Are the original songwriters entitled to some credit, royalties, or a big payday?  Meanwhile, next time you hear “Stay With Me,” “Stairway to Heaven,” or “Timber,” think of Spirit, Tom Petty, and Lee Oskar. They deserve some recognition along with possible royalties. 

If you’re looking for a more complete discussion of copyright infringement and related legal issues, check out my chapter entitled Entertainment Industry Agreements(25B) in Wests® Legal Forms, 3d, 4th & 5th.

Wednesday, February 4, 2015

What: Jon Krakauer, Into Thin Air: A Personal Account of the Mount Everest Disaster (Anchor Books, 1997)

Why: A page-turning saga of life and death set against an entrepreneurial background.

Let’s get this out of the way for starters: I dislike cold weather. Intensely. As a sixth-generation Minnesotan, you’d think I’d be genetically engineered to thrive at this time of year, but to be honest winter leaves me, shall we say, cold. I can barely skate, and although I’ve gone skiing and snowshoeing from time to time and have enjoyed myself, these are not activities I live for. Give me a blue-skied autumn day-mild temperatures, golden sunshine, falling leaves.

Nonetheless, it intrigues me to read about people who are willing to embrace extreme cold to reach their goals. And about other people who are quite happy to help them do so, for a price.

Yes, folks, entrepreneurism is alive and well at the highest place on earth. It certainly was in 1996 when Jon Krakauer wrote his best-seller about that year’s deadly Mount Everest climbing season, and business is still booming. The book—which has been the subject of some criticism regarding accuracy—has nonetheless been very popular, was adapted into a made-for-TV drama, and is being made into a 3D feature film, slated for release later this year. 

This is an adventure story, first and foremost, but there’s a compelling economic backstory. Take a poor country for which adventure tourism is a major source of revenue. Add entrepreneurial climbers whose business success depends on delivering the most clients—many of whom have little or no climbing expertise or acumen—to and from the summit.  The market? “Walter Middys with Everest dreams.” 

A highly recommended read:  Life and death and the price of ambition against the background of the commercialization of Mount Everest.

Friday, January 30, 2015

Monster Learns Beastly Lesson

Last summer, the Beastie Boys won a $1.7 million judgment against Monster Energy Drink for the unauthorized use of their music in a promotional video. The judgment included statutory damages and penalties, and I thought was a pretty good recovery for the group, but the Beastie Boys now want another $2.4 million to cover the costs of the suit.  

The lawsuit involved a promotional video that Monster created using a mix of five Beastie Boys’ songs. I may be a little fuzzy on the facts, but the BB mix had been created by a disc jockey, Z-Trip (Zach Sciacca), who had earlier been authorized by the Beastie Boys to create the mix in connection with the promotion of a BB album. Z-Trip was apparently authorized to use the mix himself as a promotional item, but was not authorized to sell or license it.

Z-Trip used the mix at a party during the Monster-sponsored snowboarding event “Ruckus in the Rockies”.  A Monster employee charged with making a highlight video of the RITR event included footage of the live Z-Trip program and used some 23 minutes of the BB mix as background music. The video was posted on the Monster website, YouTube, and Facebook.

From the beginning, Monster essentially admitted wrongdoing and offered $125,000 to settle the matter, eventually raising the offer to $250,000 just before trial. The Beastie Boys initially wanted $2 million and wouldn’t come down to the Monster offer. (By the time Monster made the offer of $250,000, the BB probably had incurred more than that in trial preparation costs.)

Having failed to reach a settlement, Monster proceeded to defend its actions at trial on grounds that it had been authorized by Z-Trip to use the mix, and that Z-Trip was therefore liable for the infringement.  (Z-Trip was also sued by Monster, but the case against him was dismissed on summary judgment.) The Monster employee responsible for the video had sent a preliminary cut of the video to Z-Trip with the message “Please have a look at the video from this past weekend and let me know if you approve,” to which Z-Trip replied “Dope!” And that was apparently good enough for Monster to believe they had authorization to use the Beastie Boys’ music in its promotional video, although it’s not clear that they even asked about authorization until after the BBs claimed infringement.  

Had Monster undertaken even a basic clearance check before co-opting the Beastie Boys’ music, it would have learned that the music was not to be licensed at any price. Only shortly before the snowboarding event and creation of the Monster video,  Beastie Boys’ member Adam “MCA” Yauch died and had stated in his will that he did not want the band’s music to be used for advertising. I don’t know if that is legally enforceable against the band and/or the other members (a question for the GPM Estate Planning Practice Group), but the timing was such that the remaining members of the group were committed to respecting his wishes.

Considering this personal issue and that a significant aspect of the trial was whether “Dope” created a legally binding contract between the disc jockey and Monster for use of the Beastie Boys’ music, you can begin to understand why the BBs would want to recover their legal costs. I can’t blame them, but it doesn’t work that way. Sadly, enforcing one’s rights frequently costs more than any damages that can be recovered, particularly in intellectual property matters where the primary goal is usually to stop the infringement. Damages are usually hard to prove and penalties are often not available for technical reasons. Most suits settle for exactly these reasons.

In this case, the Beastie Boys actually did quite well considering that they probably experienced little actual damage from the use of their music in the Monster video. Monster, on the other hand, sadly miscalculated the cost of their irresponsible behavior. I wonder what they spent on legal fees. 

Tuesday, January 27, 2015

Non-qualified Stock Options or Restricted Stock Awards?

Recently, an early-stage, high-growth client (a Delaware S corp.) called to ask whether, and when, to begin awarding stock options, in this case the non-qualified variety (NSOs), instead of using restricted stock grants to key contributors. Many growing companies struggle with this same issue, and the recipient and company may have differing views. Although there are five common types of individual equity compensation awards (stock options, restricted stock, stock appreciation rights, phantom stock, and employee stock purchase plans), this post focuses on NSOs and restricted stock.

A NSO grants someone the right to purchase a predetermined number of shares at a predetermined exercise price (for tax reasons, at least the fair market value on the date of grant). Typically, a NSO vests over time, after achievement of performance milestones, or a combination of the two. When exercised, the individual recognizes ordinary income equal to the excess of (i) the fair market value of the stock received over (ii) the exercise price.

For example, assume a NSO to purchase up to 100 shares at an exercise price of $10 per share. The NSO vests at the rate of 25% per year for four years and has a 10-year term. At the conclusion of the four-year vesting period, the recipient exercises 50 options. If the fair market value of a share was $20 at such time, the optionee has ordinary income equal to the difference between the $20 fair market value and the $10 exercise price, or $10 per share ($500 total). Therefore, a NSO operates as a tax-deferral mechanism by delaying the recognition of income until the option is exercised. The company receives an equivalent deduction. Of course, NSOs are highly dependent on a company’s performance because if the fair market value of the stock falls below the exercise price, the option is essentially worthless.    

A restricted stock award is a grant of shares which are subject to as risk of forfeiture until certain restrictions, like the passage of time or achievement of performance milestones, are met. For example, an employee may be granted 360 shares of restricted stock that “vest” over a period of 36 months at the rate of 10 shares per month, provided the employee continues to be employed. If the employee ceases to be employed, the restricted stock agreement often will give the company the right to repurchase any “vested” shares, with the right to any “unvested” shares automatically terminating.

The tax consequences to someone receiving restricted stock depend upon whether a Section 83(b) election was filed with the IRS. When a 83(b) election is timely filed (it must be filed within 30 days of the issuance) the recipient reports as ordinary income, the excess of (i) the stock’s fair market value at the time of the award over (ii) the amount, if any, paid for the stock. The recipient then has no tax consequences as the risk of forfeiture lapses. Alternatively, if no 83(b) election is filed, the recipient is taxed as the risk of forfeiture lapses, in an amount equal to the excess of (i) the value of the stock at the time of vesting over (ii) the amount paid for the stock, if any. This is also taxed as ordinary income and the company receives a compensation-related deduction at the same time and in the same amount. 

The type of equity compensation award granted is likely to be based on the goals and objectives of both the company and the recipient.  For example, when a company’s stock has very little value, the recipient is likely to prefer restricted stock; however, as the value of the stock rises, the recipient may prefer NSOs because of the potential immediate tax (with an 83(b) election) on grant. On the other hand, if the company performs poorly, the stock’s value may fall below the NSO’s exercise price, rendering the NSO worthless. Restricted stock awards may be more complicated for the company because the recipient becomes a shareholder on the award date, even though some of the shares remain subject to forfeiture.  Therefore, unless clearly defined in the agreement granting the restricted stock, issues may arise as to the voting, dividend, and other shareholder rights the recipient has with respect to the unvested shares.

This is a high-level summary of two types of equity compensation awards that might be useful to entrepreneurs. Of course, it is important to discuss equity compensation with your legal counsel and other tax advisors in order to develop and implement a plan that achieves the desired objectives.