Wednesday, May 25, 2011

Creating Alternative Financing – Crowdfunding & Crowdsourcing: Part IV: Who is an Ideal Candidate for Crowdfunding?

In this post, I would like to summarize the information I posted previously about crowdfunding and discuss the kind of company or individual that would benefit the most from this type of financing. In the donor-based model of crowdfunding, it would be a person or a team with a creative novel idea, something that would make people donate their money to support the idea. It is unlikely that a commercial product or service would get substantial financial backing from donors. After all, donors are not getting any interest in the company. Therefore, it is likely that the most popular projects will be those in the creative field (arts, film, books, etc.).

A start-up looking for seed funding can (and would be well advised to) reach out to their friends and family through an investment-based crowdfunding platform. The advantages include low cost of structuring the investment, the convenience of an internet-based platform to conduct the offering and the ability to raise sizable amounts of money. The disadvantages include (1) limited universe of potential investors (limited only to people with whom founders have pre-existing relationship); (2) legal risks (if founders do not hire attorneys to guide them through the blue sky and federal filings); and (3) limit on the type of investment possible (if the platform offers only one kind of investment structure).

Is crowdfunding a viable option of financing for an already existing business with a multi-million dollar revenue that needs capital for expansion? Platforms like Kickstarter or RockerHub will not be good sources of revenue, as the donors will lack the incentive to donate money to an existing and profitable business. A site like Profounder may not be a good option either, as such platforms tend to be focused on seed capital raises: for example, Profounder specializes in friends and family rounds of investing with an average amount of money raised per company of about $35,000 to $60,000. An established company with multi-million dollar revenue will probably need to raise more money than that, and from accredited or institutional investors. Also, a big company may need to consider the number of investors it wants to attract, if it does not want to trip the 500 shareholder rule. So, a crowdfunding model of investment, where many people contribute or invest small (or relatively small) amounts of cash, may not be the best option for it.

Full series: Part IPart II, Part III and Part IV.

Tuesday, May 24, 2011

Has “App Store” Become a Generic Name?

On March 22nd, launched Appstore for Android, where it offers for sale and download games and other applications available for Android smart phones. Apple Inc., the maker of iPhones, iPod media players and iPad tablet computers, sued Inc. over the use of the term “Appstore” claiming the exclusive right to the term. It is true, the term “App Store” has been in process of registration with the USPTO since 2008; Apple filed the original trademark application in 2008 in three separate classes: class 35 (retail online store), class 38 (transmission of data via Internet, etc.) and class 42 (a whole host of services relating to computer software). However, claims it is not required to obtain a license from Apple to use the term because the term “App Store” has become generic and Apple is not entitled to its exclusive use.

The general rule in trademark law is that a word cannot be trademarked if it serves as a generic term for the products or services offered by that company. A trademark must be unique. If it loses its distinctiveness, it can no longer be identified with the source of the goods or services being provided, which defeats the whole purpose of having a trademark. Over the years of popular use, many labels have become generic. Examples include words like aspirin, cellophane, cola, dry ice, lite beer, matchbox toys, monopoly game, superglue, thermos, and yo-yo. Is “App Sore” about to join the pack? Is the name also merely descriptive? For example, an “app store” can mean a store that is offering applications for smart phones. Do the first three letters “App” stand for the first letters of the word Apple, pointing to the company that invented the concept? Does the term “App Store” refer to a store that offers software applications or to a store that only offers app[le] applications (ie, apps for iPhone, iPod and iPad)?

Review of “App Store”” trademark application file, available at, shows that the examining attorney originally refused the application because each word was descriptive and because the mark App Store merely “combined descriptive terms without creating a new non-descriptive meaning”. Apple overcame this refusal by showing acquired distinctiveness. Currently, however, the mark is in publication, and is being opposed by Microsoft.

I look forward to following the progression of the lawsuit and the registration process of “App Store” mark with the US PTO. Stay tuned to find out.

The case is Apple Inc. v. Inc., 11-1327, U.S. District Court, Northern District of California (Oakland).

Thursday, May 19, 2011

Creating Alternative Financing – Part III: Advantages and Disadvantages of Crowdfunding

Crowdfunding is just one of many ways of financing a business venture or a project. Like all other methods, crowdfunding has its advantages and disadvantages. Below I discuss some pros and cons of raising money through a donation-based crowdfunding platform.


In my opinion, the main and unique advantage of crowdfunding is that people who are raising capital through crowdfunding (I will refer to them as entrepreneurs) can also use it as a marketing tool. Publishing information about a product or a project with a goal of raising capital on a well-read crowdfunding platform also raises product or brand awareness. Crowdfunding is not just limited to one single website. Supporters of the project disseminate the information using their social networks and encourage people in their networks to do the same.

Also, in addition to the money, entrepreneurs often get feedback. What can be better than “beta testing” your product and simultaneously raising capital for it? If the project does not reach the funding goal, this may be a signal to the entrepreneur that the market is not responding favorably to the offering and perhaps a change is in order. Of course, it is possible that the crowdfunding crowd is not the intended market for the product, hence the limited response. So, entrepreneurs should listen carefully to the market signals they receive through crowdfunding feedback and respond appropriately.

Another advantage of crowdfunding is that entrepreneurs can raise capital without giving away any equity. It is just like receiving a gift or a donation that you get to spend on your favorite project.

Finally, raising money through a donation-based crowdfunding platform is relatively inexpensive (especially given the fact that entrepreneurs do not need to give up equity). There is usually no need to engage lawyers or other advisors to assist in the process. Most sites charge a fee equal to about 5% fee of the money raised and another 3-5% in processing fees. Entrepreneurs also need to pay taxes on the raised capital (that would be income to the entrepreneur) and send out gifts or rewards that entrepreneurs are expected to give to their donors.


The main disadvantage of raising capital through crowdfunding is that entrepreneurs may be limited in the amount of money they can raise. An average raise amount is between $2,000 to $10,000. This may be enough money for a small project but not for a sizable venture. The reason is simple: people are reluctant to give money if they do not get any return on their investment. This is reasonable, and should be factored into the initial calculation.

Another disadvantage of using crowdfunding as a means of raising capital is the fact that your business idea would be exposed to the whole wide social network and there is no guarantee that someone will not decide to implement it. You cannot sign a confidentiality agreement with the internet.

There are risks for the donors as well. The crowdfunding sites may conduct a preliminary check to ensure the business is legitimate, but it is unlikely that they will be held responsible if it turns out otherwise. Also, the sites usually do not enforce allocation of the funds or that supporters receive their promised gifts. What happens to the project that is only partially funded? Some crowdfunding platforms would still release the money to the entrepreneurs. However, there may not be enough funds to launch the project originally contemplated, which begs a question of how and for what purpose this money would be used then. In my opinion, lack of accountability may present a serious problem as the number of participants on crowdfunding sites increases proportionately to the likelihood of occurrence of fraud. This may serve as a potential deterrent for donors as well as expose the crowdfunding platforms to liability.

In the next post, I will talk about the ideal candidates for using crowdfunding to finance their businesses or ideas.

Full series: Part IPart II, Part III and Part IV.

Tuesday, May 10, 2011

Creating Alternative Financing – Crowdfunding & Crowdsourcing: Part II. What is Crowdfunding and Three Crowdfunding Models

Crowdfunding is a method of raising funds for a business venture or a project by requesting a small amount of money from a large number of people (typically through the Internet). An average amount of money raised is between $2,000 and $10,000.

Crowdfunding is not a new phenomenon. We have seen it used by charities doing fundraisers, politicians, asking for contributions to their political campaigns (during his campaign for the US presidency, Barack Obama raised $137 million from small donors), and musicians accepting contributions from their fans for a new album.

We now see proliferation of crowdfunding because of the advance of social networks that have enabled people to reach out to their communities and networks more effectively. Over the past five years, users of websites like Kiva & Kickstarter have “donated” over $350M to crowd fund projects including art, films, software development and books.

In my opinion, there are several models or approaches to crowdfunding. First, platforms like offer the opportunity to raise money that is not directly repaid. Recipients instead may offer their contributors a specified item or service in exchange for contributions, such as a free sample of their product or an advance copy of their CD. Since investors do not expect a return on their investment, the contributions are not securities, and therefore no securities laws issues are raised. Examples of these platforms include,,,

The second category consists of platforms that enable founders to solicit and receive funds in exchange for some expectation of return (profit sharing, equity). In this case, founders issue securities, and have to be very careful about compliance with applicable federal and state securities laws. A good example of such platforms is

The third category includes companies that use internet platforms and crowdsourcing/crowdfunding methods to actually produce products. The example I want to use here is, but there may be other similar sites out there.

Category One: Donation-Based Crowdfunding

Below is a brief overview of some of the platforms offered in the first category where contributors do not expect any return on their investments.

1. Kickstarter (

Kickstarter is a platform that prefers to get funding for ideas or projects rather than companies. They offer an “all or nothing” funding: in order to receive the funds, a project must reach or exceed its funding goal or no money changes hands. Once the project is announced, pledges can be made by credit card (through Amazon processing), but contributors only need to pay if the project meets the funding goal within the allocated time (1-90 days). Recipients are expected to offer rewards to the contributors. Kickstarter charges 5% of the amount received on successful raises and Amazon charges 3-5% credit card processing fee. Although typically people raise up to $10,000, I have also seen raises of over $900,000.

2. RocketHub (

RocketHub is a platform that, similarly to Kickstarter, supports the community of “independent artists and entrepreneurs”. It is not limited to creative projects, but encourages them. The platform offers an opportunity to raise money as well as to “take creative products and endeavors to the next level”, referred to as “LaunchPad Opportunities” that allow community to discuss and vote on the presented ideas. I liked the language they use: all who initiate fundraising are called “creatives” and those who donate money are called “fuelers”. Participants also receive virtual badges for their contributions to the site. RocketHub charges 4% of the money raised if the financial goal is reached. If it is not, then the fee goes up to 8% of the total funds raised. This is done to encourage creatives to set realistic funding goals. There is also a 4% transaction fee. Successful investments typically range between $1,000 and $10,000.

3. Peerbackers (

Peerbackers distinguishes itself by the fact that it enables businesses to easily reach out to their online communities and networks. This crowdfunding site is not limited to funding creative ideas. Anyone with an idea, project, business or invention can apply to post on the site from anywhere in the world. Businesses in need of funding create profiles, describe the business and the purpose of the fundraising, the target financial goal and the length of time to reach it (should be between 15-90 days). Businesses also upload a photo or video and information about the rewards they are offering in exchange for the contributions. Then, businesses campaign for support by reaching out to their networks on Facebook, Twitter, LinkedIn, etc. and ask everyone to send the campaign to their networks as well. Funding is released if the project reaches at least 80% of the funding goal. Fees are: 5% + 1.9-2.9% PayPal fee.

4. IndieGoGo (

According to the information on the website, platform has helped raise millions of dollars for over 25,000 campaigns, across 177 countries. This site allows to raise capital for any type of venture, including a for-profit business venture, non-profit cause, or a creative project. Recipients can easily spread the work through one-click integration with Facebook, Twitter, and other social media platforms. Each campaign has real time analytics, including views, referrals, contributions and favorites, which allows teams to track closely their campaigns. There is definitely a preference for creative projects (funding for films, music projects), but I have also seen campaigns by small businesses, food, technology companies and even mobile apps companies. IndieGoGo releases funds regardless of whether the goal is met, and some 40% of projects receive at least $500, but only about 10% of projects hit their targets. IndieGoGo charges a 4% fee on the money raised when the funding goal is. The fee goes up to 9% if the funding goal is not met. Third party payment processors charge an additional fee of about 3%.

5. Crowdrise (

Crowdrise is a platform used for fundraising for charities (i.e., existing non-profit organizations with tax-exempt status). Participants are encouraged to use their social networks to invite others to donate and help spread the word. Donations are tax deductible. Crowdrise deducts 5% on donations made through the site as well as a $1 transaction fee for donations under $25 or a $2.50 transaction fee for donations $25 and over. Crowdrise accepts tips.

Category Two: Investment-Based Crowdfunding

Crowdfunding in this category means using Internet platforms to conduct friends and family rounds of financing. One exampe of such platform is I have previously written about Profounder, so this is a quick summary. Profounder is a software platform that facilitates a seed round of capital raising from investors with whom founders have pre-existing relationships. The average investment is about $1,500 and an average raise is anywhere between $35,000-$60,000. The platform is typically used by founders to raise start-up capital. The model currently in use is revenue sharing. A founder would create an account with the company description and a term sheet, send the term sheet to friends and family members and invite them to participate in the offering. If the goal is not reached within 30 days, the pledges are revoked. There is also a limit as to the number of investors who can participate in the offering, as per blue sky laws, that Profounder software helps founders to monitor. Once the deal is closed, the founder needs to file appropriate forms with the state and federal securities commissions. Even though the Profounder team provides the necessary information to do so, it is the founders’ responsibility. The cost is $100 to publish the term sheet, and a $1,000 flat fee to service the term sheet for the duration of the revenue sharing arrangement.

Category Three: Quirky (

This site focuses on developing physical consumer products that would retail for less than $150 and do not involve integrated software. It works the following way: investors submit their ideas to Quirky for consideration. If the idea is selected, it is then published for review and discussion by the community of “influencers”, who can support, revise, vote, make comments, or come up with branding, etc. for the idea. Following the review process, the Quirky team manufactures the product and sells it on their site. Quirky pays 30% of revenue by direct sales and 10% of revenue from indirect sales to each product’s influencers and 35% to the inventor.


In summary, there are several categories of crowdfunding each of which is suitable for a certain type of investment and project. Even though I listed only several platforms, there are many others out there that I did not get a chance to explore. In the next blogs, I will discuss the pros and cons of crowdfunding and what kind of companies and projects are likely to be successful candidates for crowdfunding financing. I will also discuss the legislative initiatives that are currently underway to facilitate capital raising using crowdfunding.

Full series: Part IPart II, Part III and Part IV.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Friday, May 6, 2011

Terms of Use and Why Would Anyone Want It to Be 56-Pages Long

Almost every website has an agreement titled Terms of Use that a user accepts “automatically” by the virtue of visiting the site. If you want to understand your rights in connection with using the site, you should read the Terms of Use. It specifies, for example, who holds the intellectual property rights to the content on the site. Many sites are interactive, and what happens to the nature of copyrights to the information contributed to the site is determined contractually, in the Terms of Use. At times, the site owner gets a license with the right to sub-license the user-generated content, while other times, the site owner gets to hold the copyright itself. Another important piece of information that can (and should) be found in the Terms of Use or Privacy Policy (often a separate document) is the description of whether and how the site owner can collect and use the users’ personal information, from cookies to name, address and other identifying information.

From my (legal) perspective, website owners should have a Terms of Use that is relevant, succinct and easy to understand. By relevant, I mean that the agreement needs to only talk about the items that pertain to the website (for example, no need to talk about the rules governing accounts or passwords or user-generated content if the site is not interactive). The agreement should also be succinct and avoid the unnecessary legal details (keep the necessary), to increase the chances that a user might actually read it. Finally, it should be easy to understand, so that everyone in addition to the lawyer who drafted it, can read it. This makes me wish that there was a law mandating everyone to write contracts in plain English (there is already a rule like this for disclosure provided by public companies). I think this would reduce substantially the level of litigation.

An agreement that is tens of pages long and full of legalese is unlikely to be read. I would like to re-post here an article from CNN Tech about why the iTunes’ Terms of Use are 56 pages long, and what do they actually say (because I am convinced that no one other than the two lawyers mentioned in the article have actually read it). Below is the full text of the article (found at

What you should know about iTunes' 56-page legal terms

By Umika Pidaparthy, Special to CNN
May 6, 2011 7:08 a.m. EDT

(CNN) -- During Saturday's White House correspondents dinner, "Saturday Night Live's" Seth Meyers jokingly scolded members of Congress for passing legislation they might never ever read. And he did so using a tech metaphor.

"I think you guys vote on bills in the same way the rest of us agree to updated terms and conditions on iTunes," he said.

If you've spent any time downloading music, apps or other stuff from iTunes, you know what Meyers is talking about: Those messages from Apple that pop up on your laptop, iPad or iPhone and say, "iTunes Terms and Conditions have changed. Before you can proceed you must read & accept the new Terms and Conditions."

You tap "OK," and before you know it, you're staring at 56 pages of fine print on your screen.

"I don't have time to do this," you think. So you tap "agree" without reading a word. No big deal, right?

"Yeah, just agree," wrote one user, macbookairman, on a forum, echoing the sentiments of many Apple users on the site. "Nothing bad is going to happen."

Probably not. But two digital-media attorneys contacted by CNN say that customers of iTunes, Apple's online marketplace, should still be aware of what they're agreeing to -- and what legal rights they may be giving up.

According to New York technology attorney Mark Grossman, selecting "Agree" serves as an electronic signature, due to a law passed in 2000. It has the same validity as typing your name in an e-mail or signing a document using a pen.

Jonathan Handel, a Los Angeles-based entertainment attorney who specializes in digital media, technology and intellectual property, said that because the iTunes terms are essentially a contract, people should treat them as such and give them more than a cursory glance.

But both lawyers acknowledged that few people do. In fact, Grossman and Handel, both iTunes users, admitted they don't always read the terms either.

iTunes' terms and conditions are presented in a daunting, 56-page document that few may bother to read.

To them, it is obvious why people are so nonchalant about the terms.
"When they change the iTunes terms, as they do all the time, they give you all 50 pages instead of giving the option of seeing the changes," Grossman said. "We all know that nobody reads this stuff, but it is a binding contract."

Both Grossman and Handel are quick to say that this is not just an Apple issue. Other online retailers, such as Google's Android Marketplace, also impose legal terms on downloads.

"It's not that Apple is acting badly," Grossman said. "None of that is true. Most people really just don't understand digital rights management."

Key clauses of the iTunes terms

CNN asked Handel and Grossman to go through key parts of the iTunes terms and explain exactly what are customers getting themselves into.

Overall, the two lawyers said that none of the terms really surprised them, and that customers do not have much to worry about. But Grossman and Handel said that there are three clauses that users should be mindful of:

1. Genius: The terms state, "When you use the Genius feature, Apple will use this information and the contents of your iTunes library, as well as other information, to give personalized recommendations to you."

As most iTunes users know, Genius not only puts songs of the same genre together but also recommends new songs to download by going through your personal playlists. Grossman said that while this is not something to lose sleep over, people should know where their information is going.

"Some people would say, 'Oh my god. They can look at my play history,'" he said. "If you care [about that], you should disable it."

But Grossman said that he finds Apple's privacy policies scarier, and cited the recent iPhone geotracking controversy.
"It's a long-winded way of saying we can figure out where you are through your IP address," he said. "You should assume that everything you do is tracked or trackable."

2. Loss of purchases: The terms state, "Products may be downloaded only once and cannot be replaced if lost for any reason. Once a Product is downloaded, it is your responsibility not to lose, destroy, or damage it, and Apple shall not be liable to you if you do so."

Grossman said that there is no leeway on this point, and that anyone who tried to take Apple to court over a lost digital file would lose very quickly.

"The argument is, you could have backed it up," he said. "The contract clearly says 'we are not responsible,' and it's firmly established in the law."

3. Licensing: The terms state, "You agree that the Service, including but not limited to Products, graphics, user interface, audio clips, video clips [and] editorial content ... contains proprietary information and material that is owned by Apple and/or its licensors, and is protected by applicable intellectual property and other laws, including but not limited to copyright."
That sounds confusing. Handel explained it this way: When we buy something from iTunes, we are paying for the license to listen to music or watch a movie on our iPhone or other Apple device. But we are not buying the product itself and so we can't actually own it, he said.

"When you buy a book, you own the copy of that book but not the actual material," Handel said "What you are buying here is right to use music on certain devices."

So why are the iTunes terms so long?

The eye-glazing length of the jargon-filled document has frustrated some Apple users, who believe it should be shorter.
"I've bought cars with less paperwork," wrote Mel Martin from AOL Tech in a recent blog post. "C'mon, Apple. Get it together."

By contrast, the terms and conditions for Google's Android Marketplace are about five pages long. (Android has some 200,000 apps, compared with more than 350,000 in Apple's App Store.)
So why doesn't Apple make its iTunes terms more digestible by
including a summary?

Grossman said that doing so could potentially expose Apple to legal action.

"Whatever is in those 50 pages needed to be said," he said. "Could you try [reducing] 50 to five and not lose anything? Someone is going to say that it wasn't in the summary and therefore does not count."

In addition, Handel said the lengthy terms are not all Apple's doing.

"When you got a content provider like a major label, they put pressure on Apple to keep their content protected," he said. "As a result, you end up with these [lengthy] agreements."

What consumers should do

Both lawyers agreed Apple should clarify some of the language in the document to make it easier for customers to understand.
Handel believes it would be helpful if the terms would tell consumers exactly what they're paying for.

"Here's what you are getting, here's what you are not getting," he said. "If you do lose something, who you can call? That's what needs to be highlighted."

An Apple spokesman said the company would not comment for this story.

It's not clear whether Apple will ever incorporate user suggestions and shorten or revise its iTunes terms. But in the meantime, Handel said, Apple customers should scan those terms and conditions the next time they get that pop-up message.

"There's no reason an ordinary user should have to turn to a lawyer," he said. "People should be empowered the way they deal with the world. And companies have to deal with that as well because they depend on users' goodwill. It's a delicate balance."

Thursday, May 5, 2011

Creative Alternative Financing – Crowdfunding & Crowdsourcing: Part I

On May 3, 2011, I participated in the panel discussion titled “Creative Alternative Financing – Crowdfunding & Crowdsourcing” at the 2011 MBE Annual Meeting organized by New York & New Jersey Minority Supplier Development Council. I was honored that my co-panelists were David Rose, founder and CEO of AngelSoft, an angel investor and serial entrepreneur, and Douglas Castle, a seasoned advisor, director and trustee to emerging and growing companies.

David Rose spoke about the emergence and rapid expansion of crowdsourcing. Crowdsourcing is an amazing resource to start-ups that struggle with financing early stages of company development. Crowdsourcing offers an economical way to outsource projects that would typically be performed by an employee or an independent contractor. For example, most start-ups need a name, a logo, and/or a website designed by professionals. Now, instead of contracting one company and hoping for a satisfactory end result, a start-up founder can post their project on a crowdsourcing site like, announce the amount of money the winning contributor would receive, and get tens or even hundreds of completed projects from which to choose. The founder would then select the winning contribution and pay only to that one contributor.

Crowdsourcing is not only suitable for start-ups but can also be used by seasoned businesses. Crowdsourcing may be a way to get work done in times of high demand, or a way to get fresh ideas about strategic decisions (such as, for example, whether or how to develop a certain product).

A good illustration of crowdsourcing is the 2006-2009 Netflix competition to create a better algorithm for recommending movies. Even though only one winning team received the coveted $1 million prize, hundreds contributed their solutions to the company. Interestingly, only the winners had to publish their algorithm (other submissions remained private). See A more recent example is the Doritos and Pepsi MAX’s 2011 Crash the Super Bowl contest. Consumers submitted a total of 5,600 ads, out of which six ads were aired during the Super Bowl broadcast. The winners received generous cash prizes and, of course, a trip to the game. For more information, see

Despite all the good things about crowdsourcing, one needs to be careful about the quality of submissions and the high likelihood that additional follow-up work may be required to revise the submissions (which may be difficult to obtain from a crowdsourcer). In short, crowdsourcing results are surely unpredictable, but it is worth a try.

Full series: Part IPart II, Part III and Part IV.