Summary:  Raise your hand if you have read or drafted an agreement with:

(a)        A proprietary rights assignment provision;

(b)        A provision with a long list of examples or other “things” assigned;  or

(c)        Both.

Well, the 9th Circuit just yanked from Mattel its claim for roughly $1,000,000,000 (that’s a billion dollars) in its slugfest with MGA over IP infringement arising from the Bratz doll.  That decision turns in part on scrutinizing the assignment language in an employment agreement (I admit:  The entire opinion did not turn on just one word).  The court looked at the meaning of one word:  “inventions.”  Then the court looked at the list of terms that were supposed to explain that word in that provision.

As many lawyers who draft agreements will see, that word—and the list used to explain that word—is what most lawyers find in their templates for assignment provisions.  Call it boilerplate.  In the future, call it a drafting mistake not to pay attention more closely to that metal.  And remember ejusdem generis from your 1st-year contracts class.

(As of the date of this post the opinion had not been provided a standard citation.  You can find it at http://bit.ly/bdqtrQ.)

There is some “messy” language about the application of California Labor Code Section 2870.  I think that the court got the analysis wrong (but it’s largely in footnotes).  We’ll comment in passing on this point.  Also, the court applied its own (and widely disliked) Apple v. Microsoft “extrinsic/intrinsic” test for infringement.  We’ll save that for another lawyer to address.

By the way, this post is not about the case itself but about its lessons for lawyers and their clients about agreements.  And one lesson is:  Make sure that the language really, really covers what you want covered.

Introduction

OK, so a Mattel employee quits Mattel and joins another company and there makes a doll that becomes the “Bratz” toy line that whacks Barbie in the marketplace.  (MGA eventually acquires the rights.)  Mattel sues MGA in federal district court, claiming, among other things, that the employee had assigned all his rights by operation of the proprietary rights assignment provision in his employment agreement.  The district court agrees and finds for Mattel (and on several other bases not relevant to this post).  MGA appeals and the 9th Circuit Court of Appeals vacates the judgment (for all that money) and remands (sends it back) to the district court.  Technically, the Court chastised the lower court for failing to take into account more evidence on critical points and to make findings of fact on these matters.  So, if it goes to back to that court (rather than gets resolved through settlement), then we can expect a more robust discussion of these matters.

It’s Just a Word.  Welllll . . ..  Can You Say “Ejusdem Generis” (and pronounce it properly)?

Reviewing the agreement on a de novo basis (never a good sign for the lower court), the 9th Circuit quotes some of the relevant language from that assignment provision:

I agree to communicate to the Company as promptly and fully as practicable all inventions (as defined below) conceived or reduced to practice by me (alone or jointly by others) at any time during my employment by the Company. I hereby assign to the Company . . . all my right, title and interest in such inventions, and all my right, title and interest in any patents, copyrights, patent applications or copyright applications based thereon. (Emphasis added.) At 10532-3.

The opinion then quotes the contract definition of inventions:

[T]he term ‘inventions’ includes, but is not limited to, all discoveries, improvements, processes, developments, designs, know-how, data computer programs and formulae, whether patentable or unpatentable.” At 10533.

(We regularly see a definition that doubles and even triples that list.)

The Court looks at whether or not the word “inventions” includes “ideas.”  And without even mentioning the age-old phrase, ejusdem generis, the Court at least quotes one application of the hoary rule:  “[C]ourts avoid constructions that would make “a particular item in a series . . . markedly dissimilar to other items on the same list[.]”  At 10533.  Just before that quote from a previous case, the Court notes that “ideas” differ quite a bit from the list in the agreement.  (Note to readers:  Make the comparison yourself).

Oops. I’ll bet the lawyer who wrote that agreement is squirming;  I’ll double up on the bet that Mattel and MGA lawyers are now digging through their files on all employment agreements.  Uh-oh.  (And I’ll triple that bet by arguing that most other lawyers who draft those types of agreements—and clients who use those agreements—have not yet started to pay attention. But wait:  I’m not a betting man.)

Yikes!  It gets worse.  The Court later takes note that Mattel actually signed agreements with other employees (and probably independent contractors) by which inventions and ideas are assigned.  Uh-oh.  I think some lawyers may be looking to create an ABA Lawyer Protection Program.  Or perhaps look for a career in another industry.

So What?

The Royal We empathize with the Mattel lawyers.  That language is in so many agreements in the technology world that it has become boilerplate not closely scrutinized.  Many lawyers assume that those at the client with technical expertise have vetted the applicability of that language.  Budget and time pressures from the client often force a lawyer into a kind of “issue triage,” relying upon the wisdom presumably intrinsic in the language having been applied without challenge in thousands of previous uses of that provision.

None of this makes it right.  Every lawyer should know that ejusdem generis compels one to use clear drafting to specify precisely what is to be covered.  One simple way of explaining one application of that rule is that the more items are added to the list then the narrower the applicability of that list.  Don’t quote me, though.  Say what you mean in the language.  If the employee is not going to be involved in, say, computer programming or databases then why would one include “data computer programs and formulae?”

And every client should check this language to make sure that it is clear in what it actually covers.  Is it ideas and inventions?  Now, We are not convinced that ideas can indeed be assigned (it depends upon the jurisdiction).  But that’s a discussion a client should have with its lawyer.  And that’s a discussion for which the client should happily pay the legal fees.  Is it worth the risk of losing a billion dollars in damages to save a few thousand dollars?

Wait, There’s More.

We are truly baffled that the Court did not address in more detail the applicability of California Labor Code Section 2870.  Perhaps it was briefed and perhaps the lower court did not find it necessary to address the issue.  Quoting again from the 9th Circuit opinion

shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities or trade secret information except for those inventions that either (1) relate at the time of conception or reduction to practice of the invention to the employer’s business . . . or (2) result from any work performed by the employee for the employer.’ ” Footnote 5 at 10538 (Emphasis added in blog post)

As far as we can tell, the exceptions to that rule should protect Mattel.  Mattel made Barbie.  The employee was working on Barbie.  Uh-huh.

Whatever the outcome of the case, the reasoning of the opinion should get lawyers who draft to sharpen their pencils.  And re-read their notes from 1st-year contracts classes.

Our thanks to the legal eagles at Law.com whose Corporate Counsel newsletter alerted us to another development in this case.

James C. Roberts III is the Man(www.globalcaplaw.com)aging Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group. He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the dist(www.globalcapstrat.com).ant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.  You can reach him at jcrext@globalcaplaw.com.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

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Note:  This is itself just a summary blog post—with little or no analysis.  And let’s be crystal clear:  This blog post makes no comment on the issue(s) at hand (same-sex marriage, “traditional” marriage) or the social and moral validity of the holding.  Frankly, anyone who claims otherwise is just blind to rational analysis and just wants to be angry.

I will, however, disclose that my wife and I cannot have children (due to our age) and one of the tenets central to supporters of Prop. 8 is that marriage is for procreation.

Introduction

Ignoring for the moment the topic and the holding of the recent Vaughn Walker opinion in the California Proposition 8 case, it is worth reading the case itself.  See www.scribd.com/doc/35374462/Prop-8-Ruling-FINAL.  Judge Walker crafted a solid structure in his opinion that points to the law of expert witnesses.  If you look at it this way, you will see that the trial transcript could only lead Judge Walker to his conclusion.

Reading the opinion one can see that the case came down to one side amassing evidence consistent with federal law as to expert witnesses with the other side engaging in the legal strategy of what I would call Ipse Dixit Declarations—i.e., believe me because it is obvious.

Lack of Evidence

What proponents of Prop. 8 failed to do was provide any evidence of either of their basic propositions—that marriage was for procreation and allowing gay marriage would endanger children.  That’s right.  No evidence.  There may very well be evidence to support those propositions but nothing was submitted to the court that conformed to the basic legal standards.  I won’t even get into the other assertions they made.

Ipse Dixit Declarations. “Ipse dixit” means, essentially, a statement asserted but not proven, to be accepted on faith (from Wikipedia).  For example, one of the two expert witnesses called by proponents asserted the dangers of gay marriage to the core of “traditional” marriage and to children.  And yet, he provided no evidence supporting his propositions—at least, using the long-established standards in federal court that assertions must somehow be linked to data or replicable methodologies common in a relevant industry.  True, he offered references to certain studies but these studies were largely off point—in fact, plain wrong.  At one point, he admitted that some of his assertions derived from a “thought experiment,” that is, he and his colleagues sat around a conference table and wrote down whatever ideas came up.  I kid you not.

Interestingly, the two expert witnesses the Prop. 8 proponents actually called ended up supporting, on cross-examination, many of the assertions of the Prop. 8 opponents.  For example, one witness asserted essential characteristics of a marriage.  And guess what?  He could not distinguish how ‘traditional” marriages differed from same-sex marriages with respect to the characteristics with which he agreed.

Legal Tactics

Reading the opinion also raises some interesting questions about legal tactics.  First, the California state government (i.e., those who were sued) declined to defend Prop. 8.

But more surprising, the Prop. 8 legal team dropped its expert witnesses just before the trial was to begin.  That’s right.  They were reduced to two—one who runs a center on family values and one who is a political science professor without experience on same-sex (or LGBT) politics and who ended up contradicting his own prior writings.

Thus, those who believe that there is evidence to support the position of Prop. 8 proponents should look to—and criticize—their legal counsel and neither the judge nor the plaintiffs.

Let me repeat: This blog post makes no comment on the issue(s) at hand (same-sex marriage, “traditional” marriage) or the social and moral validity of the holding.  Frankly, anyone who claims otherwise is just blind to rational analysis and just wants to be angry.

James C. Roberts III is the Managing Partner of Global Capital Law Group (www.globalcaplaw.com) and CEO of the strategic consulting firm, Global Capital Strategic Group (www.globalcapstrat.com). He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.  You can reach him at jcrext@globalcaplaw.com.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.


(Author’s note:  In this article, I get to use one of my favorite theories:  The Sergeant Schulz Theory.  Read on.  Also, I posted this initially at Tubefilter.tv.)

By now you probably know that Google won the most recent round of its legal battle with Viacom (which initially sued YouTube, now owned by Google).  A federal district court judge in New York issued a summary judgment that dismisses the $1 billion claim of infringement against postings on YouTube that were, in the opinion of Viacom, infringing on their copyrights.  It’s an opinion worth reading. [LINK HERE.]  If you are a legal wonk, then you will appreciate the succinct manner in which Judge Stanton weaves together the holdings of previous DMCA cases. (Here’s a hint: The Coase Theorem.)

The judge bought the argument that Google made—namely, that it was protected under the “Safe Harbor” provisions of the Digital Millennium Copyright Act from the copyright infringement claims made by Viacom.  More important, Judge Stanton said that YouTube’s actions demonstrated that the “takedown” provisions in the DMCA actually worked.  (Those provisions enable copyright holder to require that copyrighted material to be removed from public view.)

There are some unintended consequences (the Sergeant Schulz Theory) that may arise from this opinion, but they are likely to be acceptable for the time being.

It is not over yet.  Viacom has vowed to appeal the decision.

So What?

In a nutshell:

The burden of policing copyright infringement now squarely sits on the shoulders of the copyright owner (or the one with the rights).

With a little more detail:

  • The Safe Harbor Is Open. The DMCA safe harbor provisions are available for certain types of companies if they have and actually use the takedown provisions of the DMCA.
  • You Are Your Own Policeman. If you own (or hold rights in) a copyright, then you are responsible for policing the use of that copyright by others.

The Details

Let’s go a bit deeper in what the opinion means.  The merits of the positions of either side are not relevant here.  What is relevant is what the opinion means to players in the digital content space.

1.         Companies like Google Have a Safe Harbor. Companies that post digital content can rely on the “Safe Harbor” provisions of the DMCA when that content is posted, provided that they are serious about taking down content that may be infringing (more on that point below).  This holding is important because there was some confusion as to whether or not a company like Google was actually permitted entry to that harbor.  One view of the DMCA provisions holds that it applies almost exclusively to ISPs, but this view now appears to carry little weight in the federal courts.  Getting there was not without some abstruse legal reasoning to adapt the language of a statute written before places like YouTube existed, but it is probably solidly established by the various legal opinions on this point.

But be careful: It is not clear what sites would have this protection.  Google made the (winning) argument that, in essence, it was just providing transmission, storage and indexing of the content—sort of like an ISP.  Another UGC site might not be so lucky.  For sites that aggregate content from other sources, this opinion may incrementally strengthen their position, but they would have to fight holdings going the other way in other courts.

2. The Safe Harbor Has Some Rules. Judge Stanton emphasize that the takedown procedures worked in this case.  YouTube immediately responded to Viacom’s takedown notice:  Within 24 hours of receiving the notice, YouTube removed almost all of the more than 100,000 clips that Viacom claimed were infringing.

So the implication is clear for companies posting digital content: The Safe Harbor is available if and only if your takedown procedure actually works.

3.         Red Flags and Knowledge. The opinion also turned on the “red flags” of infringement that would be enough for YouTube to take down allegedly infringing content.  It gets complicated but Judge Stanton accepted (and essentially paraphrased) Google’s argument in its court filings that there was no practical way to check every posting for infringement.  The opinion essentially holds that a company in the position of Google’s YouTube basically has to have notice or actual knowledge of infringement of specific content.  Although the judge did not say it, the standard for actual knowledge would be, say, that Eric Schmidt (head of Google) went to the YouTube site and watched Iron Man the day after it was relased.

So the rule is: If you receive a takedown notice about specific content or if you have a really, really good reason to believe that it is infringing, then take it down.  Immediately. Then you’ll be OK.  (True, taking something down can cause other problems but that’s outside of the scope of this article.)

4.         Unintended Consequences:  The Sergeant Schulz Theory. Remember Sergeant Schulz on the TV show, Hogan’s Heroes?  He knew nuzzeen, he saw nuzzeen and that way he did not get in trouble with his superior.  Think about it for a moment:  If the opinion says that if you don’t know about the infringement then you don’t have liability.  Therefore, if you don’t try to find out if something is infringing, then you’ll be OK.  By definition, you see nuzzeen if you don’t look too hard.  And so you won’t.

5.         For Copyright Owners: Spend All Your Time Scouring the ‘Net. The implication of the opinion is that copyright owners (or the rightsholders) must now police the use of their copyrights.  Their first remedy for companies sitting in the position of Google’s YouTube is the “takedown” procedure specified in the DMCA.  It’s a clunky system, to be sure, but it is pretty much all you have.  Moreover, other recent opinions are now shifting the burden of policing the use of IP rights to those who hold such rights.

There is some hope.  First, as noted above, it is not clear that all sites can avail themselves of the Safe Harbor provisions.  For example, one could argue that Facebook would not qualify (a tall order).  However, the burden of proof now probably rests with the plaintiff and judges now have a well-reasoned (though not necessarily correct) opinion on which to rely.

Second, the holding now opens up opportunities for companies (say, startups) to create Internet policing services.  Whether they are automated (think “watermark”), manual (think outsourcing to foreign countries) or a combination, there is now a market opportunity.  There are already several such services out there.  They aren’t foolproof but they are good.

To close, the decision is not exactly binding on anyone except those within the district of the New York court.  Plus, Viacom’s vow of an appeal makes the permanence of the holding somewhat uncertain.  Both of these points are largely legalistic, because the opinion, as it now stands, will be used as an important bulwark of any argument in court by a defendant to a claim of infringement.  The bottom line:  Assume it applies.

Summary:  A librarian decides that iPhone users can jailbreak their phones.  The Librarian of Congress exercise his rulemaking authority and determined classes of works that are exempt from DMCA prohibitions of circumventing security technologies on digital media.  The basic principle is that access constraints should not preclude what would otherwise be fair use such as commentary, education or criticism.  In addition to setting free the smartphones, the rules also extend a class to documentary filmmakers (and others, though those “others” are not discussed here).

By coincidence, a 5th Circuit ruling was issued at about the same time (July 26, 2010) confirming many of the principles inherent in the rulemaking by the Librarian of Congress.  See MGE UPS Systems Inc v. Power Protc Svc LLC, et al.

Introduction

Marian the Librarian in Music Man notwithstanding, it is rare that decisions by a librarian generate vast amounts of commentary that can be fairly called “breathless exultation.”

Well, OK, so it’s the librarian who runs the Library of Congress.  He’s in charge of copyrights.  And it’s the iPhone.

In case you have been living in a cave for the past 48 hours: the Librarian of Congress ruled that jailbreaking a smartphone for two particular purposes does not cause liability under a particular section of the Digital Millennium Copyright Act (for the legal wonks, the ruling relates to Section 1201).

But wait there’s more:  In addition to other “uses” that are now permitted, certain users can crack the Digital Rights Management program on movie DVDs for purposes that have always been considered fair use.  And a teaser so you’ll read more:  Documentary filmmakers now have a bit of freedom.

The Context

Before getting into a bit more detail, let’s consider the setting.  The DMCA makes it a bozo no-no to crack the security codes preventing access to copyrighted material (let’s call that “jailbreaking”).  However, DMCA also commands the Librarian of Congress every three years to review the impact of this section on Fair Use and to create classes of works exempted from prohibitions on jailbreaking.  And that is just what he did (see the entire document—which is worth reading.  See

http://www.copyright.gov/1201/2010/Librarian-of-Congress-1201-Statement.html.)

By ironic coincidence, a 5th Circuit opinion was issued that also provides common law basis for certain types of jailbreaking.  You can find the opinion at http://www.appellaterecord.com/uploads/file/MGE.pdf.

How Fair Use Is Involved

Basically, the Librarian articulates a principle that he (OK, the Library of Congress) does not like technologies that, in blocking access, also preclude what would otherwise be “fair use.”  In the case of the iPhone, it is personal, non-commercial use.  In the case of movie DVDs, it is for education, commentary and criticism.

Jailbreaking Smartphones

The ruling enables users to jailbreak smartphones for two purposes.  The first is to enable a user to download and use pretty much whatever applications that user wants to use.  Google Voice, long prohibited from the iPhone, can now be used.  This also means that you can create your own apps and use them on your iPhone (though why you would do that is anybody’s guess:  the App Store works pretty well).

The second permitted use is somewhat more compelling.  You can jailbreak a smartphone in order to use it on other networks.  Yep.  That got you to sit up.  That’s right:  You can now use your iPhone on the Verizon, T-Mobile, Sprint or other mobile networks.

What you cannot do: Well, you probably cannot make a business out of this.  The decision by the Librarian of Congress rests entirely upon the use being personal and non-commercial.

Jailbreaking Movie DVDs

The Librarian also expanded a previously created class of works, in this case by adding the use by documentary filmmakers of short clips in their films that are commentary or criticism.  Quoting from the website above, the rulemaking permits jailbreaking the DVD

when circumvention is accomplished solely in order to accomplish the incorporation of short portions of motion pictures into new works for the purpose of criticism or comment, and where the person engaging in circumvention believes and has reasonable grounds for believing that circumvention is necessary to fulfill the purpose of the use in the following instances:

(i)         Educational uses by college and university professors and by college and university film and media studies students;

(ii)        Documentary filmmaking;

(iii)       Noncommercial videos

It looks like documentary filmmakers could use these clips for commercial purposes.  However, what this decision does not do is change the Fair Use doctrine and its accreted case law.  In other words, when a filmmaker uses a clip from a DVD then he or she must still take the risk that the use of the clip will be protected by the Fair Use defense if the copyright owner files suit.  (Remember:  Fair Use is not a “permit” but only a defense if sued.)

Summary:  This is the second part on VC Pitches, following last month’s post on preparing a Pitch Deck.  Put simply, we said that venture capitalists want a PowerPoint presentation of fifteen slides or so.  This makes sense, if you think about the purpose of the deck:  To get a meeting with the venture capitalists.  That’s it.  They do not want a tome;  they want concise reasons for spending their time to go more deeply into your idea.

In this post, we point out what they want (mainly, a seasoned management team and a robust market).  By the way, this post refers mainly to venture capital funds, although they apply, to a lesser degree, to angel sources.  There will be at least one post.

Start with The Caveats.

For every statement in this post there will undoubtedly be exceptions.  Venture investing is too big and too diverse for most generalizations to apply.  Remember that exceptions are called that for a reason:  They are exceptions to the general pattern.  Just because there is an exception does not mean that other entrepreneurs will be able to replicate that success.

Read the Manual.

OK, so it’s not a manual:  It’s the website for each fund you would like to approach.  You would be surprised at how many people miss this one.  Read it.

One Size Does not Fit All.

If you are reading the websites then we hope you have figured out that not every—indeed, not many—VC funds will match your interests, industry and needs.  Every fund has some degree of focus on sector and funding stage.  If you are a startup seeking Series A, do not send your Pitch Deck to funds that do later-stage funding.  Likewise with sectoral focus:  If your plans are in mobile apps, cleantech VC funds will not be interested.  And don’t even think of a shotgun approach.  Be very selective.

Seasoned Management.

VCs want to see that your management team has some seasoned members.  “Seasoned” means that someone on the team has been with a startup or two before and ideally one that was venture-backed.

It also means that the founder and the management team members have some experience in the space.  It is difficult to catch their attention when you work, say, as a lineman for a utility company and you are proposing to launch a medical device startup.  Sorry, but it is true.  On the other hand, having a CTO who has been CTO in a similar space makes it more attractive.

The team does not have to be complete when you submit the plan.  One could state that funding will be used to build out the team.

The Market.

VCs call it the “addressable market”  Its size has more to do with revenue than it has to do with population.  That revenue should be growing or poised for growth.  If it is a mature market or one with many major players, then, well, skip it.

And keep in mind that your penetration rates are not likely to be very high.  Equally important, penetration takes time and money.  Assume a sales cycle of at least twelve months—and that’s after you have built your sales team.  Create a business model on a penetration rate of no more than 20% after two to three years.  Yes, yes, there are many exceptions;  just remember what we said at the start of this post.  Assume $2-3 million cost minimum for each 1% penetration (and more if you are in the B2C market).

B2C v. B2B.

Many entrepreneurs think that B2C is the market for them, in large part because the best-known success stories are consumer-oriented.  In fact, most of the venture investments have been in the B2B space.  This makes sense:  It is less expensive to sell to businesses.  One uses a direct sales force with industry-centric marketing efforts supporting the direct sales.  Consumer-centric sales and marketing are wildly expensive.  Also, businesses tend to be early adopters of new technologies, provided that those technologies are solutions for mission-critical issues.

Disruptive Technology.

On the websites of venture funds you will see references to matters such as “disruptive technology” or “defensible IP.”  This one gets a little more complicated.  In an ideal world, this may be true, but in the real world, it is not always so clear.  In some markets—biotech, medtech, cleantech—unique technology may be quite important.  However, in the digital and mobile space, successful ventures have used off-the-shelf technology to build good companies.  The key in those cases has been rapid market entry and growth.

Revenue:  Get It Now.

Entrepreneurs are nostalgic for the days when revenue was not necessary prior to funding.  Well, those days are gone.  It is still possible to get VC funding without revenue but that is most often the domain of angel investors, who invest to prove the concept and get it at least close to market.

If it is not revenue then at least have some clients—preferably marquee clients.  They can be clients who are not paying you (yet), but are serving as a kind of testbed for your solution.  Having these clients means that there is a kind of third-party validation.

Let’s put it this way:  If you have revenue when you talk to VCs then you are more likely to get their attention and you are more likely to get a higher valuation.  Enough said.

Next post on this topic:  getting in front of VCs.

James C. Roberts III is the Managing Partner of Global Capital Law Group www.globalcaplaw.com and CEO of the strategic consulting firm, Global Capital Strategic Group (www.globalcapstrat.com). He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

Summary:  Somehow, entrepreneurs seem deaf on what venture capitalists want to see in the initial documents about a new company.  So, we tossed the question out at the (excellent) “Shaking the Money Tree” panel presented by LAVA—the Los Angeles Venture Association (www.lava.org).  And the answer is:

A PowerPoint “pitch deck” of no more than 15 pages and, maybe—just maybe—a two page executive summary.

OK, OK, some entrepreneurs will then respond by taking their 50-page business plan and cramming it into those 15 slides using 10-point type.  Uh, unclear on the concept.

Jim Armstrong of Clearstone Venture Partners (www.clearstone.com) made it clear (and we are paraphrasing here—hey, we’re not stenographers): “Entrepreneurs confuse comprehensive for compelling.  We want compelling.” Jim Andelman of Rincon Venture Partners (www.rinconvp.com) said this:  Remember your goal with the pitch deck—to get a meeting with the venture capitalist.  He put it another way (again, paraphrasing):  “VC’s are like moths to a flame and that flame is PowerPoint.”

True, if the VC wants more then you will have to prepare—and later submit—more detailed plans like your go-to-market plan, etc.

So, we took that advice and mashed it together with other things we have heard from many other vc’s over the gejillion of years we have been involved with startups.

The Details.

In this case, the details are some pointers on what should be included in a Pitch Deck.  In subsequent posts we’ll explain more of the process.

The Pitch Deck: Just remember that you are not trying to get everything—or even a lot—of information in front of the VC.  You’re just trying to get his or her attention.

  • 15 slides. Maximum.  That includes the title slide and the “Contact Us” slide at the end.
  • Standard formatting—meaning do NOT cram two, three, four five paragraphs of text onto any page.  Usually, a slide has three points with a maximum of three sub-points.  Use one.
  • If you ever use any font smaller than 14 points on a slide then we will hunt you down and wag a finger at you.

Why?  Well, as one of the panelists said, it’s like dating.  Would you go out with someone who told you everything about your life in your first meeting?  You need to make it compelling by highlighting the essential points, that is, the points that will get the attention of the VC, so that you can get a meeting (or another meeting).  And only those points—not a dissertation on the points.

The Slides:

OK, so you have 15 slides.  What should they say?

  1. Title Slide
  2. What Market We Are in
  3. What the Market Is and Will Be
  4. What We Do & How We Do It
  5. What We Do Uniquely/Differently (sorry for the grammar)
  6. Who the Competition Is and Will Be
  7. How We Differ from/Are Similar to the Competition and How We Beat Them
  8. Who our Management Team Is and Those We Will Need
  9. Who our Management Team Is and Those We Will Need (page 2)
  10. What It Will Cost
  11. How Much We Need
  12. How We Will Use that Money (including milestones)
  13. How We Will Use that Money (page 2)
  14. Bonus Slide
  15. Closing Slide (“Thank You”)

Now, if you think about it, some of those slides are variations of the same topic and can be combined (e.g., Slides #2 and #3;  #4 and #5;  #5 and #7).  And, you can break out #4 into two slides.  You will notice that, actually, you could do it in something like 12 slides but we gave you two slides for a couple of topics and a bonus slide just because we’re in that kind of mood.

That’s it.  Those are the slides.  Now, each slide does not have to be the exact topic listed in this list.  This is our outline, not one necessarily sanctioned by VC’s, but you get the point (we hope).  You figure out the language, but that language should answer each question (or, more to the point, explain the topic of each slide).  And remember:  nothing less than 14 points and only then if you are explaining subpoints.  Or we’ll find you and wag a finger.

And why is it that entrepreneurs don’t follow this simple approach?

And more to come in subsequent postings . . .

James C. Roberts III is the Managing Partner of Global Capital Law Group (www.globalcaplaw.com) and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

Summary:  OK, OK, for those of you who self-identify as members of the digerati, you can file this posting under “Restatement of the Self-Evident.”  However, the always-reliable Pew Internet & American Life Project just released its findings on how Americans get news. http://www.pewinternet.org/Reports/2010/Online-News.aspx.

Most interesting to us are the “social networks” results—meaning the number of people who receive or share news via social networks.  This was barely an “industry” just two years ago.  Equally interesting is the percent of people who access such news via their mobile phones.  And, of course, we were sort of surprised that TV stills ranks as the #1 source.

The Details.

Paraphrasing the results of the study:

  • News from the Internet: Roughly six in ten get their news from online and offline sources combined.
  • #3 with a Bullet: The internet now ranks third behind the TV (local then national) as a news source.
  • Social Networks as News Networks: Three quarters of those who get their news online receive it via email or social media posts and a little more than half forward (or otherwise share) the news in the same fashion.  Moreover, 37% of Internet users have “contributed” to the news—including posts, comments, etc.
  • Portable: 33% of cell phone owners now access news on their cell phones.
  • Personalized: 28% of internet users have customized their home page to include news from sources and on topics that particularly interest them.
  • Clutter Cutters—Brands Matter: Most online users rely on a handful of sources.

So What?

What these results tell us at Global Capital is that the Web now reaches many, many people through multiple platforms and not just through “traditional” news websites accessed by a PC.  That seems to be dropping in popularity in favor of mobile phones and through the user “generated” networks represented by Facebook, Twitter, MySpace, Xing, you name it.

Thus, news travels fast and, in particular, through a network that becomes sort of iteratively self-selecting.  In other words, someone hears about a news event across several platforms, depending upon where they are in their day (and in some cases through multiple platforms at the same time) and then sends it out in one or more of several ways:  to all their friends;  to those who follow them on Twitter;  and to those who are friends on sites such as Facebook.

The platform almost doesn’t matter;  it just matters that it provides them the news (either directly from specified sources or through their social network connections) and that it then lets them forward it and in more than one-third of the cases, comment on it, as well.  Can you say the “Internet?”

One thing seems certain:  Substantial evidence of progress to the goal of:

Any content, anytime, any platform and with any interaction.

Draw your own conclusions, especially the business implications.  They are substantial.

James C. Roberts III is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

Summary:  In February, Microsoft announced that it would outsource a substantial amount of its legal work to an Indian legal outsourcing company.  This is not new news but the scale of it is and an interesting twist by the Indian company:  They have an outsourcing center  in the US and will staff up another one in the UK (this is called “onshoring”).  This could easily replace several hundred US and UK attorneys and related staff.  Taken with other news such as large flat annual fee deals recently announced, it is more evidence of not just downward price pressure but a precipitous decline in lawyers’ remuneration.  It’s not all bad:  The legal profession is now, finally, restructuring, embracing flat fees, capped fees, “unit” fees.

Well, Jeez, we, along with many other boutique firms, have been doing that for years!  Why wouldn’t Microsoft turn to the smaller firms?  (OK, it’s a rhetorical question.)

The Details.

In mid February, Microsoft announced that it was creating another LPO outsourcing deal with an Indian firm with which it has been doing work for some five years.  The earlier deal—which will continue—related to IP work (including, for example, patent renewals).  In this case, the public statements indicate that the outsourced lawyers will do legal research but there are some reports that they will also draft documents.

Most notable, however, is not that they are doing this, but that their provider already operates one of the centers in the US.  The second one will be created in the UK, potentially in the North.  Lawyers, expect competition.

The LPO outsourcing looks like it is part of a budget cut, dropping the $900 million legal budget by 15% over two years.  If we assume, somewhat arbitrarily, that lawyers and staff average $100,000 per year in salaries, overhead and benefits, then that would represent about 1,350 attorneys and staff.

Microsoft is not the only company to outsource LPO.  Indeed, many large law firms take advantage of a kind of “cost arbitrage” by using lower-cost lawyers in other jurisdictions, typically to maintain margins rather than provide dramatic fee reductions to clients (though some bar associations are trying to change that structure).  Microsoft is among the first and the biggest to announce the plan.

So What?

First of all, this development is neither bad nor good;  it just is, but it will have ramifications.  This kind of onshoring means, very simply, that the legal fees will be less expensive for the large clients because, among other things, the lawyers themselves will be paid less.  This will ripple through the market.  Fast.  With Microsoft making this announcement, we can expect that large clients of the large law firms will increase the pressure on those firms to cut costs—and this time they will succeed because (1) they can point to Microsoft as a case study and (2) they can turn to these kinds of LPO providers.  Ah, the benefits of competition.

Connect the dots with other legal cost-cutting initiatives by, for example, Levi Strauss and Pfizer.  Levi Strauss just announced a deal with its outside counsel, Orrick, for an annual fee (paid in monthly installments) covering a vast range of legal work.  Pfizer has been doing the same for over a year, though with a larger number of firms.

But from our perspective as a boutique law firm with a lot of experience with “alternative fee structures,” here is where it gets interesting:  The LPO firm rates that we have heard are within line with our usual rates and above our alternative fee structure rates.  The costs are higher on a project basis—i.e., fee charged for drafting, say, an agreement v. charging for total hours for such work.  We may be getting the wrong information on the LPO fees, but it is not unreasonable to use them as the basis for comparison.

The difference, of course, is the marketing prominence of such firms—i.e., clients are aware of them.  Second, for the larger clients, using one source for such legal services reduces transaction costs.

So, perhaps one more nail in the coffin of the hourly fee structure?  We can only hope.

James C. Roberts III (jcrext@globalcaplaw.com) is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

What a product!  Go to www.apple.com/ipad/features.  This thing is amazing.  If it does half of what it promises then it will be a game-changer.  Sign us up, the only question being whether to go with the wi-fi or 3G-enabled.

Summary:  As with others in the same position, I am seduced by my quasi-outside status as a frequent visitor to Europe to write down some observations.  In this case, it is about Europe in this economic crisis and the news is this:  Not all that bad.  True, it is the worst economic situation in almost two generations but the special European “system” has demonstrated admirable resilience.  People are losing their jobs and shops are closing but the safety net has held and governments have responded with alacrity (such as it is) without the ideological war cries about socialism that are rampant in the US.  Besides, the espresso remains delicious, as does the panna cotta.

The Details.

Over the last two years I have spent about half that time (off and on) in Europe.  While I did not play the fiddle while all around me was burning, Rome itself was not on fire nor was it being sacked (but then I was not in Rome, so enough of that allusion).  Upon each return to Europe from the economic wreckage and political name-calling and Chicken Little screaming, I was mildly amazed at how well the European economy has managed this terrible crisis.

Weak Dollar, Resilient Companies. True, the weak dollar has severely crimped revenues (and jobs) of many export-based industries—the engine of the EU economy—but companies have responded by seeking other markets or simply riding out the storm.  Most of these companies are small enough and experienced enough that resilience seems to be inherent.

Fast Government Intervention. In addition, the crisis started as a credit crunch.  Without much dithering, the governments responded, usually with nationalization.  That worked.  Few cries of “socialism” were heard because people knew, and accepted, what had to be done.  Moreover, not all of the national economies included banks in serious trouble;  financial regulators in several countries had spotted the looming crisis several years before, forcing banks to suffer lesser pain then so as to avoid fatal illness later.

The Safety Net Held. EU governments invest a lot of money in their forms of social security, unemployment and—get ready—health care.  And they work.  True, public debt is high and getting higher—but, contrary to the claims of monetarists that such debt crowds out (presumably more efficient) private debt, it has not happened.

Don’t get us wrong:  We are neither for nor against public sector spending.  We’re just following the money.  Viewed that way, the safety net expenditures operate as a kind of ongoing stimulus package.  After all, people receiving this money have to spend it somewhere and they do:  on rent, food, even entertainment (today in the phone store I listened to a welfare recipient rant about problems with his government-subsidized mobile phone).  The larger public sector employment also operates as a kind of ongoing stimulus program, in much the same way.  Public employees—notoriously difficult to fire—nonetheless earn (at least some of) their money by making the trains run on time and, like welfare recipients, they spend what they earn from the taxpayers.

The same can be said of the long vacations enjoyed by most Europeans.  Five to six weeks of time off means higher, not lower, expenditures.  True, the money “bleeds” out of, say, Italy to, for example, Switzerland but it is still money spent.  GDP measurements do not differentiate among types of expenditures—just that things are made and spent.  Thus, vacation expenditures contribute to GDP.

Macro Level Productivity. Whatever the ideological knee-jerking that occurs in reference to nationalized companies, a little bit of analysis shows that they fare pretty well by all measurements—ROI, return to shareholders.  The Economist pointed out that most of the largest corporations in the world are in fact government controlled.  Moreover, European employees perform pretty well by most measurements of productivity.  Long vacations, high wages and lots of rich food do not seem to damage their output.

So What?

One can draw many conclusions from these observations (and we haven’t even gotten to the panna cotta).  We think there are many opportunities for US companies in the EU and vice versa (hey, we’re not here just for the espresso and good food).

Part Deux to come . . .

James C. Roberts III (jcrext@globalcaplaw.com) is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office for Global Capital.  Mr. Roberts speaks English and French.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

Global Capital (www.globalcaplaw.com) counsels domestic and international clients on legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.