Archive for March, 2008

News media needs to have consumers pay

March 17th, 2008

The headline here is direct from the SFGate.com article linked below.  It isn’t exactly a revelation, but the article has some interesting tidbits- such as that print journalists are figuring out how to create audio and video news items, but the advertising departments haven’t caught up as quickly.

News media needs to have consumers pay

It is possible that I am part of the problem here.  I ignore the ads on all the sites I visit as a matter of habit- i probably click on 1 in 1,000 or less.

I suspect most people are similar, which leads to the conclusion that new ad/revenue models are needed.  But what should they look like?  Hmm, I guess there’s a reason the advertising departments haven’t moved as quickly as the newspeople.

Or to paraphrase something my friend Chris said recently "content is pretty easy to develop, but revenue is fricking hard to come by". 

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The “New Environmentalism”, the Next Set of Problems and the Darn 2.0 Meme Again

March 15th, 2008

Time Magazine online has a piece on "environmentalism 2.0" and the promise of technology to lead the planet out of the climate mess technology has created.

Environmentalism 2.0 – TIME

I love technology and I am really fired up about the level of attention climate issues have gotten in the past year or so.  Still, every time I see one of these pieces I remember a line from Jared Diamond’s book Collapse.  I don’t have the book in front of me, so to paraphrase: technology has never solved any problems without creating a whole set of new ones (if you don’t believe this I have some Yucca Mountain real estate to sell you).

Fossil fuels have enabled many things (like this blog post).  We desperately need a non-greenhouse gas-emitting replacement for them, of course, and the sooner the better.

At the same time, let’s not forget to keep an eye out for the unintended consequences. Maybe in the next go-round (assuming we squeak through this one) we can figure out how to address the problems before they become crises. 

P.S.  Dear Time editors: please stop referring to things as "___ 2.0".  Do you have any idea how 2007 that sounds?

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Automatic Contract Renewals: Get Out Your Colored Pens

March 13th, 2008

When your business enters an open-ended relationship with another company, there are two ways to manage the term. First is to provide that the agreement will terminate automatically unless renewed, and second is the opposite- the contract renews automatically unless is it specifically canceled. Each method has its pros and cons. Here are some ideas to consider:

Automatic Termination
All contracts should be periodically reviewed for value to the company. One way to make sure this happens is to provide that the contract must be actively renewed or it is deemed to lapse. The problem here is that it requires memory and attention to manage. I would not recommend this to any but the most detail-oriented of clients who have a great calendar system to track review/renewal dates and a person capable of staying on top of them all.

However, for certain special transactions such as limited-term trials, this can make sense. The risk, of course, is that one forgets to renew, realizes several months later that the company has incorporated someone else’s technology into a product and is then in a poor negotiating position when the time comes to set the general availability pricing.

Automatic Renewal
This is far easier to manage, for obvious reasons, and I recommend it as the default. The trick here is that most automatic renewal contracts allow termination (without cause) only within a set period, such as 60 days prior to the renewal date. Miss the window and you could be stuck with the deal for another year. A calendar of these dates- at least for big-ticket contracts- is still highly recommended.

With automatic renewals, it is also crucial to check the “emergency exits”. What are the grounds for “for cause” termination? Once invoked, can the other side cure the breach? Is that desirable or would it be better just to let everyone walk away?

Good Practices in the Real World
In both cases, the challenge is not get caught by surprise. As a company grows the volume of contracts and renewal dates gets larger as well. Again, I suggest a calendar (or a spreadsheet) of key dates and a person charged with keeping it updated.  In most cases, renewal is a non-issue unless there are problems with the relationship.  An ounce of planning here can avoid a pound of headaches.

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Mini Case-Study on the Emperors’ VIP Club

March 12th, 2008

Bloomberg has a min-study gleaned from FBI transcipts on what made the Emperors’ VIP club successful.  It’s an entertaining read.  Highlights include:

*Strict payment policies and careful training on credit card imprints

*Clever marketing of its clients as wealthy/powerful men

*Market analysis of different regions (the Miami and LA high-end prostitute markets are apparently flooded)

*"Buy out" option to cut out the broker in the case of long-term relationships 

Bloomberg.com: Opinion

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Marketing Your Way Through a Recession — HBS Working Knowledge

March 10th, 2008

From Harvard Business School’s Working Knowledge newsletter- eight (!) tips for keeping one’s business intact through a recession.

For the most part, these are things any business needs to review periodically in any case.  For me, the one-line summary is "avoid the temptation to withdraw into product-engineering mode. You still need to sell too".  I recall many stories from the last recession about companies that laid of all their sales and marketing staff and kept all the engineers- only to end up with a product no one was buying.

Marketing Your Way Through a Recession — HBS Working Knowledge

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Why Do Stock Options Expire 90 Days after Termination of My Employees’ Service?

March 7th, 2008

I get this question a lot from clients. It used to be a very simple situation- companies hired employees and granted them stock options as incentive for expected work. If the employees quit, it stood to reason that they were no longer providing valuable services.

Therefore, essential stock option terms included (i) vesting of the option based on time spent as an employee, and (ii) outright cancellation of the option 90   This post is about part (ii) of that formulation.

IRS rules codify both of these rules. Incentive stock options (the tax-advantaged kind) are only available to W-2 employees and can not be exercised more than 90 days after termination. The other kind, non-statutory options, are not subject to that restriction, but many or most stock option plans say that *all* options expire 90 days after termination of service regardless.

Most companies I work with hire a core group of personnel, but outsource substantial amounts of work (and value creation) to non-employee contractors. The model above has substantial flaws in that case, because it is hard to tell when a contractor “terminates” service.

So are the stock option plan terms wrong? ISOs are locked up by IRS statute, but should NSOs be more flexible to allow termination for more than 90 days after termination?

My answer is generally no, but occasionally yes. Stock options take a lot of attention to administer. They can easily end up “leaking” equity out to people who no longer provide value to a company. For this reason, I encourage my clients to adopt a policy of expiring options after termination. The 90 day period makes it easier to manage ISOs and NSOs without excessive brainpower.

At the same time, there are occasions when a company may wish to allow contributors to exercise options after termination. A private company with a number of long-term contributors (employee or contractor) and a relatively high stock price might choose to let these people retain their options after termination as a way of saying “Thanks for your efforts. We’d prefer that you exercise and get the stock itself, but the exercise price makes that prohibitive, so we’ll let you hold the options until we have a liquidity event”. These situations are few and far between.

The remaining question is how to handle contractors who may make valuable contributions, but work irregularly for the business. An investment banker in this situation might get warrants, which are identical to stock options except that they expire at a prescribed date rather than based on service.

My advice in this situation is to keep warrants for the bankers (the finance types are happier seeing that) and use stock options for contributors to the business itself. This is where an NSO that is exercisable regardless of the holder’s term of service to the business can make sense.  Cases like this in which people provide *really* valuable services that merit long-term options are few and far between, but they do come up.

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The Value of Software Patents

March 7th, 2008

I am at conference today at UC Berkeley’s Center for Law and Technology. I just sat through a terrific panel discussion on the usefulness of software patents.

Brad Feld is a noted opponent of software patents. He held his own well against several others on the panel. If I understood his position correctly, it was (a) that the effort to prosecute patents is lengthy and time-consuming, (b) that software is such a dynamic field that patents can’t keep up with evolution of a business (especially a startup business), and (c) that IP portfolios result in extensive IP reps & warranties and significant potential liabilities when the startup eventually sells to a larger business.

On the other side, the argument is that patents represent a stake in the ground for any business. Weak patents exist, but when a company develops unique technology and protects it with a patent(s), it helps that company to establish its own value and possibly sell services around the technology.

In addition, because patents are public records, the knowledge goes into the public realm to serve as the basis (with due attribution/license fees) for future innovation.

The pro-patent camp’s arguments are relevant in all fields- not just software- so the question is really whether software is so different from, say, biotech, that the patent system doesn’t work.

My gut tells me that software is a more nimble field than many others, with much shorter product lifecycles. A 20 year term on a software patent probably won’t generate much value after the first 5 years or so (though the MSFT Windows group may disagree).

Still, abolishing software patents outright sounds like flushing the baby with the bathwater. This is certainly not my area of expertise, but I will venture my opinion that software companies need to think a little harder than companies in other industries about whether a patent will generate more value than risk, but that patents can still provide significant value.

I’d love to hear other opinions, though. As noted, I am no expert here and trying to understand the scope of the debate as much as I can.

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Tidal Energy, Plug-in Hybrids and *Turning* *Off* the *Lights*

March 5th, 2008

Climate change begins at home for sure.  Putting a stop to it also requires lots of local effort.  Still, where’s the line between encouragement and pie-in-the-sky-ism (I just made up that term)? 

San Francisco mayor Gavin Newsom is reportedly bullish on tidal energy, despite the fact that it is economically unfeasible for the near future, and would produce very little energy.

Newsom Waves On SF Tidal Energy « Earth2Tech

Someone last night also told me that San Francisco has an open purchase requisition out for a fleet of city plug-in hybrid vehicles.  The problem is that no one is making them as OEM and there have been only 150 or so plug-in conversions of hybrid vehicles nationwide (maybe worldwide) ever.  

I applaud San Francisco for moving to the vanguard in pursuing alternative energy.  Without taking away from that at all, I would also like to see practical initiatives such as getting commercial buildings to turn the lights out at night. Imagine how much coal it takes to light all those offices when no one is in them at night.

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IP Protection – “Take No Chances” Department

March 4th, 2008

I recently received a standard form of license agreement from a prominent technology company that featured the following paragraph:

I can’t remember when I have seen IP rights applicable throughout the entire universe. Let’s just hope they can read PDFs around Alpha Centauri. And that the Alpha Centaurians will sign on to the Paris Convention governing reciprocal trademark rights- that is, after the laser-coded version of the agreement beamed their way has actually reached them.

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Trademark Law as a Weapon to Stop Online Forum Discussions

March 3rd, 2008

Prof. Eric Goldman of Santa Clara University is a reliable source of updates on "Internet law".  This is a good summary of a tough situation:

Technology & Marketing Law Blog: Lifestyle Lift Tries to Use TM Law to Shut Down User Discussions; Website Countersues for Shilling–Lifestyle Lift v. RealSelf

LifeStyle finds itself being maligned in RealSelf’s online forums.  Established law says that RealSelf can not be held liable for statements made by third parties, so what’s an aggrieved business to do?

Lifestyle Lift goes after the forum owner for misuse of its trademarks.  The argument is mostly a dog- one can use another’s trademark to identify the business it relates to, but not profit from the mark.  The expense of litigation, however, usually makes people decide that removing the allegedly-infringing content is a better course of action.

RealSelf doesn’t do that though.  It gets made and countersues for . . . violating its terms of use.  The claim is that Lifestyle Lift posted "shill" reviews of its own product (the horror) in violation of RealSelf’s terms.

RealSelf may well win on the merits of the infringement claim, but it’ll still be out a bunch of cash on the defense, and the breach-of-terms-of-use counterclaim isn’t going to bring a whole lot of that back.

I don’t know any of the underlying facts of this case (were the critiques accurate?) so I won’t take sides.  As a UGC junkie, I am strongly in the camp that people should be free to post their opinions of products, including negative ones. There are limits, though.  Businesses also need ways to protect their reputations against untruthfulness and outright slander.

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