32: Handling Legal Matters during Startup Phase
In this episode, you’re going to hear from our very own in-house legal counsel here at Funded Today, Thomas Alvord. He’s going to give you the insider’s look at everything you should be considering when it comes to business law, contracts, and just running your new business. So let’s get started…
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1. Entrepreneurs should prioritize developing a viable business over protecting themselves legally, as the latter is pointless without (and funded by) the former, and they should expect legal issues to grow in proportion to their business size.
2. Entrepreneurs in the USA should minimize their taxes by chartering a “holding company” to own their business, limit their personal liability by incorporating their business (perhaps initially as an LLC that transitions eventually into either a C corp or an S corp), obtain a federal EIN for their business, and transact all business in its name.
3. Business owners should choose their first hires (who may become their biggest competitors) carefully, hire them with non-compete agreements, and always treat their employees well.
4. Business owners should compose brief clear contracts with good mechanisms for resolving disputes, and always try to resolve disputes amicably before resorting to either arbitration or expensive lawsuits.
5. Business owners should seek legal counsel as necessary, but minimize use of lawyers, as they are expensive and may sometimes prioritize their own interests above their clients’ interests.
6. Crowdfunding campaigners should ensure that they are not violating any intellectual property rights before launching campaigns, but avoid paying excessive attention to filing for trademarks and copyrights and patents (which may include provisional patents).
7. Amazon sellers should obtain US trademarks, which will enable them to enhance their Amazon listings with valuable “enhanced brand content.”
[01:07] Zach reminds listeners about Funded Today’s Ultimate Crowdfunding Success Guide.
[01:34] Zach introduces Thomas as Funded Today’s chief in-house legal counsel, Thomas hopes that listeners won’t find his remarks too advanced, and Zach encourages listeners to seek professional legal advice.
[04:19] Thomas stresses that the law will never create value for others that earns you money in return; he urges entrepreneurs to ensure that they’re running a viable business first before spending thousands of dollars on patents (or cheaper 1-year provisional patents), trademarks, copyrights, et cetera, which terms he defines, and Zach adds that usage can help establish patent rights and that you can’t fight legal battles without earning money.
[14:38] Thomas warns that attorneys may sometimes seek their own interests (like more business) above the interests of their clients, and cites some examples from his experience with arbitration, which is an alternative to jury trials.
[19:18] Thomas reiterates that entrepreneurs shouldn’t allow legal minutiae to delay starting a business.
[20:20] Zach and Thomas opine that people who disagree should try to resolve their conflicts peacefully first before resorting to long expensive legal action.
[24:22] Thomas and Zach note that, whenever you treat people a certain way, they tend to reciprocate.
[28:51] Thomas observes that company size tends to correlate with legal expenses.
[30:35] Thomas promises to share some true stories about crowdfunding legal issues.
[31:33] Thomas tells a true story about how KUROI HANA unintentionally used ambiguous wording that broke a German marketing law, which resulted in Kickstarter tentatively suspending it after it had already ended successfully until it revised the offending words.
[34:39] Thomas recounts another true tale about Soto Massini ending successfully, getting suspended by Kickstarter for alleged patent violations, filing an expedited preliminary injunction that yielded a favorable ruling within 7 days, and thereby avoiding needing to refund its backers.
[38:31] Thomas asserts that big campaigns attract more attention and therefore risk more legal trouble.
[38:38] Thomas conveys another anecdote about Little Heroes, which Marvel got Kickstarter to suspend for violating intellectual property rights, although the creator had previously produced similar works that were legally safe due to a parody exception.
[42:42] Thomas recommends that crowdfunding campaigners consider filing for a US trademark, perhaps through Legalzoom, which enables Amazon sellers to enhance their listings with “enhanced brand content.”
[45:43] Zach invites Thomas to overview certain basic legal tasks that American startups should generally complete.
[46:11] Thomas advises American startup founders to formally incorporate their business (with a name that’s not already in use) in order to limit their personal liability, and notes that it often works well to incorporate initially as an LLC that can transition later to either a C corporation or an S corporation.
[52:43] Zach advocates opening a business bank account and then making transactions or signing agreements in your company (not personal) name.
[53:41] Thomas counsels against owning a US business directly, but instead owning it indirectly through a chartered “holding group” that serves as an intermediary in accepting pay while minimizing taxes.
[56:19] Thomas adds that founders should also obtain EINs (Employer Identification Numbers) from the US government’s website.
[56:47] Thomas remarks how holding groups can spawn multiple startups, and recycle their names if/when they fail.
[59:30] Thomas summarizes that campaigners should focus on rendering contractual terms both simple and clear, developing effective procedures for resolving disputes, and minimizing overall attention to legal matters.
[60:28] Thomas and Zach note that, by reducing Funded Today’s original 14-page contract to 1 page, and being lenient with requests to change it, they’ve enjoyed far fewer problems with it.
[64:50] Thomas asserts that a business’ biggest threats arise from within, which is why startup founders should choose their first hires carefully, since those first hires are most likely to become their competitors; Zach recommends no-compete agreements to impede such competitors, and Thomas asks employers to treat their employees well, not only because it’s the right thing to do but also to avoid lawsuits.
[72:09] Zach and Thomas present this episode’s Projects of the Week.
Zach Smith: (00:00) Funded Today Nation, welcome back to the Funded Today podcast. We’ve had a little bit of a break, because of the summer, and the Fourth of July, but we’ve got a really great one coming for you today. As promised, you’re going to hear from our very own In-House Legal Counsel Attorney himself here at Funded Today, Mr. Thomas Alvord, my cohost on the show. He’s going to give you the insider’s look at everything you should be considering when it comes to “business law” “contracts” and “just running your new business”. And remember, if you missed our episode last time we had Rob Peck our past client of AquaVault, Kickstarter Success, and Shark Tank fame on the show. If you want to hear stories from people who’ve actually done it, that one is really going to inspire you. So without any further ado, let’s jump right.
Announcer: (00:41) The Funded Today podcast is brought to you by fundedtoday.com. Funded Today is a premier marketing and video agency. From startups to Crowdfunding to Amazon and beyond, Funded Today has helped their clients generate hundreds of millions of dollars in revenue. If you’d like help launching or growing your business visit www.fundedtoday.com to speak with one of their experts.
Zach Smith: (01:08) Welcome back to the show, I am Zach Smith.
Thomas Alvord: (01:10) And I’m Thomas Alvord.
Zach Smith: (01:11) And as we’ve done lately on the last few episodes, just another quick reminder to download our Ultimate Crowdfunding Success Guide at fundedtoday.com/guide. We’re also in the process of really making this guide beautiful, so stay tuned over the next few weeks and we’ll let you know when you can re-download it in its final beautiful form as well. Right now, it’s got all the content, in a couple of weeks it’s going to be probably the most beautiful looking Crowdfunding Document you’ve ever seen. Now let’s get on with today’s episode. The topic “The Law”, our host, our very own Mr. Thomas Alvord, Chief In-House Legal Counsel here at Funded Today as well. Thomas, it’s another one of those I got to put you in the hot seat episodes, you ready for this?
Thomas Alvord: (01:50) It should be fun, It will be fun.
Zach Smith: (01:51) So we’re going talk about a couple topics today, topic one “you see if you have a business first before you think about legal issues” let’s kind of dive right into that. What is meant by this, and what do you mean? And how have you kind of seen this play out over all the years of business that you’ve had Thomas?
Thomas Alvord: (02:06) Before I answer that let me preface it with a thought I had before we started recording this podcast, when I was in high school, I remember I wanted to learn how to play the guitar, and I don’t know if it was my mom or my brother who said, You know, it’s not that hard, just get a guitar and here’s some sheet music and start learning. The only problem was I had absolutely no background in music at all, like I didn’t even know how to read sheet music, and so it was difficult. Whereas somebody else like my brother, who already played the piano and a couple other instruments for him to pick up a new instrument would be pretty easy. And, so some of the things I’m sharing, I realize that I’m blinded in the sense “I know what I know”, but “I don’t know what other people don’t know”. And so for me, it’s easy because some of my comments are, “don’t worry about it too much”, right? Or oh, just set it up. “Go Incorporate an LLC online” with your state’s Department of Corporations and that might be easy, but for other people, it might not be. So, I kind of feel like I might be giving the same advice my mom or brother gave saying oh, just go do it, and that’s not what I’m saying. And I’d also add the typical disclaimer that you shouldn’t take this as legal advice. This is just some musings and some thoughts for you to think about as you look at traversing your business venture, and how that interacts with the law.
Zach Smith: (03:42) So with all the disclaimers and everything out of the way let’s kind of talk about things candidly and kind of get into things, and realize that even though Thomas isn’t attorney, legally we should probably say that you should consult an attorney, if you have any questions or concerns or anything specific related to these sorts of things. Sometimes a lot of attorneys will even chat with you for 45 minutes to an hour before you start our building. So keep that in mind and these are kind of the things that Thomas has learned and myself has learned over the years of running a lot of different businesses that we think will be helpful to your average entrepreneur who is just getting started in the game is that fair enough to say Thomas?
Thomas Alvord: (04:17) Perfect.
Zach Smith: (04:18) Excellent.
Thomas Alvord: (04:19) What you have brought up and asked or sad Zach was to see if you have a business first before you think about legal issues, and what I mean by that is so many people worry about having the patent, the trademark, the copyright and doing all of these things, and they don’t even know if they have product market fit. They don’t even know if they have a product that people want to buy that the community and the market wants to purchase, and so if you don’t have that, it doesn’t really matter if you go spend all of this time doing all the legal stuff and you don’t have anything to show for it. Just a few months ago, Zach you mentioned somebody I didn’t speak with them, but you mentioned somebody who I think for 10 years has been kind of doing just this.
Zach Smith: (05:12) Yes, I appreciate you bringing that up? I was actually chatting with one of our Senior Client Specialist Brendon, and he said, “hey Zach can you do on a call”? And I normally don’t jump on a call with clients, but in this case it sounded like an interesting idea and an interesting product. So I jumped on a call and two hours later we’re still talking and no joke. This person has probably spent $50,000 over the last decade trying to get this product to market, but not to market legally patent wise, they have done so many things, I was like, what gave you the idea to do this? Where did you think to do this? So, I think it goes right in line with what you’re saying Thomas, is there even a business for this? I thought it was a good idea for a product, that’s why I jumped on the call originally, but I was also like, is it a good idea? I mean, I could be wrong, just a lot of people were wrong on Snapchat. A lot of people are wrong on Bitcoin, whether it’s going up or down. So, I think it is really important to again why are you getting a patent? Why are you getting the trademark? What are you doing with these copyrights? Have you even achieved that product market fit yet? And that was what I end up spending the better part of the second hour of that call. Doing with this client as saying, what have you spent 10 years and 50 Grand for when you might have been able to figure this out for a couple of $1,000 and then done all that other stuff? So, yes I mean, it’s crazy. It’s probably one of the biggest hurdles. I think a lot of people think about when they started business I go, “I’m not a lawyer, oh, I can’t afford an attorney” oh, I got to do all this other stuff, guess what? It’s usually not necessary in fact, most of the time it’s better to get product market fit and then figure all that stuff out first, and you can always do things like slap a trademark on there, before it even begins, because again Thomas can back me up on this “usage matters the most”. So, if you can say that you were using it before anybody else, then you can always go back and do things legally, if you ever create a business that is massively successful or you even need to do something like that. At Funded Today we originally registered the “Trademark Funded Today”, and I don’t even know if we’ll renew it or not when it comes up because it’s just not necessary even for a company of our size.
Thomas Alvord: (07:23) And let me clarify a few of these points, a patent is going to be a patent that some type of widget for how something functions or a design patent for a design of some product that you may be able to patent. And a patent would cost you probably around $20,000 to $30,000 and it could be higher or lower, depending on the size of the firm or we’re in the United States, you hire an attorney, and you can also get what’s called a Provisional Patent, which it’s not a final patent, it’s not a final filing, it's just a provisional filing, and I believe it’s usually around $5,000 you might be looking at with an attorney, and that’s going be good for one year. So, it doesn’t have all the bells and whistles of the patent, but it basically is enough information describing here’s what the patent is, and I’m not a patent attorney, and so that is not my specialty. You would need a chat with a patent attorney, but that’s kind of what your costs would be. Trademark would be your brand name right? So, your brand name could be Funded Today, or it could be the name of product, anything where you want to say, this is my trademark, and once you have the trademark, you would be able to prevent others from using that same name in commerce, to avoid confusion. I can’t go create a business and e-commerce business called Amazon because that would cause confusion in the marketplace, and so that’s not going to be permissible. And then a copyright is not really going apply to too many people here, but that’s going to apply more to authors, and book writers and such, I’m not going dive into that, but that’s more your text and what you’ve written. So, what you don’t want to do is spend so many years and its people who deal in the tangential. They’re dealing with the stuff on the sidelines right? “The law never makes your company money your law is something you simply have to do to operate in a framework that will allow you to move forward” That’s it right? The law doesn’t make you money I suppose a caveat could be if you have a patent, and then you enforce it against somebody else and they have to pay you some license fee or you win some lawsuit, but aside from that of patent doesn’t make you money or I suppose if you have a patent, or something and you’re preventing from somebody else, coming and infringing, then in that case you kind of can maintain some market share but the law itself doesn’t make you money. You don’t want to spend a lot of money or time in the law, because it does not -- that’s not what creates the value, that’s not what actually generates a business.
Zach Smith: (10:14) Can I say this? And do you agree or disagree? “Not only will the law not make you money, oftentimes the law will not protect you” agree or disagree?
Thomas Alvord: (10:23) I agree 100%, and I would add “the law makes money for lawyers”
Zach Smith: (10:29) Very true.
Thomas Alvord: (10:29) But it doesn’t make money for the business people, okay, and it’s not necessarily going to protect you because we’ve seen Zach and I don’t want to name them because of the nature of it. But we’ve seen campaigns that have a patent, and they get in a lawsuit with somebody else saying “hey you violated my patent” and then them saying “no, you actually violated my patent and I actually had this other pattern and it just becomes this legal war zone, right? So at the same time, having a patent may not even protect you, and I realize this might be totally backwards if you talk to a patent attorney, and you said, “hey listen to what Thomas is saying here they would say Thomas is a fool” but my question would be how they started businesses before. There’s a difference between wanting to be legally protected, and the difference between wanting to actually move forward with your business. If you’re a VC Backed Company dude yes go and get the patent, go get a few patents to drop $100,000 it’s not that big of a deal. I’m talking to the people who is the solopreneur, the entrepreneur who has a small team, who has a limited budget and they can’t come up with $20,000. What I’m trying to say is you might not need a worry about it, and if you’re trying to debate the two guess what, you might never do anything because -- and I had a call with somebody an old friend of my brothers from high school like 15 years ago, and he has this product for a fish tank and kind of for the rocks in the bottom, and it was a new and unique way to do it, but he’s like if I don’t get patent then all of the big players they’ll be able to see what I’m doing and they’ll be able to just knock me off, but I don’t have the money to go get a patent and what if it doesn’t work out? So then you get kind of stuck in this conundrum where you can’t really take action because you don’t have the resources to do the legal late work for patent. But if you don’t then the big guys will kind of just beat you to it once they see what you’ve done.
Zach Smith: (12:33) And again this podcast is all about “Actionable Advice” so like Thomas said you might talk to attorneys and they’ll just say these guys are the biggest idiots ever but this is decades of experience here speaking to you telling you what we’ve seen and what we’ve experienced. Last year, at Funded Today, full disclosure even with Thomas as an in-house attorney we spent about six figures in legal and our company is midsize type company, so you can really rack up a lot of expenses from attorneys handling not very complex things. Here’s the biggest issue that I think that I’ve found in and Thomas hinted at it, the reason why I say not only will the law not protect you because you got to have some money in order for us to be protected, we had to spend nearly $100,000 just last year to protect our intellectual property, to protect our contracts, to collect on bad debts and all the other sorts of things that relate to legal chances are you probably don’t have $100,000 set aside or more to go and do these sorts of things. And so the law can’t protect you because you can’t pay your attorney, and we hardly find any attorneys whoever willing to work pro bono, particularly in the business side of law, you’re really in a lot of trouble. When you have a patent and then somebody violates your patent, and now suddenly you realize its going take a $100,000 to go and fight that to protect that, and then when you win, you have to collect. And collecting is an entirely different thing that we could talk about a whole episode on. Chances are, the person who violated your patent was trying to do something shady and dishonest, and so you win and you spent $100,000 and you’ve stopped them, but now they have no money for you to collect damages because they were notice in the first place. And these are all the things you’re not going hear about when you go in and talk to the attorney for the first time, and that’s why we’re sharing them with you, because I think they’ll probably help A lot of you understand that, yes, the law is important. Yes, the law is valuable, but there’s a time and a place in the season, and we think these are the best ways to go about. The thing is based upon what we’ve learned in our experience as businessmen. Would that be fair to say Thomas?
Thomas Alvord: (14:38) Yes, that’s beautifully put, it reminds me, and I’m going botch it here slightly, and I can’t remember exactly which because we’re just speaking on the fly here, right? This isn’t scripted otherwise I could go check my notes. It’s in the book or maybe it was one of the documentary’s I had watched, but I think it was in the China Study the book The China Study where it talks about how there would be doctors who would recommend heart surgery for people, and they would then go to the I believe it’s the Cleveland Clinic in Ohio, which also does heart surgery, and they would look or -- I can’t remember man and I’m totally botching and I’m just talking off the cuff here but basically like one-third or one half of it the cases they would say “look you don’t actually need heart surgery” right? The doctor was just recommending that you don’t need it, and I understand that could be differences of opinion. But like, these were just straight up people who didn’t need it, and it reminds me I forget if it was Walmart, it was it was some company where they -- I believe they brought their doctors in-house because what had happened is they had a lot of their employees who were I think it was like one-third, like all of the medical surgery that people received. It’s not even needed it’s kind of this racket and I could be totally off here, but I think every industry has different perversions like that in the sense that the people will go to help us, they’re not always there and have their interest exactly aligned with ours. The reality is attorney’s wants business is what I’m getting at.
Zach Smith: (16:28) If you look in the NBA in Professional Basketball, we see this quite a bit. Just most recently a lot of professional basketball players are not relying on their team doctors, because the team doctors might actually say, don’t do the surgery play through it, and so they hire outside doctors to get a second opinion before they go about doing that ACL Surgery or doing that hip surgery because there’s millions and millions of dollars that stake here, so absolutely I think we see these sorts of things in every single industry where, whether it’s to use the law or not to use the law, or to use the doctor or do not use the doctor, there’s definitely a little bit of that divide and, again I think second opinions are really important even with attorneys. I would talk to a couple attorneys. If you think you have a case to sue somebody, bring this episode to the attorney have them listen to it, bring the points up with them and then say “what do you think?” And then do the same thing with another attorney? And if you have an attorney who really is looking at your best interest a lot of times you’ll get the sorts of opinions that you want from the attorney before you go about and get into a heavy legal battle that’s going to cost you tens of thousands, if not hundreds of thousands of dollars.
Thomas Alvord: (17:24) Well, here’s the interesting part. We are all biased and whether an attorney thinks their biased or not, even if they’re trying to be objective, they’re going to be biased because without naming names we -- there’s the individual we’ve been talking it with recently who has this issue with a settlement and a lawsuit on, and I’ve kind of been in the middle, and I act and both parties have come to me and I’ve seen both sides and as I can see their side, and I can see their side, I see both sides, but each side in and of themselves think like, Oh, this a slam-dunk, right? I mean, like, that’s the definition of a conflict as well that’s why you’re not seeing eye-to-eye, because people are seeing things differently, it’s so basic, but it’s so true. And so attorneys, they’re not always going to they’re going to be biased. They’re going to be biased, invoice you more and say you need these service is and you may need them -- here’s the other thing, which I find really interesting right “you can hire an attorney to do legal work draft a contract do other things” but the one thing that you might actually need them to do, they might miss. And, for example, if you draft an Arbitration Clause just slightly wrong, you could actually be invalidated and open -- I was just reading about some of this the other day and open up a company to a Class Action Lawsuit in the courts when they want to prevent that.
Zach Smith: (18:51) And “Arbitration” just for those of you who don’t know it’s another way where basically instead of going to a Jury or a Judge you meet up together with the opposing counsel or the party. So, if I sue Thomas and it -- we did it through arbitration he and I would meet together, and then there’d be an arbitrator who basically, here’s our case and ways in and determines who is right, me or Thomas, that’s what an arbitration is versus your typical jury hearing that you maybe seeing on TV.
Thomas Alvord: (19:20) And my goal is not to bash attorneys, I am on attorney, it’s just to be judicious because your goal as a startup and I’m speaking again, mainly here to startups entrepreneurs because that’s who we are typically dealing with, an established business these questions don’t really matter because it’s just a cost of doing business and you get a patent, you get a trademark it’s not. It’s no big deal, right? But if you’re starting off don’t let the legal issues paralyze you from even getting going. If that’s going to hold you up, say okay at what point can I go get the patent and move forward on this? If it’s going be more than two or three years, I guess you decide yourself what time frame is acceptable to you that you’d have the funds to go get that patent, if you feel you really need it otherwise just move forward who cares, if somebody tries to rip you off. The best product is going win, and you’re going to compete in the marketplace. So just go that’s my advice, otherwise, what I see time and again, I kid you not 10 years later or 15 years later, somebody’s still talking about this idea and they’ve never done anything about it. That’s just how it rolls, it's just how it is.
Zach Smith: (20:22) And we’ve experienced everything, we’ve had competitors use our name and they’ll say, get Funded Today on their website and their names, something else and, like literally the smallest thing like that, right? And then we could have Thomas or an attorney send them a demand letter, please stop using this registered trademark, and then they might say no. And then you got to send another letter or you have to sue like again you might think this attorney drafted the most amazing letter it’s so scary it’s so amazing, yep it may be, but the other person could simply say who cares, and then you’re faced with a legal battle, so most of time -- and I got this from a book I read recently, someone in the company Tevin who’s been on this podcast before, recommended It’s called “Tuesdays with Morrie” really good book and it’s basically about a guy who is diagnosed with Parkinson’s and he slowly dying. But he has a lot of time to tell the story and give life advice, and I loved it, I really resonated with this, and I’ve thought about this so many times, and I think Thomas has said the same thing, and I’ll just paraphrase what more he said to the reporter who was interviewing him, he said, “I can’t believe more people don’t just get together man-on-man, woman-on-woman, whatever and talk about the situation and try to resolve it” And Thomas has said something very similar he’s like “what would happen if we just would have went on a park and settled apartments together and talked about this and worked it out”, and “the more I live the longer I live the more I think that’s the best way to do things pretty much 100% of the time”. If people when they had a disagreement just got together and talked about it, even if it took a multiple amounts of talking, we could solve so many problems, and probably reduce the usage of attorneys quite a bit as well.
Thomas Alvord: (22:02) There was once a master named Jesus who said, “if you have aught against your brother, go to him first”
Zach Smith: (22:08) No, there you go.
Thomas Alvord: (22:09) Biblically, if you have an issue right, because often if you have an issue with somebody, they actually don’t know that they offended somebody or somebody else’s upset, we should go and talk to them I actually try to make that my policy. Well, it’s kind of interesting. And there’s a book called “Bowling Alone” I believe it was by, uh, wasn’t a Harvard Professor about how we’ve kind of become disconnected. You know, nowadays, if the neighbor does something you don’t like, you just call the police instead of just going and chatting with them, and I’ve always thought it’s kind of interesting. I have some neighbors here in the neighborhood. I love them like they’re my friends, right? Super awesome people, and we had some neighbors that were a little more difficult, you could say, but they were actually the nicest kids to my kids here in the neighborhood but other people would like, always just call the police on him and stuff, and it will upset him, like gosh why don’t you just go talk to him? You know, you don’t just got to call the police I understand you know, people don’t want to deal with the conflict, but you know, it can be more human. I guess
Zach Smith: (23:03) That’s interesting just like we go to Amazon to buy everything and we don’t go toe to stores anymore, we aren’t even going to the people who live around us. I appreciate it when people will try to meet up, and try to work things out and talk to me man to man and I think it really matters. But again, it sometimes seems like it’s easier to just call the police or just call up your attorney. But in the end, again coming from Thomas and I as experienced so will take it for what it’s worth, we’ve found that the times we really try to work it out and talk through it we’re way better than the time for we had to sue and go through a crazy legal process that, sometimes I think our longest one took four years unless you count the collection, which is still going off. So sometimes your five, six, seven, eight years of dealing with a legal problem that maybe could have been resolved if you would have just found a way to work it out together. I think that’s a huge takeaway that I think a lot of people listening this hopefully you’ll try to apply first. And again, there’s a time in a season in a place for law and sometimes the differences are so stark, and so blatant and no amount of talking works, and you have to do it I understand that. But I bet 99% of the time if you go about at the right way and you use a little social grace, and you use a little social capital and you leverage your experiences and you show that you’re coming to them as another human being who has empathy, you could probably resolve quite a few things. If that’s the only thing you get from this podcast that might be more valuable than all the little legal tidbits will give you.
Thomas Alvord: (24:26) Well, the typical lawyer, too. And now these air, just like lawyerly musings, is flex your muscle as big as it can get that basically how I would summarize.
Zach Smith: (24:37) To everybody, with what I was taught in school.
Thomas Alvord: (24:39) Because what do they do? They send you a demand letter flexing their muscle as big as they can I mean what you can’t spend four hours and draft the complaint and just pay $300 and file a lawsuit like if you’re serious about it, right, it’s kind of laughable that people send the demand letters, but instead of doing in a civil way it’s just flex the muscles. And this one suit that that we had at Funded Today which lasted over a year and was almost $100,000 and legal fees I actually had told the attorney, I want to go and talk to this person first, and the attorney said well, and it was a debate, right? And even now I don’t know if I can look back and say, well this was the wrong decision or the right decision I don’t know what it is
Zach Smith: (25:27) Let’s talk -- everyone is different.
Thomas Alvord: (25:29) But I thought, I just want to go and chat with them right? Because immediately once you become in conflict with somebody, they’re going to put their guard up and they’re going to fight back. Watch go down the street somebody taught this to me before it’s very interesting. You go down the street or wherever and if you wave to somebody say “hi, they’ll say hi back” say, “hey, they’ll say, hey, back” “smile, they’ll smile back. Give them a fist pump they’ll give you a fist pump
Zach Smith: (25:54) Flip them off they’re going to flip you off.
Thomas Alvord: (25:56) Yes so people reciprocate right? So, if you start an engagement with somebody and its negative, how do you think they’re going to respond? If you are confrontational, they’re going to be confrontational, and if you are both confrontational, how quickly are you going to resolve a dispute? Not quickly. And again is a lot more theoretical now than practical legal, but I wonder, looking back if we had gone, if I had gone, what would have happened? Now part of the reason why we filed the lawsuit was at the advice of the attorney, and we still work with this attorney, so I value his input and I don’t mean to speak anything negatively, but I wonder how much of it was, let’s just get this lawsuit going right? More legal fees but also another difficult part was if I spoke with this person, there was actually evidence we had, that was very incriminating, and we wanted to preserve that, and if I simply went and spoke to them and said here’s what we have on you they could have deleted that. Whereas once a lawsuit is filed, you can’t go to lead evidence. Otherwise, you get in trouble basically, you can’t delta evidence. So those were some of the issues, but I think for Zack and me, what would you agree? Zack there are idea for resolving a dispute is much more civil and going about saying, hey, how can we resolve this?
Zach Smith: (27:28) Yes, what was the problem? How did you see things? How would I see things? What did the contract state? Okay, I understand how you could have felt that way, how can we work this out? And again we kind of learn that in the hard way, and that’s why we’re sharing is again what we’ve learned so that you don’t make the same mistakes sort of thing, because, like Thomas said, oh you could hire -- like I remember getting the demand letter once and I was just like Oh! My God, it’s just its terrifying this is so scary. And then I took it to an attorney and they wrote something back, and it was just attorney’s writing back to each other nothing ever came and I’m like, okay now what? He’s like okay, now you pay me 10 Grand on a retainer and I sue him. Oh! My God, crap, like the demand letters are pointless like Thomas said, and so it just makes sense unless you’re fully committed, I’m going to sue this person, and I’m going to commit $50,000 minimum for this lawsuit that you should try to work it out civilly, and it’s always going to be better that way from what I found. Unless, like Thomas said, you’re a big company and you have the budget and the legal team, and even In-House Legal Counsel are lot nicer because that can reduce your cost it’s just better to go about it that way, because from what we’ve seen. On the other side of things, you send them a demand letter, and then they say, screw you, and now you’ve started confrontationally, and so you don’t even have the option of trying to resolve things so anyway I think that’s very important I’m glad we kind of went down that tangent quite frankly, Thomas so.
Thomas Alvord: (28:47) And I am as well, I think there things people will run into, and you just have to figure out how to resolve them, and also I think legal issues are going to be commensurate with the size of your company not always, but typically. I remember there was a fellow I was talking with. He was sharing how he was paying somebody more or differently I forget and this person wasn’t working as much, but basically in California at somehow had run afoul of the employment laws, and so he had been actually trying to be nice and help out some, and then after she was like go then she came and sued him, and he was saying how he was so stressed, and it was this very difficult thing to deal with. And I’m being Gosh, man this must have been horrible, does he got, like, this $100,000, $500,000, $1,000,000 dollar suit, and then I had a friend I spoke with him he was an attorney, and he is like yes for you to fight this this will be a lot more, it’s probably best to just pay the amount in the demand or what she’s asking for in this which is $3,000 and I remember thinking what the $3,000 bucks, right? So for some people $3,000 bucks that could be the end of them, right? Like I don’t have that I barely have enough money to fill up the gas in my car halfway right, that might be some people. Whereas for other people, we’re not even going to blink right, so it’s going to be different for everybody. But these are the types of scenarios we will run into and thinking, how are you going to address them? And we kind of shared okay patent trademark, copyright, and I’m going share a little bit more about some of those. But really, the goal is to get moving, but even once you get moving you might run into situations where somebody else is going to come and sue you, and we actually have a few stories that are kind of interesting. I think we actually probably have more experiences with crowdfunding creators who had legal issues because we’ve worked with more crowdfunding campaigns than anyone in the world, and so some of these are pretty interesting stories.
Zach Smith: (31:04) Yes, absolutely I think that’s a perfect transition, Thomas, to our second topic. And it’s simple “make sure you cover your legal basis” How do you do that?
Thomas Alvord: (31:14) Well if you can because sometimes you don’t even know with some of these examples that violating the law because it's some law in some other country that you’re never going know about? Like its going be impossible for you to know that ahead of time?
Zach Smith: (31:27) Well, let’s talk about that one first Thomas let’s talk about the German Law incident and kind of what they experience and how they work through this one. I think this is a good example of kind of talking as well.
Thomas Alvord: (31:34) So “Kuroi Hana” was a knife campaign it was a Japanese knife made with Japanese steel, and it was a UK company who was creating the product, and this raised over $1,000,000 or $2,000,000 I believe, and we were running marketing everywhere one of the countries that we were running marketing to.
Zach Smith: (31:57) Most funded knife of all time may still be.
Thomas Alvord: (32:00) Yes, I think you’re right. And one of the countries we were running to was in Germany because we run to Germany and many other European countries. Apparently, there is a German Law and I’m forgetting all the details precisely right now that the way Kuroi Hana was saying their knife was made, they were saying that it was made in Japan. When in reality it wasn’t made in Japan I think it was simply using Japanese steel, by being made in China or something again I forget the details, but…
Zach Smith: (32:36) Yes, that’s on the brand.
Thomas Alvord: (32:35) …essentially it was some little nuance where it’s being created or the material being used. There’s some false advertising law, and so because Kuroi Hana was selling and advertising in Germany or to German people, then they were running afoul of the German Law. And this I don’t know if it was a Watchdog Group or an individual who it was I can’t really recall, but I actually believe -- now that I remember it was another knife company, so they saw that and they’re like, “hey, you’re not, you can’t be advertising like this” and then they sent a letter to Kickstarter saying Kuroi Hana is violating the law and Kuroi Hana had just finished their raise, the campaign was over, and Kickstarter put a freeze on the Kuroi Hana campaign. So there was no way to get the money, and if the dispute wasn’t resolved within 14 days, all of the backers money was going be refunded, like $2,000,000 plus was going be refunded, so, like, this is absolutely serious business. Now, in this case, Kuroi Hana was able to rebrand -- not rebrand I shouldn’t say rebrand changed the wording so it complied with the German Law everything was good and their campaign was reinstated and they got the funds. But that’s where even when you go out with the best intentions, you’re going run into situations where you might violate the law or somebody else will say you violated their patent and they’re going come after you.
Zach Smith: (34:16) What I loved about this story is though Thomas was able to work with their attorneys, and the and the person involved with the German Company, and honestly, in a period of less than 72 hours or so, work it all out, and resolve this very, very amicably and solve it, so even when you run into an issue, that’s pretty crazy $2,000,000 is about to be gone, you can solve it if you apply some of the principles that we talked about earlier in this episode. All right, Thomas, tell me a little bit about the incidents with the Ballet Flats.
Thomas Alvord: (34:46) It was another campaign did they raise $1,000,000 as well?
Zach Smith: (34:49) Yes, I think so.
Thomas Alvord: (34:51) And again, this goes back to what I was saying, your legal woes, legal issues are going be commensurate with your size. “Soto Massini” was a ballet flat type of shoe, and there was another company that came after them saying, “hey, you’re violating our design patent” it’s been over a year, this was another similar situation where the campaign finished, and sometimes before your campaign is over, somebody will reach out and say, “hey you violated our intellectual property, you violated our trademark or copyright” and Kickstarter will suspend the campaign. You’ll get an email from Kickstarter, and we’ve dealt with this many times because we worked with so many clients because I think on average like one in every a few 100 run into this issue, so just by virtue of the numbers, we’ve dealt with this. Anyway “Soto Massini” wasn’t this situation, again it had finished, so there was no 48 hour email, but it was this “hey, the money’s here, but here’s this company that says you’ve violated their patents, and because you violated their patent we are freezing your campaign, and you have 14 days to resolve this otherwise we’re refunding all the backers” right, which is a huge blow, because you’ve spent so much time, so much energy, so much emotional toil, and you have other costs, right marketing costs, manufacturing costs. If you’ve already started manufacturing, you might lose all of that, with Kickstarter I think, sometimes doesn’t realize the ramifications of their actions sometimes and how it literally will just put a business under or could put a business under. So Soto Massini had this serious issue, and this company lucky to Soto Massini actually filed I believe it was a preliminary injunction that was expedited I forget all the details, which was basically to get before a judge and for the judge to say “okay, yes the lawsuit might take a year, year and half but we just want to see is there going to be an injunction or is -- do we prevent Soto Massini from selling any of their shoes until after the lawsuit is over? And typically, that would happen if you could show irreparable harm. Meaning unless this party stops their actions, there will be harm that is irreparable. It will be impossible to remedy the harm that happens. In any case, within I think seven days. The judge heard the case to Soto Massini luck or good fortune I suppose you could say, the judge ruled in favor of Soto Massini, so because of that, they were able to take that and show Kickstarter and Kickstarter said, okay we’ll release the funds. Yes notwithstanding that for the last year and half Soto Massini, he has been in this lawsuit, and I had a call with the creator Thomas just or was an email, but it was just a month ago or so, and I think he said they were almost done and they were still finishing some stuff up, and then I would be going to trial and then resolve.
Zach Smith: (38:15) The good part is, it’s a big business, and it’s Soto Massini has taken off and done so well, like Thomas said, your legal troubles kind of go with how big your company grows and Soto Massini they tapped into a really massive market that apparently didn’t have any competitors before, and so the one incumbent really wanted to dial down and fight back. So
Thomas Alvord: (38:36) If you raise $10,000 you’re not going wake the sleeping giant
Zach Smith: (38:38) No.
Thomas Alvord: (38:41) It's just what happened.
Zach Smith: (38:39) It's not good advice. All right speaking of sleeping giants Thomas, let’s talk about probably the biggest sleeping giant that ever awoke with our most recent legal example “Little Heroes”.
Thomas Alvord: (38:53) So we had a client, and this is kind of sad situation where Marvel right with all the Superheroes, the Company Marvel came and said “hey, you have violated our copyright”, and it was a campaign called “Little Heroes”.
Zach Smith: (39:11) We’ve even talked about on this podcast, I think.
Thomas Alvord: (39:16) Yeah, we did. I think it was one of the products of the week as well. “Little Heroes” was a book about all the super -- not all but many of the superheroes when they were young. So Baby Spider Man, Baby Batman etcetera, etcetera and the creator of this book had done similar works under copyright law that what’s called a Parody Exception to be honest, I haven’t dived in and really researched this, but there’s a Parody.
Zach Smith: (39:51) It’s essentially when you walk Saturday Night Live or Last Week Tonight with John Oliver where they’re able to name famous brands and companies because they’re poking fun at them or being funny.
Thomas Alvord: (40:00) Sure.
Zach Smith: (40:01) That’s essentially Parody Law.
Thomas Alvord: (40:04) What I meant, meaning I haven’t dived in I don’t know the parameters for exactly when you can and when you can’t. But the idea is you can poke fun at it, right? And that’s what this author had done in the past, and in this situation a few times our team was like are you sure this is okay? Like there’s no issue with any of the copyright and in the past based off of their experience or what their attorney had told them before they thought it was okay. But Marvel came out and Marvel was familiar with the work of this artist. But Marvel came out and said “you can’t you’re violating this copyright, and they weren’t open to doing any type of licensing or doing any type of deal, and so the campaign had to be completely shut down” AND that’s where I say you need to make sure you cover your legal basis because, yes typically, don’t worry about the legal stuff, just move forward, but you want to be cognizant. Are you stepping on anybody’s toes? Yes sometimes you might run afoul, and frankly, with Kuroi Hana, that’s the first time and the only time we’ve ever had a campaign where there’s, like some international law violation. So that’s obscure, don’t I would not worry about that at all. You don’t, there’s no way you can even know if it’s going come up.
Zach Smith: (41:21) Thomas. I just had a realization one thing. I loved your phrase “a wake a sleeping giant” As soon as your campaign starts to get really successful, that’s also a good time toe before you start spending hundreds of thousands of dollars on paid media and even maybe you’re working with somebody like us at Funded Today. Okay, my campaign’s blowing up, okay, it’s really successful. Do I have my legal basis covered? That’s a good time to look at it. Little Heroes was one of the best converting campaigns we ever worked on why? Likely because they were playing off the brand equity of Marvel and Disney, who now owns Marvel, when you’re leveraging that good of a brand probably, well, literally, probably one of the best brands in the world, maybe, if not the best brand in the world. I mean, a single Disney singlehandedly has carried the box-office in 2019 with all of their movies and broken record after record. When you’re leveraging that, you have a huge chance of having a good conversion rate, and obviously that was the case with Little Heroes, and so that’s when our team said wait is this okay? is this allowed? It is it’s not and they said, yes we’re okay, we’ve done this in the past I said, Yeah, but you never done it to the extent where you’re going to raise millions of dollars because we were going to raise millions of dollars for this book, and it’s a good time to look at it, to step back and say okay we’re really successful things are blowing up here. Do we have our legal bases covered? That’s a great time to look at things and enforcing for Little Heroes they did not do that, and they face some dire consequences.
Thomas Alvord: (42:45) Here’s one legal basis that everybody should look at covering, and this is their trademark for the business that Zach and I are in a trademark yes we could go file it, but there’s also Common Law, Copyright Protections and the life we heard of somebody just ripping off our name blatantly because we’re all about being lean as well, and so again, this advice is probably a typical especially for a company our size yes, it doesn’t really matter. We could just go renew our trademark. But for anyone on Kickstarter Indiegogo that wants to transition and be on Amazon and I covered this already in our Amazon episode and if you haven’t listened to that, go back, you can listen to that you want and need a trademark for being in on Amazon, because by having a trademark you can register with Amazon’s brand listing, and when you’re on Amazon’s brand registry, it unlocks a feature called “Enhanced Brand Content” on your Amazon Listing, which enables you to put images, and additional text and really make your listing come alive and substantially boost your conversion rate. So, a trademark can take eight months to a year or more to go through the whole process so you want to start that now, and a trademark is not super expensive like a patent. The filing fees with the trademark office are usually $225 to about $400 depending on what you do, and what I will recommend is to use LegalZoom or a service like that, because you’re going be $199 for the LegalZoom service and then 225 or maybe a little more for the fee. So it’s not going to cost you an arm and a leg.
Zach Smith: (44:47) And let me throw some love to the lawyers. Thomas, start with LegalZoom pay 200 bucks, hire a lawyer if you need to after you’ve got your contract all done and say “hey, look this over, is there anything I’m missing” And maybe it cost you 100 bucks more for an hour their time or something to look over it.
Thomas Alvord: (45:05) Normally, when LegalZoom they already have that, it’s kind of like a self-service, but they have attorneys who look it over so again, I’m talking to the people who have a limited budget who are in startup mode you don’t want to go spend money, you don’t have to go spend, be judicious about it. So, but if you have the money again, you might still think do you really need this patent or this additional patent? If I’m not mistaken, I’ve been to conferences and I’ve chatted with people and they say Oh! I got these five patents and they don’t have a business to their name or anything or launched anything, they just have these patents. So, like, what does it matter if you have patents but no business? Do you want a patent with no business or business with no patent.
Zach Smith: (45:43) Unless you’re a patent troll, but that’s a whole another story as well.
Thomas Alvord: (45:46) Yes.
Zach Smith: (45:48) Hopefully that helps kind understand some of the situations that we’ve seen as we’ve ran crowdfunding marketing for nearly 3,000 projects now. But let’s go back a little bit and kind of just dial-in on some things that we recommend that you do. This is our last and final topic for the podcast, and we just kind of rapid fire shotgun style through these but base level legal setup Thomas what does this include? What needs to happen for any sort of business? And why do you want to actually do these sorts of things that you’re going to talk about?
Thomas Alvord: (46:15) So, there are legal things that you do want to do. The first is to incorporate, and that is show you have limited liability, you don’t want to go run a business, get in some lawsuit, become liable under German Law or some port because your product injured some child, and who knows what bizarre thing could happen, right? You want to limit your liability, so you are not personally liable. By setting up a corporation or say an LLC you limit your liability, that if what you do in the course of business is done through your business entity, that if somebody sues you, or if you’re liable for anything or the company is liable for anything the most that anybody is going to be able to come after you for is what your assets are worth? What your business is worth. You’re not personally liable. They won’t be able to come after your house or your home, or I meant to say your house or your car, but I guess maybe you have a house and a home, you got two homes, I guess. But you want to have that limited liability protection.
Zach Smith: (47:28) Even more reason to create an LLC.
Thomas Alvord: (47:31) And an LLC for example and every state’s different, like, for example in Utah you can set it up online, and it’s $50, or I think maybe $70, because you get the business name as well. So, you can set that up and they’ll even do the namecheck to make sure you’re not violating somebody else’s name. And as a general matter look at the name it might not be trademark. Just see it is anyone else’s using this name, because I could register a business in Utah called Funded Today, and then somebody else could actually go to California and register that same name Funded Today, and it wouldn’t necessarily be a violation, or run afoul of the state law, however, if you get into trademark violation and then you could have issues, but somebody else could be operating with the same name, and maybe it’s not even trademark. You can also look at the U.S. Trademarks Office website and just do a search does anyone else already have this name or a name very similar in the industry that I’m going to be working? And if so, then you might want to reconsider.
Zach Smith: (48:34) A good example could be like cookie marketing or Marie Cookie or something, right? And her name’s Marie Cookie, so she’s Marie Cookie LLC, but then there’s a company called Marie Cookie. In that case, it probably wouldn’t be a problem because she’s doing marketing and they’re a cookie company, and so even sometimes when you have the same name its okay because you’re in completely different spaces and that’s allowed. It’s only when there’s that brand confusion that there becomes an issue.
Thomas Alvord: (48:59) Yep and really, you might look at it and say do I want an LLC? Do I want a corporation? Zach and I don’t come from the world of Venture Capital and raising rounds, we come from the world of starting a business that’s profitable from day one or quickly thereafter profitable and building a business that that can grow. So, we haven’t had to worry about this, but if somebody is looking at doing rounds or eventually taking capital I’ve heard that typically a corporation structure is better for that, but if you have an LLC you typically can convert to a corporation, and an LLC is often a little easier to manage in terms of your filings and what you have to show
Zach Smith: (49:43) LLC is probably the most common, and if you’re just a one product type company that’s going to be bootstrapped or self-funded, probably and LLC. You can always change your LLC to be taxed as an S-Corporation when you start making yourself an employer of your company as well.
Thomas Alvord: (49:57) I’m glad you brought that up, because when you set up an LLC or a Corporation there’s two different ways you can specify for how you want to be taxed. You can be taxed as a C-Corp or as S-Corp. A C-Corp means that you pay Corporate Income Tax, so you make $100,000 the business will pay taxes on that I don’t know what the tax rate is, let’s say it’s 15% you pay $15,000 in taxes on that $100,000. So now you have $85,000 leftover. Let’s say you’re the only owner of that company that $85,000 is now going to get distributed to you or paid to you, and then you actually need to pay your personal income tax on that $85,000 as well.
Zach Smith: (50:55) If you’re in accounting, this is called “Double Taxation” you’ve probably heard about it before, which is another reason why a lot of times filing as a corporation isn’t your best bet, if you’re the typical type of business we see on Kickstarter.
Thomas Alvord: (51:06) Well, you could so file as a corporation, but be an S-Corp, and an S-Corp basically says the, business itself is not going to be taxed. Any of the profits will simply flow through to the owners. So, if you’re the only owner, that $100,000 will come all to you and be taxed directly to you. Even if you still had the money held in your business bank account for taxes, you would still be taxed individually on the $100,000 it avoids the double taxation, there’s no Corporate Tax,
Zach Smith: (51:40) And this is what’s called a Flow Through Entity, so you can’t just hold the money in your business, you’re going to have to pay taxes on it even if you don’t distribute all the money out to your personal account at the end of the year.
Thomas Alvord: (51:49) Now, on the flipside and I don’t know of anyone who has done this, who is kind of in a position like Zach and I maybe you know Zach you could have a corporation and you could say, when your tax at the highest tax rate you’re paying 40% on taxes, right? So it’s kind of a slam right? It stinks. You could have a corporation and say I’m going to have this corporation. I’m going to, maybe you make $10,000,000 year and I’m only going to pay whatever the tax rate is 20% on that, and then you actually could keep that money in the corporation and then just pay yourself $5,000 a month. Yes, you do need to pay your individual taxes every year that you pay yourself, but you wouldn’t have to pay all of that tax in the same year, that’s one other thing but again, I don’t know if you’ve ever heard of anyone doing that Zach but that is something you could do.
Zach Smith: (52:49) And I think the reason we’re talking about an LLC comes down to a lot of basic things, once you set up in LLC you receive that protection but how do you actually utilize the power of an LLC? Well, you set up a bank account in the LLCs name. You make sure everybody pays the name of the LLC rather than yourself. You make sure when you sign a check, you sign it Zach Smith or Funded Today. You make sure you do not sign anything personally, you always sign it acting as an officer, as a CEO, as a managing member, as a partner, whatever it is of your company, so that you have a good paper trail showing that you’re using this LLC separately and distinctly from your personal self. If you do this, then you can protect yourself when you sign contracts you signed the contract representing your company, you don’t sign the contract implicating yourself personally and that’s the reason an LLC so important because then, as you operate as a business owner, you actually leverage the power of the LLC and the protection, which is called the corporate veil that the LLC affords.
Thomas Alvord: (53:46) If somebody has a business there setting up and it’s just them, I would recommend setting it up as a Holding Group and create a generic name that would apply to anything, and maybe you could share how you said of your holding group, Zach, and how and what the benefits are tax wise with payroll and stuff?
Zach Smith: (54:09) Yes absolutely. So, in fact Thomas and I both do this to some extent. Thomas some trust and other things that are even a little bit more complex and we probably want to get into, but very simply Funded Today is not owned by Zach. Funded today is owned by a Holding Group, and I own my share of the company, and Thomas owns his share of the company with his Holding Group. So when Funded Today makes a dividend distribution meaning when Funded Today pays Funded Today pays the Holding Group, and then the Holding Group pays Zach Smith a salary and that Holding Group the only employees in the company is Zach Smith, and this is completely legal, probably the most efficient tax strategy you can do, get into a little bit of accounting side of things.
Thomas Alvord: (54:49) And to clarify real quick Zach when you say Holding Group it just means that there is an LLC, that you are the one who owns it, and you’re the only one who owns it.
Zach Smith: (54:58) Exactly.
Thomas Alvord: (55:00) So when you do business or when you have ownership I should say with Funded Today your ownership is not direct, it’s not Zach Smith own 50% of Funded Today, it's Agile Holding Group owns 50% of Funded Today.
Zach Smith: (55:14) Absolutely.
Thomas Alvord: (55:15) And Zach Smith you personally own 100% of Agile
Zach Smith: (55:19) That’s exactly right, yes, and the reason why that is important is it gives you another layer of protection, but it also allows you to take advantage of some of the good tax laws, so that you can essentially take advantage of the FICA Tax. So, for example, a lot of people complain about being an independent contractor. Well, essentially, as a business owner, you’re an independent contractor of your company, and so you have to pay both sides of the employee employer tax, which is your Medicare, your FICA, they call it FICA, and essentially, by setting up this way if you pay yourself a reasonable salary to operate and a reasonable salary kind of is based upon how much value of the company has and how much money the company’s making and so forth you can talk that over with an attorney and your accountant. Then you can save yourself quite a bit of money in taxes by doing it this way and give yourself even greater layer of protection making yourself even one more layer removed from your main company. And a lot of people do this and again talk with your CPA your accountant and your attorney if you could set that up but I think that’s a pretty powerful strategy as well for a Holding Group.
Thomas Alvord: (56:25) One other thing people will need to do, and I appreciate everything you shared there Zach that was great. Another thing you’ll need to do when you set up in LLC is to get an EIN, which is an “Employer Identification Number” and I should also clarify that everything we’re talking about relates to U.S. Law, everything outside of the U.S. sorry for listeners outside of the States this is more U.S based. But you can get the EIN on the Federal Government’s website not that big of a deal. I believe that’s kind of all the base legal set up. You want that corporation so you have a limited liability, and if you set it up is a Holding Group, it’s nice because if you launch a new business and it fails and just throwing it out there most likely it’s going to fail because most businesses fail, and it’s not anything about you, it's just those are just the numbers. Look at Amazon, look how many times they failed and how many times they’ve succeeded. I mean, that’s almost kind of the mantra that I think Jeff Bezos loves to live by, like we like to fail because it means we’re actually doing something, we’re trying something new. And if we didn’t win on this one, we’re going win on the next one and not the next one and the next one, so if you launch something and it doesn’t work well now you have that LLC that you can go long something else, right? You can continue to use that corporate entity. And once you have something that’s going and is working, if you have another venture you want to try, you can still do it out of that same entity.
Zach Smith: (57:54) And Thomas and I actually judiciously did this with Funded Today. The name of Funded Today is generic enough that it works really well for crowdfunding, but it also works really well if you want to get your Amazon Listing Funded Today. It also works really well if you want to get into real estate investing. It works really well in abroad array of industries that we are considering as we continue to grow, pivot and expand the company. I think its great advice as well, to not necessarily dial your company in the one particular name so that you have an easy legal setup that makes it efficient to pivot from one thing to the next.
Thomas Alvord: (58:26) Well, that’s kind of gets to branding, but if you look at the whole marketing campaign that Mailchimp has been recently running right, their tagline or what they’re saying is we’ve outgrowing our name because, we are Mailchimp but we do so much more than mail. Now we do the PPC Advertising with Facebook and not setup there and they realize, Oh! We outgrew our name. Now, again, if you outgrow too it doesn’t. It’s not necessarily bad, you can continue to operate, but it is something
Zach Smith: (59:03) Thomas I think of Amazon again, going back there, I Think of the Amazon rainforest, the diversity that it has and think of Amazon it started out as a bookstore, literally an online bookstore and Amazon is obviously a lot more than a bookstore now. If anything, it’s even probably less of the books are probably one of the least important things they do now in their company. So but they chose a name like Amazon because it has such diversity, it says diverse the Amazon rainforest, so.
Thomas Alvord: (59:27) Yes, it was A to Z Books, so you get your Cloud Computing from A to Z Books, would be kind of weird.
Zach Smith: (59:31) Could have easily been there too, and I bet they had a lot of competitors name there.
Thomas Alvord: (59:37) So, to summarize in a way, this last topic, I would say to be judicious with lawyers, don’t use too much or waste too much money, especially, for example, when the reviewing contracts, like I said, often we have worked with so many other attorneys, and it’s funny because they come back and they want these changes, that it’s like you’re the only attorney who’s ever asked for this isn’t even an issue. This is like a waste of time, and my policy is kind of like just yes change that it doesn’t matter we don’t -- I don’t want waste my time doing legal stuff right? This again legal doesn’t make you money it’s just something you have to do. So make it as quick and easy as possible, I look at something and I say is it very clear what the terms are for what both parties were doing? Is that clear? And if there’s a dispute, how is it going to be resolved? That’s really who all that really matters and we’ve actually changed how we approach things. I look by writing a contract as a form of art, it’s part of the sales process of getting people to sign a contract. We used to have a 14 page, 15 page contract, now it’s one page with some addendums, it’s very short is very simple I try to write any contract as distinct as possible.
Zach Smith: (60:57) And Thomas, to your credit, we have had zero issues with that new contract, and surprisingly we had a lot more issues with our 14 to 20 page contract that we have years ago, and so making it beautiful, making it simple, making ease understand for both parties can actually go a long way protecting yourself, believe it or not.
Thomas Alvord: (61:15) And so we have attorneys that will come to us and they will redline and ask for changes to so many different things, and there’s one provision we look at and we laugh, not that is bad that our client signed this, but we laugh because of everything that a client’s attorney could have said they fail to mention the one thing that should have stood out to them the most. And what I’m referring to is when we have clients sign a contract, we have them signed personally and we have them sign as a company. This way if we have bad actors, which we have now and again, and somebody creates a fraudulent business venture, and then they could just wind it down and say “hey, there’s no business, you can’t sue me” we can still sue them individually. Now, we don’t really sue anybody individually if there’s an issue, unless they were fraudulent or they’re like, straight up not willing to work and make any of their payments. So, it’s not an issue if you’re above board, it doesn’t matter, right and sometimes good attorneys will come back and they’ll say “hey, don’t sign, don’t be personally liable” and we explain, well here’s why we need you to sign that and they say okay that makes sense that’s not an issue that, but we have these attorneys who redline and underline and ask for all these changes, and they don’t even notice that one thing which basically it’s more like an attorney’s just reviewing the contract depending on what they ate that morning for breakfast? What they’re kind of noticing and saying “hey, change this”
Zach Smith: (62:53) If there’s advice for attorneys out there, we should probably create a checklist of here’s 20 thing you should always look at in every contract and make sure your attorney looks at these things.
Thomas Alvord: (63:02) Well, I understand yes could it matter? But attorneys that say Oh! The choice of law is Utah and the venue is Utah County or Salt Lake County and they’ll come back in there, so we want it change. Often we say, look, it doesn’t matter and if they really press we okay fine we’ll change it because it doesn’t really matter, like the chances that something is going to happen is so minimal, and if it does happen the reality is whether we’re in Utah or California yes it might be a little nicer if we’re in Utah than in California, but the likelihood that we’re actually going to have a lawsuit that goes all the way to trial, and most stuff can be done filing things online, making telephonic appearances. The likelihood were ever going to go to California is so, so minimal that I just don’t know. It doesn’t matter is just change it right. What I am saying is actually what we practice I don’t worry about all this legal stuff, especially when we’re just trying to work out a deal that might be a $5,000 or $30,000 contract. Yes, if we’re talking about $50,000,000 contract, then yes, maybe that matters, but even then the choice of venue doesn’t matter the attorneys can make a trip for a $50,000,000 contract if there’s some trial. Really the thing that would matter then is choice of law. Is it Utah Law? Is it Delaware Law? Is it California Law? And then in that case, you’d be looking at given what we’re doing is the law in this jurisdiction more advantageous to us than in another jurisdiction and what we’re doing with Crowdfunding and Amazon and marketing with 'cos it doesn’t matter, it yes I’m sure there’s some jurisdiction that one point might have some more favorable case law either for the plaintiff or the defendant, but we don’t worry about that, what we like to do is let’s do business. Let’s get going and try to avoid lawsuits, right? The last point I kind of wanted to bring up is to avoid lawsuits, treat your team well, so they’re happy then again, you never know if somebody goes rogue, and maybe the last piece of advice I’ve never heard anyone else shared this but seeing many different startups, I’ve worked with my brothers, ours be cautious of the first people that you hire. The first people that you hire typically will see the entire operation of your business. When you hire your tenth employee, your fiftieth employee it’s a big system with people doing specialized, individualized things, and so it’s harder for them to understand the whole operations to be ambitious enough to go compete. But time and again, I’ve always seen with startups the first hires are very often the ones who will go and compete with you. And I believe it’s because they see the whole operation they see start to finish, they might even be doing everything start to finish, but they know how it’s all set up and they’re helping build the business from the ground up, and I think they get in their mind this idea I’m the one putting in a lot of time and actually building this up. Why am I not getting any equity? Why don’t I have any skin in the game? I should be getting paid more right, and also the first employee is very often will know what your margins are and what you’re making. And so, in our company we had the issue, and my brother’s company they actually had a few people who went and competed and they sued to stop because literally, they just copied exactly what they were doing. So, your first hires be judicious about what you share or how much you share if possible. Maybe it’s not even possible, right?
Zach Smith: (66:49) And then the other thing you could do Thomas is to discourage this for your employees and your independent contractors put together a non-compete you could probably find them on LegalZoom pretty simply, maybe have an attorney look over it. Make sure it’s valid for whatever state you’re in. Utah has different rules than other states. So that’s where an attorney could maybe give you an hour two of their time, and have your people signed non-compete agreements and non-circumvention type things.
Thomas Alvord: (67:13) Well, and typically speaking non-competes are more and more frowned upon by the courts because they don’t want to prevent people. And I understand the public policy. They don’t want to prevent people from going and engaging in labor that they know how to do that will benefit the market, and provide a living for them and help the economy. But at the same time, your greatest threat there’s a whole episode we could do on this, your greatest threat for anybody and everything will always come from within. You think look at the lawsuit with Waymo, is it Waymo? Am I getting it right and Uber right, and I forget the details. But in that lawsuit, I might be mixing up the facts here I can’t recall exactly you have somebody who leaves Google and comes to Uber and is apparently using that intellectual property and helping Uber build their self-driving cars. And where did that come from? It came from within. Your greatest threat is always within. I mean, I look at people right? Who have a contentious relationships that they have to deal with in their life right, and the worst ones, it’s always going be with divorce right? Like the biggest pain in the side the thorn in the side it’s always going to be divorce right? It always it always comes from within. And so, in a business like, be judicious with your first hires, have the non-compete but make sure you understand the people well, you treat them well. I mean, you want to treat him well just because they’re human being right and to be respectable and kind to anybody but in terms of business as well. That’s something else you should be cognizant of.
Zach Smith: (69:02) And it’s so profound your advice here Thomas be cautious with your first hires, they will compete. I mean, Amazon, Jet.com, Bumble, Tinder. I mean, you could probably go through a name 50 of them. if you want it to a week like you said, we could probably do a whole episode on it. It’s something a lot of people don’t realize because you’re excited, you’re going ho. You’re all it’s a lot of times, your friends and you start a company, and then it turns into turmoil. So protect yourself non-competes, non-circumvents make them not completely broad so that they have a lot more applicability specify them just for your industry that you’re working in and take into account local and international and national laws. And I think you can go a long way there. But then, most importantly, treat your team well make it so they don’t want to leave as much as possible try to help them out so that they enjoy the experience, and I think you’ll have a lot better shot it, building a business that last, I’m having so good team camaraderie and overall any culture as well. And that’s our episode any final comments or things you want to add. Thomas.
Thomas Alvord: (70:05) I like what you said before you can work with an attorney, typically because they want to get your business right. The attorney that I’ve worked with when I -- when I graduated law school and took the Utah Bar they have a mentor program I don’t know how many other states have this, where for a year I met with a mentor. Now, typically, if you go work at a law firm, you’re going to work under an attorney, and they’re kind of your mentor helping you learn. I did a joint JD MPA, so I got a Master’s in Public Administration and I didn’t really take the law route and so I was kind of doing different things, obviously right, because here I am at Funded Today And so Gerard, and I think he was just doing it just to be helpful, right? Just to contribute. I don’t think he was doing at all to drum up business, and attorneys are typically encouraged to do 50 hours of pro bono work a year, and so he was just doing it to be my mentor, but he became my mentor, and then this business got going and then we have lawsuits and I didn’t have time or the experience that I wanted to say I’m going to run with this, right? So we worked with this attorney and it generated, you know, over $100,000 as we’ve had legal issues come up here, legal issues come up there. And so I would recommend, if going back to what Zach said though an attorney will sit down and talk with you and typically spend an hour just seeing what your cases, what issues you have, and so if you have stuff go chat with an attorney, chat with a few attorney, see what they’re going to do, but be judicious. I mean we’ve had other attorneys where we’ve had where we’ve done some work, and then they keep sending us an email, saying I got this in the mail and then they send us an invoice for $100 bucks, just like stop you’re not authorized, don’t bill us anymore, right? We don’t like don’t answer your mail for us or anything. We don’t want any more legal fees, right? Be judicious and spend some time on the legal issues, but don’t spend too much time. Focus primarily on your business and make it happen.
Zach Smith: (72:15) Love it so that is our episode. And as we always like to do, our favorite part of the episode is probably are Funded Today Products of the week and today I’ve got one that is actually just barely launched on Kickstarter it’s by a former client of ours LIVSN, and this is their 2.0 of their Flex Canvas Pants V2. These are awesome if you’re an outdoorsy person, we live in Utah, so we love to get outdoors and hike in camp. These are probably the pants for you, but they’re not just for the outdoors these are also pretty refined, you could wear them to a business meeting. They have everything I mean let me just list off some features, waking mesh interior liner, internal zipper pocket for security, extra deep vented pockets, the back of these pants the butt part of it, and again without getting too personal I’m known to kind of have, ah, bigger butt it’s like my ass apparently, it’s got the amazing cushy soft vented butt portion of these pants that make them really light, really breathable all kinds of flexibility. You can ride a bike on these amazingly well if you commute to work or if you’re into that sort of a thing. Leg seams flat felt seams for strength, it's also code with C6DWR, which basically makes it repel water and stains, these are awesome and they’re already off to a really good start $31,799 bucks raised just barely launched like I said, check them out, I think you’ll love them “The Flex Canvas Pants V2. Thomas, what you got for us?
Thomas Alvord: (73:42) So you have the pants and I have the belt. It’s the SMART BELT 3.0, and this belt is on track to raise over million I think all of their belts have raised over a million. It’s super popular belt and looking at it, I’m thinking, I’m going to get me one of these. I don’t think that’s proper English, but you know what I mean. So it’s an Italian leather, its super clean looking, and it has a Kevlar Core, and it’s one of the belts that have the micro adjustments. So instead of the holes in the belt where you put the prong through it has these little micro adjustments on the back on the inside, where their little notches. So you can get it to be exactly the size you want and then there’s no part hanging out like you typically have and so that’s the SMART BELT 3.0 and you can get one of them on Kickstarter right now for $59.
Zach Smith: (74:45) Awesome, and we’ll link to these on our website fundedtoday.com/podcast. Thanks again so much for listening. Now funded today nation what did you like about this episode? What do you want us to ask our next guest? Who do you want us to have on what you want to talk about? We’d love to hear from you. Please email us. Leave us a comment on our website fundedtoday.com/podcast or give us a review. We read every one of those they really keep us motivated, just got a great one in a couple days ago. I said that I was reading and they help us don’t want to come back and keep creating some more great episodes for you. Next time based on your feedback, we’ve actually put together something pretty amazing I think you’re going to love. We’re calling it “the ultimate crowdfunding prelaunch checklist” and we’re to go over it line by line, then we’re going to give it away you for free. You’ll be able to print it off and use it as a reference system to keep you on track as you progress towards launching your next big idea. By the time you check off that last one, you will a 100% be ready to launch, and this takes away a lot of the guesswork, a lot of the stress, a lot of the worry walks you through month by month of the entire process. I think you’re going to love it. It’s comprehensive, beautifully designed and most importantly, it’s put together by all of our team at Funded Today who have together raised more than $250,000,000 for nearly 3,000 projects worldwide. I think you’re going to get some massive value at from it. So tune in next time and remember, like always, don’t wait until tomorrow get funded today
Announcer: (76:09) Funded Today is the worldwide leader in Rewards Based Crowdfunding on Kickstarter and Indiegogo combined they have raised over $200 million and counting for thousands of new ideas and inventions worldwide. If you got an idea for a new product or invention visits fundedtoday.com to speak with one of their experts.
Projects of the week
References and Resources
Funded Today: Podcast: “Life After Crowdfunding: Amazon Presentation”
Funded Today: Podcast: “Ultimate Crowdfunding Pre-Launch Checklist”
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