We have recently seen a large number of companies in the social media space attract significant amounts of funding and then falter, or fail, in closing financing rounds. Whereas many held the promise of reaching astronomically high valuations they are now worth only a few million dollars, and in some cases less.
Companies that have managed to scale, and “go viral,” have from my observations done a number of things right. I highlight them below and try to correlate to steps in-house counsel can take to help ensure the company does not stumble when coming out of the starting block.
Creating a product road map
Companies that last and are successful continue to innovate. When version three of their product hits the market the engineering, marketing, sales, and operations teams are already running verification tests on version six. To avoid being a flash in the pan they offer their customers a road map — a compelling product evolution.
For counsel this means working closely with the design teams, filing provisional patent applications, entering into evaluation agreements with early adopters, providing for robust technical support terms for current products as well as future updates and upgrades, and getting out in front of the curve to bird-dog potential issues with qualification, testing, regulatory approval, and other compliance legislation.
Going viral does not just happen on its own
Facebook was launched at Harvard, and then grew in use in Ivy League universities before going viral. Twitter was launched and went viral at South by Southwest in Austin.
It is important for in-house counsel to appreciate how going viral does not simply happen and how viral moments need to be carefully staged. Licences, for example, may need to be negotiated with other social media tools such as Facebook and Twitter so they integrate with your client’s tool.
In-house counsel will be called upon to advise on multiple issues regarding when to time the tipping point. Should steps be taken to file for intellectual property protection before the product is launched? What is the first sale doctrine and are there equivalents outside the United States? How useful are software patents anyway? Is it best to tread carefully and sign up alpha and beta testers to non-disclosure agreements and carefully guard disclosure of the opportunity? Will too conservative of an approach hold back growth, or is it best to simply assume some risk, gain a first mover advantage, and simply surge ahead?
Moving quickly may mean increasing time to revenue, resulting in less or no dilution of your client’s stock. Underlying all of those decisions are legal questions regarding intellectual property protection, disclosure, format and complexity of legal agreements, and the like.
Working closely with marketing and sales to assist with ad revenue agreements, sponsorship agreements, revenue sharing contracts, endorsement agreements with celebrity social media influencers, leases for pop up shops, etc. in short order are important steps in paving the way for that moment when your client’s tool goes viral.
Enhancing enterprise value
It is important to reflect on what builds enterprise value. Establishing a clean chain of title with regard to intellectual property is critical to future financing, partnerships, and exit strategies so agreements with employees, consultants, and partners need to be tight and clearly written. Patents should be filed wherever appropriate to enhance your client’s valuation.
Contractual clauses giving third parties a say in your client’s change of control or assignment should be avoided, if not outright banned. Government programs such as the Industrial Research Assistance Program, Natural Sciences and Engineering Research Council, and others should be investigated to determine whether non-dilutive grants are available.
Legal counsel should work closely with investors, the board, and external bankers to pull together information for designers with regard to optimizing product design that will support the company’s valuation. For example, counsel has a role to play in informing development teams that features and functionality should be built into the tool’s shopping cart to analyze purchaser’s shopping patterns.
Built-in features can provide a considerable amount of information with regard to abandonment (i.e. the point at which a potential purchaser decides not to purchase the tool for example because of shipping costs, price, or product comparisons). Having those data points can considerably increase the fee ad agencies will pay per subscriber to enable better monetization of the service.
Social media companies ultimately live and die based on advertising revenue. Legal counsel can provide leadership to the team by ensuring the company is fixated on developing and implementing a monetization model. It is not enough to build cool technology; it has to be designed in such a way that advertisers can leverage off it, and your client needs your support in developing online and app advertising, product sponsorship, and product sales.
Urgency and expediency
In addition to being mindful of all of the above, social media companies that have gone on to greatness are obsessed with urgency and expediency. Its lawyers have to deal with a bewildering variety of legal issues that come from operating in the digital sphere, which is often short on law and precedent. Their passion and fervour is palpable. They cannot afford to be the department that says “no”; they need to be enablers.
Lawyers who are perceived as a perpetual roadblock are often dispatched or assigned roles not on the critical path.