SaaS Legal Consulting

Business Law - Hire Good, Smart People To Ask Good Questions

Sunday, August 29, 2010 by David Castor

I was reminded today of something told to me by a friend last year:

Good people who are smart ask good questions

Bad people who are smart ask bad questions

Good people who are not smart ask bad questions

In business we are always looking for answers – but what we really want are good answers. Today the issue is never whether we have enough data (we arguably have too much), it is whether we can properly utilize that data to make better decisions. I see this especially in my Internet Law / SaaS law practice where an immense amount of data is available. Analytics and business intelligence tools can help – but they are still based on one critical factor:

It still takes good people who are smart to ask good questions before any data analysis tools can help develop good answers.

Think Enron and Madoff for examples of smart people who are "bad" and purposely misuse data to manipulate and misrepresent answers.

See also:

Entrepreneurial Law - Developing a Good Business Model
Culture of Private Equity
Entrepreneurial Law - Proof of Concept & Proof of Scale
Fatal Flaws in Leadership
Keep the Good Ideas Coming but Stay Focused
Business Law - 10 Common Negotiation Mistakes
Funding Law - Presentations to Investors

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Business Law - What Happened to Business Ethics?

Monday, August 2, 2010 by David Castor

The post below is fantastic. It is by Michael P. Alerding, CPA (my business partner's father) at his accounting firm's new blog site. He gave me permission to re-post it here (thank you Alerding & Co.). Check it out: Alerding & Co. Blog

What Happened to Business Ethics?
By: Michael P. Alerding, CPA

Every time I get a contract to sign, I find it almost impossible to spend the time reading the fine print and trying to understand all of the future implications of the agreement. As my son, the attorney always reminds me, “Words mean things”.

I made an airline reservation the other day and for the first time read all of the fine print associated with the “contract” to provide me with transportation. The rules were almost limitless and included some scary matters associated with timing (being to the gate on time), cancellation (flight may be cancelled without notice) and my “rights” as a passenger (not many). Having traveled quite a bit for over 40 years, I thought I understood that if I pay for a seat on a plane, the airline had the obligation to provide me with service and transportation. Well, maybe……….

Reading emails is almost as difficult now as signing a contract. Almost all business emails have the disclaimer, running anywhere from 100 words to 300 words, discussing the limitations for use of information included in the email. Although I try not to print too many emails, I probably waste one out of every three pages when I do printing the gibberish relating to limitations. Remember, words mean things. Does that mean that every time you send an email to someone you are effectively saying that you really don’t mean it and they can’t rely on what you have said? Words mean things?

We now, and have been for decades, live in a society of mistrust and a CYA mentality. Whatever happened to business ethics? What happened to the day when a deal was a deal not because my words were better than yours or because some litigation in the Fifth Circuit Court favored my position vs yours, but because it is the right thing to do? This “gotcha” mentality has become a game for businesses. The only winners are usually the lawyers and we just keep doing the same thing over and over. As Michael Crichton said so very well, we have created a “State of Fear”.

Have we forgotten basic business ethics and standards of conduct? Have we lost sight of the basic concept of doing the right thing because it is the right thing to do? Do we lack the self confidence needed to judge our own actions and, instead, leave the determination of what is the right thing to do to some judge, a jury or an arbitrator? When did we lose our innocence about what is right or wrong?

After a heated and long discussion about corporate responsibility in an audit committee meeting a few years ago, one of the elderly and very wise members of the committee sat silently during the discussion. After all of the give and take on whether it made good “business sense” (aka “profit” sense) to implement a corporate policy that would protect customers in the event of a mistake made by the corporation, there was a lull in the conversation and the old gentleman finally spoke up. In a very quiet, but direct voice, he simply said, “We need to do this simply and only because it is the right thing to do”. It was profound and the committee sat silently. The motion passed unanimously.

Simple and uncomplicated business ethics still has a place in our society and in business in particular, but it continues its downward spiral into the lower rungs of our conscience. Doing the right thing because it is the “right thing to do” needs to make a comeback – and it needs to happen soon.

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Business Law - Why Is Profit A Negative Thing?

Friday, July 30, 2010 by David Castor

One of my favorite movie scenes is from The Jerk. Navin Johnson is working at a carnival guessing peoples weight. He is talking to Frosty, his boss:

Navin R. Johnson: [bleakly] I've already given away eight pencils, two hoola dolls, and an ashtray, and I've only taken in fifteen dollars.

Frosty: Navin, you have taken in fifteen dollars and given away fifty cents worth of crap, which gives us a net profit of fourteen dollars and fifty cents.

Navin R. Johnson: Ah... It's a profit deal. Takes the pressure off. Get your weight guessed right here! Only a buck! Actual live weight guessing! Take a chance and win some crap!

It is amazing how easy it is for business professionals to take their eye off of profit. I see this often in my business law / funding law practice. Key employees easily ignore profit while focusing on their client projects and immediate incentives – ignoring the fact that company profit gives them long term advancement potential. Business owners get tied up with client sales and revenue projections – ignoring the bottom line purpose of what they are building – to make profit.

It bewilders me how many professionals don’t know how to determine whether they are profitable. A business owner recently told me about a sales reps’ excitement of landing the $50k deal that had already cost $20k to secure and will cost another $30k to $40k to fulfill. Way to go!

I also find it interesting how profit has developed a negative connotation in so many business circles. Business cultural goals are considered personal, meaningful and someone enlightened. Profit goals are considered a “numbers guy” thing. I am a big believer in creating the right company culture - but fact is cultural goals cannot be met if the company is not profitable.

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Business Law - Morning People

Monday, July 19, 2010 by David Castor

There is a great article in the July-August edition of the Harvard Business Review entitled The Early Bird Really Does Get the Worm. The article summarizes a study which found a correlation between "morning people" and career success. This is based on a number of traits which are commonly found in morning people.

Traits
Agreeable
Optimistic
Stable
Proactive
Conscientious
Satisfied with Life

Being a morning person, of course I loved this! Most days I am the first in the office. I love getting my to-do lists together early each morning and executing on the list throughout the day. I have found this to be an extraordinarily important practice in building and managing a successful law firm.

I have never understood evening people. It seems that they miss out on too much and are always in reactive mode rather than proactive mode. That creates a stressful life. Of course that is not always true - I know many who are actually much more organized than me and run great businesses.

The study did find some positive traits of "evening people". They tend to be more creative and intelligent than morning people. I fully agree with those points! The study also found that they tend to be more extroverted. That is probably true, but I have not noticed that point to the same degree. At any rate, those are traits that are necessary in any balanced business team.

See also:

Entrepreneurial Law - Developing a Good Business Model
Culture of Private Equity
A World of Private Equity
Rules of Funding
Entrepreneurial Law - Proof of Concept & Proof of Scale
Fatal Flaws in Leadership
Keep the Good Ideas Coming but Stay Focused
Business Law - 10 Common Negotiation Mistakes
Funding Law - Presentations to Investors

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Build Your Business Model Around the 7 Deadly Sins?!?!

Thursday, May 13, 2010 by David Castor

I recently read a summary of a lecture on applying the seven deadly sins to software development. The sins are:

Lust	Obsessive or excessive thoughts
Gluttony	Over-indulgence, over-consumption
Greed	A sin of excess like lust and gluttony, but in reference to wealth
Sloth	Laziness, indifference, apathy
Wrath	Uncontrolled feelings of hatred and anger
Envy	Resenting another because they possess something you do not
Pride	Excessive love of self

The idea is not to sell products leading to the sins themselves but to creatively apply the concepts of one or more to your software product to create an appeal and addictiveness factor to your product. I wonder if the same can be applied when customizing a product / service for a new business or market opportunity.

Lust	Do you touch a deep seeded relational need in people?
Gluttony	Do you tie into a desire for comfort or consumption?
Greed	Do you solve financial or monetary needs of your customers?
Sloth	Do you create efficiency or freedom of time for your customers?
Wrath	Do you provide a forum for dialog, debate or conflict resolution?
Envy	Do you provide customers a higher standard of living?
Pride	Does your product/service provide customers a sense of identity?

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Other posts that may of be interest

SaaS Law - Don't Use the Word "Affiliates"
Entrepreneurial Law - Proof of Concept and Proof of Scale
Good Metrics

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Alerding Castor Hewitt Proud Sponsor of Adoptions of Indiana (AD-IN) Annual Golf Outing

Monday, April 26, 2010 by Lainey Scheetz

You might wonder why an Indiana law firm with a practice in several areas of technology (Indiana Internet Litigation, SaaS Legal Consulting to name just two) finds itself supporting a golf outing that raises money for adoption? "As a firm that prides itself on supporting the local community, we don't always align our charitable giving strictly to serve our immediate demographic. There are many organizations deserving of our support and Adoptions of Indiana is certainly one of them," comments Dave Castor, Founding Partner and lead counsel in the firm's involvement with Internet-based companies.

On Tuesday, August 31st Adoptions of Indiana will host it's third annual golf classic at the Golf Course of Indiana. Now in its third year, this event looks to build upon past successes and top past earnings to ensure that critical programming continues for birth parents and adoptive families alike.

Adoptions of Indiana was founded in 1995 by professionals in the fields of mental health and social work whose lives were personally touched by adoption. ADOPTIONS OF INDIANA is a not-for-profit 501(c)(3) corporation that is licensed by the State of Indiana as a child-placing agency.

The agency is a member of the Joint Council on International Children's Services, the North American Council on Adoptable Children, and Indiana’s Adoption Coalition. In addition to being licensed in the state of Indiana, they are also licensed and approved by the state of Connecticut to assist their families who are adopting children born in Indiana.

Adoptions of Indiana works with highly respected and well established adoption agencies and adoption attorneys throughout the United States. Our agency provides domestic and international adoption services to Indiana residents.

SaaS Licensing Payment Terms

Monday, April 19, 2010 by William Boncosky

We all know the beauty of the SaaS business model: great cash flow from up front payments, recurring revenue from clients that renew, ratable revenue recognition that results in smooth rather than lumpy revenue models, etc. But what if during your licensing agreement negotiations the client is pushing back and threatens some or all of these SaaS model advantages?

This is when its great to work with attorneys that have extensive SaaS legal consulting backgrounds; attorneys that not only understand ASP law or cloud computing law but can help achieve business goals during licensing agreement negotiations.

If a client does not want to pay up front, provide and incentive for them to do so. Give them 60 day payment terms and a 2% discount for paying for a 1 year subscription / license up front. That's better than receiving payment over a 13 month term, no? And if you are a start-up struggling to manage cash flow, a small discount for an up front payment is a small price to pay.

If this is a consistent issue, consider incentivizing your sales force for up front payments. Give them a bigger / better commission for clients that pay up front within 30 days.

Three Things Every Entreprenuer Should Know

Wednesday, April 7, 2010 by David Castor

I had the privilege of speaking at the Rainmakers Incubator event this morning. I thought the Rainmakers team did a nice job organizing the event - even with a last minute change in location due to factors outside of their control. Thank you guys for the opportunity to join you this morning!

The topic given to me was "Three Things Every Entrepreneur Should Know." My legal practice focuses on entrepreneurial law, funding law, SaaS business law and securities law. In these fields I see a lot of business models for emerging companies and read a number of business plans - close to two a week. When the topic was given to me I figured that the talk would be easy to organize as I review every business model under a 3-prong analysis.

So, here is the cliffs notes version of my talk.

There are 3 things that any successful company must have in order to be successful:

1. The right market opportunity
2. The right management team
3. The right capital structure

If any of these are broken, move on - the business will fail.

The right market opportunity is more than just a great idea to hit a hole in a market. The entrepreneur (or private equity investors) should satisfy 3 proofs:

1. Proof of Concept
2. Proof of Scale
3. Proof of Commercialization (at profit)

For management team, beware of the scientist syndrome. If the visionary is a scientist whose ultimate goal (in all honestly) is to advance his science, move on. If the visionary does not understand corporate finances or cash flow models, move on. Take on partners ONLY when you NEED them - not just when you like them, are buddies with them, or are related to them.

For capital structure, if you are raising private equity, set specific goals and milestones for equity raises. Consult with a securities attorney who not only understands the law related to equity raises, but also understands how to get deals done.

Side note - most attorneys don't understand the private equity landscape. Don't hire your cousin the divorce attorney to help you with your equity raise. Of those attorneys who understand securities law, all of them should be able to draft investment documents for you - but that is the easy part. Find one that understands corporate finance and will help you model your capital strategy and help you meet investors. That is the harder part - and I meet very few attorneys that are capable or willing to do this. This is a point that I believe sets my firm aside from most.

If you are not raising capital, be specific on your cash flow projections. Revenue projections should be an educated guess, but expenses can be largely known. Most early stage companies have more fixed expenses than variable costs for their first year or two. There is no reason that you should not be able to budget for this and keep costs under control.

Rules of Funding

Thursday, March 11, 2010 by David Castor

There is a good article on the Mercury News Blog today on How dot-com start-ups have changed 10 years later. The article addresses the maturity of both technology companies and US private equity investors over the last decade. It is an interesting read.

There has been a lot of activity in angel investor groups and venture capital investments in Indiana technology companies over the last few months. 2010 has definitely started with a bang at Alerding Castor Hewitt where we have helped five companies secure funding this calendar year. I am traveling with two technology clients in a couple of weeks to meet with investors in Southern California.

Still, the same rules apply when seeking funding. An early stage company looking for funding must prove:

1.    Management Team (including expertise in field and proven financial and leadership ability)
2.    Market Opportunity (including the need, ability to meet the need and scale)
3.    Investment Opportunity (is the expected return worth the risk of investment)

Partners in Success - Den of Deliverability

Wednesday, February 24, 2010 by Chris Stephen

Your friendly neighborhood technology legal counsel here: One of the greatest aspects of our firm is the fact that we, as attorneys, get to partner with our clients to assist in the development of their dreams. Additionally, while we focus on being the general counsel for all business types and sizes, one of my personal areas of passion is seeing new technology based clients develop and partnering with them to see their success.

One such emerging company that I'm happy to say we are partnering with is Den of Deliverabilty (www.denofdeliverability.com) ("DoD"). DoD is a start-up for which we've done SaaS legal consulting. They are focused on assisting their clients in getting their e-mail messages to the end user and drawing the distinction between "ham" (mail that people requested and want to receive) and "spam" (unsolicited commercial electronic mail). This process can be much more arduous that one might initial think, but luckily, DoD can help any business maximize their marketability through the proper use of commercial electronic messaging.

I'm very excited to see this company take off. They have great ideas and really cool software components that I think are going to be essential to any business. And just for fun legal disclaimer (what do you expect, I'm a lawyer) as I mentioned, I, and this firm, have done legal work for them, but we are not otherwise compensated by them.

So if you think this is something that your business might benefit from, check these guys out.

2010 Top 50 Indiana Super Lawyer: Brian Hewitt

Thursday, February 18, 2010 by Janet Monroe

Indiana Probate Litigation, Indiana Entrepreneurial Law

Congratulations are in order to Brian Hewitt, the newest parter of Alerding Castor Hewitt, LLP, who was recognized this week as one of Indiana's 2010 top 50 Super Lawyers.

Brian concentrates his practice on estate, trust, and guardianship planning, administration, and litigation; and mediation and business law.

He is a Certified Estate Planning and Administration Specialist, a Fellow of the American College of Trust and Estate Counsel, and a member of the Probate Litigation Committee of the American College of Trust and Estate Counsel.

Brian has spoken widely at continuing education seminars on estate planning, business succession, litigation, and mediation.

Congrats Brian!

We are proud that you have chosen to join us as a named partner of Alerding Castor Hewitt, LLP, an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Where Have I Been? - 2010 Update

Thursday, February 18, 2010 by David Castor

I have taken a few weeks off of blogging. Honestly, I felt like I needed the break, but I am excited about getting back on the saddle and writing again.

Since it has been a few weeks, let me give a brief update on what we have been up to. Alerding Castor Hewitt has had an exciting beginning to 2010. On January 1, Bill Boncosky joined us. Bill is a business attorney / technology and SaaS law attorney working with privately held companies, primarily in technology industries. Bill has spent the last seven years as General Counsel at ExactTarget. We all have much to learn from him and are thrilled to have him as part of the team. The IBJ put out a nice article in January on our firm's focus on entrepreneur law and Bill's joining us in this field.

This week Scott Kreider joined our business litigation group. Scott adds to a team headed up by Mike Alerding that handles a difficult and necessary discipline for any full service business law firm – handling business disputes. It is great to have him aboard. Also, Mike made the IBJ's 40 under 40 the other week. Good stuff.

Over the last few weeks our firm has helped four clients through capital funding processes - three from angel investors or private equity firms and one from a venture capital firm. It is always encouraging to see business clients grow, and we count it as an honor to be part of their process.

We have also been involved with many businesses and business owners through customer deals and strategic business growth matters. We will write more on some of those matters in future posts.

I was a guest lecturer the other week at Purdue’s entrepreneurship capstone course. Man I felt old, but I was very encouraged by the enthusiasm, drive and smarts from this class.

So there is the fire hose version of the last few weeks. 2010 is off to a strong start for ACH. I am looking forward to what is coming down the pike.

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

What Does Your Attorney Know about SEO?

Tuesday, February 16, 2010 by Janet Monroe

SaaS Litigation, SaaS Legal Consulting, Software Litigation, ASP Law

Keeping up with software clients can be a challenge for technology legal counsel.

The software as a service industry evolves quickly, time-lines are condensed, and the playing field yesterday can look decidedly different than it looks today. The name of the game for a SaaS company is to stay ahead of the pack and become known as THE leader in its industry.

I recently read an article in Entrepreneur magazine about Search Engine Optimization titled What You Don't Know About SEO.

What I DO know is that many of our clients could have written this article.

For those of you interested in Internet marketing, here's an excerpt about targeting keywords to help drive search results that our friends over at Compendium Blogware could have written:

"Google, of course, is the web-search alpha dog. But all the others--Bing, Yahoo, Ask.com, Lycos--are sniffing out the same stuff.

What gets their attention? Good, fresh, focused content. Adding a blog is one of the easiest and most straightforward ways to bulk up on content. If you sell hair-removal devices, for instance, start a blog that explores all aspects of waxing, plucking, threading, electrolysis and so on. Over time, your site will accrue searchable heft.

The trick is to be hyper-conscious of your keywords. For example, if you want web surfers on the prowl for "eyebrow waxing" to find your site in search engine results, organically work the exact phrase "eyebrow waxing" into each blog post (maybe multiple times), and use it on all static pages related to eyebrow waxing. Lather, rinse and repeat with every term and phrase you want to rank for.

Before you start writing content, though, research and plan your keyword attack. Is geography important to finding your customers? Then maybe "California eyebrow waxing" is the phrase you want to home in on."

Just a brief example of the world I'm living in by working in the area of SaaS legal consulting, I have the absolute privilege of working with high-tech, fast growing companies. Truly partners in success, I and the other attorneys of Alerding Castor Hewitt, LLP who practice in the area of technology legal counsel welcome the challenge of keeping up with the pace of this industry.

ALERDING CASTOR HEWITT LLP PARTNER NAMED TO FORTY UNDER 40

Thursday, February 4, 2010 by Lainey Scheetz

FOR IMMEDIATE RELEASE
February 4, 2010
Contact: Lainey Scheetz
317.403.9012
lscheetz@alerdingcastor.com

ALERDING CASTOR HEWITT LLP PARTNER NAMED TO FORTY UNDER 40

Indianapolis, IN – Alerding Castor Hewitt LLP is pleased to announce that Michael Alerding, a partner at the firm, has been named to the 2010 Indianapolis Business Journal’s Forty Under 40 list. The list recognizes local business and professional leaders who have achieved success and excelled in their field before the age of 40. Those honored have demonstrated leadership, initiative and dedication in pursuing their careers, and are likely to continue to achieve in the future.

David Castor, partner at the firm states, "Michael has served the professional and civic community of Indianapolis for many years. I am proud to be a partner of his as he brings with him a strong commitment to our vision while balancing that with a solid family life. Michael represents what we should all strive for - personally and professionally."

Prior to forming Alerding Castor Hewitt, LLP, Alerding was a partner at Sommer Barnard PC and Bingham McHale LLP.

A 1989 Cathedral High School graduate, Alerding received a bachelor’s degree in journalism from Indiana University before pursuing his law degree at IUPUI. He was admitted to the state bar in 1997, the same year he graduated with honors.

Alerding is a husband and a father of three young daughters. “I don’t need to make a whole lot of money nor do I want to necessarily,” he said. “The desire to feed my family is what gets me out of bed in the morning, and everything I do is for the sake and purpose of my family.”

Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Your SaaS Customer License / Subscription / EULA

Tuesday, January 26, 2010 by William Boncosky

For SaaS companies, the customer agreement is critical. Why? A SaaS relationship is not a 1-time purchase of software to be installed. The SaaS customer agreement is a document which will govern (what you hope will be) a long-term relationship with your client. It must cover the software license aspect of the relationship, the ongoing maintenance, upgrading and use of the software and - often overlooked - the professional services to be provided by the SaaS company to the client. The standard software license agreement is simply not sufficient. And please do all you can to talk your REALLY BIG client from insisting that you use a form purchase agreement.

I recommend a "Subscription Agreement" for the use of the software. This makes it clear what you are providing to the client - not a license to use software but access to a service during the subscription period. The SaaS client must also consider the relationship professional services play and the nature of the SaaS service being provided. Each will require customization of your SaaS customer agreement.

SaaS legal consulting requires a novel approach to client agreements. Knowledge of ASP law, SaaS litigation issues, cloud computing law, etc. is just a start. Make sure you discuss the unique nature of your SaaS service with a experienced SaaS law counsel so that you put the best agreement possible in front of your clients.

Check Out The Butler Accelerator

Thursday, December 24, 2009 by David Castor

Entreprenurial Law - Accelorator Program

Closing in on the end of 2009 I have to say that I am quite pleased with the commitment Indiana showed this year to be a State that supports and promotes innovation, entreprenuership and business growth.

This week I had breakfast with Larry O'Connor, Executive Director of Butler University's Business Accelerator. Larry is a former CEO of Bank One Indiana. Following his "retirement", Larry became CEO of The IndianapolisMuseumm of Art, and recently took the position to lead theAcceleratorr program.

On the program's website, Larry describes theAcceleratorr as follows:

Operationally, the Accelerator is a consulting business designed to serve middle market companies in Central Indiana. Teams of professional consultants, faculty and students work directly with these companies - helping them to grow and simultaneously providing a living laboratory in which undergraduate and MBA students learn and experience real business problems and situations.

While Butler is continuing its work with mid-market companies, 2009 also showed growth of incubator programs and the birth of new angel investment groups in Indiana. As an entrepreneurial law / private equity attorney, the health of these groups means a lot to me in terms of support and growth of my clients.

2009 was a strange year for businesses. Private capital was hard to come by due to economic constraints. Lending was tight. The corporateenvironmentt seemed to be mired by corporate fraud (Madoff, Durham). Despite all of this, Indianapolis proved to be a great place for businesses to launch and grow.

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

SaaS Law – Don’t Use The Term “Affiliates” - PART II

Tuesday, December 15, 2009 by David Castor

The other day I wrote a post on my reasons not to use the term "affiliates" in licensing agreement negotiations. See post here. My general point is that the term has no common meaning in the law and may create ambiguity in the contact.

I addressed several different definitions of the term in laws, but the term is not only defined differently in law, it is also used differently in business.

For accounting companies, for instance, the Interstate Commerce Commission defines the term as companies controlled by the accounting company alone or with others under a joint agreement. So, “affiliates” falls outside of typical entity ownership structures and to companies with controlling interests through contractual relationships.

In the banking industry the term is commonly used to refer to an FIB which processes credit card data for other financial institutions or financial institutions that issue MasterCard or Visa cards. The term here has nothing to do with ownership structures.

In television and radio industries, affiliates are companies not necessarily under common ownership which have contracted with a network to broadcast its programs.

In the Internet world a marketing affiliate refers to a company who links to another company via a weblink which then allows the hosting company to obtain a commission on sales made as a result of user’s clicking through that link.

"Affiliate" is a term that is used in contracts when the parties want to refer to an entity relationship but do not want to take the time (or don't know how) to define it. Again, it is best to avoid this term, but if you must use it, make sure to define it clearly in the contract.

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

SaaS Law – Don’t Use The Term “Affiliates”

Monday, December 14, 2009 by David Castor

There are several scope of license issues to work through when handling license agreement negotiations. In my SaaS law (SaaS legal consulting) practice I often see licensees wanting to open the scope of the license to its “affiliates”.

For many larger SaaS customers this makes sense as these businesses often operate as families of companies rather than single operating entities. The customer may need to open the license to its other companies in order to properly use the software. Just last week I was negotiating a Software License and Services Agreement with a Fortune 100 company that has over 50 companies in its U.S. operations alone. They needed SaaS user seats for most of these companies.

The problem with the term “affiliates” is that it is not precise and may mean different things to different parties. Some contract terms have clear legal meanings. For example, “subsidiaries” commonly means companies which are owned and controlled by another company. “Parent” commonly means the company that owns the subsidiary. “Joint venture” commonly means a contractual relationship between two companies to engage jointly in a particular operation.

“Affiliates” does not have a common meaning for most contractual purposes. At the highest level the term points to a working or organizational relationship between two companies, but it is unclear how related the two companies have to be in order for them to be considered affiliates. For example, are joint ventures affiliates? Are management companies or consulting companies affiliates?

The term is defined differently in Federal and State laws and by legal dictionaries.

The Banking Act of 1933, for instance, contains a very broad definition as any organization that a bank owns or controls by stock holdings, or which the bank's shareholders own, or whose officers are also directors of the bank. This definition is probably much broader than most licensees intend and most licensors are willing to accept.

The IRS defines the term much more narrowly (for purposes of consolidated tax returns) as a group of companies whose parent or other inclusive corporation owns at least 80% of voting stock. This definition may be more narrow than the licensee intends.

The Investment Company Act defines “affiliates” as a company in which there is any direct or indirect ownership of 5% or more of the outstanding voting securities. I am not sure if any licensee or licensor is intending that precise scope when using the term.

Black’s Law Dictionary defines the term broadly as a corporation that is related to another corporation by shareholdings or other means of control. By that definition a management or consulting company could arguably be considered an affiliate.

The Ninth Circuit court recently adopted the Black’s Law Dictionary definition as it applies to the TCPA (an opt-in privacy law related to telephone marketing), but interestingly, the court also determined that because there was no direct contractual relationship between the two companies, they were not affiliates. Thus, the court apparently also needs to see a contractual relationship between the businesses for them to be affiliates.

Finally, a note for Indiana technology companies – Indiana Code 23 (the Indiana business statute) does not define “affiliate” and Indiana courts have not yet addressed the definition in a business structure context.

You see the point. The term is messy – which is why it should be avoided. The point of contracts is to be clear and avoid ambiguity. This term can create ambiguity and lead to unnecessary disputes down the line.

Entreprenurial Law - Proof of Concept & Proof of Scale

Tuesday, December 1, 2009 by David Castor

New technology businesses usually face two hurdles to get their product to market. The first is proof of concept. The second is proof of scale.

Both are intended to solve the “Ability” stage of the business plan process and move the business into the "Meeting" stage:

Recognition of Market -> Recognition of Market Opportunity -> Ability to Meet Market Opportunity -> Meeting Market Opportunity at Profit

Proof of concept is simply the proof that the business can develop a working prototype that solves the market opportunity issue. For a software licensing company this will be development of a bare bones software program, usually without user interface design or additional back end functionality. It solves the most basic questions of whether the contemplated design will meet intended functionality.

Proof of scale is the initial to-market phase that proves the business can scale the technology (or good or service) to satisfy the market opportunity at a profit. Some of the issues to address at this stage include:

Adequate capital
Quantifiable customer demand
Number of sales force required
Adequate supply chain (in terms of cost, quality and time)

After proof of scale is satisfied, a business is usually in a more stable mode with its product (or service) satisfying the market opportunity at a profit.

As an entrepreneurial law / SaaS law attorney, I have helped several clients work through these and many other issues in the “proofs” stages. I find that few business fail to address the proof of concept stage well, but many ignore issues in proof of scale. One of the key issues to address early is quantifiable customer demand for YOUR product as many of the other issues spring from this one.

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Good Metrics

Monday, November 23, 2009 by David Castor

What are your metrics for business success? I attended a non-profit board meeting this past week where the directors were working through this question - "How do we measure success?"

A common metric that was discussed was # of volunteers in the organization in ___ years. Although this metric does measure growth, it does not measure the quality of growth. What if the volunteers are under committed, under trained or just plain lousy at their job? You may meet your metric but find that your organization is under serving the community, or worse, frowned upon by the community it is trying to serve.

Similar metrics are common in business plans where I often see # of customers as a metric for growth. I also saw this problem with the prior administration of Indiana's 21st Century Fund where creation of jobs was the key metric for grant opportunities. The problem there is that there are good jobs and bad jobs - purely measuring # of jobs does not distinguish between the two. I could create tons of hourly pay jobs today if I wanted, but those jobs would be low wage and temporary. Not the type that would ultimately benefit the State. In short, the metric is not a good measure of success.

The difficulty with metrics is that they can come in just about any form you can imagine. They are simply a way to measure growth. The key is to tie them in with the ultimate goals of your organization. Most companies do not want growth at the cost of profitability. Personally, I would rather run a small shop with higher profit than a large shop with smaller or no profit.

So, here are a few poor and good metrics for successful business growth:

Poor metrics:
# of employees
# of customers
# of square feet of office space

Good metrics:
Net Profit at $_____, based on Revenue of _____.
% of customers at ___ % margin
___% profitability margin per employee

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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

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