When Innovation Is More Than Technology: Software Company Allows Customers to Steal Their Software

Freakshow Industries implements innovative business model for its music tech software by letting customers “steal” the software.

As Freakshow says:

We fight crime by legalizing it. You can’t break an agreement you never made.

Creating products in the digital world can be difficult. Anyone can steal and reproduce your products at will. Copy protection is weak and generally only hurts your paying customers by making their experience inconvenient. I have a pile of license fobs as testament to this.

Some companies provide freeware and simply don’t charge. Others put out a tip jar. Freakshow Industries takes it a step further and provides a link for customers to steal their software.

It does not come without a cost. First, the thief must endure a Q&A with insults around why he or she chooses not to pay, with options including ‘Money is Tight,’ ‘Software Should Be Free,’ ‘I Am A Dick,’ and “I Changed My Mind and I Want to Pay.’ Each provides some additional commentary and ways for the thief to do a little on their part, such as pay less than full price or to provide a tip. However, the ‘I Am A Dick’ tab replies with “Well there is no fixing that. Download away asshole.”

Why would Freakshow do this? Resigned to their fate, perhaps? As they say:

Stolen product licenses are fully functional, they are just not eligible for any upgrade stuff. We do not otherwise taint these licenses in any way.

Also, if you steal a license then we’ll be using our own discretion around just how much we’re going to support you. Just be a good person and we’ll probably help you out. Yeah.

Don’t get us wrong. We would definitely rather you actually buy our software. But we realize that some people, for whatever reason, just won’t. So, if you’re going to be that person, then we would rather you steal directly from us than catch some shitty computer cancer from whoever else would be hosting our work.

Basically, stealing is inevitable and they don’t want to make life worse for their legitimate users. They also recognize the risk involved in acquiring pirated software on the streets, or at least through p2p networks. They probably also recognize that users of cracked software may actually come back and buy stuff if they decide they like it. Freakshow also provides easy access to links for buying their other merchandise, like t-shirts. Nonpaying customers may become paying customers, of some sort or another, eventually.

Whatever their reasoning, it is refreshing to see a company that cares about its users, paying and otherwise. It is refreshing to see a new take on this issue.

Obviously developers want to sell their products, but no amount of wishing is going to offset the reality that the cost to reproduce and distribute digital goods is zero. If you make your software unwieldy to validate and use, people will crack the copy protection or go elsewhere. Cultivating these users may actually turn them into paying customers, even if they wind up paying for other goods and services apart from the original software.

Freakshow Industries previews its Backmask plugin.

More Big Tech Companies Stay Private, Or Wait Longer To Go Public

The Wall Street Journal took note that many companies with high valuations prefer to stay private these days. Mostly, it is talking about the types of tech companies that went public much earlier in their life cycle in the late nineties.

A number of Internet, software and consumer companies are raising huge sums in private deals that enable them to postpone initial public offerings for years, if not indefinitely. Moreover, they often negotiate these private placements directly with investors, bypassing banks.

The article mostly deals with how investment bankers more used to IPOs are dealing with large companies that prefer to raise money privately.

For most people, the woes of investment bankers struggling to meet changing business conditions is not particularly interesting. However, what I find interesting is the assumption that these companies would necessarily want to go public. If you don’t have to, why would you subject yourself to periodic reporting, plaintiffs’ lawyers in the securities bar, Sarbanes-Oxley, etc…?

In addition, the universe of investors for private companies is expanding.

Banks trying to woo more private-placement clients said they provide a needed service. Companies are staying private longer partly because the number of investors interested in private deals has expanded significantly, they said.

Many of these companies are also less dependent on funding from the public markets.

“What’s changed is that companies are getting so quickly from startup to real traction,” said Dan Dees, global head of technology, media and telecommunications banking at Goldman. “You can’t just wait for the IPO pitch.”

And yet, this is what critics used to complain about for IPO companies: they were too immature for the public markets.

To me, it still comes down to an essential question for the issuer: Why do you want to go public. Because ‘go’ is only a part of it. ‘Being’ public is the long-term expense and obligation.

Uber, France and Protectionism

France moves to ban Uber while homegrown ridesharing service BlaBlaCar continues to grow.

Carsharing service (or unlicensed taxi service, depending on who’s talking) Uber has faced enourmous regulatory hurdles where local taxi cartels try to protect themselves from the popular service. Europe is no exception as several there is a movement in several countries to stop or regulate or extract fees from Uber. However, Europe has lagged the U.S. in startup activity and success and has taken action against many prominent U.S. tech companies, such as the recent antitrust actions against Google and previous antitrust actions against Microsoft that seem so quaint now.

With that backdrop, let’s take a look at France and Uber.

The French government recently declared that some of Uber’s services would be banned in 2015. Like many places, there are some consumer protection rationales.

““Currently, those who use UberPop are not protected in case of an accident,” Mr. Brandet told the French news channel BFM TV, on Monday. “So not only is it illegal to offer the service, but for the consumer, it’s a real danger.””

Anyone anywhere who has ever taken a licensed cab knows this is silly. The real answer? Regulation and protection of a local cartel.

“Critics contend that the service represents unfair competition for other taxi operators, and falls afoul of many licensing rules across Europe. That has led cities across Europe, including Brussels and Berlin, to outlaw the budget car service.”

But what happens if a local company makes good?

“The 28-year-old student is one of a growing number of people across France relying on ride-sharing to travel long distances. Driving the change is a homegrown startup called BlaBlaCar that is challenging state-run railway monopoly SNCF by creating an alternative transport network out of empty car seats.”

Is longer distance safer? What about how everyone loves European trains and how every U.S. city wishing to be considered “world class” wants more trains?

It turns out that when given a choice, people prefer not to take public transportation.

“BlaBlaCar’s ascent has come partly on the back of a deteriorating public-transport system across the continent.”

Even better:

“Its business model responds to the flaws in train travel his association has been complaining about for years: high prices and bad service . . .”

It makes you think that maybe a homegrown company has advantages over a foreign company providing what the local authorities cannot.

Or maybe they simply don’t like it when people make money in an unregulated environment.

“Because it keeps fees so low that drivers are sharing costs rather than making profit, the company argues it is quite different from a company like Uber, which also uses some nonprofessional drivers and bills itself as “ride-sharing.”

“There has been such a hijacking of the word ‘ride-sharing,’ ” said Mr. Brusson. “The key is about the driver not making a profit, and the driver going to his destination anyway.””

And yet, BlaBlaCar has business aspirations, as long as the drivers don’t make money.

“BlaBlaCar was originally called covoiturage.fr—simply the French word for “carpooling”—but its founders changed the name to BlaBlaCar to ease international expansion with a non-French brand they could own.”

France moves to ban Uber while homegrown ridesharing service BlaBlaCar continues to grow.

Why Startups Fail – Mint vs. Wesabe

In an old blog entry (that I just found), one of the founders of Wesabe thinks back to why his company lost to Mint.com and shut down. For those who don’t remember, Mint was high-flying personal finance site that was sold to Intuit in 2009 for about $170 million.

Wesabe and Mint went head-to-head. Mint won. Here's why.

Marc Hedlund writes an honest article about his take on why Wesabe eventually shut down. First, he knocks out four myths, including that Mint launched first, had a better name and design and went viral.

Then, Hedlund discusses what he saw were the drivers behind the success of one and the failure of another. At the end of the day, it comes down to familiar themes recognized by those of us who work with businesses, particularly startups.

“I think in this case, Mint totally won at the first (making users happy quickly), and we both totally failed at the second (actually helping people).”

Mint gave people what they wanted and made it easy. Wesabe wanted to help people change their financial behavior, which is a value judgment with which the consumer himself/herself may disagree.

Hedlund notes that some of the things founders obsess over are really not important:

“You’ll hear a lot about why company A won and company B lost in any market, and in my experience, a lot of the theories thrown about – even or especially by the participants – are utter crap. A domain name doesn’t win you a market; launching second or fifth or tenth doesn’t lose you a market. You can’t blame your competitors or your board or the lack of or excess of investment.”

He does get to the crux of the issue about how to succeed:

“Focus on what really matters: making users happy with your product as quickly as you can, and helping them as much as you can after that. If you do those better than anyone else out there you’ll win.”

That’s it. Give people what they want to meet their needs and solve their problems.

Hedlund still believes that there are problems to be solved. However, imposing your judgment on people’s behavior will not have the same success as meeting people’s needs and desires.

“So, yeah. Changing people’s behavior is really hard. No one in this market succeeded at doing so – there is no Google nor Amazon of personal finance. Can you succeed where we failed? Please do – the problems are absolutely huge and the help consumers have is absolutely abysmal. Learn from the above and go help people (after making them immediately happy, first).”

First Public Bitcoin Company, An Ecommerce Reseller Of Consumer Products, Goes Public Using A Reverse Merger

First Bitcoin public company (sort of) went public through reverse merger.

Charles Allen, CEO and CFO, of Bitcoin Shop recently went on CNBC to discuss why a reverse merger was the best choice for his company to go public. His reasons included:

Publicity from being public
Transparency
Time to market, merger done in three weeks
They wanted to be the first public Bitcoin company
Ability to raise funds

For this post, let’s overlook my opinion that reverse mergers are generally a terrible idea. You never know what you are getting into, such as Bitcoin Shop’s recent extensive revisions of two years worth of financial disclosures following the notice of nonreliance on previously issued financial statements and audit reports.

Bitcoin Shop goes public through a reverse merger transaction.

There are private companies that not only can navigate the process, but have the systems set up to successfully transition to being a public company. However, they are few and far between. In addition, the fundraising seldom materializes. To Bitcoin Shop’s credit, they did raise about $1.8 million in a private placement related to the reverse merger.

As to Bitcoin Shop’s Bitcoin-related business, as Mr. Allen described on CNBC, it basically is an affiliate seller of products for other sites. It lists products and permits payment by Bitcoin. It has a goal to be a leading virtual currencly marektplace, but it is not a “Bitcoin” company. It markets stuff sold by others and processes payment and takes fees. It currently has a single vendor, but it plans more.

Bitcoin Shop may be able to earn revenue through markups on products and processing fees and undercut credit and debit card processing fees. Time will tell if this is a viable strategy. But, for all of the technical discussion in its investor presentation and SEC filing discussion the transition, Bitcoin Shop is an ecommerce company that lists products for sale by another vendor and processes payment denominated in Bitcoin.

There is nothing wrong with that, and I would not be surprised to see many more follow suit. However, I am reminded of seemingly hundreds of companies with little relationship to technology slap a “.com” at the end of their name back in the 1990’s. Is history repeating itself?

Law Grad Working In Retail Seems to Miss Some Opportunities

Law Grad Working Retail offers cautionary tale of bad decision and bad attitude.

Business Insider recently highlighted the “Law Grad Working Retail” blog about a hard luck law school graduate without a job forced to sell cologne in some kind of department store. He clearly feels the job is beneath him.

“I am too good for this job. You know who else is too good for this job? EVERY SINGLE OTHER PERSON THAT WORKS HERE. Retail jobs fucking suck. What’s up with all these idiots white knighting minimum wage retail jobs? If you don’t think this work is dehumanizing then you are insane.”

He says that he’s “liveblogging the loss of my last shred of dignity” and discussing his job and coworkers.

He claims that he went to a top 50 law school, was on law review and had a second year summer associate position, but he did not get a job offer.

It is both difficult and easy to feel sorry for anyone who went to law school in or after 2009. It is easy because they are entering the worst long-term job market for attorneys that many of us have known or will know. It is difficult because after the disastrous 2007 and 2008 economies, it should have been clear to anyone being honest with themselves that the market for new law school grads would be extremely difficult. Even now, there is still a huge glut of legal talent that will take years to balance.

If we assume that even part of his writing is honest, there is a personality issue at play. A combination of a bad job market and a personality case make for bad job prospects.

Here is something all law students should understand when interviewing. If your school is good enough, and especially if you got the summer associate position in the first place, it is assumed you have the intellectual ability to do the job. However, the interviews and summer associate position test your personality. If working with you is miserable because you are annoying, lazy, ethically questionable or otherwise unpleasant to be with, people will NOT want to spend hours upon hours with you in a conference room reviewing documents. People will NOT want to take the chance that they will get excuses instead of work product.

He said in his blog that he hasn’t taken the bar exam. However, he has co-workers asking legal questions. It seems he is missing an opportunity to rise above a job he feels is beneath him. Get a license and a laptop and you can be in business. You do not need the other trappings of an office in a high rise.

“This blog is not about complaining that I can’t get a legal job. Where in the fuck did I ever say that? I haven’t taken the bar so I’m not even trying to get a legal job. But up until the bar exam I applied for thousands of legal jobs and couldn’t get shit. Since the bar exam I’ve applied for hundreds of non-legal jobs and have come up empty. It’s not like I’m gonna pass the bar and suddenly everything is going to be fine. I have plenty of friends who did pass the July bar and don’t have jobs. Stop saying “he hasn’t even taken the bar!” like you found some kind of gotcha against me.”

Here is where is he so misguided. No, getting the license is not going to make everything “fine.” However, it is a prerequistite to the practice of law. Since he did not get hired out of law school, he needs to pass the bar to even be considered for any type of legal job. He had a probationary period with a law firm that may have carried him through the exam, but for some reason it did not work out. I seriously doubt anyone else will take the same chance. No one is going to hire him as an attorney without it.

My guess is, even if his stories are true, he is really an aspiring writer. Fine. However, there are a number of red flags here for anyone who would consider hiring him, and it makes his lack of job offer from the firm where he spent his second summer understandable.

That said, his writing is somewhat entertaining. His co-workers sound like interesting people, and their stories will make you continue reading through the various posts.

In any respect, I wish him the best of luck. For aspiring lawyers, use it as a cautionary tale. Credentials are just the beginning. Personality and attitude also matter.

Swiss CEO Pay Limits Rejected By Voters

A show of reason from Swiss voters.

A Young Socialist-backed proposal to limit executive pay to twelve times the pay of junior employees was voted down by Swiss voters by a vote of 65 percent. The executive pay limits far exceed the disclosure-based limitations of Dodd-Frank and SEC regulations.

According to the Bloomberg article, at least five of Europe’s highest paid execs are in Switzerland.

Swiss Flag — Swiss voters reject strong limits on executive pay.

The leader of the Young Socialist party vowed to continue the fight to:

Send Swiss companies fleeing to other jurisdictions
Severely water down the talent pool willing to work in Switzerland or for a Swiss business
Turn the pool of executives working for Swiss companies into easy prey for headhunters in competing companies in other countries
Make Switzerland toxic to anyone who wants to start a business and hire employees

There may be constraints on UBS leaving Switzerland, but you can bet its CEO (or those talented enough to be in line for executive positions) has plenty of means of escape from this sort of income restriction. However, do you think Glencore (giant international commodities trading firm) can’t structure its business away from these restrictions?

These are the types of consequences that result from navel gazing over “income equality” and generally looking to more successful people with envy and anger rather than looking to more successful people and trying to learn about how to become successful.

Disagree? Ask the French.

Delaware Supreme Court Discusses Meaning of “Business Combination” In Activision Vivendi Case

As it turns out, it isn’t ambiguous.

Link: Activision Blizzard Inc. v Hayes

In an appeal of an injunction, the Delaware Supreme Court took a look at whether a stock buyback would be a “business combination” requiring stockholder approval under Activision’s bylaws.

Background

Activision Blizzard fights for its rights to buyback its shares.

In 2008 Activision bought Vivendi’s video game subsidiary for Activision shares. Vivendi also made a separate cash investment in Activision. Activision’s bylaws were amended to require approval of unaffiliated stockholders with respect to any merger, business combination or similar transaction between Activision and Vivendi. In 2012, Vivendi wanted to sell its Activision stake but found no takers. Activision agreed to a buyback, under which Vivendi would create a non-operating sub, “Amber,” to hold the assets for sale and Activision would purchase Amber. Activision did not seek stockholder approval, which was the part of the reason for the litigation, which resulted in a preliminary injunction.

Court’s Analysis

The court first looked to see if “business combination” was ambiguous. Nope.

“A provision is ambiguous only if it is “reasonably susceptible to more than one meaning,” and the fact that the parties offer two different interpretations does not create an ambiguity. Moreover, a provision “may be ambiguous when applied to one set of facts but not another. Finally, the provision must be read in context.”

The court decided that while the meaning could be ambiguous in some contexts, it was not ambiguous here because under their agreement, Vivendi will sell 429 million shares of Activision stock back to Activision. Because those shares will become treasury stock, control of Activision will shift from Vivendi to Activision’s public stockholders. Vivendi’s holdings will decrease from 61% to 12%, and Vivendi’s representation on Activision’s board will decrease from six appointees to none.

Since there was no “combination or intermingling of Vivendi’s and Activision’s businesses,” it is not a business combination. In fact it is the opposite of a business combination. These companies will be separating themselves. As a result, the stockholder approval requirement does not apply.

In addition, structuring the sale through Amber does not change the analysis. Neither the form of the transaction nor its size changes its fundamental nature. Amber is a shell created to serve as the transaction vehicle. The court stated that calling Amber a business “disregards its inert status” and “glorifies form over substance.”

The size of the deal does not change the analysis. The plaintiffs argued that it was a “value-moving” transaction. However, the bylaws do not require stockholder approval based on size of the deal.

In addition, the bylaws do not require stockholder approval for any deal between Activision and Vivendi, only specified transactions. While the Chancery Court may have been looking out for the non-interested shareholders’ interests, other provisions of the bylaws already provided for independent director approval for related party transactions.

Internet Sales Tax Law Struck Down In Illinois

Statute providing for Internet sales tax on out of state sales and sales through affiliates struck down in Illinois.

Link: Performance Marketing Association, Inc. v. Hamer (Illinois Supreme Court)

Amazon.com is typically the primary target for state Internet sales tax laws.

Like many states, Illinois desperately wants to collect an Internet sales tax when its citizens buy stuff over the Internet. Generally, a state cannot impose duties to collect taxes on out of state retailers and must rely on people to report their own purchases and pay the sales taxes directly to the state. Good luck with that.

In order to get to the Internet sales, Illinois changed its sales tax law to change the definition of “maintaining a place of business in this state” to include:

“a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link of the person’s Internet website.”

In other words, Illinois can get to Amazon and its sales if someone in Illinois signs up for their affiliate program and includes an Amazon ad on their website.

The performance marketing industry has been fighting these laws across the United States and made it to the Illinois Supreme Court.

The court noted that the statute does not require tax collection by out-of-state retailers who enter into performance marketing contracts with offline and over-the-air broadcasters. As a result, the amended statute is targeted solely at “online” performance marketing.

The plaintiffs argued that the federal Internet Tax Freedom Act (the “ITFA”) preempts the Illinois statute and that the Illinois statute violates the commerce clause of the U.S. Constitution. The ITFA prohibits a state from imposing discriminating taxes on e-commerce. This includes revenue raising measures and the imposition of obligations to collect sales taxes.

The court concluded that the statute uses performance marketing over the Internet as the basis for imposing a use tax collection obligation on an out-of-state retailer. However, national, or international, performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois will not trigger an Illinois use tax collection obligation. As a result, the statute imposes a discriminatory tax on electronic commerce within the meaning of the ITFA. Accordingly, it is expressly preempted by the ITFA and is therefore void and unenforceable.

Because the court made its decision based on preemption, it did not make a decision based on the alternative argument that the statute violates the commerce clause of the Constitution.

Startup Tips and Lessons from Zynga: Knowing When To Step Aside

Sometimes the skills needed to start a company are different from the skills needed to run a company.

Cross-posted at My Gamasutra Blog.

Earlier this week, Zynga made an announcement that was not too surprising to folks following the company. Mark Pincus was out as CEO.

Zynga was a high-flying casual game developer sailing on the winds of its relationship with Facebook. Zynga described itself as “the world’s leading social game developer.” It went public in December 2011 at $10.00/share, and its stock price had traded as high as $14.69/share in early 2012.

Since that time, Zynga’s fortunes have fallen. Its stock has traded below $4.00/share since Summer 2012 as its daily and monthly active users declined and it continued to lose a lot of money.

What was surprising was the Pincus was staying on as Chief Product Officer and Chairman of the Board.

In addition, reports state that Don Mattrick, the new CEO, was chosen by Pincus as his successor. Pincus was quoted as saying:

“that if I could find someone who could do a better job as our CEO I’d do all I could to recruit and bring that person in. I’m confident that Don is that leader.”

So, what are the lessons here for startups, particularly tech startups?

I’ve previously written about how startups need people different skillsets at different points in their maturity.* What is remarkable in the Zynga story is that Pincus seemed to understand that Zynga had grown past his skillset as a CEO, and a different kind of leader at this point in its development.

Most founders, even those that do not name the company after a beloved pet, consider that company to be “their baby,” even after taking VC money and public investor money. They have nurtured the company from idea-to-business, and they believe that they should maintain control of it, even in the face of mounting evidence to the contrary, like, say, gigantic losses of money and declining user numbers, prying a founder out of a controlling role can be difficult and painful. This can be particularly painful for the founder, who may be faced with a loss of confidence and sense of shame despite the company he or she may have built.

Pincus will continue to have a powerful role at Zynga, particularly as one of the two members of the Executive Committee of the Board of Directors. However, if the reports of how this transfer of power took place are accurate, Pincus should be commended for his maturity and foresight in recognizing the changing needs of Zynga.

Or maybe he should be admired for his strategic foresight in maintaining a powerful role before being dispatched entirely by the Board of Directors and angry shareholders. Maybe Mafia Wars does prepare you for real life after all.

*For Gamasutra readers, see here for a discussion of how companies begin to need salespeople as they mature, a position that founders may not be suitable.