day 5 aug 26 2009

Lead to Win

Day 5, Wednesday August 26

Stephen Davies & Serge Lafontaine Making and managing sales

Fred Dixon Pricing and delivery

Eric J. Smith Key legal issues for technology start-ups

Curt Dodd Realizing business value through patents and intellectual property

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Lead to Win

“Making and Managing Sales”August 26th, 2009

Stephen Davies and Serge Lafontaine

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Agenda

OverviewFind first customers most willing to buy from youAdapt the funnel to sell to first customers you target Map funnel information to cash flows

Exercise #1 and #2

Sales and product marketing techniques to maximize funnel valueExercise #3 and #4

BREAKUse the Internet to sell Participants Open DiscussionSummary / Tasks Post Phase 2

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Overview

• Upon completion,– You will know about

• What a sales funnel is

• Linking sales to cash flows

• What internet marketing techniques are out there

– You will know how to• Categorize and prioritize customers

• Build a funnel for your organization

• Map sales to your cash flows

• Identify appropriate internet marketing techniques for your organization

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Overview

• What this course is– How to setup and manage sales

– How to link sales with marketing

• What this course is NOT– How to sell

– How to market (detail)

• Terminology that is assumed– Inside/outside sales

– Distribution channel

– Direct/indirect sales

– Others

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Agenda


Exercise #1 and #2



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Find first customers most willing to buy from you

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Customer Demand:

Need: The desire for a product or service

Demand: The ability to pay for a product or service

Demand is the desire and ability to buy a product or service.

Demand is the desire and ability to buy a product or service.

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Characteristic Comments

• “A” Customers– ‘Bring me a proposal I can sign.’

• “B” Customers– ‘I like the product, but I need to do more research before I can decide.’

• “C” Customers– ‘Yes, we have that problem, but I don’t know what to do about it. We get

by. How does your product relate to our situation?’

• “D” Customers– ‘We have no problems like that in our organization.’


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Characteristic Comments - Strategies

• When talking to potential customers you need to ask the questions that allow you to prioritize.

• You need strategies to move potential customers up the chain– “A” Customers

• great, can you please provide me a reference

– “B” Customers • here are links to impartial research to help you decide

• here is a list of references that will tell you what you need to know

– “C” Customers• I will get you in contact with a technical person to discuss with you in detail

– “D” Customers• Nice to talk to you, will contact you back in a year


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Communication• Close “A” customers. Get them to buy your product.• Convince “B” customers: Provide them with additional

information to make a decision, and reinforce your company as the best choice (share of mind)

• Coach “C” and “D” customers and use public presence as a means to gain credibility with them—and access to them.


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Customer Types and Technology Strategy

• Technology disruptions encounter “C” and “D” customers– Longer sales cycles

– More subject matter expertise marketing

– Evangelical sales model

• Technology increments encounter “A” and “B” customers– Shorter or immediate sales

– More product level marketing

– Direct sales model


Most startups tend to be technology disruptions.Most startups tend to be technology disruptions.

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Increasing the probability of engaging customers

• To target and engage higher probability customers you need to identify the few key values from your product offering

• You also need to release your product at the appropriate level in the marketplace


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Disruption curve


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Blue Ocean


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Agenda


Exercise #1 and #2



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What is a sales process

Adapt the funnel to sell to first customers you target

Source: Wikipedia

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How does it work• We take a generic, or organization specific list of stages

and assign probabilities to each stage.• The probability represents the likelihood that the customer

will move to the next stage of the pipe• New Opportunity (5%)

• Initial Communication (10%)

• Fact Finding (25%)

• Develop Solution (40%)

• Propose Solution (60%)

• Solution Evaluation (75%)

• Negotiation (85%)

• Contracts (95%)

• Closed won (100%)


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Funnel Stage Confidence of Winning 10%

100%

Day 1

Day 183

20%

45%

60%

80%

90%

Day 22

Day 44

Day 94

Day 160

Day 180

Lead Yield30 “Raw”

1 Won

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Doing it in practice• For simple funnels use excel• If you have a larger number of customers good idea to get

a CRM system, for example:


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Doing it in practice example 1 (from provided template)


Totals/Average 47% $300,000 $142,500 06-Feb-10 177

Company Opportunity name Funnel stageStage

probabilityContract

valueFunnel value

Est Close Date

Days to close

Steve co Product A New Opportunity 5% $10,000 $500 01-Jun-10 291 Bob co Product A and B Initial Communication 10% $50,000 $5,000 15-Apr-10 244 ABD Product B Fact Finding 25% $40,000 $10,000 01-Dec-09 109 DEF Product A Develop Solution 40% $30,000 $12,000 13-Feb-10 183 GHI Product C Propose Solution 60% $50,000 $30,000 15-Jan-10 154 Blockbuster Product A, B and C Solution Evaluation 75% $30,000 $22,500 24-Feb-10 194 PWGSC Product C Negotiation 85% $40,000 $34,000 04-Nov-09 82 CIBC Product C Contract 95% $10,000 $9,500 01-Sep-09 18 Lead to Win Product A Propose Solution 60% $30,000 $18,000 01-Mar-10 199 Redwood Product B Initial Communication 10% $10,000 $1,000 01-Jun-10 291

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What is a sales funnel• A tool that help you assess using different metrics how

healthy and balanced your future sales are. It will tell you:– At what stage a customer is in the sales process– What value of opportunity is associated with a customer– How long customers are taking to move down the pipe– Gross figure on how many customers are at what stage– Project $$ revenue forecasts for your cash flow statements


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Agenda


Exercise #1 and #2



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Map the funnel to cash flows

Cash flow estimate:

Cash injection into cashflow is:(closing date + credit terms)

at a value of(deal size * funnel stage probability)

Cash injection into cashflow is:(closing date + credit terms)

at a value of(deal size * funnel stage probability)

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With no credit terms

Company Opportunity nameFunnel value

Est Close Date Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10

Steve co Product A $500 01-Feb-10 500$ Bob co Product A and B $5,000 15-Apr-10 5,000$ ABD Product B $10,000 01-Dec-09 10,000$ DEF Product A $12,000 13-Feb-10 12,000$ GHI Product C $30,000 15-Jan-10 30,000$ Blockbuster Product A, B and C $22,500 24-Feb-10 22,500$ PWGSC Product C $34,000 04-Nov-09 34,000$ CIBC Product C $9,500 01-Sep-09 9,500$ Lead to Win Product A $18,000 01-Mar-10 18,000$ Redwood Product B $1,000 01-Jun-10 1,000$

Totals $142,500 $9,500 $0 $34,000 $10,000 $30,000 $35,000 $18,000 $5,000 $0 $1,000

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With 60 day credit terms

Company Opportunity nameFunnel value

Est Close Date Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10

Steve co Product A $500 01-Feb-10 500$ Bob co Product A and B $5,000 15-Apr-10 5,000$ ABD Product B $10,000 01-Dec-09 10,000$ DEF Product A $12,000 13-Feb-10 12,000$ GHI Product C $30,000 15-Jan-10 30,000$ Blockbuster Product A, B and C $22,500 24-Feb-10 22,500$ PWGSC Product C $34,000 04-Nov-09 34,000$ CIBC Product C $9,500 01-Sep-09 9,500$ Lead to Win Product A $18,000 01-Mar-10 18,000$ Redwood Product B $1,000 01-Jun-10

Totals $142,500 $0 $0 $9,500 $0 $34,000 $10,000 $30,000 $35,000 $18,000 $5,000

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Agenda


Exercise #1 and #2



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Using Exercise #1 – Worksheet (next page)

1. List 10-20 potential customers and identify customer type (A,B,C or D) for – Leads

– Qualified Prospects

– Already engaged

2. Define Funnel Stages and according percentage values.

3. Populate the rest of worksheet for all fields

Exercise #1 – Building Sales Funnel

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Exercise #1 - Worksheet

CustomerName

CustomerCharacteristics

Product Funnel StageStage Probabitlity

(%)

ContractValue

($)

FunnelValue

(Stage Prob * Contract Value)

EstimatedClose

(month/year)

123456789

1011121314151617181920

A: ready to buy New Opportunity 5%B: need more research Initial Communication 10%C: have problem, but get by Fact Finding 25%D: no problem Develop Solution 40%

Propose Solution 50%Evaluate Solution 75%

Negociation 80%Contract 90%

Close 100%

1 2

3

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Using Exercise #2 – Worksheet (next page)

1. Transcribe Funnel Value and Closing date information filled in Exercise #1 Worksheet into Exercise #2 worksheet

2. For each customer entry, enter the Funnel value into the appropriate closing date column

3. Calculate totals for each months

4. Identify your typical credit terms: ___ days

5. Change closing date months to reflect credit terms

6. Analyze cash flow requirements

Exercise #2 – Sales Funnel Cash Flow

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Exercise #2 - Worksheet

FunnelValue

(Stage Prob * Contract Value)

EstimatedClose

(month/year)Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10

123456789

1011121314151617181920

Totals

1

2

3

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Agenda


Exercise #1 and #2



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Sales and product marketing techniques to maximize funnel value

Lead

s

Marketing

Sales

CHASM {

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Standard ways of marketing your product

• Print media

• Visual media

• Audio media

• Tradeshows

• Internet

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Most effective for a start-up is Niche Marketing

By seeking out smaller segments of larger markets, marketing can be developed and promoted quickly to uniquely serve a targeted

and potentially loyal customer base, leading to a small but regular income stream. This technique is then repeated across several

other niche marketing activities until a desired outcome is achieved.

By seeking out smaller segments of larger markets, marketing can be developed and promoted quickly to uniquely serve a targeted

and potentially loyal customer base, leading to a small but regular income stream. This technique is then repeated across several

other niche marketing activities until a desired outcome is achieved.

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Most effective for a start-up is Niche Marketing

• Satisfying the needs of individuals

• Marketing centered around people

• Cultivating long-term relationships and trust with customers, i.e. Communities

• Hearts and minds

• Concentrated effort:– saves time and money

– focuses business

• Greater customer satisfaction due to better served needs

• Cultivates relationships

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Agenda


Exercise #1 and #2



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Exercise #3 – Marketing Strategies

to complete for your business

1. List out all of the ways you currently market (including costs). NB leave Internet out for now (next section)

2. List out all of the ways your competitors market

3. Brainstorm new opportunities in other modes of marketing that may be relevant

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Exercise #4 - Markets

to complete for your business

1. List the markets you are selling into

2. List the markets you intend to sell into

3. For each of the above define an initial “beach head” niche

4. List other potential niches to move to once you have revenue in the first.

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Agenda


Exercise #1 and #2



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Use the Internet to sell

• We are going to assume that everybody has, or intends to get a website going.

• There are a number of ways to market on the internet, e.g.– Paid advertising

–

– News channels/press releases

– Social Media

• We will concentrate on Social Media because this is showing to be the most cost efficient and effective way to market to your audience today.

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• What is social media?– Using the web to connect or reconnect with an individual or a

group of like minded individuals

• What is a social network– A website or web-service with a database

Trends show that community users remain customers 50% longer, spend 54% more than non-community users and visit 9 times more

than non-community users

Trends show that community users remain customers 50% longer, spend 54% more than non-community users and visit 9 times more

than non-community users

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Old NewEyeballs Hands

Britannica online Wikipedia

Personal websites Blogging

Content Management System Wikis

Directories Tagging

Stickiness Syndication

Instant messenger Twitter

Conferences Unconferences

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• Social Media Tools– RSS feeds

– Social networks

– Blogging

– Micro-blogging

– Podcasts

– Message/discussion boards

– On-line video

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• RSS feeds– People subscribe through an RSS aggregator to be updated of

news

– If you have frequent new updates, or use a mix of other social media tools that you want to make people aware of

• Social Networks– Search to find individuals in companies to directly target

– Ask questions to large populations of people

– Take out paid advertising to a directed group

– Start your own group, or join an existing industry group and PARTICIPATE

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• Blogging– Get your technical people to blog on relevant industry advances

– Do NOT use a blog as an advertising medium

– Comment on other blogs and try and get cross-referrals

• Micro-Blogging– More focused than blogging

– Great to update people at events (e.g. conferences)

– Post if you see something interesting, people use as a referral service

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• Podcasts– Keep them short and relevant

– Tie them to RSS feeds

• Discussion boards (Website Toolbox, Invision etc)– Opportunity to be controversial (safely)

– Constantly watch, nothing worse than posting and not following up

– Reading other comments good opportunity for background research\

– Good to test ideas prior to implementation

• YouTube (or similar)– HUGE following

– Opportunity to showcase products

– Some associated production costs

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Agenda


Exercise #1 and #2



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Participants Open Discussion

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Agenda


Exercise #1 and #2



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In summary

• There are a LOT of people you can talk to• You should only talk to people that are prepared to give

you $$ if your product/service is right for them• Good, focused marketing will generate accurate leads• Initial filtering by conversation will categorize• Try to fill the pipe in priority order (A – D)• Don’t forget you don’t necessarily want all A’s, a mix is

good BUT majority A’s and B’s is preferred• The further you work down the pipe the harder it gets• Enjoy – sales and marketing is a rewarding experience

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Post Phase 2Tasks

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Task 1 to complete for your business

1. Identify appropriate market segment to release technology into

2. Review list generated during Exercise #1 and add more target customers

3. Blue ocean helps you differentiate from your competition, even if you are not disruptive – perform analysis

4. This will enable you articulate key differentiators to your target customers

5. Start phoning. For each call categorize the customer

6. Identify and implement your own strategies for moving up the chain

7. Only return (initially) to the highest ranked customers for ongoing business development


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Task 2 -Doing it in practice - extend the example

Simple additions that are valuable are (in no particular order):

1. Funnel value by month – vital for cash flow forecasting

2. Average number of days per funnel stage (too see where your “blockages” are)

3. Estimated vs actual close

4. % dropouts at each stage of the pipeline (closed lost)

5. Keep track of the contract value as it changes (initial estimate – final) to see how accurate your estimating is


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Task 3 - to complete for your business

1. List the ways you use the internet at the moment

2. List the ways your competitors use the internet

3. For each of your customer categories (A, B, C, D) list appropriate ways of using different social media to reach out to them

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Lead to Win

Pricing and DeliveryAugust 26, 2009

Fred Dixon, CEO Blindside Networks


Fred’s background in sales

• Co-founded three software companies– Databeacon Inc (sold to Cognos 2004)– OpenLava Inc– Blindside Networks Inc

• My sales experience– Large deals (> $10k) with professional services (PS)

component– OEM sales (largest was $250k)

• I have– Raised 4.7M in venture financing– Hired a US/Cdn sales force (VP of Sales + 4 reports)– Sold primarily to private/public companies


Learning objectives

You will know about:• Price strategy and generic pricing approaches• Price attacks

And you will be able to:• Contribute to price decisions• Present, justify, and defend your pricing


In the beginning ...

• In the early stages, your goal is to create satisfied customers that you can use as references

• Price is a key component of a satisfied customer– Subscription based pricing:

• Usually tied to consumption over time

– License based pricing• One time license + support + professional services

• Let’s break down pricing into three phases:– Before the sale: Create a pricing model that makes sense– During the sale: Justify the pricing to the customer– After the sale: Deliver on the value at the agreed price


Pricing: The Big Picture


Research your price

• Factors that affect pricing strategy– Example

• Three generic approaches• Price to capture fair share of value• Drill down into their costs• Fit with the customer’s pricing logic• Take advantage of environmental differentators


Factors that affect Pricing Strategy

Price strategy

BU’s P&L• Revenue growth• Impact of discounts• Cost structure

Competitors’ responses• Price wars• New entrants• New products

• New price strategy

Health of industry

Stage in life cycle

Organizational consensus

Value of offer relative to competitors


Example

• License• Support• Professional

Services

• Example: $10k base with 15 days of PS– Year 1– Year 2– Year 3

(Three Generic Approaches)

%20 of license/year

$1500/day

$10k + $15k + $2k = $27k

$2k

$2k


Three generic price approaches

Emerging Growth Mature Decline

Extract

• Premium price

• Differentiated offer

• Creates opportunities for rivals

Yes Yes Yes Yes

Neutral

• Price close to competition

• Prevents price wars

• Compete other than price

Yes Yes Yes Yes

Penetrate

• Low price is primary driver

• Price wars

• Low customer loyalty

• Leads to confusion

No Yes No No


Price to capture fair share of value

1. Value segment

2. Value levels

3. Segment offers

4. Financial value demonstrated

5. Price

Level1 Offer1 Value1

C1 x Value1

Level2 Offer2 Vaue2

C1 x Value1

… … … …

Leveln Offern Valuen

Cn x Valuen

1. Identify targeted value segment

2. Define value levels

3. Determine offer (product, services, delivery etc.) that delivers value for each level

4. Demonstrate value each offer creates

5. Price to reflect value created


How to determine what customers are willing to pay?


Drill down into their costs

Supplier’s view of proposed solution

• Advanced HW• IP technology• System integration……

Solution to save 60% of SW budget

Financial value = Save $252 M per

year

Integrate (i) drilled down customer answer and (ii) internal view

Supplier Question Customer Answer

What do you need? Reliable XYZ

Why? Save SW Budget

How much is SW budget?

70% of project cost

How large is average project costs?

$3 M/project

How many projects/year 200 projects/year


Fit with customer’s price logic

• What each customer is willing to pay

• Relative to competitors• Combination pricing• Foot in door pricing• Transparent pricing• Cost plus

1. Other ways to set prices?2. Method(s) your company uses?

Focus on logic of approaches your customers and you use to set prices, not on absolute price numbers

Show how your price logic supports customer’s price logic

• Other approaches (not covered)• Dynamic pricing

• Variable pricing

• Auction

• Group

• Based on an index

• Regulated pricing


Take advantage of environment differentiators

Ability to price discriminate increase when:

• Markets are very different from each other

• Customers can’t resell products bought in one market into another market

• Competitors can’t undersell where prices are higher

• Cost of overseeing discriminatory pricing is low

Price discriminate based on:

• Image• Customer segment• Location• Timing• Channel• Packaging


During the sale


Pricing during sales

• Explore your customer’s pain• Justify your price in terms of their pain• Incorporate price sensitivity• Present you price early!

– Low price sensitivity: take advantage– High price sensitivity: differentiate

• Prevent and be prepared to respond to price attacks• Defend your price


Explore your prospect’s pain

Manager

Director

VP $ Impact

$ Impact

$ Impact

$$$Total impact of problem =


Justify your price in terms of their pain

• Focus on the current costs incurred by your customer (as opposed to your features)– You want to show that the status quo (no sale) is not an

option

• If possible, describe your solution in terms of reducing their costs– Decisions are easier when it’s cost reduction rather than

taking a risk for a future benefit

• When should you talk about price?


Present your price early!


Low price sensitivity:take advantage

Customers price sensitivity towards prices decreases when:

• Product is perceived to be better• Product fits well with assets bought previously• Conditioned to buy from the supplier• Costs and time required to search for and compare

with alternatives are high• Cost is small compared to total cost• Cost is small relative to income• Cost is paid by others


High price sensitivity: differentiate

• You have many opportunities to differentiate– Educate the customer based on your experience working

with other companies– Reduce their effort to implement your solution by improving

your product and project management skills– Anticipate and solve problems (reduce risk) for the customer

during planning and delivery– Enable customers to map their position or benchmark their

performance relative to others– Makes sense of information and predict in ways that

customers cannot do on their own

• Take every opportunity to strengthen the relationship– Your motto: “We will not permit you to fail”


Price attack (you or yourcompetitors)

To prevent price attacks:

• Make money for customers, suppliers and resellers

• Avoid encouraging rivals’ price attacks• Alert customers to risks of poor price

quality• Make public your intentions and

capabilities to deal with various types of price attacks:

– Low function, low convenience offer– Same function with large distributor as

partner– Unbundled into high-low functionality and

high-low convenience that can be ordered online or phone

– New functionality– Discriminatory, high prices in certain places

and low in others

To respond to price attacks:

• Increase benefits of existing offer, maintain price

• Increase price and improve quality

• Ignore those unlikely to gain large market share

• If discriminatory, inform customers in both segments

• Strengthen value chain, enforce laws and patents

• Offer volume discounts with bundled prices

• Reduce price• Retreat from segments and

strengthen offer in others


Defend your price

• Have three “stands” ready– They are going to squeeze you until

you stop dripping (this is a good thing).

• After three stands, if they still ask for a deal, then say

“If we do _____ would you be willing to do ______?” – For example: they agree to be a reference customer

• Do not reduce your daily rate!– Instead: provide some free days of professional services

(*) Reprinted from http://www.flickr.com/photos/tico24/57517238/ under Creative Commons Attribution License.

*


Summary

• Always rationalize your price from the customer’s perspective– Determine who is impacted by the current problem you are

trying to solve

– Drill down into the cost of the status quo

• Present your price early– Add value (from the customer’s point of view) to differentiate

and support your price

• Be ready justify and defend your price from– Price attacks, or

– Being squeezed by your customer


Pricing Exercise

• Let’s try applying the pricing strategy to your opportunity

• For each opportunity1. Explain your pricing logic

2. Justify your pricing

3. Defend your pricing


After the sale


After the sale

Now it’s time to deliver on the value you promised


Learning objectives

You will know about:• The importance of project management• Breaking down large projects into two main phases

And you will be able to:• How to manage customer expectations for delivery• Keep a project on track


Ensuring successful delivery

• Observations:1. A successful reference is created during the

implementation, not the sale

2. Most companies don’t have good project management skills

3. The more you are involved in implementation, the higher the chance this will be a success

• During delivery you can add (significant) value to justify your price now and in the future

• But wait, I’m not a project manager …


Have an implementation process

• There are lots of processes– Waterfall (good for first project with a new customer)

– Agile development (need a lot of trust)

• Goal: Deliver to customer a high-quality solution on time and within budget.

• Your process should– Clear definition of roles and responsibilities

– Clear phases of delivery with accurate milestones

• Example: Microsoft Solutions Framework (MSF)


Roles and responsibilities

• Program Manager– Delivery of solution within project constraints

• Product Management– Ensure solution matches customer needs

• User Experience– Enhanced user experience

• Development– Develop to product specifications

• Test– Release after addressing all issues

• Release Management– Smooth deployment and ongoing management

You Lead

They Lead

They Lead

Shared

Shared

Shared


Two phases

• Split the implementation process into two phases:– Phase I: Planning and design: determine what needs to

be done by whom • 25-40% of overall project effort

– Phase II: Implementation

• If you get pushback from the customer– Say: “Based on our experience, this process is the most

cost-effective way to implement this solution.”– Analogy of building a house: No builder would is going to

start building a house without the architectural plans


Phase I: Determine what needs to be done by who


Vision Scope

• Vision/Scope document (short as possible)– Identify the long-term vision– Define expectations for first implementation (scope)

• Capture how the customer measure success

– Identify people for each role– Capture high-level requirements (attach as a spreadsheet)

• Business

• User

• Functional

• Security

• Risk management– Identify risks and plan for management of them (few

companies do this themselves)


Create a project plan

• Take the requirements spreadsheet1. Add a new column (days of effort)

2. Estimate the days for each requirement

• This part is always a challenge for a company– But it’s a very important activity as your company must

become good at making time estimates ASAP

• Before you present the milestones to your customer– Build-in time for internal slippage

• If you are a day early on each milestone: You’re a hero

• If you a day late on each milestone: You are unreliable


Signoff

• Before you start phase II– The customer can add/remove features and modify the

price/timeline– Say: “You control the costs by adding/removing features

from the spreadsheet”

• Be ready to defend your time estimates

• Get signoff– E-mail is fine


Phase II: Implement the solution

• Phase II is really “follow the project plan”– Implementation– Testing– Delivery

• After you start Phase II– Expect the customer to request changes– Say: “That’s a good idea, do you want us to add that to this

release?”– If so,

• Always discuss costs directly (use e-mail for summaries)

• Spec and bill as a change requests (more revenue!!)


Account management

• Account management– Your project management skills ensure development

remains on track and risks are properly managed– Hold weekly meetings and updates with the customer

• Invoicing– Invoice against milestones– Never invoice for something that you don’t have approval for

• Your motto: “We will not permit you to fail”


Delivery summary

• Capturing the requirements, user scenarios, and specs will ensure you build what the want

• Having your own implementation process enables you to – Lower the risk for your customer– Manage the deployment– Protect against feature creep– Legitimately charge for changes– Setup for deployment of your next release

• Successful delivery = successful reference


References

• Solution Selling: Creating Buyers in Difficult Selling Markets, Michael BosworthISBN: 978-0786303151

• Microsoft Solutions Framework 3.1 (microsoft.com)


Lead to Win

Key Legal Issues for Technology Start-ups August 26, 2009

Eric J. SmithFraser Milner Casgrain LLP

© Fraser Milner Casgrain LLP, 2009. See last slide for licensing information.


Key Legal Issues for TechnologyStart-ups

My background • Technology lawyer, Co-Chair of National Technology

Transactions Practice Group, FMC (2001 – Present)• Vice-President, General Counsel, and Corporate

Secretary – Corel Corporation (1996-2000)• Vice-President of a business advisory services

company focused on early stage tech sector (2000-2001)

• Recognized by The Best Lawyers in Canada 2010


Agenda

Key Legal Issues for Technology Start-ups

1. Threshold Issues

2. Company Formation

3. Co-Founder Issues

4. Shareholder Agreements

5. Financing the Business

6. Employees and Contractors

7. Contracts that Enable Sales and Partnerships


Threshold Issues

1. Ownership of Intellectual Property

2. Duties to Previous Employers/Third Parties:a) Confidentiality

b) Non-solicitation

c) Non-competition

d) Assignment of IP rights


Choice of Business Organization

Corporation• Most popular form of business organization• Separate legal entity from those who own it

(shareholders) and those that operate it (directors, officers and employees)

• Income taxed in the hands of corporation• Shareholders taxed on dividends and capital gains

(when selling shares)


Reasons to use a Corporation

• Limited liability (although shareholders many have to guarantee obligations)

• Can exist in perpetuity (individuals can come and go)• Flexible investment vehicle – can create different

classes of shares• Can offer shares or options to buy shares to attract

and retain personnel


How Do I Incorporate?

• Conduct name search• File Articles of Incorporation• Pay registration fee• Organize company


Where Do I Incorporate? Canada vs. Ontario

• Legislation is very similar• Federal permits head office in any province• Getting desired name more difficult federally


Where Do I Incorporate? Canada vs. United States

• Many Canadian tech companies seek financing in U.S.

• Interests of U.S. Investors often conflict with Canadian founders and employees

• Can have impact on decision of where to incorporate (or migrate)


Canadian–Controlled Private Corporation

Canadian incorporated; private; not controlled by non-residents or public corporations

Advantages:

a) Favourable capital gains treatment

b) Refundable investment tax credits (ITCS)

c) Tax deferred on exercise of stock option

d) Tax deduction on gain from optioned shares

e) Lower tax rate and small business deduction

f) Deduction of allowable business investment loss (for lenders to CCPC)


Problems For U.S. Investors

• S.116 Income Tax Act• LLC treatment• May require complex exchangeable share structure

*See handouts for detailed discussion of issues in this and preceding slide


Weighing the Options

Canadian incorporation, if:a) Company will qualify as a CCPC

b) Company can fund operations without significant foreign investment

c) BDC or labour sponsored fund may be early investor

d) Cannot afford extra expense of U.S. incorporation


Weighing the Options - cont’d

U.S. incorporation, if:a) Company will not qualify as CCPC

b) Lead investor is U.S. investor

c) Anticipated exit is acquisition by a U.S. entity

d) Company anticipates shifting bulk of operations to U.S.


Co-Founder Issues

• Remember threshold issues• Beware of automatically treating everyone as equals


Issuing Shares to Founders

• No operating history and usually very few assets• Founders’ shares usually issued at nominal price

(e.g. $0.001 per share)• If assets being transferred to corporation – s.85

rollover• Consider tax planning (e.g. income splitting through

family trust)


Issuing Shares to Others

• Contractors/employees/others• Must comply with securities laws• Must be paid for (money, property, past services)


Capital Structure

• Keep structure simple in order to accommodate future financings

• Generally, founders should purchase all shares they desire at time of founding

• As investors acquire shares, founders may lose control over future issuances and stock splits


Cap Table Example

After Series “A” Financing

Shareholder # of Shares Price Ownership

Founders 2,000,000 $0.001 24.2%

Seed 1,000,000 $0.50 12.1%

Series “A” 3,500,000 $2.00 42.5%

Employees 1,750,000 $0.20 21.2%


Cap Table Example

After 3 VC Rounds

Shareholder # of Shares Price Ownership

Founders 2,000,000 $0.001 8.2%

Seed 1,000,000 $0.50 4.1%

Series “A” 3,500,000 $2.00 14.4%

Employees 1,750,000 $0.20 7.2%

Series “B” 5,000,000 $2.00 20%

Employees 1,750,000 $0.20 7%

Series “C” 6,000,000 $4.00 25%

Public 3,333,333 $12.00 14%

Total 24,333,333 100%


Vesting and Buy-back Rights

• Should Founders have to “earn” shares?• Repurchase option if founder ceases to be participant

in business• Vesting of 3 to 5 years


Shareholders’ Agreement

• Management of Corporation• Rights and obligations of shareholders• Is agreement needed at start-up stage?


Key Provisions of Shareholders’ Agreement

• No “one size fits all” agreement• Restrictions on transfer of shares• Right to repurchase• Pre-emptive rights• Right of first refusal• Drag-along• Piggy-back• Composition of Board• Super-majority approvals


Financing the Business

• Is money the primary issue?• Types of financing:

a) Debt

b) Equity

c) Hybrid

d) Government loans/grants


Debt Financing

• Shareholder loans (secured or unsecured)• Other Individuals• Banks/Financial Institutions• Credit cards• Typical documents:

– Loan agreement– Promissory Note– Security Agreement


Equity Financing

• Selling of shares from treasury• Existing or new class of shares• Investors may demand preferential rights• Must comply with securities laws• Typical Documents:

– Subscription Agreement– Shareholders Agreement


Convertible Debt

• Debt which is converted upon occurrence of event• e.g. next equity financing• Usually has a discount on financing pricing• With or without security over assets


Sources of Financing

• Founders• Friends and family• Angel investors• Venture Capital• Strategic Investor• Government (Loans, Grants, ITCs)


Approaching Investors

• Very time consuming• Research before approaching• Seek referrals• Understand your market and competition• Know how much you need• Beware of offering memorandum/securities laws


Employees

Common Pitfalls• Lack of proper written agreements• Using inappropriate precedents • Failure to limit entitlements on termination• Improper implementation• Faulty IP and confidentiality provisions • Over-reaching restrictive covenants• “Deferring” salary• Improper termination


Contractors

• Regarded as a solution to “employment” liabilities• But contractor may still be an employee• If employee:

– EI and CPP liability– Fines for not withholding income tax– WSIB premiums and/or fines– ESA liabilities and fines– Termination liabilities– IP ownership/waiver of moral rights


Sales and Partnership Agreements

• Examples– Letters of Intent/Memorandum of Understanding– Evaluation/Trial Agreement– Co-Development Agreement– Co-Marketing Agreement– Distribution Agreement– Reseller Agreement– OEM Agreement– License Agreement– Service Agreement


Pre-Negotiation

• What are your objectives?

• Identify and involve internal stakeholders

• Identify key “must haves” and “must nots”

• Assess strengths and weaknesses – understand bargaining position


Threshold Questions for Sellers/Licensors

• Do you own what you are selling/licensing?• If not, have you secured necessary licenses and

consents from 3rd parties• Have you secured rights/waivers from

employees/contractors?• What are your obligations to 3rd parties? (including

Open Source license obligations)


Negotiation Tips

• Set expectations (internal and external)– Goals– Timing– Process– “Under promise, over perform” (when possible)

• Understand the other side’s concerns


Pre-Contract Discussions

• Confidentiality/Non-disclosure Agreement– Purpose– Key Terms to Review– Related Parties– Beware Multiple NDAs– Incorporating into Subsequent Contract


MOU/LOI

• Purpose• Pros

– Provides framework for contract negotiations– Used to indicate engagement between parties

• Cons– Can delay negotiation of definitive agreement– Often results if failure to enter into definitive agreement– Can have unintended consequences

• Binding vs. Non-Binding Provisions


Battle of Forms: Whose Contract Do We Use?

• Usually a function of who has more bargaining power

• If using own form, should be drafted in clear, user-friendly manner (test: would the average person understand the substance of the transaction from reading?)

• Even if using other party’s form, useful to have own standard terms and conditions (especially SLAs, support offerings)

• Don’t agree to anything that you don’t understand.


Using Legal Counsel Effectively

• When should you involve legal counsel?

• Who should you use?

• Draft/Review Process (i.e. how to save money)– “Please review the attached”


Thank you


Licensing Information

This work is licensed under Creative Commons Attribution – Non-Commercial – Share Alike License. To view a copy of this license, visit creativecommons.org.


Lead to Win

“Realizing Business Value Through Patents and Intellectual Property”

Aug 26, 2009

Curt Dodd – Wi-LAN, Inc. VP, Patents and Counsel


Disclaimer

DISCLAIMER

• This presentation provides general information regarding some basic principles of intellectual property law. It does not constitute legal advice and should not be relied upon as such.

• If you have a particular question for which legal advice is required, please seek independent legal counsel.

• I am a lawyer, but I am not your lawyer.


The World Is Increasingly Complex…

• Yet their views of science, too, were soon to be dislocated beyond repair by the exploration of thermodynamics and the discovery of radio waves: radioactivity, relativity, fluid and quantum mechanics were all to make it even more difficult for the educated lay mind in the early twentieth century to arrive at an understanding of the contemporary state of science comparable to, say, an eighteenth-century amateur’s capacity to understand Newton’s universe. Since 1950, any such widely-shared lay understanding is virtually impossible.

– The Penguin History of the TWENTIETH CENTURY (1999)


Know the enemy, Know yourself…

• Hence the saying“Know the enemy, Know yourself, And victoryIs never in doubt, Not in a hundred battles.”

He who knows selfBut not the enemyWill suffer one defeat For every victory

He who knowsNeither selfNor enemyWill fail In every battle

– Sun-tzu – The Art of War: Strategic Offensive


Intellectual Property Overview

What will be covered

Various types of intellectual property rights• Patents• Trademarks• Copyright• Trade Secrets• Design Patents / Industrial Designs


What is Intellectual Property?

• Property is any physical or intangible entity that is owned by a person or jointly by a group of persons. Depending on the nature of the property, an owner of property has the right to consume, sell, rent, mortgage, transfer, exchange or destroy his or her property, and/or to exclude others from doing these things.

– Wikipedia – Definition of Property

• Intellectual property (IP) is a number of distinct types of legal monopolies over creations of the mind, both artistic and commercial, and the corresponding fields of law. Under intellectual property law, owners are granted certain exclusive rights to a variety of intangible assets, such as musical, literary, and artistic works; ideas, discoveries and inventions; and words, phrases, symbols, and designs. Common types of intellectual property include copyrights, trademarks, patents, industrial design rights and trade secrets in some jurisdictions.

– Wikipedia – Definition of Intellectual Property


What are Patent Rights?

• A patent is a set of exclusive rights granted by a state to an inventor or his assignee for a limited period of time in exchange for a disclosure of an invention.

• The procedure for granting patents, the requirements placed on the patentee and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. Typically, however, a patent application must include one or more claims defining the invention which must be new, inventive, and useful or industrially applicable. In many countries, certain subject areas are excluded from patents, such as business methods and mental acts. The exclusive right granted to a patentee in most countries is the right to prevent others from making, using, selling, or distributing the patented invention without permission.

– Wikipedia – Definition of Patent


What are Trademark Rights?

• A trademark or trade mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumer with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities.

• A trademark is designated by the following symbols:• TM (for an unregistered trademark, that is, a mark used to promote or brand goods); • SM (for an unregistered service mark, that is, a mark used to promote or brand services); and • ® (for a registered trademark). • A trademark is a type of intellectual property, and typically a name, word, phrase, logo, symbol, design, image, or a combination of these elements. There is also a

range of non-conventional trademarks comprising marks which do not fall into these standard categories.

– Wikipedia – Definition of Trademark


What is Copyright?

• Copyright gives the author of an original work exclusive right for a certain time period in relation to that work, including its publication, distribution and adaptation, after which time the work is said to enter the public domain. Copyright applies to any expressible form of an idea or information that is substantive and discrete and fixed in a medium. Some jurisdictions also recognize "moral rights" of the creator of a work, such as the right to be credited for the work.

• Wikipedia – Definition of Copyright


What are Trade Secrets?

• A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as "confidential information" or "classified information".

• Wikipedia – Definition of Trade Secret


What is a Design Patent?

• In the United States, a design patent is a patent granted on the ornamental design of a functional item. Design patents are a type of industrial design right. Ornamental designs of jewelry, furniture, beverage containers and computer icons are examples of objects that are covered by design patents.

• A similar concept, a registered design can be obtained in other countries. In Japan, South Korea and Hungary, industrial designs are registered after performing an official novelty search. In Europe, one needs to only pay an official fee and meet other the formal requirements for registration (e.g. Community design at OHIM, Germany, France, Spain).

• Wikipedia – Definition of Design Patent


Integrating IP with Business


Examples of common uses for various IP rights• What rights are appropriate depends on what one is

trying to protect

The various ways in which Patents can realize value• And most depend on what your competitor is doing…

Developing a business strategy• Factors to consider


What Kind of Protection is Needed?

Q: What kind of IP protection is needed?A: It depends on what you are trying to protect, and how you

plan on using the rights.

• Patents– Useful for protecting new ways of solving problems (methods,

machines, chemicals,…) which can be copied by others and the use of which can be detected

• High Tech; Pharma; Manufacturing; Farming…• Trademarks…

– Useful for identifying origin of goods and services and preventing others from attempting to confuse the market

• Tommy Hilfiger is a good example – largely a “brand” / re-seller • Arguably rights of origin (treaty) falls unter TM’s – e.g. “Champagne” only

comes from France• Copyright

– Useful for protecting an artists expressions (not “general” concepts)• Music, movies, literature, software

– Note – some countries protect “integrated circuit topographies”



Q: What kind of IP protection is needed?A: It depends on what you are trying to protect, and how you

plan on using the rights.

• Trade-secrets / Confidential Information– Useful for protecting things for which confidentiality can be maintained

• This can include publicly available products which cannot be easily reverse engineered (Coca Cola recipe)

• Can sometimes be a more effective way to protect software than patents which require disclosure…

• Design Patents / Industrial Designs– Useful for protecting ornamental design of a functional item

• Coke bottle• iPhone layout• Nike shoes



IP is not (typically) an end unto itself… though there are exceptions…

• Intellectual Property Rights Are A Business Tool– Used to gain competitive advantage and realize return on R&D, marketing,

creative efforts and other “investments”– IP rights can be expensive to obtain, and can cost many times more to

enforce…

• Litigate on Principal, not Principle– Things go wrong when people are convinced they are right… because

litigation is unpredictable.– IP issues are BUSINESS issues, a big factor being the law. But they are

not solely LEGAL issues (who is “legally right” doesn’t always matter…)


How to Use Patents for Value

Ways In Which Patents Can Be Used For Value

• Exclusivity– Use patents to prevent others from offering competitive product or service

• Licensing– Use patents to generate royalties– Good for inventions which would not result in a customer changing brands

• Sell Patents– Patents cost money to maintain and enforce– Companies often sell patents in “non-core” areas / markets they’ve exited

• Defend / Deter 3P Patent Assertions– Defend against would be licensors or litigants (e.g. direct competitors)



Ways In Which Patents Can Be Used For Value

• Freedom to Operate– But note, a patent is a negative right to prevent infringement – A patent is not, however, a license to practice an invention

• Insurance– Minimizing the chance that a central concept of one’s offering ends up being

patented by another… – Note, public disclosure can achieve some of the same objectives…

• Other Business Objectives– Use patents to realize better prices from suppliers– Use exposure to IP as catalyst to form business relationship… (“we could sue

you, but prefer to work together…”)

Note how most of the ways in which patent are used depend on what others are making, using, selling…

– A patent on something only you make / use / sell will not have much value…



Developing an IP Business Strategy

• Determine Broad Business Strategy, Then Consider How IP Can Complement

• Factors To Consider Re: Patenting (Is it necessary)?– Product / service business to protect?– Competitors– IP landscape– Tolerance for litigation– Market size– Budget– Culture of industry



Developing an IP Business Strategy

• Examples:

E.g. to exclude competitors / limit exposure to licensors:– focus on patents related to one’s own core products or services

E.g. to defend against competitor’s patents / leverage patents for business value– focus on patents relating to key competitor’s commercial offerings

E.g. to generating revenue– Focus on patents widely used by others and for which detecting and

establishing infringement is not onerous (e.g. standards based inventions)


The High Tech Ecosystem


Particular challenges of the High Tech Ecosystem

Various IP Business Models

Case Studies


Patents and the High Tech Ecosystem

• Particular Challenges

– A great deal of high tech innovations are the result of collaborative efforts (e.g. industry standards) with many players involved (some of which also sell product / offer services; others don’t…)

– Hundreds (thousands?) of patents can relate to a single device (e.g. cell phone) -- which makes monopolizing a technology difficult (but not impossible); also makes determining the value of any one patent very tough…

– Difficult to commercialize all of one’s innovations; or one may be precluded by underlying patent rights

– Infringers are often customers or suppliers…

• As a Result…

– The high tech industry has seen a whole host of new business models, arrangements and strategies emerge develop in response to the exponential growth in patents and globalization (e.g. requiring RAND or “royalty free” obligations to participate in standards, patent pools…)


IP (Patent) Business Models

• FTC Discussions Re: IP Business Models (Dec 2008)– Ray Millien of PCT Companies (Lobbying / Advisory Services), formerly GC for

Ocean Tomo identified 17 different business models (as distinct from R&D companies / law firms)

• Patent Licensing and Enforcement Companies• IP aggregators • IP technology development type companies • Licensing agents• Litigation finance or investment firms• IP brokers• IP M&A advisors• IP auction houses• IP technology exchanges• IP back lending (IP as collateral)• Royalty stream securitization firms• Patent analytics software and services• Focus on Universities• IP transaction exchanges• Defensive patent pools / alliances• Technology and IP spin out financing• Patent based public stock indexes


IBM, Marshall Phelps and Microsoft…

Case Study #1 – IBM, Marshall Phelps, Microsoft…

• IBM– Consistently obtains more US patents per year than any other institution

• 4186 in 2008 (only 13 companies received over 1000; only 4 over 2000 )

– 1990’s -- Marshall Phelps convinces IBM to use patents to generate royalties

– IBM typically reports ~$1B / year in licensing revenue ($975 in 2006)

• Microsoft – Traditionally did not file or assert patents– Paid ~$100B in IP royalties (2003)– Recently hired Marshall Phelps out of retirement – Corp VP for IP Policy

and Strategy– Received 2030 US patents in 2008 (rank #4) – NB received 5000th US

patent in 2006…


The Wireless Industry

Case Study #2 – The Wireless Industry

• 3rd Generation Wireless– Qualcomm develops and patents fundamental concepts for employing CDMA for

cellular communications– QC generates significant IP royalties– QC also leverages IP to support product (chip) business– Industry responded with WCDMA – Many high profile patent battles

• Qualcomm and Broadcom (QC pays BC $891M)• Qualcomm and Nokia (Nokia pays QC $2.3B)• RIM pays $173M for GSM/UMTS patents; RIM and Motorola sue each other

for patent infringement

• 4th Generation Wireless– IP landscape far more fragmented– Product vendors have responded in many ways – forming patent pools; making

unilateral licensing declarations; filing DJ actions; funding IP aggregators…– RIM trying to prevent sale of Nortel’s 4G patents to Ericsson


The Evolution of Wi-LAN

Case Study #3 – The Evolution of Wi-LAN

• Research / Product Company– Early R&D work in the wireless transfer of data– Filed and obtained two core US patents – ‘222 (OFDM) and ‘802 (Multi-

Code CDMA)– First company licensed by FCC to sell OFDM products in unlicensed ISM

band– Sold both OFDM and MC-CDMA products which are still in operation

• Technology Innovation and Licensing Company– Sold various divisions to Fujitsu and Eion Wireless amongst others– Transitioned into a more IP based business model – Continue legacy of developing new innovations (R&D)– Monetize existing patents which read on a variety of wireless data

technologies– Provide a market for IP in and of itself, and improve transactional

efficiencies


The Evolution of Wi-LAN


Patent Reform

Case Study #4 – Patent Reform

• Patent Reform Advocates– Apple, Cisco, Dell, Google, HP, Intel, Microsoft, Oracle and SAP

• Patent Reform Opponents– 3M, Qualcomm, Rambus, biotech and pharma– Manufacturing Alliance on Patent Policy:

BASF; Corning; Cummins Inc.; Cummins-Allison; Dolby Laboratories; Dow Corning; DuPont; Gates Corporation; Medical Device Manufacturers Association (MDMA); Milliken; Monsanto; PepsiCo;Texas Instruments; United Technologies

• Key Contentious Provision– Basis for calculating patent damages…


Final Comments

Patent Fundamentals

• File early, file often – earliest inventions most valuable

• The “threshold” for patentability is lower than you think!

• Do not disclose before filing (use NDA if necessary)

• Be careful when participating in Standards Setting Organizations or using Open Source software (read the fine print!)

• Work with professionals