Legal Services for Entrepreneurs in Colorado

Why Your Kickstarter Project Should Form a Limited Liability Company

Kickstarter alone has led to almost 3 billion dollars of funding to nearly 120,000 projects. Crowdsourcing has become a viable alternative to traditional funding sources, whether the focus is launching a specific project or building a business.

The success stories of crowdsourced funding are as varied as the projects funded. However, the lessons from failed projects are repetitious. Those failures stem from a failure to adequately plan.

You need to protect your idea, your efforts, and your assets. Here’s a list of issues that can destroy a project:

1. Collaborator disputes

Circumstances, people, and lives change. An initial collaborator may lose interest, lack the time necessary, or even decide his or her participation should be worth more money. If you don’t already have a formal agreement in writing to deal with collaborator disputes (or collaborators leaving or wanting to change the terms of their involvement), you are leaving your project one argument away from imploding.

For example, if there are three co-founders on a project and one of the co-founders abandons the project, without a formal written contract to the contrary, the departing founder has a strong argument that he or she is still a 1/3rd owner on the project. This can lead to the departing founder taking a chunk of later profits without contributing any more work, or even disrupting the project by claiming ownership of portions of its intellectual property (discussed further below).

Every serious project needs an effective mechanism to handle the potential problem of the departing founder. Ignore this at your peril.

2. Intellectual Property of the Project

A major issue of collaborator disputes is: who owns the intellectual property (“IP”)—including the execution of the ideas; the components of the product or project; the name and marketing; and, the content and the strategy. If you haven’t set that out in writing clearly, the answer is likely that each individual owns his or her own contributions—and each individual can withhold consent to use the IP at any time.

For well-run companies, the company owns the IP; the individuals do not. This allows the company the flexibility to do what it needs to run and grow the business. Without clear IP assignment agreements, each founder has the ability to hold the company hostage at any time.

Other than basic founder disputes, IP issues are the number one cause of early-stage legal issues. This can happen when an acquaintance that you spoke with about the project decides, after seeing the success of your campaign, that you owe her something for her input or ideas. It can happen when a company finds out an early-stage founder has started using the same IP on another project or with another company or competitor.

3. Intellectual Property of Others

Perhaps your Kickstarter plans to parody some brand names or skewer a celebrity or political figure. The First Amendment provides some protection for people who use names, brands, and other intellectual property for the purpose of parody. However, that protection is limited, particularly where the parody is primarily for the purpose of commercial gain. A copyright infringement claim could see the profits of your project going straight to a third party…assuming your project isn’t prevented from getting off the ground entirely.

4. Personal liability

Getting your project funded is the beginning, not the end, of the story. For example, a company named Zano raised about 3.5 million dollars on Kickstarter to build an advanced selfie drone. For a video demonstration of what was intended (and never achieved), see YouTube.

Wildly successful funding was followed by sloppy spending, production delays, internal disagreements, and ill-advised gambles to try to stay on schedule. For a full account, see Mark Harris’ “How Zano Raised Millions on Kickstarter and Left Most Backers with Nothing.”

Months after a wildly successful Kickstarter campaign, the company was left with thousands of unfulfilled orders; unpaid bills from component suppliers; investors seeking recovery of their investments; and a company without money to pay for any of it.

No one plans to fail. But sometimes even promising projects and business ventures can end up the victims of a parade of unfortunate circumstances. When that happens, you do not want the supporters, investors, and suppliers coming after you to recover the debt. That is one reason why people form limited liability companies (LLCs) or corporations—to protect their homes, cars, and personal credit from suffering the consequences of a project’s failure.

5. Moving forward to new projects

After a successful campaign, you may wish to move onto a new project—leveraging the ideas, popularity, branding, marketing, websites, and goodwill of the last project. You may also wish to do so while working with new collaborators. Without formal agreements as to who owns what, you may be locked out of spring-boarding from your previous success—or forced to drag along deadweight from your last project.

How to protect your project and your company:

– Form a distinct legal entity, like an LLC or corporation.
– Use organizational agreements to make it clear how that company will operate.
– Use formal agreements to set in writing who owns the IP, how disputes are resolved, and who receives what.
– Consult with individuals or services that understand the legal and practical problems your company will face before you face them, and before they threaten your project.

If you’ve read this far, you are serious about making your idea a reality. Now is the time to speak to someone who can set you on the right track to protect your ideas, your efforts, and your success.

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