Thursday, June 26, 2014

Aereo Supreme Court Case: One Shot in a Battle Between the Online Mobile World and Everyone Else

By Jim Verdonik

I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at or Or you can check out my eLearning course at or or you can purchase my books at

I thought you might be interested in my comments about how investors should be careful in the legal conflict between the Internet world and the physical world in this article published by WRAL Techwire yesterday about the US Supreme Court's decision in the Aereo case that upheld broadcast TV's rights over Aereo's service that charged mobile device users to see TV shows.

You cannot profit from other people's copyrighted content even if it goes through the air to others for free.  Copyright owners have the right to decide who can use it for free and who has to pay.

This will not be the last case where this type of legal  battle will be fought between Internet entrepreneurs and people who think their rights are being infringed.

Personally, I'm a neutral party in this war, but investors should be careful not be caught by surprise in the middle of this battleground.


VC attorney: Aereo case will deter investors, not entrepreneurs

Published: 2014-06-25 12:21:00
Updated: 2014-06-25 15:36:31

Technology startups aren't likely to be scared away from innovation due to Aereo's loss at the Supreme Court, but investors are going to "be more careful," says Jim Verdonik, a veteran attorney who works with venture capitals and startups.

The nation's High Court on Wednesday handed Aereo a stinging rebuke, ruling the company violated copyright laws by using innovative, miniature antennas to in data centers to capture and resend TV programs to subscribers who pay monthly fees.

But the biggest losers may be the investors, such as Barry Diller, who had poured close to $100 million into Aereo.

So while entrepreneurs will likely keep looking to upend existing businesses, investors need to be more cautious.

So says Verdonik, who works at Ward and Smith, P.A., in Raleigh and is one of the most respected legal minds in the region's startup community.

"Entrepreneurs will not be deterred by this case," he tells WRAL TechWire. "Entrepreneurs will always try to push the envelope."

But the caution flags have been raised for angels, VCs and others thinking about making a tech play.

"Investors, however, will be more careful about investing in companies that violate the rights of others," Verdonik explains.

"The technology/legal lesson is that just because you can do something with technology, it doesn't mean you should finance it."

And he blames part of Aereo's court failure on the money people who saw a chance to upend broadcasting and cable TV as we know it.

"Entrepreneurs by nature always have their feet on the accelerator. In this case investors forgot it was their job to apply the brakes," Verdonik says. "The result was a crash."

Ryan radia, associate director of technology studies at the Competitive Enterprise Institute, a think tank in Washington, D.C., also doesn't see innovation ending - as long as it's "legal."

“Today the Supreme Court ruled in favor of network television programming and the rights of its creators and distributors. Companies like Aereo, who had essentially been free-riding on broadcast content, will have to stop operating without permission," Radia said. “But, this isn’t the end of online television, since companies like Hulu, Netflix, iTunes all pay the networks for their content and share it in a legal way.

“People should not worry that this decision will halt innovation in online entertainment; this case was about protecting companies’ original content from unauthorized resell. It also does not endanger cloud computing; as the Court said, this decision does not render companies such as Dropbox and YouTube liable for uploads posted by individual subscribers.”

However, more crashes may be coming, Verdonik warns.

Et tu, Uber?

Uber, for example, which is already encountering strong headwinds in Europe.

"Uber faces similar issues," Verdonik says.

"Investors giving Uber an $18 billion valuation are ignoring legal issues. Investors hope that Uber can change legal reality.

"But powerful groups that include taxi owners and workers and city officials who want tax revenue are lining up against Uber. Time will tell who wins that battle, which will involve a mixture of legal issues and political clout."

Verdonik also cautions against belief that technology can lead to change when the opposition is well-armed.

"Looking at the big picture, I think you see increasing conflict between the online/mobile device world and the physical world," he says.

"The Arab Spring uprisings were attributed to the power of the Online device world. But the physical world of guns and boots on the ground seems to have quickly reversed initial losses.

"We should not be too quick to judge winners and losers in these struggles between the online world and the physical world. There will be many skirmishes in a long war."

And investors may soon learn in a very costly fashion that technology does have its limits - in court or in the street.


Thursday, June 12, 2014

Crowdfunding 101 for Real Estate Developers

By Jim Verdonik

I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at or Or you can check out my eLearning course at or or you can purchase my books at

Right now many of our real estate development clients are seeing the national economic recovery take root locally and have promising projects available to them. 
Our region is growing. 
·         People need places to live.
·         Growing businesses need room to expand.
·         Relocating businesses need new facilities.
That spells market opportunity.
Traditional Lending Sources
But many real estate developers are waiting on the sidelines.  They can't get into the game and are missing these opportunities, because their traditional lenders are unwilling or unable to fund new projects, either because:
·         Some lenders are still risk adverse and overcompensate for bad decisions made before the 2008-2009 crash.

·         Other lenders are hampered by new regulations that limit their ability to lend and increase their costs.
Unless your project is blue chip with a big equity cushion to protect against downside risk, you face a greater number of hurdles to obtain bank loans for real estate development projects than you faced ten years ago.
That's one reason why inflation is so low despite the Federal Reserve System lavishing big banks with money.  Inflation doesn't occur when the Fed prints money.  Inflation is the product of too much money chasing too few goods and services.  That is not happening at the rate it did in past economic recoveries, because the banks are not lending money to businesses and businesses are not putting the money to work.  Instead, a lot of money is sitting idle in passive investments like treasury bills.

Even if you find institutional investors or lenders with a willingness and ability to lend, you are usually forced to:

  • Do your deal on their terms. 
  • Pay high fees.
  • Provide substantial collateral.
  • Personally guarantee the loans putting your personal assets at risk.
The bottom line is that you either take on substantial personal liability and risks or you give up a big part of your equity.  And this on top of the demanding documentation and oversight requirements that traditional lenders usually require.

Your job is to develop new projects and refinance existing projects as loans become due.  But you can't develop new projects or refinance even successful exciting projects without money.

So, what are real estate developers supposed to do?

We see two basic choices for developers:

  • Wait for traditional lenders to loosen their purse strings.
  • Learn how to tap into other financing sources.
Market Cycles

In every real estate market cycle, traditional lenders eventually loosen lending standards.  So, if you wait, you will probably eventually get money.  At some point in the lending cycle, most projects become fundable.

But be careful what you wish for.  Timing is critically important.  It matters if your project is funded first or last.

Timing is a primary reason why some deep pocket developers succeed over time while other developers with fewer financial resources fail:

  • The people who raise money early in a market cycle are usually able to capitalize on the market opportunity.  They cash out before the market becomes saturated with copycat projects. 
  • The people who raise money late in the market cycle when credit has become easier to obtain are often left trying to sell into an overbuilt market.
Which group do you want to be in?

Real estate market cycles have proven over and over again that local markets can quickly change from underserved to overbuilt and that "he who hesitates is lost."

Crowdfunding Alternatives

Luckily for developers (and anyone else who needs to raise capital), many people are looking to invest in real estate and other alternative investment opportunities, because, among other things:

  • Bank certificates of deposits are paying very low interest to savers.
  • High volatility in the stock market makes many people nervous.
Until recently, it has been difficult to tap into the money that individuals have accumulated and want to invest without going through traditional gatekeepers on Wall Street.  Federal and state securities laws have limited your ability to raise capital from anyone other than institutional investors and lenders or people you know personally or through your business connections.

Most people don't have enough high net worth friends and business associates to raise large amounts of capital.  Besides, if you put all your family, friends, and colleagues into a deal, you might become very unpopular, if your deal goes badly.  These are the same people you rely on to sustain you through difficult times.  Do you really want to risk all these important relationships?

Recent changes to securities laws, however, now make it much easier to both borrow and raise equity capital from individuals.  At the same time, technology is making it much easier and less expensive to both communicate and transact business with virtually everyone in the world.  When we apply these new technologies and less restrictive legal regulations to raising money, we call it "crowdfunding."

But perhaps when you first heard about crowdfunding, it seemed like it was not important to you.  When we make judgments like that, busy people often screen out additional information, because want to stay focused.  Let's explore why not learning more about how crowdfunding applies to your business is a mistake.

Real Estate Industry Using Crowdfunding

Let me ask you a question:  Who is raising more money using the new rules and technologies that comprise crowdfunding:

  • Software developers?
  • Or real estate developers?
Does it surprise you that the real estate industry is raising more money through different variations of crowdfunding than technology businesses are?

Does knowing that crowdfunding is opening new doors for many real estate developers make you want to re-think your crowdfunding strategy?