Legal Aspects of the Business Model Canvas

April 2014

Author: John A. Leonard


Steve Blank and Alexander Osterwalder have developed analytical tools to assist lean companies develop successful business models.  The system of Customer Discovery and Customer Validation is a way to organize your business.  Outlined below are key legal aspects to consider for each section of the Business Model Canvas.

1. Key Partners. – Checklist of types of relationship agreements.

a. Strategic Alliance Agreement – Platform.  (Example: the exclusive relationship for Farmville on Facebook).

b. Strategic Alliance Agreement – Financial.  (Example: a business partner purchases 10% of a company to infuse cash and grant access to partner’s customers).  Can you buy out the Strategic Investor if the relationship sours?

c. Joint Business Agreements (Examples: Sharing of customer data, referrals, joint advertising; reduced licensing fees for customers).  Do you have customer approval for sharing data?

d. Channel partner/traffic partner agreements (Examples: advertising agreements; fulfillment agreements; payment agreements).

e. Suppliers of goods and services for Key Activities (including those on the cloud).

f. Are the foregoing agreements in writing?  Are your damages limited?  If information is shared between the company and a partner, is this activity described in your privacy policy – especially early in the customer discovery phase.  See number 5 below regarding FTC issues regarding sharing customer data with third parties and protection of intellectual property.  Are the agreements exclusive?  Non-exclusive?  When do they expire or renew (keeping in mind you will iterate and may pivot).

2. Key Activities.  What are the most important activities of the company to achieve its value propositions?

a. Typical listings are software development, platform maintenance, R&D, hardware production, sales, and fulfillment.  Legal issues associated with Key Activities are discussed throughout this document.

3. Key Resources.  Establishing and protecting Key Resources is important to a successful business model.

a. Human Resources – Hire people correctly.  Do not misclassify employees as independent contractors.  Do not defer wages pending funding – hire at minimum wage and revise wages once funding has occurred.  Use agreements to avoid litigation.

b. Financial Resources – Company formation and equity.  Establish a corporation or LLC to shelter owners from creditors.  Get advice on tax strategies when beginning – especially where one person contributes money and others get stock for services; have a buy-sell agreement.  Issue equity carefully and consider how to get equity back if a person leaves.  Issue equity carefully and consider state and federal securities laws.  Understand how to use convertible notes, common stock and preferred stock for early investors.

c. Financial Resources – Lean timing (Survive with only the bare minimum of capital until after validations).  This may be the most important aspect of the Lean Start Up method.  Funding only minimum lean operations until Customer Validation and Business Model Validation results in preserving value for founders and initial owners.  A build to sell company may never seek VC money.  It may simply sell after validations.  A Scalable company; however, may seek VC funding, but only after it has preserved its maximum value by lowering risk through validations.

d. Intellectual Property Resources – All IP (trade secrets, copyrights, trademarks and patents) begins as a trade secret.  Ensure that all persons and entities involved in the creation process and who have access to sensitive IP execute non-disclosure agreements and tech transfer agreements.  Ideas and data are the main assets of a technology company and need to be protected by contracts, and where applicable, consider early registration at the copyright office, trademark office, or patent office. 

e. Physical Resources – Agreements for space and equipment should be coordinated with capital requirements and reviewed for legal terms.  Blank’s Customer Discovery and Customer Validation methods will generate a substantial amount of data.  Many companies gather data in ways that that permit them to use and sell it.  Your data may be worth more than the goods and services you sell.

f. Professional Resources – Lawyers, part-time CFOs and accountants are invaluable.  Know them and ensure they understand your business.  CFOs are invaluable when raising capital and pricing goods and services to reflect costs and profit margins.

4. Value Propositions.  What do you ultimately want to change?

a. Market differentiators (such as faster, cheaper, better brand, better design, more convenient, better suited for a particular niche) are all confirmed with an MVP, testing and data.  See number 3, above.  Have you protected the MVP, ideas and data from the idea through your various iterations and pivots?

b. Lean companies test and acquire data from prospective customers continuously.  Do you have agreements with prospective customers on the ownership and use of data?

5. Customer Relationships.  How do you manage your tactics to get, retain and grow customers?

a. Website terms of conditions and privacy policy – Have your customers agreed to terms and conditions prior to use?  Have you limited the company’s liability on its terms of use?  Do you “say as you do and do as you say” on your privacy policy according to FTC rules?

b. What terms are you using for SEM/SEO and do they violate trademark laws?

c. Do your retention techniques such as contests avoid gambling and registration requirements under both state and federal law?

d. Is company owned content protected by registration under copyright law? (Examples: website, trademarks, copyrights, newsletters, tips, FAQs).

e. How have you protected and transferred ownership of customer supplied content in reviews, blog comments?

f. How are up-sells and cross-sales managed internally and with your partners? Can you audit results?  Have you protected sharing of data and customers in your partner agreements?

g. If using social platforms, does your use of the platform comply with current platform rules and terms of use?

h. In connection with the purchase of email list purchases, have you and your business partners limited liability?

i. How are referrals compensated, managed and tracked?

6. Channel Relationships.  How do you manage your channels (such as, awareness, evaluation, purchase, deliver and after sales channels)?  How many channels will you start with?  How many channels will you ultimately use?

a. Website Channel only

b. Use of a Platform App store

c. Use of CRM/CRC Ad Networks or Exchanges

d. Use of a social media platform

e. Use of an aggregator/distributor

f. Use of a partner’s flash sale (Groupon) or relationship engagement (Ibota)

g. Multi sided markets require one for the source of goods and service and one for sales of goods and services (Amazon)

h. Agents

i. Distributors

j. VARs

k. OEMs

l. APIs

m. Key Partners in Section 1

n. Are the foregoing agreements in writing?  Are your damages limited?  If information is shared between the company and a partner, is this activity described in your privacy policy – especially early in the customer discovery phase.  See number 5 above regarding FTC issues regarding sharing customer data with third parties and protection of IP.  Are the agreements exclusive?  Non-exclusive?  When do they expire or renew (keeping in mind you will iterate and may pivot)?

7. Customer Segments.  What mass market, niche market, segmented market, diversified market or multi-sided market will you pursue?  See numbers 1 and 6 above regarding legal issues related to reaching these markets.

8. Revenue Streams.

a. Company goods or services (sold, subscribed, auctioned, temporary use, pricing terms)

b. Company collected data sharing

c. Company platform for advertising by others (banner, Ad Networks, Ad Exchanges)

d. For each of the foregoing, what agreements are in place to capture this revenue?  Has a CFO confirmed the pricing and margins (after payments to channel partners)?

e. Are the foregoing agreements in writing?  Have you disclaimed the correct warranties? Are your damages limited?  If information is shared between the company and a partner, is this activity described in your privacy policy – especially early in the customer discovery phase?  See number 5 above regarding FTC issues regarding sharing customer data with third parties and protection of IP.  Are the Agreements exclusive?  Non-exclusive?  When do they expire or renew (keeping in mind you will iterate and may pivot).

f. What are the costs of Key Partners, Key Activities and Key Resources?

g. Has a CFO confirmed your cost and pricing structure in order to sell goods and services at appropriate margins?

h. Have all the streams of revenue been identified and matched against their cost?

i. What management data is your CFO giving you in order for management to better operate the company?

9. Cost Structure  For each revenue stream, do you understand the costs?

a. What are the costs of Key Partners, Key Activities and Key Resources?

b. Has a CFO confirmed your cost and pricing structure in order to sell goods and services at appropriate margins?

c. Have all the streams of revenue been identified and matched against their cost?

d. What management data is your CFO giving you in order for management to better operate the company?

 

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

Copyright © 2014 Fairfield and Woods, P.C.,ALL RIGHTS RESERVED.

Comments or inquiries may be directed to:

John A. Leonard