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The guys talk about Kickstarter and who exactly is responsible for when campaigns fail to provide rewards to backers.

Full Podcast Transcript

NASIR: Welcome to our podcast where we cover business in the news and add our legal twist. My name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: And welcome to our Kickstarter campaign to raise funds for what? For ourselves, right? We’re just going to take the money and leave.

MATT: I don’t know if that’s allowed under their terms of service, but how much are we looking to raise?

NASIR: Well, it’s for our podcast – to help us fund the podcast. As far as how much we’re looking to raise, I think I would say a minimum of $1.00 but maximum $2 billion.

MATT: The minimum is the important thing because, if you set your minimum and, in order to actually get the proceeds from Kickstarter, you have to reach your minimum. If not, then nothing happens.

NASIR: Oh, okay.

MATT: So, yeah, we’ll just have to make sure that we’re following the rules that Kickstarter has on its terms of service and this is actually what it truly says. “Don’t break the law. Don’t lie to people. Don’t offer prohibited items. Don’t victimize anyone. Don’t spam. Don’t harm anyone’s computer. Don’t abuse other users’ personal information.”

NASIR: Yeah, I think we can do that.

MATT: Sufficient for me. But let’s say we do get that investment, well, I guess, first, let me backpedal a little bit. We have to offer some sort of reward or benefit in order for people to give us the money.

NASIR: I already have a list. Like, for example, okay, if you pay us $5.00, then you get a free download of our episode. If you pay us $10.00, then you get to listen to an episode before it comes out and that’s about, like, six hours or so before. We can go on from there. I have a lot of ideas.

MATT: Yeah, all very good, of course.

NASIR: Yeah, all very good.

MATT: So, if we do that and then people give us money, we don’t fulfil those, I mean, those would be easy rewards to fulfil. But, oftentimes, people start these Kickstarters and have these rewards. A lot of times, if it’s product-based, it’s going to be based on giving them some form of the end product and, what happens when the people that ran this individual Kickstarter don’t end up giving the rewards to the people they’re supposed to, I guess that’s what we’re going to talk about here – the issues behind that – because it happens. I don’t know what percentage of the time it happens but it happens, I’m sure, I was going to try to ballpark a percent but I’m just not even going to do that.

NASIR: I mean, obviously, I think most people are honest but, at the same time, it’s not about honesty. It’s also about how many projects just fail. I think our perspective may be a little warped because we tend to hear those stories more often than not. I mean, we’ve had personal experiences with our clients who have either done campaigns or have had relations to it and so forth. It’s not uncommon for just a group of people to go in there with positive, wholesome intentions. They raise the funds and they find out, “Oh, there’s some kind of kink in the production,” or whatever and they need more funds and it just falls apart or one of the partners leaves and doesn’t go anywhere. That happens. I mean, that happens with any project which shows you there’s always going to be a time where you need more money. Sometimes, what you raise in the Kickstarter campaign maybe not be enough.

MATT: Yeah, that’s a good point. I don’t think there’s too many people out there that are just trying to scam the system and get free money. Maybe that guy who did the Airbnb thing.

NASIR: Of course. We covered that a while ago, that guy that was overstaying in an Airbnb also had onne failed Kickstarter campaign where he didn’t do anything with the money and then he was working on a second one, right?

MATT: Right. It was a sizeable amount, too. I think it was $40,000.

NASIR: Yeah.

MATT: But, yeah, sometimes they just underestimate the expenses involved in manufacturing or distributing the products so they could run into problems and Kickstarter’s stance is pretty straight-forward. It says the contract is between the person that puts up the thing and the people that give their money where Kickstarter itself is not part of this contract. They do address the issue of, if rewards are not being fulfilled, and they basically come down to saying the person needs to make the best effort in order to make sure the backers get what they’re supposed to get. If not, then make the best effort in giving them some sort of refund or something like that. But, I mean, in situations where the person that created it underestimates the expenses and then has already taken the backer’s money and then tried to pay for things and now it’s zero dollars and what’s your remedy as a backer?

NASIR: Exactly. I think that’s the frustration that I would have with these companies like Kickstarter because, in fact, we wrote an article on the blog about something about the crowdfunding exposure. Anne Wallace did a good piece on it; she put it well. She’s like, as they say, the house always wins. In this sense, it’s that Kickstarter is going to get their percentage – not either way, I should say. But, if it gets funded, they get their fees and they have no risk and no liability because they disclaim everything. I mean, not only do they disclaim that they’re not responsible, like you said, that the backer and what do they call it? The entrepreneur – the contract is between them but, also, they limit their liability to, I think, $100. They have an arbitration clause in there which is not unusual. They also have it so that there’s indemnification so that, like, if, for example, the company does something wrong and Kickstarter is sued by it, then the fundraiser actually has to indemnify the company which, again, is not all unusual but compare that to, for example, eBay or PayPal – not necessarily the greatest companies either but they do get involved in the dispute. They have a dispute resolution process between the buyer and seller. Kickstarter is not even willing to do that and I’m just wondering, “Look, at what point are you going to take responsibility?”

MATT: That’s very true. They just say, “Hey, we’re a platform. We’re not responsible for this. We don’t oversee the projects’ performance. We don’t mediate disputes. It is an agreement between the person that created it and the backers, and that’s that. We’re just here to provide this website and a way to accept funds and then, ultimately, transfer them to the person that created it after taking the cut that we’re entitled to.”

NASIR: I really feel that – there may be out there but there is room for a platform that actually vets their projects, you know, and gets a little more involved because you can still disclaim your liability or limit your liability even getting involved and I think that’s what the Kickstarter legal compliance is worried about – once you start putting your hands in, then it’s going to be much harder for them to argue that they are not culpable, right?

MATT: Well, if I remember correctly, Kickstarter used to have some sort of screening process and then, a year or so ago, they just opened it up kind of a free-for-all. But, yeah, I mean, without the screening process, you’re going to run into a lot more questionable campaigns that are being run. So, I guess they figured the amount of money they’re making off all the projects is going to outweigh the cost associated with dealing with these disputes.

NASIR: I think one of the biggest problems too is that, compare this to eBay or like a transaction you buy on eBay, it’s a buyer and a seller. This is a bunch of buyers or a bunch of funders and one company. The problem with that is because these funders tend to be, what? Ten, $15.00, $20.00 at a time – I don’t know what the average is but relatively small amounts – the incentive for any one of those funders to actually file a lawsuit is very low. It’s like the trouble is too much and so the only way that it would make sense is if there is some kind of class action or some kind of attorney that’s willing to group everyone together and then file a lawsuit But, on top of that – not to go into a long rant here – if this company chose to take the funds and not do anything with it, that company is probably not collectible anyway. They’re going to go away or they spent the money already and so where’s the resolution? In fact, in the past, I think the only way that this has really come to manifest itself is maybe some civil lawsuits here and there, but the state governments or state attorney general will step in when a lot of people have been harmed somehow.

MATT: You’re exactly right. What are you going to do if you gave $10.00 and you didn’t get your… even, like, $50.00. I mean, it’s not going to be worth the time to go after someone. I don’t know if you saw this in, let’s see, it was 2012 on the Kickstarter blog. These people that are affiliated with Kickstarter wrote this post saying how Kickstarter is not a store. They say, “Hey! You know, we require the creators to talk about their risks and challenges of this particular project so we think that’s enough.” In a store, if you pay money, you get the product, so it’s not always the case here is how I interpreted this.

NASIR: Oh, yeah, absolutely. By the way, I just found $1.5 billion inn pledges for Kickstarter since 2009. The failure rate for Kickstarter campaigns – I don’t know what the reference is here but – it’s reported to be greater than half – more than 50 percent. Can you imagine that? Assuming that’s close to a dollar amount if you can equate it to a dollar amount. Out of $1.5 billion in pledges, $750,000 was basically lost – or $750 million I should say.

MATT: Yeah. Obviously, it’s an alarming stat or alarming number but I’m really not that surprised. To me, what Kickstarter has become, maybe at the beginning when it was a little bit different but now enough people know about it. Kickstarter campaigns are just essentially people trying to get free money in hopes that it will jumpstart their product. I think the creators are looking at it all wrong and the backers don’t necessarily understand the ramifications of it either so it’s not the best market to really get money for your product and then have to move forward. It definitely still is good for some creators, some products, but enough of them are in the wrong spot to be doing this Kickstarter route.

NASIR: It’s a good point. I was just having a conversation with somebody who had this really great idea, a business idea, and he was thinking about ways to fund it. I was just thinking, you know, he was mentioning crowdfunding and Kickstarter and so forth but, really, to me, if you really have a great idea – and this guy really did have a great idea – is Kickstarter the best way to go about that? To me, it’s a little amateurish in the sense that, if you really have a great thing to sell, you can go to an investor and get the whole thing funded with one or two conversations. I guess that’s idealistic but that’s what happens in the real world. Going this Kickstarter route, there’s a lot of downsides. I mean, you’re basically disclosing your idea to the public. I like the Kickstarter campaigns that are really truly a kickstarter like, okay, “It cost me $5.00 to create this widget. If you give us $20.00, you’ll get the first widget in the production and we’ll use that money to create the widget.” To me, that makes sense, you know? And then, it’s just a math problem of being able to produce the widget to make sure we have enough to ship it and all that. The early adopters get the widgets first. I think that’s a win-win.

MATT: Yeah. I’m looking at the most funded Kickstarter campaigns. Two of the top three are by the same company, Pebble Technology, for these different watches. Coolest Cooler, I’m sure you heard about that – the cooler with all that crazy stuff with it. Your favorite, number four, $8.7 million in pledges, this card game called Exploding Kittens.

NASIR: Oh, yeah, we’ve covered that. Did I buy that? I feel like I bought it. I’m not sure. Did I buy it on-air and I haven’t gotten it yet or something?

MATT: It’s very possible. Yeah, a lot of games, it’s pretty much technology. It’s a combination of technology, games, and then I would say entertainment – like, Veronica Mars movie, Reading Rainbow, some Zach Braff thing.

NASIR: Again, I have to confirm this statistic, but that majority of the projects fail, that bothers me a little bit – still. Everyone says there’s eight out of ten businesses or sometimes people say nine out of ten businesses fail in the first five years. That makes sense to me because, you know, over a long period of time, you know, there’s a lot of things that can go wrong. But, with the Kickstarter campaign, if you raise the minimum funds that you have, okay? All you have to do is produce. You have a project and you’re going there. It’s like, “Okay. I have everything. All I need is the money.” They get the money and then they fail. It just goes to show you, it’s very amateurish because it’s all in the execution and kind of gives some light out that, look, sometimes your problem is not just that you need funds, you know? There’s a lot to it.

MATT: And I don’t know how Kickstarter necessarily tracks the future success.

NASIR: Again, I’m not even sure if that’s something reported by Kickstarter or if that’s something through third-party research. I have to look into that.

MATT: Yeah, because I would think it’s got to be third party because Kickstarter even says, you know, We don’t monitor the performance.” Basically, the thing is you set an amount, you reach it, you get the funds that people have pledged, and then it’s up to you to make sure that you follow through with everything. We’re out of the picture at that point.

NASIR: Yeah.

MATT: Great model for them. They have already got their cut and have cut themselves out of any liability.

NASIR: Exactly. The house always wins. Kickstarter collects 5 percent of the funds that are collected for projects that meet their goal.

MATT: Yeah.

NASIR: Regardless of whether they win or lose. I think that’s troublesome.

MATT: I’m sure there’s probably been the campaigns where the creators had estimated their expenses and been right but they forgot to account for that 5 percent that’s taken out.

NASIR: Oh, yeah. We covered this, too. There was also tax consequences to that too, right?

MATT: We did cover that.

NASIR: It would be a gift, right? It’s taxable income and there’s so many issues.

MATT: Well, if you look at that, there’s revenue, and the money you pay is expenses then it could just net out to zero, yeah.

NASIR: That’s true. In theory, it should net out to zero.

MATT: Hopefully.

NASIR: Whatever the profit is.

MATT: Or – I’ve got it, I’ve just figured it out – we’ll just do this Kickstarter, we’ll get the money and then spend more on it and then we’ll have a net loss and then we can pass that through to our individual taxes.

NASIR: Perfect. It’s a big tax scheme that we’re working on.

MATT: I like when people ask that idea to me and I’m like, “Well, you realize that it’s all predicated upon you losing money in a business so you’re losing dollar for dollar in your business and you’re saving whatever your tax rate is on the tax benefits so just think about that for a second.”

NASIR: Very classic. Okay. So, after this story, I’m not ready to put Kickstarter on my boycott list amongst Yelp and Uber but there is something that bothers me about that practice so I’m going to be keeping an eye on them.

MATT: Slowly but surely, you’re alienating every big company. What do you use for a search engine? You probably don’t even use the internet. I don’t know.

NASIR: No, Google’s not perfect but I think they’re still, more or less, doing better than other companies in their projects and ethical approach, but definitely not perfect.

MATT: I thought for sure you would say you’re a search kind of guy.

NASIR: No, I’m not. Thanks for assuming that. Well, anyway, thanks for joining us, everyone.

MATT: Yeah, keep it sound and keep it smart.

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Legally Sound | Smart Business covers the top business stories with a legal twist. Hosted by attorneys Nasir N. Pasha and Matt Staub of Pasha Law, Legally Sound | Smart Business is a podcast geared towards small business owners.

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