All Posts Archives - Page 12 of 14

I’ve Seen the Future, and It’s Voice Activated

By: Steve Masur

Smartphones are awesome. But aren’t you sick of looking at the tiny screen, especially if you wear glasses? A hundred times a day you stop in your tracks to navigate some groovy mobile interface to get a tiny piece of information—an address, a gate number, maybe a change in direction. The screen is a litter bigger now with plus sized phones, but we’re talking micro-centimeters, which isn’t going to solve text neck or reduce your chiropractor visits. For years, I have been waiting for the virtual reality device that would replace smartphones. Would it be Google Glass, or Cardboard, or would Samsung, Apple, or some other tech innovator change the world with something new? It is actually none of these. It’s the voice interface, with products like Alexa and Siri.

Done right, it’s a lot easier and faster to say something and get an answer than to use a visual interface. Waze has already solved thousands of car accidents—and 65% of all family arguments—just by telling us which direction to turn. Siri and Alexa are okay, but many people agree that, as annoying as it might be to others, whispering or yelling emails and text messages at your iPhone is magical in terms of convenience. These days, almost everyone has become conditioned to expect that words will be wrong in texts, or emails, but they still get what you mean. So it’s not a problem that your emails don’t come out exactly right.

But there’s still a long way to go. Alexa is just a fun toy. It takes too long to wake up, you have to think too hard about how to phrase your question, and the answers are still too rudimentary to be really useful. If, like one of my friends, your name is actually Alexa, forget about it; your home life will be a living robotic hell. But the voice interface is going to get better. Artificial intelligence technology will cause it to understand you and your speech pattern and quirks, and the answers will get more and more exact and nuanced.

Consider the potential applications and market opportunities, as people think of more and better ways to exploit this new interface. It is still early, but it’s obvious that there will be some big financial wins in this space. The Beats sale to Apple was just the beginning of the big tech companies’ increasing and accelerating foray into audio. As voice activation gets better, the headphone and Bluetooth speaker markets will go crazy and this will drive more innovation in apps. This is great news for artists and the music streaming business. These technologies will create greater penetration of sound devices in our everyday lives. Hopefully, there will come a time when you can’t avoid having excellent sound.

But the music business is not even the half of it. Voice activation is the next big thing in mobile, home, and automobile computing. As a sector, it has the potential to change computing as much as mobile phones or efficient search engines. Any application you can think of can be, and will become, accessible by voice technology, and this will drive an enormous amount of financial value in the capital markets over the next five years. Audio will not eclipse the changes that virtual reality will bring. They are on parallel paths. But audio will hit consumers in a big way, and sooner. And for augmented reality applications, audio will do far more than any fancy visual interface could ever have done.

App Promo Summit

Every once in a while, we will let you know about events of interest produced by others. On April 6, the App Promo Summit is coming to the Stewart Hotel in New York. The event is about mobile apps. As you have probably heard, regardless of how many they download, the average person uses 5 or fewer apps on their mobile phone. The showstopper at the Consumer Electronics Show was Alexa, which blindsided a lot of people in mobile media. We believe the mobile app market is ripe for disruption, as people adopt voice-activated services over those that require looking at a tiny mobile screen.

App Promo Summit is special because it attracts a much more international crowd, creating something of a miniature, C-level GSMA Mobile World Congress staged in New York. This allows one to gain insights into what is happening worldwide, not only in the US.

The App Promotion Summit will feature presenters from eBay, the New York Times, Jet.com, Urban Airship, 1stdibs, Dashlane, iHeartRadio, TodayTix, Duolingo, Nickelodeon, and many more.

New York Takes a Chance on a Game of Skill

By Steve Masur and Sarah Siegel

How the distinction between skill and chance gave rise to a billion-dollar industry

In daily fantasy sports games, players are not placing “wagers” on the odds of winning based on the number of people playing; they’re paying “entry fees” to compete in a guaranteed prize pool where the prize is set and made well-known to players before the game begins. These players are not “taking a chance” by playing Brandon Marshall against the Cardinals defense; they’re “skillfully selecting” Brandon Marshall based on statistics and past performance of both wide receiver Brandon Marshall and the top-rated Arizona Cardinals’ defense.

This distinction between game of chance and game of skill is what separates illegal gambling from a legally-recognized daily fantasy sports exception under the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), the federal law that regulates online gambling.

Under the UIGEA, a carve-out was created for fantasy sports sites as a legal exception to gambling, as legislators believed that success in fantasy sports was based on skill rather than chance. While this Act crippled the online poker industry, it created the basis for the operation and legitimization of the interactive daily fantasy sports (DFS) industry in the United States.

The legal status of DFS sites is determined on a state-by-state basis, based on each state’s gambling laws and regulations. As of 2017, nine states have passed legislation legalizing and regulating DFS sites in their respective states, and about twenty states have pending legislation on the matter. However, in certain states, such as Washington, Alabama, and Nevada, DFS is considered a form of gambling per their states’ laws. As a result, DFS sites have created self-imposed technological barriers to block these residents from accessing DFS sites and prohibit people in those states from participating in these sites’ online games.

This lack of uniformity in the legal status of DFS across the country, as well as the novelty of the industry itself, has created a large, murky gray area for the industry’s laws, rules, and regulations.

Daily Fantasy Sports Sites in New York

New York is one of the nine states that have legalized and regulated DFS. While other states had previously passed legislation to legalize DFS, New York’s legislation brought with it the most controversy and attention.

The DFS bill (S 8153) was passed by the New York Senate in June 2016, and signed into law by Governor Andrew Cuomo in August 2016. This bill came after a seven-month legal battle that began in October 2015 when Attorney General Eric Schneiderman announced that he was investigating sites such as DraftKings and FanDuel as unregulated gambling sites.

Cease and desist letters were sent to DraftKings and FanDuel in November 2015, which prompted the DFS site giants to file a lawsuit against the state of New York. In December 2015, a Supreme Court justice granted the Attorney General’s request for a preliminary injunction, but soon after, the Appellate Division granted a stay and allowed the DFS sites to continue to operate in New York until a final decision was reached. In June 2016, the Senate passed the legislation to legalize and regulate the DFS industry in New York—a massive victory for the DFS industry.

What Does the New York DFS Bill Mean for New York?

New York’s DFS legislation explicitly states that interactive daily fantasy sports games do not constitute gambling; they are games of skill. This distinction is important to note, as gambling is a game of chance, not a game of skill, and is therefore illegal under the New York Penal Law. However, if DFS is considered a game of skill under New York law, then it can legally exist and operate in New York.

The New York DFS legislation regulates DFS sites by requiring operators to prohibit games based on high school or college sports events, register with the state, and implement a range of consumer protection measures. Some of these consumer protections include restricting players under the age of 18 from participating, ensuring that the accurate odds of winning are represented in all advertisements, and identifying highly experienced players on the platform. Additionally, New York aggressively taxes DFS revenue at a rate of 15% of gross revenue generated by players in New York, which the State then uses to fund education.

It’s not yet clear what impact New York’s DFS law will have on other states. However, New York is home to an estimated 10 percent of active DFS players and is the largest state thus far to pass legislation to legalize DFS, which will likely provide momentum for states with pending DFS legislation.

The Future and Impact of the DFS Industry

The subsequent state-by-state legalization of DFS operations has given rise to a legitimate industry, rather than one that survived on the graces of legal loopholes. The DFS market, once dominated by the giants FanDuel and DraftKings, is now in the company of startups that see an opportunity to become new key players in a developing DFS industry.

While the legalization has helped fortify the foundation of the DFS industry, the regulations have also created problems for these newer DFS companies. Some states’ regulations require DFS operators to pay hefty taxes to operate in the state. For a newer DFS business, this financial burden can make it difficult to operate a profitable business at anything less than a massive scale, creating large barriers to entry for new DFS companies and curtailing innovation in the industry.

While the DFS industry gains its footing in North America, legislators in states where DFS is not legal will be watching closely. Like the eSports industry, which has faced similar criticism as a result of its nationwide growth and popularity, all eyes will be on the DFS industry and similar industries as it takes shape within this new regulatory landscape.

*We would like to thank our intern Sarah Siegel for her contribution to this article.

You, Me, and 83(b)

By: Jon Avidor

Imagine you’re at a cocktail party with a circle of sophisticated, seasoned startup investors and you get caught in a conversation about 83(b) elections, finding yourself completely out of your depth. What you do next is critical: First, get out of there. Nobody deserves to be subjected to party conversation about tax law. Ever. Second, let a lawyer explain to you what in the world 83(b) is, and why you might want to consider making the election and making it on time so that you can avoid an unnecessarily high tax bill.

Background

The federal government taxes the value of any property a person receives in connection with the performance of services as part of the that person’s gross taxable income. If the property consists of shares of stock that are subject to vesting (meaning the company has a right to repurchase all or a portion of the stock under certain circumstances, such as your departure from the company) then you have the ability to choose when it’s taxed. If you don’t file an 83(b) election, you’ll be taxed at the time the stock vests, and the income on which you’ll be taxed is the difference between what you paid and the value of the stock at the time it vests).

By making an 83(b) election (a reference to Section 83, subsection (b) of the Internal Revenue Code, 26 U.S.C. § 83(b)), you are effectively asking the IRS to accelerate your tax, and to tax you at the time of grant, not when it vests.

Why Make the 83(b) Election

A taxpayer would be inclined to make an 83(b) election if she suspects that the value of the property will increase over time such that taxing the value of the property at the time of the grant, when it’s worth less, will alleviate a greater tax burden when her property rights fully vest later. This is commonly the case with early-stage companies. Consider the following scenario:

You are approached by the founders of a startup that has just gone through its first seed financing round with an offer to become the company’s new chief executive officer. The founders offer you a competitive compensation package, which includes 10,000 shares of stock at a price of $0.001 per share for an aggregate purchase price of $10.00. However, the stock is subject to a two-year vesting schedule and a right of repurchase on all unvested shares. You accept knowing that you will be taxed on the difference between the stock’s purchase price and fair market value. You must now decide whether you want to be taxed at the time the shares are purchased (when the fair market value is $0.001 per share), or when the right of repurchase lapses and the shares are fully vested two years from now, presumably when you have increased the company’s value, and the fair market value of its shares, as its CEO.

It is often a good idea to file the 83(b) election soon after receiving value that could someday increase in value. This way, you will pay less in taxes if the potentially valuable asset actually realizes that value.

How to Make an 83(b) Election

Any transferee should consult with her professional tax advisor before making any decisions regarding whether or not to make an 83(b) election. It is in each transferee’s sole discretion whether to make an 83(b) election, and as such, it is that taxpayer’s sole responsibility to submit this notice to the Department of the Treasury. However, be aware that a transferee has a small window of time, within thirty days of the award date to be exact, in which to make the 83(b) election, so she should not delay this decision for long.

To make the election, the taxpayer sends a letter to the IRS that contains information about the taxpayer, the property and transfer for which the election is being made, any restrictions on the property, the amount paid for the property and its fair market value, among other things, as required by Treasury Regulations, 26 C.F.R. § 1.83-2(e). In addition, the taxpayer must also provide a copy of the 83(b) election notification to the transferor (commonly, the corporation).

CES Las Vegas

By: Steve Masur

Steve Masur recently moderated a panel on Leveraging Content and Celebrity for Cross-Platform Success at CES in Las Vegas. The panel, at the Digital Hollywood conference, discussed how to create maximum impact for brands and make money for celebrities in the rapidly changing media environment. Panelists consisted of top agents Carol Goll from ICM and Farhana Pargac from CAA, seasoned producers Matt Ringel, Jamie Elden, and Jared Hoffman, and Noah Rubin, the brains and execution behind Merry Jane, Snoop Dogg’s cannabis lifestyle media property that is leading the way for how all lifestyle media should be executed. They discussed the differences between how to use TV ads versus mobile small screen social media and how to get the most out of each. The panel provided some great insights. For example, it’s clear now that, while we are in the thick of the “small screen” environment that similar panels predicted in prior years, CES showed us how important voice driven technologies like Alexa will be during 2017 and 2018. They also discussed the impact of VR (virtual reality) on the media landscape, and exactly how brands are thinking about their media spend on traditional media, social media, and these new media.

We’re already looking forward to Digital Hollywood’s MediaSummit2017 which will be held here in NYC March 7-8.

Legal Alert for Online Service Providers

By: Jon Avidor

On December 1, 2016, the U.S. Copyright Office rolled out its new electronic registration system and directory for registered agents under the Digital Millennium Copyright Act (“DMCA”). This shift from paper filings to an online platform requires any service provider with a designated agent prior to November 30, 2016 to reregister its agent through the new online system by December 31, 2017 to continue its protection under the DMCA safe harbor. If you or your business maintains a website that enables users to post or transmit content, you may qualify as a service provider under the DMCA and this notice might apply to you.

The Digital Millennium Copyright Act Safe Harbor

Section 512 of the DMCA, 17 U.S.C. § 512, provides Internet communications service providers with a safe harbor from liability for copyright infringement for infringing material posted by its users, provided the online service provider meet certain qualifications. The service provider must implement a notice and takedown protocol that would allow copyright holders to report alleged infringement of its protected work on its website or through its service, and the service provider may avoid liability for copyright infringement by removing the infringing material and, if appropriate, terminating repeat infringers. As prerequisite, the online service provider must designate an agent to receive these notices of claimed infringement, register that person with the Copyright Office, and identify him or her in its posted terms of service or usage policies.

Implications of the New Rule

The Final Rule by the Copyright Office, which amends 37 C.F.R. §201.38, institutes three changes implicating the notice and takedown regime of the DMCA:

Online service providers that rely on the DMCA safe harbor protections must designate its agent to receive notices of claimed infringement through the Copyright Office’s new electronic DMCA Designated Agent Directory by December 31, 2017.
Under the new system, agent designations expire after three years and companies will have to reregister to remain current. This is a departure from the old paper system in which agent designations did not expire.
The new electronic DMCA Designated Agent Directory will list an online service provider’s agent designation history based on its paper filings.

If your business hosts or facilitates the transmission of user-generated content on its online platform and you miss the December 31, 2017 deadline to designate a DMCA agent through the new electronic directory or fail to maintain an active agent designation, your company will not continue to be protected by the DMCA safe harbor provisions, which means you could face exposure for copyright infringement alleged against users of your online service.

Founders Roundtable

By: Steve Masur

The next Founders Roundtable meetup on Nov 28th from 7-9pm at Spark Labs NEW Bryant Park location. Come join us along with the serial entrepreneurs, CEO’s, and digerati that make up the Founders Roundtable from 7-9pm where we will enjoy discussions from three new companies including one that Google featured at Cannes Lyons 2016. Find more information here and please RSVP if you’d like to attend.

The Name of the Game is the Name Game

By: Jon Avidor

Our client, who makes virtual reality entertainment apps, forwarded an e-mail from a private investigator. “Is this for real?” they asked. The PI had offered to purchase their URL for 6 figures. The deal was so good that we presumed the offer must be coming from a Nigerian prince, or maybe a Russian oligarch promising riches in exchange for some personal contact information. Anyway, we decided to respond, and see where it led. “The only way our client will consider selling this name, its URL and access to all of its social media accounts, is if you are willing to offer enough for them to rebrand their consumer facing company, which would take at least 7 figures to do right,” we responded. A few e-mails later, we actually came to an agreement. Even so, we still thought we were wasting our time.

To our surprise, we actually got a signed agreement in return, and consummated a real deal, with funds wired directly to our client without the need for escrow, before our client even took its first steps. Once the wire landed, our team transformed the company in 5 days, without losing any early stage momentum or consumers who use our client’s software. It actually came in as planned, and nothing bad happened. Our client’s brand and URL actually changed hands fair and square.

We never heard from any oligarchs or Nigerian princes after that, but just to be safe, before closing the deal, we did ask our client, “if this is a giant brand, or company, are you going to be mad that you didn’t ask for more?” They actually already had their suspicions, but they said no, they would still consider it a good deal, at the advice of counsel. Sure enough, a few days later word came out that a giant brand was launching a new product using our client’s previous name.

This isn’t the big exit that entrepreneurs dream about in their bootstrapped co-working space. Still, for a company in the midst of a seed round carefully deciding how to finance its next big software development and launch, this unexpected asset sale was a solid validation and provided a strong boost of adrenaline to the team. The money didn’t hurt, either. They had closed a significant financing round without giving away any equity.

Tax Benefits of Start Up NY

By: Steve Masur

A New York business that has partnered with a college or university sponsoring the tax-free area in which the company seeks to locate and do business, and demonstrates that it will create new net jobs in its first year of operations may participate in the START-UP NY program and, in doing so, operate tax-free for ten years.[1] Pass through entities do qualify for the tax benefits; in order to qualify for the program, the business must either be organized as a sole proprietorship, partnership, corporation, or limited liability company.[2]

START-UP NY eliminates tax liability for “any business or owner of a business in the case of a business taxed as a sole proprietorship, partnership or New York S corporation, that is located in the tax-free NY area,”[3] for ten years by providing tax credits for the following:

Business Tax-Free New York Area Elimination Credit: This credit eliminates franchise tax and personal income tax calculated by the business when filing its tax return. The credit equals the business’ “tax-free area allocation factor” multiplied by its “tax factor.”[4] The tax-free area allocation factor is the business’ economic operational presence (assets and payroll) in the tax-free area.[5] For businesses with operations both inside and outside of a tax-free area, the credit would be prorated based on the percentage of assets and payroll within a tax-free area(s).”[6] For owners of pass-through entities (i.e., sole proprietors, partners, S-corporation shareholders, and LLC members), the taxpayer’s tax factor is the portion that individual’s income attributable to the income of the business in the tax-free area.[7]
Excise Tax on Telecommunication Services: This credit is equal to the amount in excise tax paid by the business on telecommunication services for services rendered within the tax-free area.[8]
Metropolitan Commuter Transportation District (MCTD) Mobility Tax: The business is exempt from this payroll expense.[9] The District includes New York City[10] and Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester counties.[11]
Sales and Use Tax: This refund is for sales and use taxes paid for the retail sale of goods and services used or consumed by the business’ operations in the tax-free area.[12]
Real Estate Transfer Taxes: “Leases of real property in a tax-free area to an approved business are exempt from the New York state real estate transfer tax. This exemption also applies to any local real estate or real property transfer tax imposed locally.”[13]
Personal Income Tax Exemptions for Employees: Employees of START-UP NY businesses who were hired in a certified net new job[14] in a tax-free area are exempted from paying New York State personal income tax and, if applicable, New York City personal income tax or, Yonkers personal income tax surcharge or nonresident earnings taxes.[15] The employees only receive the wage exclusion tax benefit during the period that the business remains eligible for the START-UP NY tax exemptions (that being, at most, ten consecutive years).[16] The employer must withhold New York income taxes from the wages paid to eligible employees unless they provide the employer with a certificate of exemption from such withholdings.[17] There is a cap on the number of employees that qualify per business, as well as a statewide cap on the number of net new jobs.[18]

[1] N.Y. Econ. Dev. Law §§ 433–434 (McKinney’s 2015); see also STARTUPNY, http://startup.ny.gov/business-growth (last accessed Aug. 5, 2015).

[2] N.Y. Econ. Dev. Law § 433(1)(d).

[3] N.Y. Tax Law § 39(a)(1) (McKinney’s 2015).

[4] Id. § 40(b).

[5] Id. § 40(c).

[6] STARTUPNY, supra note 1.

[7] N.Y. Tax Law § 40(d)(2).

[8] Id. § 39(c-1); STARTUPNY, supra note 1.

[9] N.Y. Tax Law § 39(d); STARTUPNY, supra note 1.

[10] I.e., New York, Bronx, Kings, Queens, and Richmond counties.

[11] N.Y. Dep’t. of Tax and Fin, Guide to the Metropolitan Commuter Transportation Mobility Tax 5 (2012), available at http://www.tax.ny.gov/pdf/publications/mctmt/pub420.pdf.

[12] N.Y. Tax Law § 39(f); STARTUPNY, supra note 1.

[13] N.Y. Tax Law § 39(g). See also STARTUPNY, supra note 1.

[14] A “net new job” is defined by statute as a job that: “(a) is new to the state; (b) has not been transferred from employment with another business located in this state, through an acquisition, merger, consolidation or other reorganization of businesses or the acquisition of assets of another business, or except as provided in [N.Y. Econ. Dev. Law § 431(6)(d)] has not been transferred from employment with a related person in this state; (c) is not filled by an individual employed within the state within the immediately preceding sixty months by a related person; (d) is either a full-time wage-paying job or equivalent to a full-time wage-paying job requiring at least thirty-five hours per week; and (e) is filled for more than six months.” N.Y. Econ. Dev. Law § 431(5).

[15] N.Y. Tax Law § 39(e); STARTUPNY, supra note 1; START-UP NY Employee Information, N.Y. Dep’t. of Tax and Fin., http://www.tax.ny.gov/pit/sny/employee_information.htm (last accessed July 30, 2015).

[16] START-UP NY Employee Information, supra note 14. “Employees hired for and whose jobs are certified as net new jobs in a tax-free area will pay no state or local income taxes for the first five years. For the second five years, employees will pay no taxes on income up to $200,000 for individuals, $250,000 for a head of household and $300,000 for taxpayers filing a joint return.” STARTUPNY, supra note 1 (emphasis added).

[17] START-UP NY Employer Information, N.Y. Dep’t. of Tax and Fin., http://www.tax.ny.gov/pit/sny/employer_information.htm (last accessed July 30, 2015).

[18] Id. “There is a maximum of 10,000 tax-free jobs after year one, 20,000 tax-free jobs after year two, etc.” Id.

New Business Models for Streaming Music Services? I Choose Local Radio

By: Steve Masur

New music services seem always to try to differentiate with technology, and say that they have a totally new approach to discovery, or user acquisition. I am so bored of hearing that, and it never makes any damn money. I always think, why don’t these folks want to go after the ENORMOUS traditional market they are trying to disrupt; RADIO.

Terrestrial radio guys spent more than 50 years learning valuable lessons about how to sell ads on radio. Now that more and more people are streaming, why not bring these lessons to streaming?

Local ads for car dealerships, Taco Times, and local events do well on the radio. If you want to talk about metrics and use of data, why not apply that to local markets? Wouldn’t that be a great way to apply the new technologies used in internet ad sales, and sold to the same shortlist of brands for the last 15 years? Why not expand the scope of who you are selling to, and apply that to local brands, which terrestrial radio people have long known is what sells on the radio? It’s an easy pitch to local advertisers — more and more people are using streaming services as they change diapers, fold their laundry, drive their cars around, and work at normal jobs all over the country. Wouldn’t you like to try giving this new market of people the same ads you are giving them on terrestrial radio? You never hear it pitched. Instead, you hear about new technology, user acquisition, and new approaches to discovery that actually just feel like work, because you have to look at the screen and enter your preferences.

As far as VC pitches go, if you are risking millions of dollars, why not risk it on a proven market? Hire a bunch of traditional terrestrial radio ad sales people with proven track records, instead of developers in Ukraine, DR, or Indo, and see what happens. Watching that develop would certainly be a lot more interesting than listening to another pitch about big data metrics applied against a tiny user base, struggling with user acquisition, or the new technology your team can’t quite seem to get done on time.

Pitching tech is too noisy and confusing. Keep it simple. Pitch normal media people, local newspaper and radio guys, and pitch them on a business plan that is about normal local radio advertising. This back to the future approach would actually be innovative in this market. The only company doing anything like this is Pandora, and that’s why they are so huge. But they are very limited, and not innovating very quickly, and they are in a huge market with plenty of room. Why not go for that opportunity?