It is our final episode with the Nessa Group, even though our relationship will last a long time.
In this episode, the Nessa Group discusses a business with a unique and very special product. The product has the ability to help other businesses greatly. However, the business is built on shaky ground and the discussion revolves around that a business needs more than just a unique product.
Anthony Verna: (00:00)
Welcome to our eighth and final episode of our special mini-series with the NESSA Group. We’ll start. Hi, Jim Huerta. How are you?
Jim Huerta: (00:08)
I’m doing well and I’m happy that we’ve accomplished the eight episodes and I hope that they draw a lot of attention.
Anthony Verna: (00:14)
Thank you, sir. And Barry Kolevzon, the other principle of the NESSA Group. How are you doing?
I’m doing fine. Getting educated. Learning more than we know now.
All right. Wil Jacques, our patent professor.
Yes. Always a pleasure to be here.
Justin Tripodi, our branding buddy.
Pleasure to be here, Anthony.
I’m sorry I couldn’t do better than that on the illiteration and Scott Mautner, our corporate attorney. How you doing?
Doing well, thank you.
And which firm are you with, for attorney ethics?
Harrington, Ocko and Monk.
I’m managing partner of Verna Law also. So on this particular case study is a former client of the NESSA Group and one that most of us here have experience with. So, let’s talk a little bit about the software that this particular client had made. And it did really work very well. It made that client, and that company, I should say a leader in online shopping experiences. Jim, why don’t you take it from there?
Just give it a backdrop. Sure, sure. The company had been up and around for a while. They actually had established a quite a bit of patents. I’m going to say it’s somewhere in the 30s. I’m not totally positive right now how many patents they had. But it was, I think ahead of its time. It was a way that shoppers online cannot lose track of what they had been looking at or what they had been shopping for. You were able to have like a cookie sitting inside the shopping process where it would take you right back to where you left off of what you were interested in depending on the store, whether it’d be a jewelry store or a clothing store. The utilization and the possible additional utilizations were non-ending. I mean, you can keep on thinking about how many things you can do with it.
Anthony Verna: (02:13)
So Jim, a user would be able to leave the website store and come back to it with the cart exactly as it was.
And then would the user also see remnants of this cart, for lack of a better word, around the web? So if I close this cart and this store and I went like onto Facebook and I went to Twitter, would I see other ads targeted to me to go back?
Jim Huerta: (02:40)
I think it would be more specific and driven to the establishment that were using the app.
Anthony Verna: (02:45)
Okay. So, there were also a special ways that if I recall correctly that an ad could be shown to a user as well.
I mean, so there was something unique with this particular, absolutely. And a lot of the, the shop, a lot of the online shopping experience was unique for this particular company as well. What did you think some of the benefits were to the user?
Jim Huerta: (03:12)
Well, I just thought the whole concept of the way it would track your history and browsing and your shopping experience was very unique. I mean, until I saw this product, I wasn’t someone who shops online, but this really created a point of interest for me. The things that it could do in the areas that it could tackle. It didn’t have to stay solely based on shopping. It had the ability to expand into other locations and other type markets because of the whole idea of the memory in the way he was setting up, the way you were surfing the client or whatever.
Justin, what did you see with product?
Justin Tripodi: (03:48)
It’s been some time since I looked at this client, so I could be wrong, but I believe one of the interesting products or futures they offered was expandable ad units that were dynamic. Meaning that within the ads they would sell. For example, if they were selling an ad to Home Depot, when a user is on any website and they see that Home Depot ad, they would actually, they would be able to shop within that ad. They would able to be able to look at the menu bar and navigate departments and add something to their cart without navigating from the page they’re on. That’s a value add for a business because you’re taking a hurdle out and that hurdle is for them to click on that ad and go to a new website and search from there. You’re collapsing time and steps for a user, which is always important to condense the customer journey that ends in a sale.
Anthony Verna: (04:43)
Jim, with that technology, were there measurable results that this company had for a user’s shopping experience?
Jim Huerta: (04:53)
Oh yeah. If you’re talking about successes and getting positive reviews, they were getting a lot of that without me being able to mention some of their clients were very large retail establishments in their sections … whether it be hardware or whether it be jewelry. They were not unidentifiable companies, they were companies that had a good reputation and were sizable.
Anthony Verna: (05:18)
Correct me if I’m wrong and Wil, feel free to jump in if you recall it. I remember there that this company had a claim that they would be able to double, triple the click through rates and therefore double and triple the sales that were made because of the technology. Did you find those numbers to be…
Jim Huerta: (05:43)
In fact, I did some research cause I had to because of the fact that I was pitching it and looking at it. Several of the comments that were made and some of the numbers that were given, I checked and they did prove to be correct cause I had letters from the establishments that their growth patterns were in fact what you’re saying that they would double or triple their sales.
Wil Jacques: (06:03)
Sorry about that. Anthony, I kind of goofed there on your gym just a little bit, but no, you’re right. The claims showed enablement of that particular feature. I wasn’t aware of what the numbers were exactly, but the claim did speak to the fact that it would be able to add a multiple to that experience.
So I’m scratching my head here a little bit. Here’s a company that has multiple patents. Something like 30 patents.
Jim Huerta :
They were really up there. I don’t remember exactly.
Wil’s telling me that the claims check out, you’re telling me that the promises check out. Justin, recalls the time-saver for the user, the steps, the easier shopping. I look at all of this and I put it together. All right, why are they coming here and okay, what’s wrong? Cause I’m figuring something’s wrong if we’re talking about this here.
Jim Huerta: (06:55)
So, so your point is well taken and this, if you look at the principles of a business and the ability to have an ongoing concern, these guys had it. They had the right app, they had the right clientele, they were doing the right thing. This is all base problematically what I call management fear, bad management, a misdirected board. And that’s where things started to really unfold for these guys. And if I might give you a little background then you guys can, it’s funny that we mentioned the earlier episode. We talked about 15 years, which is what we are talking about earlier. This is also was a 15 year tragedy if you will. So maybe it’s something to do with 15 years. I don’t know. But, what happened was that, and I’m picturing this because of the fact that it was so dynamic and so ahead of its time, that when these guys were sitting down, they were already, instead of focusing with making the big money, they were already out here somewhere.
So the guy who invented it wasn’t there with them. He was somewhere else probably back in here protecting his child or whatever. What happens that that created, uh, a conflict of interest between the board and the guy who was the inventor and was that CEO, which led to why we’re having this discussion. That created a situation where the board asked for the resignation of the inventor and the current CEO and brought someone else who was letting them know, you guys have the Holy grail. I can get you into any market in this country, in this world, and make money from it just on what you have developed. And I think that’s what this thought of this whole, that’s when they finally came to us. And I might add that the CEO who was displaced actually came back because the CEO that was selected went rogue on the board and he was let go also.
Scott Mautner: (08:46)
I think we talked about this in two episodes ago on how to protect yourself and how did you invite people into your company and incentivize them and entice them to good but protect the interest of the company and the shares of equity that could be offered.
So, what were some of the other examples of poor management through this company?
Jim Huerta: (09:09)
When I first saw it, I couldn’t help but think about Apple at the beginning with Steve jobs because he recall Steve jobs was this creative. He was this creative guy who was making all the equipment that we use, very intuitive and, and that’s what this thing was doing. And all of a sudden people started talking about what we can do much better. And you know, out goes Jobs, he goes, creates another magnificent kind of participation in a big company. Then he comes back and does the same thing. Well in this case, it couldn’t be done that way because of the fact that there had been a lot of damage done with this whole exercise with management and the board and stuff like that. When this guy came back, he didn’t have the ability to talk up like Jobs talked about Apple and the money and the success this guy was sitting with money had gone and no progress. The inability to manage the company. So there was so many things that were left behind because of this transaction that it took away from the ability to even go to the next level of investors and say, “Hey, I have this company for you. Every time we took it to somebody, they loved it. There was no, there was no, Hey, that’s, that’s stupid. I don’t want to look at that. They all loved it.” And then they did their due diligence and the history, this destroyed these sites.
Anthony Verna: (10:35)
What else in the history was an issue? Was there a revenue problem, a burn rate problem? I mean…
Jim Huerta: (10:42)
It was strictly a problem based on management fear as I call it. I don’t think that they would have had the problems they had if they wouldn’t have gotten to the point with the firings in the hiring and getting ahead of themselves. It just was not a good idea.
But this company could not have been flush with cash right?
Well, the other thing is not to give too much away, but they had actually raised $50 million, which they blew through. The new CEO who had this vision of how to turn the company into a different direction. He spent an enormous amount of money on bringing in consultants and bringing in all kinds of research material on where they could take the software and the supported by all these patents.
Anthony Verna: (11:26)
Scott, can I bring you in here on a second? If a company is spending $15 million on consultants, on marketing, I mean that sounds like way too much for a small company. I mean, I don’t want to use any loaded words from a legal standpoint for you and me, but I mean that doesn’t sound like behavior I’d want from one person at a small company.
But it sounds like there was a bigger problem with just corporate governance in general. So usually when you go through raising money, what Justin was just alluding to is the investors, I’ll get board seats, existing management or the founders will keep board seats and typically the founder/CEO in this case would have some sort of employment agreement. Obviously you can always be fired. They buy him out. But if you have an employment agreement, it’ll sort of limit the ability of the board to do things sort of willy nilly. They then, it sounds like brought in a new CEO who ran through $15 million. And so the first thing I would want to know as a board member having fiduciary duties to shareholders and potentially other people is where did the $50 million go? An easy way to do that is bring in forensic accountants and look at it. You don’t want to spend a ton of money doing that, but you’d want to know if there was mismanagement or you know, something a little worse. Let’s call misfeasance in this instance. But you do want to try to figure out, because as a board member you do owe duties to these people who gave the money to the company to grow them a company. And if things were not what we would call kosher, you need to deal with that as well.
Anthony Verna: (13:17)
What are some of the telltale signs that somebody in this role is acting properly versus not acting properly?
Scott Mautner: (13:25)
Well, certainly, on bigger projects and certainly on spending money, whether there’s appropriate board consent for things that are out of sort of the ordinary course of business, whether the budgets are being followed, whether in a lot of instances where there’s been sort of management misfeasance you see a lot of expenses being run through the business. Teeny, that sort of in weird places and being spent and in sort of odd things. You may even want to know whether, if you’re hired an outside consultant to do a lot of work and there’s a lot of money going to one consultant who is the ownership and management of that consultant because you know, there could be really sort of heinous things going on including kickbacks and things like that. I’m not saying that happened here, I don’t know. But you know, as a corporate governance point of view, you need to sort of think about those things and they happen, they happen more often than you would otherwise think.
Jim, did this company have a problem obtaining customers? In other words, obtaining companies to use their platform on their own websites because of their reputation?
Jim Huerta: (14:52)
No, I think they will do okay with their marketing and their sales pitch to the people, the retailers who were using them. Their biggest problem is that even to create a marketing campaign or to get into these new clients you needed, you know, a sales force, you needed a marketing team. And these guys, because of the fact that they had had the occurrence of the money that Scott was put, we’re talking about just now, they were carrying a load of history that created a problem for the NESSA Group because the NESSA Group was put in a position to get capital for them so they can take it out again. And unfortunately, every time we brought this conversation up with an investor, it didn’t take long for the investor to do their due diligence. And even here, this guy, because this guy would talk about the history and as he’s talking about these guys are rolling their eyes and saying, you blew through $50 million and what are you doing here?
What do you, what do you want me to do for you? You know, so it was complicated, and you know, I can give you a little bit further if you want and then we can get into contention. I mean, we felt at the time, I think all of us felt the same way. The CEO had to disappear. The company name had to change. And if had to be assigned the patents to a brand new company and just kill the history, somehow work it out that, that, that company no longer was managed by that group. There was none of that excess baggage being carried. But again, when you talk to an inventor, you talk to certain people, but their company, that’s like them giving up their first born. Okay. So that became a problem. But we fought and I think you guys can speak up collectively that he needed to go. He needed to move the company to a different name and do things differently than they were doing. Cause I think that would have created the ability to raise money for that.
Anthony Verna: (16:38)
I mean, one problem, you know, I’ll tell a story. I mean, one problem I had was…it was after speaking with him, was connecting him with somebody in the online advertising world who had another connection that would’ve been perfect on multiple retailers, multiple other accounts like that. And it wound up being like relentless. Like, Hey, did you make that connection? Hey, did you make that connection? Hey, did you make the connection yet? And after a while I got an email from my referral that said, look, it’s time out. I’ve got to do my work life as well. And I’ll make that introduction as soon as I can. But like now he’s bothering now. I went from like he’s asked a few times to now, now I’m being followed.
Jim Huerta: (17:26)
Funny you should say that. Which is perfect. And that was because I think I had you and I talked about it. Now that memory starts coming back. I learned right away not to give this guy a contact email or one of my contacts because that created an exchange that my context will call up and say, “Jim, if he sends me one more email, I’m going to go over and punch you in the nose.” Okay, I’m done with this.
Anthony Verna: (17:47)
Yeah. So Justin, do you have something similar?
Well, I actually have a question based on something you said, Jim, which was the solution you guys found was to take the patents and kind of start a new company and for three legal representatives in the room, if I have a piece of IP that I’m securing, let’s say I’m the inventor, there’s options on where I can assign that patent if it even needs to be assigned. Now, if I’m, let’s say creating a product-based company that I want to be operational, but I also want the opportunity to license it. Do I want to put or assign that patent writing to that operational company? Or do I want to have a holding company that owns the patent first?
Anthony Verna: (18:27)
You know, the holding company Trek. When I’m advising my clients on the holding company, what I tell them is that what you’re going to do is you’re going to set up, you’re going to do this for tax purposes and that’s why you’re setting up a holding company. So put all of your intellectual property in a holding company, have a licensing agreement between the parent and the holding company and make sure that a payment is going from the parent to the holding company. And then you, next thing you do is you pick up your phone and you call your CPA and you say, all right, and now I’ve got multiple companies that I need to start properly bookkeeping for and paying taxes properly on. Cause your taxes get trickier. But there are tax savings cause you’re making a payment from a parent company to a holding company. So, it’s effectively a payment to yourself. So the taxes get tricky. And that’s off of anything that I know. But that’s the reason that I would say you want to do the holding company.
Justin Tripodi: (19:29)
For an operating company, I’m looking to build a business, potentially invest in a product, I’m going to need outside capital. The benefit of keeping the IP separate in a holding company versus what I would offer equity from an operational company provides me some opportunities in how I can move forward in terms of an exit strategy.
Scott Mautner: (19:51)
So two things. No one’s going to invest in one entity where all the IP is in a different entity. So if they, as long as your offering allows the same pro-rata in both entities, it’s not a problem. Sort of jumping on what Anthony was just saying, one of the reasons you may want to put the IP in a separate entity is not, is besides taxes is also to protect against liabilities and claims. And so, it depends how much IP you’re really going to have because, every time you set up an entity, there’s costs involved, there’s costs of administration, there’s actual out of pocket costs, there’s costs of, along with the administration, legal, accounting, all that sort of thing. And so there may not be always the bang for the buck. I mean there are certainly companies out there such as Xerox who put everything in a separate entity and that entity is actually the value of Xerox right now, not manufacturing copies and cameras anymore and …
Justin Tripodi: (21:05)
So, if I was going to file IP, who should I talk to help facilitate this process for me? Would it be an individual like yourself?
Scott Mautner: (21:12)
It would be a combination of Anthony and myself. Because Anthony will give you the appropriate advice on patents and trademarks and the IP world. I do a lot of that, but more on the licensing side, but it’s really forming the entity and thinking about how you’re going to structure the business and whether you’re going to have a holding company, some operating companies, some affiliates. It’s a combination, but there’s no one size fits all. It really depends on what the business is going to do moving forward and how you’re going to be doing it. So, I have another client that is opening retail locations, old school, brick and mortar. But every one of those retail locations has a different entity because you want to isolate liabilities, you want to isolate leases, you want to isolate usage of different brick and mortars spaces. So, again, no one size fits all.
Anthony Verna: (22:11)
Jim, please tell me that there is some good news that the NESSA Group was able to do with this particular client.
Jim Huerta: (22:20)
Other than give the advice that we gave and separating himself from the company and what Scott and Justin all of us will discussing. I think the problem was that the person didn’t want to move on these suggestions of these recommendations. So frankly we parted ways kind of thing. At that point there was no such thing as when it help you, I’m not going to keep billing you if there’s no, and then of course it was a whole idea. Could I have you guys do this work and I’ll pay you later? And that didn’t work out for me in my mind either.
I wanted to end on a happy note.
Jim Huerta: (23:03)
The happy note is, and there is a happy note, the happy note is that we’re able to sit here, we’re able to discuss it, we’re able to have people who are going to be listening to this podcast was saying, Oh my God, I’m there. We’re talking about me, which we died for. At least maybe that was sparked them to pick up the phone or go to an email and say, I heard the podcast guys on there. Similar problem. I’m willing to talk to see what you guys can do for me. So hopefully that’s the icing on the cake. It’s certainly not going to be that. I can tell you we had some grandiose conclusion with this client cause we didn’t.
Anthony Verna: (23:34)
No. And look, obviously when you’re in a consultancy, not everything is going to go well. I mean, I’m sure Scott and I can tell stories until we’re blue in the face about clients who didn’t listen to us well. So that’s not certainly an unusual…
You also got to think, Anthony, by the time people come to people like us, not necessarily Scott that much because of the front end sums up they might do, but when they come to consultants it’s because most of them already have tried all the little gimmicks and all the suggestions that we’ve made by Uncle Vinny. And before you know it, they find themselves in the downward spiral. So, they’re coming to us not because they’re sitting on top of the mountain, they’re coming to us because they find themselves tumbling down that mountain and they need someone to rescue them. So now our job is to fix. We’re fixers. That’s what we are.
Or worse than Uncle Vinnie, going to YouTube. And I’m sure there’s, I’m sure there are plenty of YouTube videos on businesses.
There is. I bet there is.
All right gentlemen, thank you once again. This concludes our mini-series. It’s been fantastic, it’s been informative. Thank you all for being here and thank you everyone for listening. One last time. Jim, how does everybody find you?
I’m going to, it’s going to be tough not to be able to do this again. You can reach us at www.thenessagroup.net. Thank you for listening and I hope we’ll find ways that we can help you. Thank you.
Thank you. Thank you. Thank you.