If you’re thinking about supporting a startup company via Kickstarter, IndieGoGo or the like, or if you are a startup company needing capital to bring your product to market, the story “ZPM Espresso and the Rage of the Jilted Crowdfunder” in the May 3 New York Times Magazine is a must-read cautionary tale. The now (likely) demised Atlanta-based company profiled, ZPM Espresso, created quite buzz when it raised close to $370K on Kickstarter in 2012. Their open source espresso machine was designed to make coffee that rivaled that of machines used by baristas that cost $700 or more, but could be had by ZPM’s Kickstarter backers for only $379. After many delays, ZPM announced in January that it was not going to deliver any of its promised espresso machines and, of course, it is not refunding any of its backers’ money. In March it looked as though a lifeline would be thrown to the company, but the Times article reports that the rescue by a wealthy coffee-loving entrepreneur will not happen, leading us to believe that ZPM is no longer a viable company. While ZPM is not the first–nor the last–crowdfunding failure, the review of its history in a longform journalism piece provides a detailed look into what went wrong, and is a must read for anyone interested in playing in the crowdfunding space.
As a lawyer, a point of interest for me is whether there is any way for the backers to recover their money because they paid for a product that they did not receive. It would seem only fair that some mechanism should exist for them to obtain reimbursement in some form from one or more of ZPM, its cofounders or Kickstarter.
The company appears to have few or no remaining assets: the Times article indicates that they owe $35K in legal and personal debts. While they did file a patent application on their espresso machine design, it appears that they have let the application go abandoned, which means that, to the extent their machine incorporated a patentable invention, that invention is now in the public domain and free for anyone to use to make a similar machine. ZPM may have some IP in design specs and similar information, however, given the difficulty that the company had in bringing its product to market, this information is of dubious value as a corporate asset that could be sold to pay back the Kickstarter backers. In short, it appears that there is little, if any value, left for the backers to extract from ZPM as a corporate entity.
There is a report that the backers plan to bring a class action suit against the company. However, as a registered Delaware corporation, ZPM’s co-founders are protected from personal liability, and any legal recovery would be from corporate assets, which we have already determined to be non-existent. Even if the cofounders are not protected by the so-called “corporate veil”–such as if they failed to pay their corporate registration fees for an extended period of time–the backers will still be out of luck because it is apparent from the Times article that the co-founders themselves are broke. In other words, “you can’t get blood from a turnip,” as my Midwestern Mom says.
Certainly, ZPM’s backers can attempt to bring a class action lawsuit, but they will have to pay a law firm to take the case because there is no incentive for a lawyer to take the case based upon an expectation of fees resulting from a settlement. This might make the backers feel better, however, the cost to pay the lawyers will quickly exceed the $379 each is owed by the company, and is likely a nonstarter. They also can bring a complaint to the appropriate state regulators, but the likely remedy will be that ZPM will be prevented from doing business in that state, which is already mission accomplished. So, it follows that backers of failed crowdfunding campaigns like this one currently possess no real way today to recover their money, and it would seem to be a case of “caveat emptor” for those thinking about supporting product-based startups in this manner.
But Kickstarter got paid, too, and it certainly has deep pockets, so it would seem appropriate that this company would bear some liability, right? This is not the case, however. Kickstarter expressly disclaims all liability for failed projects by clearly and unambiguously placing the liability on the startup: “The creator is solely responsible for fulfilling the promises made in their project. If they’re unable to satisfy the terms of this agreement, they may be subject to legal action by backers.” Moreover, Kickstarter expressly limits its liability for damages to $100. Anyone who backs a project through Kickstarter is bound by these Terms of Use, which in the aggregate get the company off the hook for issuing any refunds of substance to supporters of failed projects.
Beyond the risks to the project backers highlighted by ZPM, the Times article is generally a cautionary tale for anyone seeking to go the crowdfunding route for their product-based startup. As the CEO of a product-based startup that has considered crowdfunding, this article has made me think twice about heading in that direction. While I could summarize the plot of this longform piece, I would not be able to do the story justice. Let it suffice to say, getting their Kickstarter project funded appears to be the easiest part of the startup journey for the ZPM cofounders. The Times article shows that it is not only “caveat emptor” for project backers, it is “careful what you wish for” for crowdfunding startups.
