The Oculus Rift Buyout Outrage: What are the Rights of Kickstarter Backers?

And with good reason. The Oculus Rift promises to satisfy one of the holy grails of the technology world: virtual reality (VR). Though the modern concept of VR has been pursued since the 1980s, it is fair to say that no one had ever really done it right. That all changed when John Carmack and Palmer Lucky launched a Kickstarter campaign to fund their attempt at VR. Benefitting from generations of technological advances, the Oculus Rift boasted the ability to smoothly track head movements and provide the wearer with a high definition display across her field of vision. The campaign earned an astounding $2.4 million dollars from about 10,000 backers, making it the 17th highest funded Kickstarter at the time of writing. Considering their funding goal was only $250,000, the community’s enthusiasm for the project was unmistakable. For a donation of $300 or more, backers would receive a developer prototype of the device, an option many took.
The community reaction to the Oculus Rift since the Kickstarter campaign was overwhelmingly positive. Important players in the industry made plans to incorporate the technology, over 50,000 developer kits were sold (causing a supply shortage), and consumers anxiously waited for the chance to get their hands on a final product.
This all changed on March 25th, 2014 when Facebook announced its acquisition of Oculus. An outcry could be heard across the internet. Many who had originally “invested” in Oculus, some with money, others with their vocal support, felt betrayed. They viewed the acquisition as their hope for VR gaming selling out to the corporations who want to plaster their computer screens with targeted advertisements. They felt that they had provided Oculus with enough backing to make selling out to the social networking giant unnecessary.
What’s more, many felt that they had rights when it came to how the company was operated, as they helped fund the launch of the project. However, exactly what rights do these “investors” have as Kickstarter backers? For example, are they similar to the rights given to equity investors of startup companies (which often include a vote on a sale of the company)?
This is unfortunately where it would have done many of them a favor to read the fine print. Kickstarter explains the benefits of “backers” (note: not “investors”) under its FAQ section:

“Backers that support a project on Kickstarter get an inside look at the creative process, and help that project come to life. They also get to choose from a variety of unique rewards offered by the project creator. Rewards vary from project to project, but often include a copy of what is being produced (CD, DVD, book, etc.) or an experience unique to the project.
Project creators keep 100% ownership of their work, and Kickstarter cannot be used to offer equity, financial returns, or to solicit loans.”

Thus, despite the fact that they did give money to a company in order to “invest” in its future, they did not (and could not) invest in a traditional sense. Typically, equity investors are entitled to voting power as shareholders in a mixed buyout financed by cash and shares (like the Facebook buyout of Oculus). However, Kickstarter is purely a donation website where creators may or may not offer rewards to donors. This distinction should be an important consideration for all backers on Kickstarter going forward. It may also potentially be an advantage for certain startups with “projects” they can advertise to the public as this “no-strings-attached” form of crowd-funding avoids some problems of finding investors traditionally. Regardless, it will be interesting to see what the future holds, both for the Facebook-owned Oculus and for crowd-donation services in general.
Luke Smith is a J.D. candidate, ’15, at the NYU School of Law.