Emerging Enterprise Center Blog - Commentary and Analysis For Entrepreneurs and Startups

A friend suggested that I comment on a post Confessions of a Pack Rat (aka My Document Retention Policy).  Which I did, but then thought to recreate the comment as a post here because, retention (at least of emails) is a theme I come back to from time to time on my blog. 

So, here goes: like diamonds, email (and all electronic copies of documents, letters, etc.) are forever. Unlike diamonds, everyone can afford to have them and keep them – and everyone does. If you really delete an email or an old draft of something, guess who will have it for sure: the guy suing you (or defending your suit). 

We had a case in our office in which our client got a multimillion dollar settlement from a fortune 100 company in part because our client kept everything electronic and the defendant had a “retention” policy that, in those days, caused them to delete old email. The defendant made assertions in various legal filings based on the statements of their employees, which turned out to be completely false when the old emails were produced (by my client). Defendant’s credibility was, of course, completely undermined.

See also my posting Email is Forever for a similar story about instant messaging.

Having said that, not everything is electronic. Careful attorneys often purge their paper files after a transaction for a variety of reasons. One reason is that saving all those forests of paper is expensive (Iron Mountain loves it, of course). Another reason is the one that several comments pointed to: in a litigation, some very bright graduate of some elite law school will doubtless be looking for the worst possible interpretation of everything. 

A story that I heard some time ago involves Larry Sonsini, one of the name partners in the venerable Silicon Valley law firm of Wilson, Sonsini, Goodrich & Rosati. As the story went, he was being deposed in connection with a securities fraud case. Plaintiff’s counsel pointed to a draft document that had the letters “BS” written in Mr. Sonsini’s handwriting in the margin and asked pointedly what that could possibly have meant. Sonsini, is said to have paused, looked at the document, and responded, “Bob Short to review.”

Having said all this, I keep everything, including my handwritten notes. For better or worse, I need these things (including my notes) to remember accurately decisions, analysis and facts. Like Fred Wilson (author of Confessions of a Pack Rat), I have been deposed, been a witness and had to produce documents (including my handwritten notes). I have never regretted it, and in two cases, my handwritten notes (made contemporaneously with events then long gone) proved critical to my client’s case.

Back to email for a moment, emails seem to be a place where people will write all sorts of things that they would never say or write in a more formal letter. Be careful what you write and to whom you send it.  Also be aware that whatever you send can be forwarded with ease (or with negligence). Finally, be aware of blind copies. You do not know who is getting the same email you just received.

Clean energy technology entrepreneurs might seem to have reason to be more optimistic these days than their counterparts in other fields such as software and technology. After all, most VCs and industry observers maintain that quality clean energy startups remain good candidates for funding even in this challenging environment. However, promising clean energy startups can get caught in the dreaded funding gap between proof of concept in a lab setting and the establishment of commercial viability that might attract venture capital.

This is where state support can be crucial. In Massachusetts, the SEED funding program administered by the Massachusetts Technology Collaborative’s Renewable Energy Trust has brought almost $5,000,000 to early-stage clean companies, mostly in the form of convertible debt, in deals up to $500,000 matched by other debt or equity investment.

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Today is Obama’s inauguration. It is a day of great optimism on so many fronts. Having said that, we have just published our Q3 New England deal numbers. Another source for deal numbers is CrunchBase. It has two categories: financing and acquisitions. If you click on the graphs, you get the underlying data. In the case of the financing, CrunchBase publishes the date (by month), the issuer, the amount of the raise, the investors and the stage. In the case of acquisitions, it provides the date, the target, the acquirer and, sometimes, the price. The acquisitions graph shows a steep decline in Q3 – who would have guessed? The financing graph shows a steep decline in October and a slower decline thereafter. I am not sure how CrunchBase gathers its numbers, I imagine that it is based in some way on information provided by its network (which is large). In any event, their data is consistent with all the other data I am seeing... Obama has is work cut out for him.

Updated later on January 20.  I just took a look at Don Dodge's blog.  He too has Q4 numbers to show. 

We present with pleasure the next issue of EEC Perspectives, our periodic look at venture activity in the New England region. With this issue we are back to Series A transactions, featuring those closing during the third quarter of 2008. (Prior issues of EEC Perspectives, which alternate between Series A and later rounds, can be found in the News and Publications section of  the EEC website.)

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One theme that comes up from time to time in the press and in the practice of law (everyone has a horror story about it) is the errant email (the one you wish you had not sent).  To state the obvious, people have a tendency to put things in emails that they would never write in another context.  Mostly when you do this, the only bad thing that happens is modest embarrasment.  However, some emails have led to major problems for the sender becasue they can, and will, be used against you, and you can't, as a general propostion, get them  back. 

A few things to note, the company server belongs to the company and the emails that reside therein can be accessed by the company if it wants to.   Another obvious source of problems is the autofill feature for email addresses.  If you are sending anything sensitive, look twice.  Similarly, the "reply all" button.  Finally, our firm had a case that turned, in part, on instant messaging.  The sender assumed, incorrectly, that instant messages are not saved anywhere, but the recipient of the relevant message had turned on the save function.  In that case, the sender's testimony was exposed as perjury.

Usually the story of errant email has a bad ending, but here is one where the tables appear to have turned.  According to TechCrunch,  "Tapulus CEO Bart Decrem sent out an email to investors yesterday updating them on the status of the iPhone/Android focused company. It was forwarded to us, and we reprint it ..."  However, one of the comments to this blog post, notes, "The leaked email almost looks like a press release. Not sure if the title of the blog justifies the post !"

So, while this post demonstrates that there can be strategic uses for the errant email, it is the exception that proves the rule. 

I am going to deviate from my usual practice of limiting my blog posts to subjects related to start ups, venture capital and the like to comment on the Madoff scandal. This particular post reflects my views and my views alone. Specifically, it does not represent the point of view of any of my partners or of Foley Hoag LLP. I am solely responsible for this content. 

For all of my years as a practicing attorney I have represented small public companies before the SEC in connection with their ’34 Act compliance as well as in financing activities (including all sorts of PIPE transactions) and in M&A activity. It has long been my perception that the SEC has an institutional bias against small so-called mini-cap or micro-cap companies. The SEC will spend enormous resources to review and comment on filings from these companies. Small transactions will be hung up at the SEC for months and months because the SEC has a policy (or may be developing a policy) that somehow touches on what these companies are trying to do. Huge costs will be run up trying to comply with SEC comments. It becomes hard to escape the feeling that the SEC uses its regulatory muscle to try to regulate these companies out of the public market. In my experience, my clients have always been willing to make all disclosures – even to the point of disclosing matters that are patently not material to make certain that the public gets what it needs. Nevertheless, I have often had the feeling that the SEC starts from the proposition that all small companies are really nothing more than fraudulent schemes aimed a bilking investors.

From my limited vantage point, fraud seems to occur randomly in the business world. It is just as likely to happen at Enron as at some microcap company. But, one Enron, one Madoff, one Adelphia dwarfs one micro-cap scandal. The notion that the SEC gave a big time industry insider like Madoff a pass is beyond outrageous. It reflects a fundamental prejudice at the SEC in favor of the big boys and insiders and against small players. The SEC needs to re-examine its priorities. Fraud needs to be pursued at all levels and limited resources need to be allocated to achieve the best result for the investment community as a whole, and “small is bad” just should not be acceptable.

There has been a lot of hand-wringing about the downturn in the venture industry and what it forebodes for entrepreneurs and VCs. The sites and commentaries are too numerous to mention. One post describing an entire industry event devoted to this issue can be found on Startable. There is also an article in the December issue of VCJ on the subject of the venture capital model. I think one (if not the main or even the only) issue is the lack of exits at decent return rates to investors. While that means returns to the VCs, it also means returns to their investors. The money won’t flow to the entrepreneurs or the VCs from the ultimate investors – pension funds and the like -- until they see a healthy return on a reasonable horizon. How is that for stating the obvious?

The problem then becomes how to promote good returns. It is impossible to get investors to buy IPO stock, if they don’t see good price growth in the stock. It is impossible to get an acquirer to buy at a favorable price if they don’t see the market return. In this world it becomes harder and harder (and less desirable) to start a company. As a result entrepreneurship declines, technological improvement slows, new company formation slows, employment slows, etc., etc., ...

So, the issue is, how do you improve the economics? I am sure there are a lot of ideas out there, but one idea is to change the tax treatment of NOLs so they are not lost in a sale (and not almost always lost in an IPO). Since NOLs, in a venture-financed company, are likely to approximate the amount of investment dollars, the tax benefit to a buyer (or the investing public in an IPO) would be equal to the total invested multiplied by the tax rate of the buyer (or in the case of an IPO, the tax rate of the company itself). This is a significant value boost. It would make deals more attractive. For a more detailed analysis of this issue, see the article Rick Schaul-Yoder and I wrote for the December issue of VCJ (registration required).