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

One of my pet peeves has been the lack of understanding that people have around electronic records.  I have written prior blogs about the need to be careful about what goes into email and the like.  In particular, I have tried to note these issues whenever I see them on the front page of  the paper (yes, I still read the Journal in hard copy).  Well, on Monday there was an article about Congress calling for an investigation of Countrywide's VIP program after discovering that phone recordings had been destroyed.  I have no clue about the circumstances of the destruction, and it could easily be completely innocent. 

According to the WSJ,

A Bank of America spokesman said in a written statement that the VIP recordings "were retained only for a limited time or until avialable recording space was utilized. Due to these limitations, we have no recordings from before July 2008 when Bank of American assumed management of Countrywide and terminated the VIP program."

Perhaps Bof A was following some regular corporate policy and the destruction of the recordings had nothing to do with the contents. 

What I really want to get to (for which this article in the WSJ is just the jumping off point)  is that destruction of records (electronic or not) can be a really bad idea.  Lawyers have a word for destruction of evidence "Spoliation."  The link is to Dictionary.com, but here is how Black's Law Dictionary defines spoliation:

The destruction of evidence.  It constitutes and obstruction of justice.  The destruction, or the significant or meaningful alteration of a document or instrument.

There is also a wonderful latin phrase "contra spoliatorem onmia praesumuntur".  A rough translation of this phrase is that all presumptions go against the destroyer of evidence.   Not only does it look bad, a judge and a jury and a prosecutor are likely to assume it is bad.

Prithvi Tanwar, an associate at Foley who does a lot work with us at the EEC, recently had occasion to consider the General Public License in the context of start-ups.  This resulted in the following comments which I thought would make a useful post.

A start-up wants to develop its online application using scripts licensed under the GNU General Public License (“GPL”). What are the potential ramifications? Any modifications and works derived from a script or product that is licensed under the GPL must themselves be licensed under the terms of the GPL when distributed to third parties (they must be made available in source code, at no additional cost, to anyone to whom you distribute the modifications or derivative works).

There are two questions a start-up building software derived from scripts under the GPL needs to ask: (i) Do we plan to distribute the software? and, (ii) How much of the software do we plan to develop using the GPL scripts? If your business plan requires the sale/distribution of software to customers - move to question two. If however, you plan on providing a service using your web application, where all your software sits and runs on your servers and users access these servers through their computers (be it desktops or smart phones) you might not trigger the distribution requirement under the GPL license. If you are distributing software, the next step of the analysis is to determine whether your product “as a whole” is a derivation of the script under the GPL. If this is the case you might very well have to disclose the source code for your entire product and not just the portion you developed by modifying the GPL script. Not the route you want to take if you view your product as proprietary. Unfortunately, the question of what constitutes “as a whole” is difficult and requires a case-by-case analysis. This might be a good time to call your IP Counsel to get an idea of how much risk you plan on taking using open source software in your development process.

Your choice of a software distribution vs. service provider model will also affect investment and exit events in the future. Using GPL scripts in the development of your website application will raise concerns for potential investors and buyers. If a potential acquirer or investor views your product as the main asset, to be distributed and marketed as a closed-source proprietary product, they might balk at your use of GPL scripts. If however, the buyer or investor view you as a services company where your main asset is your customer base and market presence, the use of GPL scripts might not be a problem. Executing a software development process in tandem with your business plan and still having room for flexibility is a difficult process, but is key to avoid boxing yourself into a corner over the long run.

Sometimes it is worth being reminded of the obvious.  I just read Fred Wilson's blog about not planning too much.  It reminded me that I recently heard some words to live by.  "You need to know what your customer wants, not what you think he or she should want."

I think it was Ezra Pound who said something like: "Literature is news that is always news..."  (I am sure I butchered the quote.)  His point was self-evident, but I read a lot of stuff (including blogs) because it helps me keep up.  There is one blog that I come back to over and over -- not because it helps me keep up but because it is always engaging and always relevant to something in my world.  I think what really keeps me coming back is that Rands addresses practical management issues in a sincere and compelling way.  So, check out Rands most recent post, which is typical of his style.  Maybe you will like it as well.

I recently met with an investment banker client.  He asserted, and I believe him, that middle market M&A activity is at 20% of the ten year average (he was talking about numbers of deals) and 33% of what it was in '01 and '02.  That is the bad news, his take on these numbers is that we are poised for a big rebound in 2010.  Hope springs eternal in the human breast.

One of our partners, Rick Schaul-Yoder tells this story:

When you prepare an IRS Form SS-4 to apply for a taxpayer identification number for an entity formed in the United States, you must use a U.S. address on the form.  If you use a non-U.S. address, the IRS will issue a taxpayer identification number that begins with "98".  "98" numbers are issued to non-U.S. entities.  Having a "98" number will cause significant headaches.  If the entity doesn't have its own U.S. address, use a reliable "care of" address in the U.S.

Sample headache:  a large London-based investment manager client recently formed a new Delaware limited partnership as an investment fund.  The SS-4 for the Delaware limited partnership was incorrectly filed with a non-U.S. address.  The IRS issued a "98" number.  The fund went to open a brokerage account with JP Morgan, and gave Morgan an IRS Form W-9 using the new taxpayer identification number.  Morgan rejected the Form W-9 because it used the same non-U.S. address. (IRS regulations won't allow brokers to rely on a W-9, as certification of U.S. status, if the W-9 shows a foreign address.)  The client contacted us, and we corrected the address, using a U.S. "care of" address on the Form W-9, but Morgan then asked why the fund had a "foreign" 98 number.  We had to say that the IRS incorrectly issued the 98 number, and we assured Morgan -- ultimately by supplying a certified copy of the Delaware certificate of limited partnership -- that the partnership is indeed a U.S. entity.  Dealing with Morgan took several days, with the client understandably more than a bit concerned because the fund was ready to launch and couldn’t do so without the account being opened.  The client also understandably failed to comprehend why it could take so much effort to prepare a simple, half-page IRS Form W-9 consisting of no more than 3 lines (name, address, identification number) and a signature.