Unethical Bootstrapping & Investor Liability – Pirated Software

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I have been contemplating writing this post for about 2 years, and have been jotting down various notes for it for at least a year.

There are lots of ways to unethically nudge your fledgling company along. For example, you can artificially inflate your numbers. “You’ll love our site! Millions of other people are already using it!” Faux-Guerilla marketing, is another example (e.g. posting a message on a forum somewhere pretending to be a user in love with your product or service). “Procuring” copies of your competitor’s proposals by pretending to be a customer is also something I’ve seen before. The sky is truly the limit when you operate with little or no regard to ethics.

However, the widespread use of pirated software among startups is probably the most prevalent problem that I’ve seen.

I routinely deal with various early-stage entrepreneurs (increasingly not just here in the Southeast, but all around the world.) Based upon my very non-academic study, I would venture to say that somewhere around 40-60% of the companies I’ve met with over the past few years have used, or are using, pirated software in some part of their organization. That’s a pretty big number, and I’m convinced that number probably goes higher.

How bad is the problem? Well, in many of the cases I see, usually it’s just 1 or 2 people within the organization that are the primary offenders. However, there are companies that are quite literally “powered by pirates”, from the dozens of illegal copies of Windows XP and Microsoft Office to the software running the CRM database, the accounting platform, the software development tools for the engineers, the email servers, and even the phone system.

It’s a big problem, and has been for a while.

I have made a few observations:

  1. It comes down to money, at the end of the day. The unethical bootstrapper’s mindset is squarely around this premise: If I have a choice between paying the rent or plopping down $1,000 for desktop publishing software, I’m paying the rent. Bootstrappers are always seeking new ways to save money and hit milestones – while illegal and unethical – using pirated software certainly accomplishes both.
  2. Convenience is also a matter, although on a smaller scale. It is much more convenient to download pirated software than it is to buy it and wait a week, or get in the car and visit the computer/office store.
  3. Despite the increases in computer security and rights management techniques, stealing software is easier than ever. A cursory search on common file sharing networks revealed current versions of Microsoft Vista (and XP), Oracle Enterprise, Quickbooks Pro, etc.
  4. Usually, the piracy stems from the IT shop, not the management team (unless the founder is a particular technology-savvy individual).

I was thinking about the potential impact of this on the due diligence process for a venture raise. I’ve never seen a VC do an audit of software licenses as part of the due diligence process. I have, of course, seen software licenses roll up as “assets” when a company is being dissolved or sold-off. This is the sort of detail that a VC isn’t typically going to explore during due diligence (an exception might be with certain levels of enterprise software) – but they should, as there are tremendous potential liabilities.

According to the SIIA (Software & Information Industry Association):

If unauthorized software is found, the company must license enough copies of the software, pay a fine equal to three times the cost (MSRP) of the software and adopt and implement company-wide software compliance policies.

If the company refuses to conduct an audit, SIIA may sue the company for copyright infringement on behalf of its members.


Hey VCs, there’s a nice way to watch your investment get eaten up. The current damage estimates are $100K per title in a civil suit, and $250K per title in a criminal suit. It wouldn’t take much to kill a young company. All it really takes is a founder who doesn’t feel like he or she is getting an equitable piece of the action, or a disgruntled former employee, combined with a phone call to the SIIA and some reasonable documentation.

Here is a great resource for companies looking to become compliant.

My advice to you entrepreneurs … continue to budget wisely, but be sure to leverage open source solutions. With open source solutions now available for most any problem, there is really no need to have to pirate a commercial product just to accomplish a task.

My advice to investors – hire someone to do an audit of the venture’s base of software licenses. Make sure they are legitimate, and that there is an audit trail confirming their purchase.

Cheers.

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