Two Step's Private Company Equity Management Blog

At a recent Two Step webinar, Craig Newfield, Vice President and General Counsel of Gomez, Inc., and Mark Martines, Executive Vice President and General Counsel of Jenzabar, Inc., presented an excellent framework for improving and assessing legal compliance at venture-backed, high-tech companies.

At these types of companies, there is inherently a tension between activities that increase sales and profits and those that improve legal compliance since they each naturally compete for limited resources. The unstated question that tends to exist in some form is something like: “Should we take the time to improve our stock option approval process if that is going to take time away from negotiating a sales contract?” Or, “Should we formalize our development processes to insure that shareware that is used in our code is used in compliance with the specific license agreements?”

Those are the types of real questions that growing technology companies face every day as they grant new options or develop new code and where the problems faced by careless compliance will not be apparent until due diligence begins for the next round of investment or an acquisition. But, if compliance issues are uncovered, they can throw a monkey wrench into a deal just when you were hoping everything would go smoothly and not increase the level of scrutiny by the investor’s team of lawyers, accountants, and technology detectives.

The panel discussed the compliance benefits related to both enterprise risk reduction and value creation:

• Reduced risk of errors and irregularities
• Minimized risk of fraud
• Reduced risk of litigation
• Reduced costs of operational inefficiencies
• Minimized due diligence risks
• Increased regulatory compliance
• Improved contractual relationships
• Improved operational efficiencies
• Increased credibility with stakeholders
• Maximized value of the business

But, where do you start? The presentation quoted Richard Steinberg of Steinberg Governance Advisors and the former corporate governance practice leader at PwC for his recommendation to ask the right questions:

• What are the most significant risks facing the company?
• What are we doing about them?
• Are our senior management and directors apprised of all material risks?

And how to you get the right answers? The panel suggested requiring senior management and those who report to them to sign “Section 302-like” certificates that certify to legal compliance and appropriate internal controls as far as their respective business activities and information that flows up to the financial reports. Guidance can be found in Sarbanes-Oxley and the COSO framework, but it must be used appropriately since neither are a requirement for non-public companies.

The five sections that make up a typical compliance scorecard and were discussed in the webinar with real-life examples from their experience are:

• Corporate Governance
• Fraud Prevention
• Records Management
• Protection of Assets
• Compliance with Laws

While their perspective was based on their own experience at venture-backed, technology companies, certainly the compliance framework that they developed could be used by any company that is not required to comply with Sarbanes-Oxley.

Although compliance remains challenging and can be a complex balancing act, the lessons learned from companies that have been through the investment and acquisition process are that a well thought out framework and an appropriate level of effort as applied to the unique circumstances of each organization will provide an excellent ROI whether measured by risk avoidance or enterprise productivity.

The recorded version of the webinar and the related white papers are available here.

When I got a pop-up message from Intuit the other day that they have jumped on the bandwagon and released a read-only version of QuickBooks Online for the iPhone, it got me thinking about cell phones and my new iPhone. It made me realize how pervasive this new productivity tool had become in the nine months since its release. It’s particularly noteworthy, since QuickBooks Online does not yet work with the Apple Safari browser. Although it’s very limited and many will ask was it really worth the effort, I think it’s a great looking view-only application and delivers a minimum amount of information into the palm of your hand. How much is in a bank account? How much do we owe that vendor? How much does this customer owe us today? A balance sheet for Dec.31st? It’s all there.

But I wondered, are they perhaps just trying to get on the “Mac is cool” bandwagon after seeing the recent onslaught of the square guy v. the cool guy in the Apple v. PC television commercials (http://www.apple.com/getamac/ads/) or have they seen the genuine utility for their user base of a “less is more” iPhone approach to online apps (http://www.apple.com/webapps/).

My own mobile, wireless experience has been that of frequently switching to the latest and greatest cell phone (sometimes I admit more than once a year) until I’ve finally settled down … with an iPhone and "it rocks.” At first, a flip phone seamed so cool compared to the original peanut shaped phones. Then, along came the Razr which was so thin, who could resist. Then, I had to debate a Blackberry versus the Treo when they were still head to head in popularity. I chose the Treo700w, since I wanted to remain in the Windows family, but learned to regret the choice.

Then, last summer, one of my neighbors was showing me travel photos on his iPhone, “finger flipping” from one picture to another and the totally useless, but cool looking, world clock for the cities he had traveled to. The user experience was contagious, almost like bubonic plague or methamphetamines. I had to have one.  BUT, I had to worry about the ATT Wireless Edge network. Everyone claimed it would be like going back to 1998 dial-up for web surfing. Well, I decided I’d just limit my browsing to Wifi access, since by 2007 carrying around a cell phone and an iPod on a bike ride or on an airplane seemed so old-fashioned. Two devices? I thought if over one million iPhones had already been sold by Sept. 2007, why not be 1,000,001. Certainly, no one could claim I was the first guy to jump off the bridge.

Six months later, there are over 5 million iPhones in use. In fact, every employee at Two Step Software has been offered an iPhone just so they can experience the direction of new technology (Apple has certainly led on innovation from the original Macintosh to today’s iPod Shuffle - now that’s small). If you’re working at a SaaS model software company on America’s Technology Highway (Route 128), spitting distance from MIT, it’s somewhat obscene to still be carrying around a cell phone, a Palm pilot, an iPod, and a beeper. Get it together!

At the rate that iPhone applications are coming out, it’s becoming the ubiquitous connectivity device for the new business executive, less focused primarily on email and more focused on browsing and other online productivity applications. I use my iPhone for phone calls, emails, text messaging, listening to music, checking the weather, reading NY Times headlines, contact management, scheduling, family photos, my alarm clock, maps and directions, YouTube, secure password management, Salesforce.com, and QuickBooks.

If you too want to be the coolest over 40, Facebook, MySpace, YouTube, Twitter, Blogspot, Gen X, SaaS, on-demand, CFO or CPA and "connect” with those young, hipster 20-something employees slugging down Jolt and cranking out Ajax code, get an iPhone, download a Wagner symphony, and surf the Wall Street Journal Online. They’ll see you rocking out and think you’re watching Sarah Silverman F------ Matt Damon on YouTube (http://www.youtube.com/watch?v=wnVJZkDuVBM).

Now, that’s cool.