Archive for October, 2006

Real Taxes on Virtual Assets?

October 30th, 2006

This is a fascinating area opening up in the frequently mundane area of tax law. Given the sophistication of online games and communities and the relative stability of the markets in those environments, should tax authorities have jurisdicition over virtual transactions?

Reuters reports (through Second Life correspondent Adam Reuters, of course) that the US Congress’s Joint Economic Committee has taken notice of the question and is presently rolling around the various permutations. Wagner James Au also gives the scoop on Gigaom.

It is an established fact that if one makes Linden Dollars in Second Life and sells them in the real world for US Dollars, the IRS wants to know about it.

What makes things interesting is that “virtual” markets have become so stable and robust that virtual gains and losses may start to take on attributes that would be considered taxable in the real world. In other words, if a suit of Elven mail from World of Warcraft could be sold for near-equivalent value to numerous buyers at different times, should that armor be deemed an asset for tax purposes?

The IRS’s barter rules show just how deep this particular rabbit hole might go. Under barter rules, goods received through trade or game winnings have value when they change hands, not merely when sold.

Even further, items obtained as prizes could be subject to taxation as, you guessed it, prize earnings. Does this mean that every gold piece won from every slain orc would have to be declared?

And a moral/legal fun question: if my WoW avatar is a thief, do I need to declare to the IRS my ill-gotten gains? On what tax return schedule should these earnings be presented?

I agree with Au that Congress is likely to spend a long time looking at these questions and probably far longer working with the IRS to come up with a set of rules, if it ever gets that far.

If, however, Congress and the IRS do move to tax these assets, the landscape of game development and hosting may be in for a major jolt. Game publishers might be required to 1099 each subscriber every year for “gains” made. If that happens, Linden Labs will look prescient. By sticking to its policy of providing the environment alone and leaving it to users to build and manage just about everything inside, it strikes me that they will stand the best chance of escaping the administrative nightmare that scenario presents.

A Boy Scout Would Never Pirate Copyrighted Material!

October 23rd, 2006

The San Jose Mercury News reports on another front in the film industry’s war on piracy. The Los Angeles scouting council has, in conjunction with the MPAA, created an antipiracy patch. The patch shows a film reel, a music CD and the international “C in a circle” copyright symbol.

To get the patch, scouts must learn the basics of copyright law, how to identify five types of copyrighted works and three ways copyrighted materials may be stolen. They must then choose from a list of activities that includes creating anti-piracy public service announcements and visiting a studio.

To me this seems simultaneously brilliant and stupid. Brilliant for thinking to reach out to the audience (13-21 year old boys) whose copyright-piracy beliefs are still in formation, and stupid for the ham-handed execution of the idea. All the teenagers I know are very media-savvy and disdainful of messages so obviously patently propagandist and patronizing (could the PSA become a how-to for budding pirates?).

If the intent is to personalize the effect of piracy, I suggest the patch should be awarded to scouts who create a video or audio recording, give it away DRM-less to their friends, and then manage to collect license fees on the content. Since scouts are trustworthy, loyal and helpful, I am sure the council wouldn’t need to worry about auditing the source of license revenue. Then again, scouts with those characteristics don’t need the MPAA’s message anyway, right?

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Trendy Company and Band Names

October 11th, 2006

I noticed a few years ago that something had happened to the names of up-and-coming music groups. It seems like about every 10 years bands switch en masse from using “the” in their names to omitting it. The trend looked something like:
1960’s: The Beatles, The Rolling Stones, The Velvet Underground
1970’s: Rush, Journey, Led Zeppelin, Spinal Tap
1980’s: The Cure, The Gogos
1990’s: Nirvana, Radiohead
2000’s: The White Stripes, The Thrills, The Killers

The trend spans genres and made me wonder what psychic wavelength musicians share that causes them to all hit the same ideas at the same time. Maybe it is just a handful of publicists that kick things off and get everyone thinking it is the way to be “new”.

Recently I have noticed a similar pattern in naming conventions for startups. The ecosystem is much smaller than the music world, so perhaps it is easier to find the sources.

In the ’90s there was a proliferation of companies named using uncommon words (I am focusing on English here). Yahoo! is the earliest of these I can think of. Others include Google and Quokka.

In the early part of this decade Flickr set the standard with its IM-style omitted “e”. Many imitators followed, culminating in Zooomr (third “o” and omitted “e”!).

While initially clever, this trend doesn’t seem to have legs. The range of options for a really stand-out name with omitted (or added) vowels seems pretty limited and the idea appears to have run its course.

Another emerging trend was kicked off by Del.icio.us with its creatively-placed periods. Ma.gnolia.com may illustrate a potential pitfall of the strategy, though- forget the . and you may end up at ExxonMobil.

Much more creative, in my opinion, is the class of “numeral/word” company names. I draw the history here back to 37Signals and SixApart, though others may find earlier examples. Narenda Rocherolle wins the creativity award here for using the trend to name both his company, 80degrees, and its product, 30boxes (with bonus points for the completely inscrutable nosoapradio blog).

I like this trend. It makes you think a bit more: why 37? Is there some literary or technical reference I am missing?

Of course, the practical benefit may be that the domain names for unusual number/word combinations aren’t taken, or aren’t expensive to purchase. Actually, that one fact may explain the entire span of company naming trends- necessity is the mother of invention and ocassionally cleverness as well.

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Underpaid Founders and Pushing the Founders Out: Two Great Articles

October 11th, 2006

Harvard Business School has a great free newsletter containing executive summaries of articles written for the school’s Alumni Bulletin. Two recent pieces are highly topical for many emerging business.

The first is an article called Are Founders Underpaid? Author Noah Wasserman finds that compensation to founders of private technology companies trails that of non-founding executives by an average of $300,000. The summary identifies a survey pool of 528 companies, but doesn’t go into detail on specific industries or growth stages. Wasserman offers a number of possible explanations for this, including the facts that non-founders can jump ship more easily, and founders may pay non-founders more to give them a greater personal stake in the business.

The second article is even more interesting and covers the thorny question of When Founders Must Go. The article consists of a short case study of Wily Technology and describes the negotiations among the Board, senior management and founder Lew Cirne regarding his role. Author Noah Wasserman summarizes one important component of the founder’s decision making as “[be] Rich vs. [be] King”. In other words, bring in someone who can take the company to the next level, or remain lord of a small domain.

I don’t think the choice is nearly that simple, nor is it an either/or decision, but both pieces make for interesting reading.

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Abstaining from Board Actions by Written Consent

October 5th, 2006

Prior to the start of this year, Board actions by written consent had to be unanimous for California corporations, as in every other state of which I am aware. This is generally good policy- all Board members should be made aware of proposed actions. Board meetings must be preceded by formal notice; written consent actions do not require notice and the easiest way to ensure that everyone was advised is to require everyone to sign.

A slight disconnect exists, though, where a director has a personal interest in a matter under consideration- e.g. approval of a loan to/by a director. If the action is approved at a meeting the interested director can abstain from voting, but if the action is by written consent the director was still required to sign her approval.

The new law, codified in Section 308(a)(8)(b) of the Corporations Code, now allows an interested director to abstain from a written consent action as well, provided that the potential conflict is described in the written consent and the director abstains in writing.
This seems like a reasonable step by the California legislature. I have certainly talked to many clients who would have preferred to be on the record abstaining from votes on matters concerning them. The procedural steps are also sensible; disclosure should be a part of any well-written set of resolutions in any case.

My only question is what happens if someone decides disclosure was not sufficient? The law introduces a gray area where none existed before: either a consent was signed by all directors and the action was approved, or it was not. The new law allows for some uncertainty, and it will be interesting to see how matters evolve.

The legislature apparently considered this as well- the law sunsets at the end of 2010, indicating to me that it is meant as a test run to see how it works in practice. I wonder how many companies will actually take advantage of the provision?

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Facebook/Microsoft Merger Talks: How to Say No

October 5th, 2006

The story of Mark Zuckerberg’s negotiations with Microsoft has made the rounds after being first reported in the WSJ, but is amusing nonetheless.

Zuckerberg declined to attend and 8AM meeting on the grounds that he wouldn’t be awake that early, and further passed on a weekend conference because his girlfriend would be in town.

The Microsoft team had to get a pretty bad feeling from this treatment. “He’s just not that into you” seems to sum up the tone pretty well.