SideCar CEO Sunil Paul admitted that it was “more challenging” to get venture capitalists onboard, given that SideCar was sent a cease-and-desist letter by the California Public Utilities Commission in August, along with competitors Lyft and Tickengo. He said that VCs were also concerned about there being quite so much competition in the taxi 2.0 space.

So why did the VCs pony up the money? Because Paul assured them that his service is differentiated and was carefully built within existing laws — something he personally is very familiar with, due to his work around legalizing peer-to-peer car-sharing in California. It also doesn’t hurt that SideCar recently acquired a patent for transportation routing that Paul received in 2002.

SideCar got the cease-and-desist order from the PUC on Aug. 15, saying that it lacked the necessary charter-party carrier permits. Paul told AllThingsD that the letter came as a surprise, arriving less than a week before a scheduled introductory meeting with a PUC supervisor.

Since then, SideCar has kept its drivers on the road, while trying to explain itself to the PUC. Paul maintains that his company doesn’t need a charter-party carrier permit because those are for limo services, which isn’t what SideCar offers.

In San Francisco, SideCar competes directly with Lyft, which equips drivers’ cars with large, fuzzy, pink mustaches that raise visibility. Lyft — which also received a cease-and-desist order — has yet to release growth numbers, but SideCar now says it has facilitated more than 50,000 rides since February (most of them since its public launch in June).

Paul said that SideCar expects to expand to U.S. markets beyond San Francisco shortly, and ultimately beyond just ride-sharing. “We’re out to build something that makes it possible for you to not have to own your own car, and this is the beginning of a series of innovations that will make that possible,” he said.

The firms have continued to operate their services since then, but word of some of the letters just came out in a San Francisco Chronicle story.

The SideCar app

Lyft, SideCar and Tickengo make mobile apps that connect drivers to passengers who exchange donations for rides. The donations are only suggested, but riders who don’t make them risk lower ratings from the drivers. The PUC told the companies they lacked the necessary charter party carrier permits to operate.

“Our view is we are not offering a transportation charter service, so there’s nothing to cease-and-desist,” said SideCar CEO Sunil Paul in an interview this morning.

“They seem to have an attitude where they lump Uber, SideCar and other smartphone companies in one, without looking at the specific details of how we operate,” he added. (Indeed, Uber received a similar letter two years ago, and also continues to operate.)

Lyft COO John Zimmer told a similar story. “It was clear that they didn’t have an understanding of what we do. We designed the service to be in full compliance with regulations. We’ve been in conversations with them, and they admitted to the fact that current regulations weren’t written with this in mind.”

Both Paul and Zimmer said they have been in ongoing discussions with the PUC since then they received the letters in August.

While the talks have continued, the PUC has not done anything to enforce the orders. ”We understand that what’s likely to happen next is a public investigation,” Paul said.

The PUC’s general counsel, Frank Lindh, told the Chronicle that his concerns include liability in the case of an accident, and commercial competition for existing regulated taxi systems.

SideCar, Tickengo and Lyft clearly knew their legality was going to be questioned from the start.

Lyft cars have signature hot-pink mustaches.

“Everything we’ve done has gone above and beyond what any alternative transportation, what taxis or limos, requires. We’ve been very careful from the beginning,” said Zimmer.

“There’s certain entrenched interests that are not happy, and they have a lot of sway to try to put this existing innovation back in the bottle. But smartphones are not getting any dumber,” Paul said. “We’re out to build something that makes it possible for you to not have to own your own car, and this is the beginning of a series of innovations that will make that possible.”

Zimmer had a similar message. “The important thing is we need to be able to innovate. There are serious problems with transporation in this city. Why would these regulators try to stunt innovation during a tough economy?”

Paul noted that he is intimately familiar with California transportation law from his successful efforts to pass AB 1871, which made car-sharing services like Getaround and RelayRides legal.

He pointed to two specific SideCar features that were built with compliance in mind: Passengers cannot request a ride without specifying where they are headed; and the suggested donation is based on an automatically calculated peer-based average, not an amount set by SideCar. Plus, said Paul, over the lifetime of the SideCar service (just about the last six months), about 1 percent of passenger trips have been given for free.

Meanwhile, Zimmer noted, Lyft has secured a first-of-its-kind $1 million excess liability insurance policy for its service.

Both SideCar and Lyft have put up blog posts on the matter.

Update: Tickengo co-founder Geoff Mathieux called and confirmed his company received a cease-and-desist in September. He contended that Tickengo had been unfairly lumped in with Lyft and SideCar, because those services have much in common with commercial taxi businesses.

Tickengo, by contrast, doesn’t screen or train drivers, doesn’t buy insurance, and actually limits the amount any driver can earn per year to $8,776 (the estimated American cost of car ownership).

“We’re trying to elimate the need for commercial vehicles, so we’re the total opposite,” Mathieux said. “Lyft is taking regular people, yes, but they’re turning them into professional drivers. It’s not disruptive; it’s a yellow cab with a mustache.”

“We’re not all created equal here,” he continued. “You can’t lump all these companies in one bucket. Some are legal and some are not. They’re BS-ing their way into peer-to-peer, and it’s not peer-to-peer. Frankly, I think the PUC has a point.”

Update 2: A representative for the PUC replied to questions we sent via email.

What are the core concerns about how these services operate, and what regulations do they violate?

Companies must obtain charter party carrier permits, which a company receives after the CPUC ensures that its drivers are properly licensed and is insured to carry commercial passengers.

What happens, going forward? It doesn’t appear that these services are stopping. What’s next?

The law provides various enforcement tools, fines, filing criminal complaints and possible imprisonment, vehicle(s) impoundment, coordinating with other law enforcement agencies, etc.

It was way less weird than I expected.

The guy who gave me the ride was an incredibly friendly fellow named John Robertson, who was driving for a start-up called SideCar, which has built an alternative to taxis, with cars driven by regular people and hailed using smartphone apps. SideCar launches to the public today in the San Francisco Bay Area.

At a SideCar employee’s suggestion — I should admit that my Friday afternoon meeting had actually been at SideCar’s office — I sat in the front seat of Robertson’s car and chatted him up.

Robertson told me he recently retired after 30 years as a project manager at UPS, and quickly got bored. He now generally drives five or six hours per morning with SideCar, and golfs in the afternoon.

Robertson said he lives in the East Bay, and has used the driving as a chance to get to know San Francisco better. He only makes $80 or so per session — which isn’t great, minus the cost of gas — but he doesn’t do it for the money, but rather because he believes in what SideCar is doing.

And Robertson meets all sorts of interesting people — during the beta period, lots of Twitter and Google employees, where word about SideCar apparently spread quickly through their SF offices.

SideCar is run by Sunil Paul, the serial entrepreneur and investor behind companies like Brightmail, who in recent years has been exploring cleantech and now the “cleanweb.” Paul first worked on getting California legislation changed to allow car sharing, and tested a start-up in that space called Spride, but then decided the more transformative and potentially lucrative opportunity was around sharing rides within an online community rather than borrowing people’s cars.

If you ask Paul, the idea for a ride-sharing start-up first occurred to him in 1999 — and he actually received a patent on some aspects of it in 2002.

After sitting on the idea for some 10 years, Paul recently invested and became CEO of a University of Michigan transportation research spinoff called Shepherd Intelligent Systems — now SideCar.

SideCar has been in testing since February, with more than 10,000 rides to date. In San Francisco, SideCar isn’t nearly as fast as Uber, but rides can be booked in “minutes to 10s of minutes,” as Paul described it.

As seems to happen with many timely ideas, there is a direct SideCar competitor that also just launched — it’s called Lyft, and is made by the start-up Zimride. I tried Lyft yesterday, and from a user’s perspective, it seems almost identical.

There’s one key difference between SideCar and the competition, at least according to Paul. After all the work he did with car sharing, he knows the regulations around collaborative consumption and transportation backward and forward, and SideCar’s payment system is apparently more strictly built to abide by existing laws.

The way it works is that SideCar automatically and dynamically computes a suggested payment that averages what other people have paid for the same kind of ride. This sidesteps the company and the driver setting a price for the ride, in order to avoid commercial vehicle restrictions. SideCar takes a 20 percent cut.

Users don’t have to pay for the ride, but if they don’t, drivers are unlikely to give them a good rating, and they’re less likely to be picked up the next time they request a ride. (Lyft has the same policy.)

Of hinging his company’s business model on an optional donation, Paul said, “The capitalist in me is scared silly of that idea, but the human being says you can trust people.”

Another nice feature of SideCar is an easy way for riders to share their ETA with a friend and send them a live online map of their progress in the car. This looks a lot like Glympse, and helps people reassure themselves that someone knows where they are while they’re in a stranger’s car.

Paul is being somewhat secretive, even as SideCar opens to the public, and won’t disclose how much funding he’s raised or how many employees he has. He did give me a long list of investors, which includes his own Spring Ventures, Huron River Ventures, SV Angel, Lerer Ventures, First Step Fund, Jeff Clarke, Lisa Gansky, Robert Goldberg, Jared Kopf, Konstantin Othmer, Mark Pincus, Martin Roscheisen, Josh Silverman and Thomas Varghese.

Earlier this week, I slogged through the rain in a very dorkish GroupMe plastic poncho at SXSW in Austin to attend what I thought was one of the more interesting sessions, titled “Why Cleanweb Will Beat Cleantech.”

Perhaps because it was not yet another creepy location app (memo to Banjo and Highlight users, please stop attempting to get me to allow you to stalk me, cuz I ain’t!), it was more sparsely attended.

But the presentation by longtime Silicon Valley entrepreneur Sunil Paul was a good one, given his premise that current information technology tools were at the heart of creating solutions around energy conservation.

The founder of Brightmail — and also the first start-up partner of Zynga CEO and founder Mark Pincus at a Washington, D.C., company called Freeloader (where I first met the pair) — thinks that clean technologies like solar can be better leveraged with Cleanweb, which he defined as the “application of information technology to resource constraints.”

In other words, more Airbnb (fewer hotel rooms mean less carbon emissions), more Zappos (fewer stores, less driving to stores, etc.) and more teleconferencing (that’s easy to grok) is evidence that the Cleanweb could be an important contributor to saving the planet.

Quoting a recent tweet he saw, Paul noted that a smartphone today has as much computing power as the computers that put a man on the moon, but all we do with them is launch birds into pigs.

“I am saying we can do something better with the aggressive application of software technology,” he said.

Actually, those Angry Birds are now in space, too.

In any case, here’s Paul’s interesting deck from the talk:

cleanweb_presentation-Sunil-2012-mar-10

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In a new filing with the Securities and Exchange Commission concerning its upcoming IPO, Zynga is expected to unveil two key management and board changes at the online gaming phenom:

Chief Business Officer Owen Van Natta — who came to the San Francisco-based start-up several years ago to help CEO Mark Pincus grow it and develop it — will step down from his job and become a strategic adviser focusing on major partnerships. He’ll still remain board member at Zynga, but will give up millions of pre-IPO shares by moving out of his operational role.

And director and venture investor Brad Feld will leave the the board, which VCs sometime do as companies move to a public offering and add members with more specific business experience.

In his place, longtime entrepreneur and investor Sunil Paul, who founded a company called FreeLoader with Pincus many moons ago, will join the board.

Zynga confirmed the changes to me in a statement by Pincus:

“Owen is a valuable business partner. He’s made great contributions to Zynga and continues to be an important part of our team.”

Sources said the changes related to Van Natta around are not part of a recent controversy around a Wall Street Journal story about clawing back of some share options grants of early Zynga employees who had become less involved in the company. While the company cannot actually take back already vested shares owned by those staffers, the article has put a lot of scrutiny on Zynga and raised questions about how to cope with the kind of hyper-growth some Internet firms experience.

That’s certainly been the kind of rocket ride Zynga has been on, as it has grown from a small social gaming company on Facebook to a high-profile public company.

Zynga is in the final stages of its IPO process, answering questions from the SEC that are typical. If all goes well, Zynga execs are expected to go on a road show after the Thanksgiving and go public by the end of the year at a market valuation of close to $20 billion.

That was different from when Van Natta officially got to Zynga in the spring of last year — after a rocky experience running the doomed Myspace. At the time, he told me at the time that planned to be focused on scaling the business and did not consider himself a long-term operating executive.

Since then, he has helped Pincus hire a series of experienced gaming execs, including a chief operating officer, a chief marketing officer and others.

Zynga was Van Natta’s third high-profile Web company in recent years. He was a top early exec for Mark Zuckerberg at Facebook until early 2008, and in 2009 he took over News Corp.’s (NWS) MySpace, a job that lasted less than a year.

Early in his career, Van Natta was also was a top strategy, marketing and deal exec for Amazon, which bought an early social networking start-up called PlanetAll that he worked at.

It will now be interesting to see what Van Natta does next, but it is unlikely he will take a permanent position. He is a longtime angel investor in Silicon Valley, including in hot start-ups such as Asana and still holds a significant stake in Facebook.

But, in moving out of his job at Zynga, he will be giving up many millions of shares of a rich trove he was given when he arrived at the company. That said, Van Natta already owns millions of accelerated vested shares and will get another large grant as a board member.

Translation: Don’t cry for Mr. Van Natta, Silicon Valley — he made $42 million last year from Zynga shares alone.

Since I posted an interview with Social Gaming Network’s Shervin Pishevar today on the announcement of his $15 million funding, it seems only sporting to post this lively video interview I also did with his main competitor, Mark Pincus of Zynga, recently too.

Zynga, named after Pincus’s dog, is one of the two main social-gaming networks that are competing for audience by offering highly interactive games of all kinds. Its aim is to be more engaging and create a series of addictive games that users will return to again and again.

Pincus, who also founded the Tribe social-networking site, is a longtime entrepreneur. I met him way back when as a reporter at the Washington Post when he and Sunil Paul launched one of the few start-ups–Freeloader–in the D.C. area.

And I can report that Pincus is as jumpy and energetic today as he was 15 years ago.

He has certainly been busy lining up a spate of fancy investors, garnering $10 million in funding in January, including from: Union Square Ventures, Foundry Group, Avalon Ventures, Pilot Group, along with personal investments from Silicon Valley players Reid Hoffman and Peter Thiel.

Zynga, which is larger than rival SGN, claims 2.3 million total daily active users across Facebook, with its Texas Hold’em game being the largest it offers. Other games include Sea Wars, Blackjack, Attack! and Scramble.

As I said in my SGN post, while BoomTown often makes fun of viral apps, most of which are faddish and juvenile, the better-made gaming apps actually are likely to be a real business over time, as long they remain engaging and fun to play as the classic real-life games are.

Zynga plans on making money through ads, including creating its own ad network for other gamers, as well as via the sale of virtual goods and premium offerings.

Here’s a chat with Pincus at Zynga’s offices (Pincus owns the building, by the way, which also houses a bunch of other Web 2.0 start-ups) in San Francisco: