I have been thinking about this and wonder what startups do about the issue of copyrights... if you have an idea for an application that could potentially be used for copyright infringement would you still create it? How would you decide this?

Absolutely. If you limit yourself only to technologies that can't be used to infringe copyrights, you've basically eliminated everything relating to computers.

I'd think twice about writing something whose primary purpose is to infringe copyrights. Aside from the legal ramifications - hey, my job is all about intellectual property, it's a little hypocritical to do my best to steal other people's intellectual property.

Basically, I'd be comfortable inventing BitTorrent, Gnutella, or YouTube, but would feel a little guilty about Napster and AudioGalaxy.