Ask HN: How can I prevent getting 'ousted' from the company that I co-founded?

[newbiecofounder]

I am the technical co-founder in a New York based company. ‘Company’ is just a way to say it, we are just two guys with a good idea and an already finished MVP that I built myself in a four months period. The idea guy is not technical at all, he knows his away around in all business related matters, and coming from an ivy-league school, he has a lot of connections.

Four months ago he approached me with the idea, which I liked, and I started working on it. I like to do stuff, and I started working on it as a side project. I have a very well compensated job in a local startup and I would like continue to do that in the short/medium term.

As I said, we have a really good idea and a working product. Is not crazy to say that my co-founder could raise a couple hundred thousand dollars from investors in our current state. My concern is that so far everything, my equity, and possible future role in the company has only been agreed verbally.

I’ve mentioned my co-founder several times that we need to incorporate and he says it’s one of the things on his list, but never happens. He says is not the right time and that we must incorporate once the investors jump in. I feel like I’m the one who has worked the most during this four months and I don’t want to end up without a single share of ownership in the company that’s going to be behind our product.

HN: How can I guarantee that I keep my value as a co-founder and get something in return in case we succeed? How can I prevent this other person from taking the code (which I shared with him) and give it to someone else to continue working on it, taking me out of the picture? I’ve heard of several similar stories, I just don’t want to be part of one. Thank you.

[eli]

You are asking a specific legal question. You must (must!) pose it to a lawyer. Most lawyers offer a free consultation. Go right now and set one up. This is not something you want to be wrong about because you trusted some Internet forum comment.

[mason55]

People always say "go talk to a lawer!" but someone in this situation likely has no idea how to even find the proper lawyer.

[graeme]

The only reply worth listening to. This is clearly a legal issue.

[youngButEager]

There are a couple ways to approach it, depending on your level of trust in the Ivy League co-founder: BRUTE FORCE APPROACH 1) stop working on the project -- at this point you have leverage because you have the code and the knowledge of the code, he does not. 2) make the code base unavailable 3) refuse to participate in fund raising, where he needs you (normally) as the tech cofounder to answer tech concerns raised by the investors

I'll stop there because there's a 'softer gentler' approach you can figure out by yourself.

I'm stopping there because he has already insinuated the following:

"I'm not convinced yet that I need you, software guy. It seemed easy enough to find a guy like you to code this up for me and I could probably do that again, especially once I raise funds and can actually pay someone to write code."

"If I was really willing to share the pie, I would have addressed your concern about "let's put the equity share in writing" but I sort of 'stone-walled' you on that because the risk of you bailing out now is minimal, you already provided me an MVP which I can show to investors to raise money."

I've been down this road before. Unless you have very unique technical know-how, you can be replaced by almost any other coder. And if you provide the work with no 'sharing agreement' you risk discovering that your non-technical co-founder shows he is not motivated -- by anything -- to later cut you in for a piece of the pie.

Let me say that another way. Put together an equity share paper. Put it in your own words and/or using equity share statements from the web. If he refuses to sign even that, you know where you stand, he's probably put you on his "expendable" list.

After the tech world saw Zuckerberg become a billionaire by absconding with 'not his idea', ethics and respectable business behavior is much less common, unfortunately.

[rohamg]

> After the tech world saw Zuckerberg become a billionaire by absconding with 'not his idea', ethics and respectable business behavior is much less common, unfortunately.

If anything, the Zuckerberg situation is a counter-example: similar to OP, Zuckerberg was the technical guy, and similar to OP, he was not placed under sufficient contractual obligations before beginning the work, thereby allowing him to "abscond" with the "idea" (if such a thing is even possible).

[james1071]

He is not going to sign an equity agreement before there is a company, is he?

[adambenayoun]

Hello Newbie co-founder. You MUST consult with a lawyer asap since getting advice on a forum online is not legal advice.

Close your browser and call one NOW! However if you read below that line - you're on your own :)

---------------------------------

Since you developed the code and you never signed on any paper that hand over the rights to that code to another person or a company (I hope you didn't) then you probably have some leverage since your co-founder (or his corporation) won't be able to use it.

One of the few things that you do when you incorporate is create a TAA (Technology Assignment Agreement) that will sell your IP to the corporation. The technology assignment agreements deal with IP that was created by the IP owner before the he became a shareholder - in your case IP created by founders pre-incorporation.

The technology assignment agreement is usually referred in the stock purchase agreement (SPA) since the transfer can be seen as the consideration for any stock purchased by you (when incorporating).

Without that any founders will have a hard time to get investors to invest since the company itself does not hold any right over the code or any inventions.

Additionally - I must say that your co-founder might be right in the fact that you do not want to incorporate the company until you can know for sure there is some sort of positive outcome. It seems that you just built an MVP and there's no need to incorporate (payroll? selling something?).

Incorporating means that you will need to start declaring taxes and report to the IRS and that add a lot of overhead that you DO NOT WANT. The best thing to do is probably wait until you have some investors showing interest and then incorporate in order to receive that investment.

I would probably consult with a lawyer and prepare a sit-down with your co-founder to form a legal document that will establish the relationship between the co-founders.

AS always - IANAL

p.s: Edited and added some clarification about TAA

[allworknoplay]

A lot of people are saying 'get a lawyer', but I have different advice:

If you don't trust the guy, don't start a company with him.

Really. You will need to deeply and totally trust each other in every thing you do for years if you go down this route, and if he's dodgy about this, he's going to be dodgy about everything, to you, your customers, your future employees, etc. Investors will see it too, and they won't want to invest if they can't trust him and if you two don't have a professional, trusting relationship and absolute dedication to the success of the company over your personal gain.

Don't do it.

[brudgers]

Right on. Right now, there is no company. The OP owns the software and the implementation not the concept is the only thing that has concrete value.

The business person's obligation is to execute on the business side, and that obligation hasn't been fulfilled. Moreover, the business person has stated that they are not going to execute their role until they feel like it.

Let the other fellow lawyer up.

[eli]

Ending the relationship might well be the right course of action -- but I'd still meet with a lawyer to discuss it!

[arikrak]

I'm not a lawyer, but I think you own the code you created by default. Though you should obviously try to get a legal contract and all.

[e40]

Especially without any agreements between the two of you. In absence of them, you own it. Your idea guy isn't that smart if he doesn't understand this.

[justinzollars]

This is probably not true.

[JoeAltmaier]

Do the paperwork up front. I can't count the number of times I've been approached with good ideas, and some vague promise of equity at some vague time in the future. I always say no, thanks. Not to say I've never been a startup member/founder; I've done nothing else my entire career. I just never, ever do it that way.

[robgibbons]

Put copyrights in all of your code, I mean everything. Copyright assignment is the act of assigning your work to someone else, usually in the form of a contract job.

Until a contract is signed, and you have "assigned your copyright" to another entity, all of your produced code remains under your own control.

[rwbcxrz]

I was in a situation similar to yours for several years early on in my career. My co-founder had built somewhat of a prototype in his spare time, and he and I wanted to take it to the next level.

And we did. We launched a private beta, signed a couple small-time clients, and started making money. The product kept evolving, and my co-founder got less and less involved.

I kept pressing him to do the paperwork. We'd made a verbal agreement, which he affirmed many times (I still have the chat logs in Gmail). I trusted him to keep his word for a long time.

After about five years, I found myself suffering through depression, stress, and burnout. I couldn't take it anymore, so I left the company.

As soon as I left, he started to actually work on the business, finding clients and looking for funding and investors, free of the shackles of his promise to me.

The only way you can guarantee your value is to have a formal agreement -- one drafted by a lawyer. I don't know your co-founder, and I certainly hope he's not like mine, but you need to look out for yourself. Even if your co-founder is a stand-up guy, it's not his job to look out for your interests.

[late2part]

Your chat logs are a written agreement.

[preinheimer]

Even without incorporating, a written document with some semblance of ownership can be helpful. Before I split my company out from my sole proprietorship my co-founder and I agreed by email to an ownership split.

Having something out there that says you've both agreed to some split, even in your own words, is super helpful to protect your interests when investors show up. Their lawyers will want that gone, and replaced with something more formal. To do that they'll need you to agree to a new formal relationship, and for you to agree you'll need to be happy with what they're offering.

I'm not a lawyer, this isn't legal advice. Just observations from my own experience.

[webwright]

I'm not a huge fun of going thru the time and expense of legal formation every time you want to explore a potentially lucrative side project... I once rapidly formed an LLC because someone wanted to buy a side project of mine.

But you can protect yourself. First, only dabble with people who you trust. It's not perfect (every couple believes "till death do us part" when they say it), but it helps. Beyond that, it's trivial to write out a shared understanding that will get you much of the way to "protected". Note that the most important thing is that they are ethical and there is a shared understanding. Legal docs aren't a substitute for that, they're just a weapon if you need to go to war.

Discuss the following: 1) Compensation. Equity? Deferred $? If equity, % of ownership (fully vested) and rate of vesting. (read: http://thenextweb.com/entrepreneur/2013/07/21/startup-founde...)

2) What happens in various dissolution scenarios? What if either or both of you want to quit? What if either or both of you wants to fire the other? Who owns the code?

Once you share a verbal understanding, write it down via email to him and have him respond to the email confirming that he agrees. If you're worried, print and sign 2 copies. It doesn't have to be legalese to give you teeth if a fight happens... But your goal should obviously be to avoid a fight.

You have a lot of power right now, but you should use it lightly. Say, "Hey, X-- I'm feeling increasingly uncomfortable and would love to take some time out to discuss our partnership. I know incorporation is expensive and time consuming, but I'd like to make sure we share an understanding on X, Y, and Z. Once we do, I'd like to write that down, email it, sign it, etc. Does that make sense? When would be a good time for that? I suspect we'll need a few hours of quiet time." Until that happens, stop writing code and (if you think he might be a bastard) make sure you have the passwords.

[rohamg]

FWIW incorporation is not time consuming NOR expensive.

But yes, you're right that a simple written agreement is much better than nothing (though doesn't provide full protections on both sides - founder vesting, dispute resolution, etc.).

If your cofounder is a half-decent business guy he knows both of the above, which makes this situation somewhat suspect.

[vineet]

I am not a lawyer, and you should talk to one. But, before that - there are a couple of thoughts that might help:

You should have a broad agreement before you go to the lawyer. Are you thinking about a 50% share in the company or a 1% share in the company. You need to talk about it and be on the same page. After you talk about it, I would just get a confirmation via e-mail. Some documentation is better than no documentation. (Yes, you ideally want a lawyer looking at it, but it also would be a legal liability for him if there is a rough e-mail agreement that he hasn't given you shares for).

The idea guy will likely want you to be working full time on the company. I think your answer should be something of the order of 'Yes, as soon as you are also full time meeting goals XYZ and that we have enough runway to pay me 50% salary for 18 months'.

Until the company exists any work that you have done you own it (unless he has paid you and you have explicitly assigned the IP to him).

If he waits for investors before incorporating, there is going to be a tax situation (because then the company will be worth something). You ideally want to incorporate and value the entire company in the beginning at $1 or something similar.

Most investors will likely want the technical talent that they are investing in. If he gets good investors then they will likely want you to have an comparable share in the company as him. However, in my opinion, your worst case scenario is that he could say to the investors you are not too important, and that he can toss your code and get it built offshore for cheap (which might be easy given that there is an already working prototype).

[Theodores]

Your friend came up with an idea, 1% inspiration. You have done the 99% perspiration. You have more of the cards than he does. Work the 'nothing signed' to your advantage.

What does money bring to the table and how will it convert your MVP into a viable business entity?

Personally I believe you need customers before you get yourself beholden to some outside investors.

Get the customers, go live with your MVP in a soft roll-out way, do what you have to do to get to ~100 customers/clients/users. If they like your product then they will do some 'organic' growth for you. If that happens then you will have traction. You will be able to get money for growing into a proper company from many other sources than your friend's network.

So, head for success. When your friend who would not give you a formal 50/50 wants to know why he is not needed just tell him that his idea was just an idea and that 99% is perspiration. From how you tell the story he has brought nothing else to the table other than an idea, ideas on their own are worthless.

Much like winning the lottery there is this dream of having the right idea, getting an MVP and then being bought by FB/Google/Yahoo to then not have to work ever again. However why not go for the customers, get revenue from them and grow the business fairly and squarely?

If you are charging customers, selling ads or getting revenue sent by any way that needs code, make sure your bank details go in the back end. Simple as. Setup the hosting in your name, make sure you have the DNS situation under control too. Keep your partner along for the ride just in case he does bring something useful to the table but don't tell him that he isn't really needed until you are absolutely certain of that.

[wtvanhest]

A lot of people here suggested you speak with a lawyer and they made it sound like you should do it on your own.

1st, make absolutely certain that who ever you choose as your lawyer is a startup lawyer. Do not contact a family friend who does litigation or someone else that does real estate law. You must hire a startup lawyer who does work for venture firms, angel investors etc.

2nd, From the read, you are worried, but you still think your co-founder is a good guy. If that is the case, you should just send him a link to this post and say: "I asked this question on HN, and it is clear that we may not need to incorporate yet, but I am concerned about protecting the work I have done and will do in the future. Let's start talking to lawyers about everything to get the ball rolling."

By staying positive and just showing him that this is the right thing to do, you are making forward progress. If he balks at hiring a lawyer, you may want to consult one on your own.

[newbiecofounder]

First, thanks to everyone for their advice. I'm reading carefully.

Replying to your comment: yes, I think he is a good guy. But in all honesty, I would like to finish the product and stop working on it while holding to some (even small) equity in case the company succeeds.

We've already outlined a plan to bring paid developers onboard. Once it materializes, I would like to do less and less until completely detached.

It all started as a good idea and I had a lot of fun building it. Looking back, I see the quality of our current product and the time I've spent on it, and I think I should own part of it even if I don't continue to be involved in its potential success.

[danford]

Some of the previous threads:

https://news.ycombinator.com/item?id=7326162

https://news.ycombinator.com/item?id=3101498

[madaxe_again]

Apply the veil of ignorance and put yourself in the shoes of a potential investor.

Would you invest in a solo ideas guy with an MVP but no skill? Or would you rather invest in a dynamic duo?

Trust is a hard thing to grow, but it does become rather easier when you work to understand the motives of others from their perspectives, and if there's a shred of doubt in an investors' mind as to whether the cofounders trust one another, they will not bite.

That all said, what's stopping you from opening an llc/s-corp and assigning the ip?

[abracar]

You should definitely sign a founder agreement right now, even if incorporation is still a few weeks/months away. For my own startup we used a custom version of this template: http://www.docracy.com/103/founder-collaboration-agreement Did you guys already agree on equity split?

[james1071]

How can you agree on an equity split when there is not a company?

[bagosm]

Well first thing you should do is contact a lawyer but second thing you should do is to actually:

talk to your cofounder.

Express your fears, and negotiate a solution (solutions which you have already in mind having talked to the lawyer). Maybe he really hasnt had time or maybe he really thinks that the investment stage is the most appropriate for incorporating.

[leorocky]

I'm pretty sure that in some states, like California, verbal agreements are protected by law. If he admits to the verbal agreement in court he's bound by it. I don't know if this is true in New York. If they disagree and say they never made any such arrangement then they may be lying but then it's murkier.

[matttheatheist]

In the business world, as in the natural world, either you eat, or get eaten.

And you are clearly at the bottom of the food chain. You are best suited to a lifetime of regular employment, not launching a startup.

Every man's got to know his limitations. Make sure you know yours.

[rhino369]

Write up a simple partnership agreement that assigns interest in the partnership.

Or don't, you already have a partnership with him. But with no agreement you'd have to follow default partnership rule. 50/50% split of profit, assets, and debt.