Ask HN: My co-founder and I are about to split, what to do?
My co-founder (who is a close friend) and I have been working on a startup for about 1 year now. My co-founder had the "idea" for a startup. He needed a programmer, so we joined forces. His role is supposed to be design (though currently the application uses my design) and sales/business development/marketing.
The product is 99% complete and could be launched in a week. Unfortunately, we can't agree on partnership terms and ownership of the company. My co-founder wants 60% of the company and refuses to split the equity equally with me. My attempts at discussing/negotiating this with my co-founder only stir hostile, belittling responses from him.
I've often felt bullied and mistreated by this person, who treats me like a "resource" and bosses me around like a child. Though in certain stages of the project my co-founder has contributed significantly to mocking up the user-interface, we've gone through many iterations and, currently, 100% of the design AND code was created by me.
It's looking like we are about to go our separate ways, and my he is threatening legal action and asking me to sign an NDA.
He is not trying to take my work. He wants to start from scratch again by finding a co-founder or hiring a developer to build his idea. The thing is, I'm still invested in my product. I don't want to ditch it.
I haven't signed anything up until now. I think my co-founder registered an LLC, but we've never agreed and signed any sort of partnership/ownership/nda agreement. What power do I have in this situation? Could I find a new non-technical co-founder and launch my product? As a last resort, I would even launch my product for free so my co-founder does not find another poor technical co-founder to abuse. I feel very cornered right now.
I've spent over 1200 hours designing and developing and have a very strong vision for the product.
What can I do?
Thanks in advance, HN. You guys are the best.
* ONE SUPER-IMPORTANT FACT I FORGOT TO MENTION * My co-founder does not have access to my code. I've suspected a partnership breakdown for awhile now, and since I haven't signed anything legal, I decided to make sure all of my work stayed out of my co-founders hands. I've never signed any agreement. I haven't been paid a penny.
104 comments
[ 3.2 ms ] story [ 184 ms ] threadOne more validation that proves that an online database where you can explicitly pledge equity to someone upfront is a must. Check out the new http://fairsoftware.net that's what it does.
To answer your questions: if it's your code and you didn't sign anything, your "friend" is not in a strong position, since he most likely has no rights to it.
By the way, stop calling someone "your friend" when they threaten to sue you.
Now for a final word of advice and in the spirit of helping resolve a situation that I have witnessed many times, I'm willing to talk to both of you, as a neutral third party, hear each of you out and report back to both privately what I recommend. Use my contact info - I have done this in the past.
Then I would gather all evidence you have and create a full time-line of the project. From when it started, to who did what, what was previously agreed on, either via email or in person. Then it is time to talk with a lawyer.
This may well be the only side to the story, but something tells me there has to be more to it.
> My co-founder had the "idea" for a startup.
I'd be totally ready to render judgment if I heard the other guy use the idea argument but we need to hear it from his mouth.
Lesson learned though, good luck.
Discovery, will ferret this out in court and without a patent, who came up with the idea != an equitable consideration in the eyes of the court. If he truly has not done any or little work you may walk away with a larger stake than he is looking for. Exploitation is frowned upon in most courts.
> We've gone back and forth many times. It's hard to decide on equity when circumstances change.
No it's not, it's easy.
I've always felt that two or more people involved in a business like this should share equity in relation to the number of hours they have actually worked, adjusted for any cash they have invested in the business.
For example if neither of you have invested cash but your partner has worked 400 hours and you've worked 1200 hours then the split is 25/75 in your favor. Simple!
The split changes as the ratio of hours changes or as the partner's cash investment changes, but the basic agreement here is that each partner's time and/or money is equally as valuable as that of the other partners. If one partner stops working completely his share will continue to shrink as the other partners continue to increase their relative shares by working more and more hours.
This IMO is "fair" because no matter what, it's the hours the two of you have worked that determines who gets the most, with cash investment considered too of course.
I told my brother this years ago when I had already invested 700 hours in a new business, as well as five thousand dollars in cash. He saw the potential of my venture and he wanted to jump in with a 50/50 deal immediately. I said no, I've invested 700 X $50 = $35,000 in labor and $5000 in cash so I'm ahead of you by $40,000 -- so here's how we will do it:
My share right now is 100% and yours is 0% but you have the right to invest cash or time (valued at $50 per hour) in order to catch up to me. When you've caught up by investing as much time and/or money as me then we will be equal partners, but until then we will use this sharing ratio to determine who owns how much of the business.
It's a good system that rewards partners for their actual contributions instead of some pre-conceived notion of how much each one might be worth relative to the others.
I'd think you should get a good lawyer asap.
Odds are you do have documentation. Get all the emails, receipts, etc. you can find, the code (hopefully you have logs, etc. of work in source control, although I'm not sure if they'd know what to do with that in court or if would be admissible as evidence), and talk to people who could testify on your behalf.
The other option is to ditch it all, but it sounds like you are invested enough where you would rather make a lifetime enemy than give it all up.
"currently, 100% of the design AND code was created by me."
You may have done the typing, but you also acknowledge that there was a lot of discussion that led to the current design. I guess that this is an area where your co-founder may see things very differently ('(s)he did the technical stuff, but all the ideas are mine')
As to your question, you should decide what you value more: getting back on your co-founder, or having the product succeed. In the first case, go talk to a lawyer; in the second, I think you should get an agreement that includes you leaving the company ASAP. That ASAP is because of phrases such as 'bullied', 'bosses me around', 'belittling' that make me wonder about the 'is' in 'who is a close friend.'
How much you can get out of it depends on the value you have to the company. That will depend on the technical complexity of the product.
I think tptacek is correct concerning the legal issues here. In any case, I didn't say the "friend" would prevail in his claim that the OP was an employee of his LLC, nor that he wouldn't suffer unintended consequences as a result of making the claim.
http://www.ehow.com/list_6306349_massachusetts-state-unemplo...
"Employers who fail to pay unemployment insurance premiums can also be ordered to serve time in a state prison."
You can search for the legislation on Mass.gov if you like.
The point is that it's not relevant to the situation at hand, because 10 months before that could ever happen, the "employer" is going to get a notice saying they owe some trivial amount of money, and they're simply going to pay it to go away. You would have to be made of stupid to end up in jail over employment taxes.
Note that you're replying both to a lawyer (in dc's case) and to someone who's dealt with this exact situation (in my case); you may want bigger guns here than a pay-per-word Demand Media article.
2)It seems to me that you've been very complacent with your co-founder up to this point which is why he thinks he can bully you with such a bogus claim. You need to politely say you've had enough of the abusive relationship and you wish him the best of luck.
3)Did you sign anything for the LLC? Anyone can put anyone else's name down when they register it online, but without a signature it's meaningless. Form your own LLC or S-Corporation and start learning the biz side yourself. Articulate exactly what you think you need a biz person for and start doing what you can. You'll get a better understanding of the expectations you'll have for the next guy, who may end up being an employee instead of a co-founder.
Good luck!
Your BATNA in this negotiation is "get on with my life and leave you with zero"; that may be a strong enough position to get your partner to let you buy him out (or vice versa). That's about the best that will come of this.
You could "lawyer up", but that's not going to help you that much, unless your former cofounder is dumb enough to take you to court or make a break for it with your code. It's hard to argue that someone shouldn't talk to a lawyer, so I'll just say: don't spend too much money on it.
There's no chance you're going to work with someone who threatened to sue you because you wouldn't sign over your code after he tried to take a 60% share of a product you coded by yourself.
I'm being grim, and surely that will irritate you or someone else in this thread, but I'm trying to point out the path that costs you the least time, heartache, and money.
It's just business.
This is why partners should incorporate and come up with a mechanism for handling acrimonious departure before getting to work. A classic response to this problem is the shotgun clause.
The early histories of many successful SV companies are peppered with a sour business deal or two. The winners are those that hung on and fought. Did Gates walk away when when Jobs discovered that he was building GUIs? Who walked away from Facebook? Zuckerberg or the other guys? You know the twins...or "those other people" whoever they were. You get the point. Exactly, its just businesses.
This "company" has no actual assets of any sort (users, contracts, relationships, press, brand recognition, ...), except for the code, which his co-founder does have a legitimate claim to. And due to the founder dynamics, the company will never amount to anything.
So these guys are basically fighting over 10% of nothing. Yup, walking away seems like the best course of action.
To me, this sounds like the nuclear option. In fact, the idea of "Mutually Assured Destruction" could be applicable here. If the OP's partner sues them, they could countersue and they'd both be out. That could make an effective bargaining chip.
But if that doesn't work, I'd say that you're right. The OP should move on.
Failure = who cares.
Success = danger (see below).
Big success = guaranteed lawsuit.
There are several failed startups that I'be been in where there was no possibility of the phoenix rising from the ashes because the people responsible for the failure were clearly going to sue if it became a big success.
Even in one situation where the ownership of the code was crystal clear (the primary author was the son of a very big time lawyer and was very careful about that).
In that last case they insisted on owning a majority of a new venture despite their proven ability at failure. In my experience, greed of the sort we're seeing here is a strong sign this situation will never work out; among other thing it reveals a whole lot of things about how the other person views you and your contributions to the venture. It also suggests the other guy is not going to be able to make it work if he parts with you.
Giving up this fundamentally, fatally flawed business is step 1. From this fresh point of view, you might be able to come up with a relative win-win. Maybe your so-called cofounder can purchase the code from you instead of wasting many months getting it rewritten again. That would be better than walking away empty-handed.
That said, I propose a fundamentally different target for the "clawing back".
You said this is a close friend. Fuck money. Fuck the business. Save the friendship. In your position I would assume the business is lost and do whatever it takes to salvage the friendship. Get another friend to mediate. Come to an understanding. Accept that you've both got your fixed, blinkered view of things, and you're not going to agree about it, probably ever, but you can still get back to being friends despite that.
Close friends are far more valuable than any business. I was lucky to keep my best friend when my first business blew up. I am really glad I made the effort, as hopeless as it seemed at the time.
I wonder if there is much "friendship" left now.
However, you should take a break for a few days/weeks so that both parties can cool down, and then try to talk to him again. Hopefully you guys will be able to patch up things and launch the site.
To give an idea of how worse the situation was, the fellow would ask the employees to spy on me for mundane things like connecting to internet. Later verbal accounts of people, suggest that he used my caste as a device in manipulating them.
Nevertheless, I'm really grateful to the person for showing true colors so early instead of many years and dollars (or rupees) later.
Throwing out good code after putting 2+ years of time and money was nearly soul crushing. Yet, it turned to be a better decision when I realized that I could create a superior and totally different product. Now, instead of me worrying for getting sued, the fellow who cheated me has to carry that burden all the time. That leaves me more freedom to focus on the real needs of my users.
Besides, with this experience under the belt, OP will surely get a better co-founder if s/he continues to keep working.
Edited: grammar.
As the son of two professional parents who grew up on farms, that latter fact turned out to be ... rather unfortunate WRT to the last Indian manager I had (a naturalized citizen but was born, raised and went to college there).
Having said that you must now move on. You have the code, he doesn't have any rights for it. If you stay, this will backfire big time down the road.
The partnership must rely on trust and respect, clearly not what's happening here.
Move on.
Try to think of mutual-resolutions that both split you up and allow someone to move forward. (In the meantime, sign nothing and 'reserve all rights'.)
Something involving a side-payment or non-dilutable passive share might work. For example: you agree to walk away and give him the code for a cash payment and 25% share of the company with no further obligations. Then, if it does take off, you've got a great claim worth pursuing, but in the meantime, you're free of the headache and able to apply your talents elsewhere. Or vice-versa.
If you do go this way, you might ask him to 'walk away' with a payment and passive share first. When he says that's a raw deal, then see if he'd offer the same in reverse. And, make the negotiated agreement ironclad/final with a lawyer's help -- rule out as much possible 'but the code isn't as promised' or 'we had to rewrite it all' later-claims. (Remember: when shopping for lawyers, you essentially get 30+ minutes free advice from each one you talk to!)
That's akin to what's known as a http://en.wikipedia.org/wiki/Buy-sell_agreement: One of you makes an offer to buy (or sell). The other must either accept the offer, or he can flip it around on you, in which case you must accept it. (This is akin to "you cut the cake, but I decide which piece I want.")
If you went that route, presumably you'd want to put the buy-sell agreement in place first, then one of you would make the offer. You'd want to think through which one of you should be the one to make the offer - that could vary greatly with the circumstances.
(Disclaimer, more or less mandatory for lawyers: I'm not your lawyer, YMMV, etc.)
This gives you two things, equity for the work you have done with no commitment to work with him further. If he succeeds then it is all good, make sure you have a forced buyout clause, where you can demand that your share be bought out or that you can sell it. If he fails ownership of the software reverts back to you and then you can have a go at it.
The way I see it, that gives you two shots at making it work. Either he succeeds and you get a profit for the work you have done with no further involvement. Or he fails, you get 100% ownership and you get to have a go. Either way, it gets you out of this mess with no involvement with him anymore.
I started a company about 4 years ago where I was the sole developer and the idea was mine, but the financing and business end were mostly being handled by my old friend/boss. I knew absolutely nothing about how incorporation or IP laws worked. I really wish that there was some kind of "Start Here" guide at the time, a "Startup for Dummies" kind of resource.
In my specific situation, the failure of the company wasn't due to disagreement or anything. Rather, the economy in Florida tanked earlier than the rest of the country. This negatively affected the folks I was working with and they needed to relocate elsewhere in the country to support their family. Meanwhile, I was going through a nasty and heart-rending breakup with my longtime girlfriend and ended up ditching everything and moving to San Francisco. In the end everything has worked out, and while I learned a lot from the experience, I still wish that "How to" guide was out there at the time.
Cease working on the project until the situation is resolved.
Package up everything you have related to this, mail, I/Ms, code, everything. Any paper notes, any receipts, anything you did to track time. Document everything, make several copies. Don't delete information which is inconvenient or contradictory to your story, if it's digital it already exists somewhere else anyway.
The conflict may not be resolved in your favor, though the lack of any written contracts, ownership agreements, etc. is going to be a major stumbling block in any litigation against you.
Establish a fair value for your labor, what was the opportunity cost to you for the 1200 hours you worked on this instead of getting paid? Don't go nuts here, if you get paid $50/hr for contract work then that's a reference for a dollar value for your time.
Establish a value for —for lack of a better term— your good will: the intangible contributions, ideas batted about, subtle shifts in the product/business strategy, and your ongoing contribution of such.
Finally, how much would you take to walk away, handing over the code, all rights, etc, for zero equity, zero credit?
Now, ask yourself some questions:
- what's the value of the product overall today? Is that based on real revenue? potential revenue? pie-in-the-sky valuation? sum of all labor/expenses?
- is your friendship with your co–founder worth more or less than the "potential" monetary value of either the 50% or 40% equity stakes, or the sum of your contributions and your walk-away value?
- is the relationship truly poisoned? Can it be rehabilitated? Can it be rehab'd with you working together? Or would it be better for you to split amicably?
- is any of the monetary value at stake worth more than the potential cost to litigation? Or than the personal cost if there's a bitter split between you?
- would you have come up with this idea, put 1200 hours into it, without the cooperation & dialogue with your co-founder?
Talk to a lawyer, learn what your options are.
Possibly talk to your "co-founder" about mediation, bear the expense equally, it'll cost less than either litigation or years of bitterness.
If you have the code base, you have a lot of power. The worst thing you could do right now is launch the product without having this conflict resolved.
I walked away from a startup after 18 months of work when the founder changed the terms of the organization of the company drastically. A number of us had worked together previously, and worked for that 18 months on mostly a handshake. We're on cordial terms now, years later, but not what I'd call friends. My lesson learned there was: if the ownership structure isn't documented promptly and up front, you don't have a startup, you have a lawsuit waiting to happen.
One possible way to "timestamp" your entire code tree might be to zip it up, cryptographically hash the result, and then print out the hash and physically sign it with a notary.
I have no idea how legally useful this might be. I'm sure it would be legally difficult to explain. :-)
I know where I come from (NSW Australia) there's already established legal recognition of MD5 hashes, they use them to verify authenticity of traffic enforcement camera data.
In other words, he has enough to take the issue to court. That he's unlikely to win in court is completely irrelevant; court cases can take years (the last case I was involved in didn't get an initial hearing for 7 months after we filed) and are ludicrously expensive.
2. In court, the accounting could be messy and expensive. As an alternative, if your "friend" were amenable, you could sign a walk-away agreement that, in essence, let him do what he wanted with the UI, and you do what you want with the under-the-hood stuff, with no obligation to each other. In the agreement, you could consider an early-neutral-evaluation clause (see http://goo.gl/f2Js) and a fee-shifting clause (see http://goo.gl/J1JK) to create incentives to settle the (likely) subsequent disputes.
3. Another possibility is that, LLC notwithstanding, you were legally a partnership, with each of you owning an undivided interest in [EDIT:] the partnership, with the partnership in turn owning everything, e.g., the UI and the code. For that, a lot would depend on what state(s) the two of you are in.
(Disclaimer: I'm not your lawyer, YMMV, etc.)
(I know Bindview from way back; my friend Adam Shostack used to work there, back when they competed with the security company I was at at the time.)
A.) Yes, move on. Pack up all your work and put it in a safe place.
B.) Learn from it. In the future, all of the equity and administrative decisions should be made and agreed upon before writing any lines of code.
C.) While it might be satisfying to take your work and launch yourself (or hit him with a free service), think hard about it, and definitely consult a lawyer. It will be a sticky situation.
Sorry, that just doesn't sound practical. Do all you people actually do this?
If he is threatening legal action, take legal action first. File a complaint if he even touched your software. (Uploads it to a server, tries to give it to another developer to reverse engineer, etc.). Don't say anything in email or verbally that you may regret later. In fact, assume that when you talk to him, whatever either of you say may be used in court.
Start going it alone right away. Try to market and sell the product by yourself. Your wrote it. Its yours. He might try to take you to court over this in that you had some "verbal" agreements wrt a joint venture and he probably has some emails to back him up (M. Arrington et. al.) so it is imperative that you either placate him or take legal action first.
If you decide to keep the code for yourself, then you end up sweating it out with him, being stressed, and so on. Best to tell him good luck. I'm sure you're a smart guy so you'll find another adventure, so let that guy run with his pipedream, and just keep proof of the fact you built it, as I'm sure you have emails and proof showing equity division and so on.
Wish him the best of luck because ultimately if he succeeds you do as well (after the lawsuit), regardless if you split up or not.
You could always do a friendly "shotgun" clause tactic too.
Your co-founder launches it and then you quit with the equity. He can find someone else to carry on the code. If he's successful, then so are you.
Good luck. I've been where you're at. It ain't fun, but life goes on...
If you're going to break-up, try and get what you can out of it. I don't think you should get lawyers or courts involved -- wait until there is real money (if ever) before taking that plunge. Instead, why don't you offer to have your co-founder buy you out? I don't know what you'd charge for contracting, but 1200 * 150 = 180k. If you make that a debt that he owes you due on a liquidity event in exchange for him having total ownership, then you walk away with nothing now (which is the most likely outcome regardless) but you do have recourse if he ever does hit it big. It is also the best deal for him, as there is a working and near-done system that he can effectively get for free -- if he has a big liquidity event, then he should be happy to pay you a decent contractor's rate. Write something simple up in plain english and include a note where you agree to binding arbitration, which should save you both some cash if you ever have a deep disagreement in the future.