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Parable of the missing legal. Advice?

7 points by AnonProtag ↗ HN
I'm a cofounder (coder, not a business guy) of a site that's currently filtering thru a few first round offers that will put our valuation somewhere between 5 and 10m. We're less than a year old and we're not live yet. I'm being vague here for obvious reasons. The original founder, a friend, asked me to come on and do the backend work for 10% equity and a very low initial draw. He's subsequently decided to cut my equity down to 5% to accomodate bringing on a CEO who will be getting 20%. My dilution was out of proportion to all the other equity holders. I don't have a signed equity agreement - everything I've done was under a contracting agreement of which I've been paid for approx 1 month of the 7. A few months ago I cut my salary to zero to help float our offshore UI dev. None of the principals are being paid. I've written somewhere around 90% of the system - everything but the front end. My buddy, the original cofounder, is dawdling on bringing the formal agreements up to speed, and he's behaving like a power hungry jerk. The strange equity dilution punishment didn't help things. A lawyer I spoke with said I would have ownership of all the work I did that was unpaid. And I've brought along a personal library I've been working on for a few years that's a core piece of the system. We don't have legal on that either. How do I deal with this? I have a personal rule about not working with jerks and my trust level is very low. And if it weren't for the potential I'd have left already. Your advice and thoughts on this would be greatly appreciated.

8 comments

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trevelyan
A few thoughts: (1) you're using the words "friend" and "buddy" to describe someone who is nothing close to being either of those, (2) your equity position should be at least 20% given the way you describe your contribution to the product, (3) your team is doomed if they have 3/4 senior positions (and want to hire a CEO) and yet you are the only competent developer with experience in the area....

I'd take your code and go home, but not before letting your friend know you'll be suing for copyright infringement and breach of contract. Your friend is legally obliged to report the lawsuit to any investors and that alone should tank their prospects of getting funding. So you have a tremendous amount of leverage if you choose to use it. And there is no reason not to use it.

The more fundamental question is why do business with these people at all? They have already signaled that they consider you the least important member of the founding team. And even if you get this stuff resolved, unless the trust issues are solved you're just setting yourself up to be screwed over the next time around. I'd look for a way to explicitly license your code to them (especially the core library) for cash up-front and a small but non-diluting equity position for your previous contribution. Then leave and do something with people who are more worth your time.

lindacambrian
I am an IP/startup lawyer and I know the startup world intimately, having worked for/in one. You might want to arrange a deal with the other members of the startup to buy you out, since you no longer want to be part of the team. Also, Do you have any emails/voicemails/texts memorializing your 5% equity? The reason I ask is bc sometimes formal written agreements aren't necessary in some cases.

From an IP standpoint, if your initial agreement did NOT give all the ownership of the code you've written to the company, then you ARE the rightful owner of the code, doesn't matter how much you were paid/not paid.

AnonProtag
I'm in Canada if that changes anything. I do have records stating the equity position, but nothing formal. I am listed as a cofounder in various media we have floating around, from presentation vids to the biz plan, investor sheets and social media presence. The IP lawyer I talked to told me that since I'm under a contracting agreement and I haven't been paid the code is mine. The law regarding this may be different in the states. And yeah I am thinking of getting some non-dilution clauses in place for the likely possibility of an exit. Negotiating this and a licensing agreement for my library is what I think my fuzzy plan is at the moment. My concern is going down a litigation path against a much larger wallet, but I think my case is pretty strong.
AnonProtag
To put a frame around this. We're expecting to be profitable within the 1st year. We think we won't need any money after this, unless it's a more strategic play and then we'll think of VCs. Our hosting/infrastructure costs are zero. (I'd give away too much info if I said how). We have several LOIs with potential customers. The CEO to be brought his last company to 500m sales (not sure of the time frame on this). We anticipate getting in this range in about 3 or 4 years barring an earlier exit. So that's the playground. Way, way out of my league.
lindacambrian
To be honest, I am surprised that your co-founder dares to do this before you guys go live... Everyone knows you do NOT mess with the tech co-founder, especially not pre-launch. To echo the first comment, it sounds like a toxic environment. You gotta get yourself outta there!
lindacambrian
Don't fret, my friend, It sounds like you are in a very good position to negotiate. The CEO/other members of the team do NOT want a Facebook on their hands, so it's likely that they'd want to work this out either now or later. I am not familiar with Canadian law at all, so unfortunately, I can't help you with that. But if it's anything like US law, all of those informal pieces of "evidence" would be enough to prove your equity. Remember- you have a lot of bargaining chips. You can very strategically negotiate your way to the amount of equity you deserve. Is your company incorporated in Canada or the US?
a3camero
I'm not sure what the time limits are for deleting posts but you might want to consider doing that if you have some sort of pending negotiating/legal troubles. There are not that many 5-10m range startups in Canada and someone might be able to identify you eh.

Good luck! Hopefully things will work out well and you'll get a nice chunk of the money on the table.