

Ask HN: How bad is the decision to work as a co-founder without legal contracts? - log0

Thanks for reading.<p>Hi all, this has been biting me a bit.<p>I've been invited to be a coder ( me + 2 coders and the organizer as ux ) to a startup, and was verbally promised a share of the revenue ( equal ). The organizer is not a close-friend, but merely someone who invites me because I suited the capabilities.<p>The idea is quite nice, not era-shifting though, and looks like there are going to be a lot to learn side-by-side, too : lega, marketing, business stuffs I don't know and never did before. However, all of these said future have no legal contracts until the <i>formal registration</i> of the company ( where names are formally noted, and registered to the government ), which is when revenues start pumping in.<p>The startup requires devotion other than my full-time day job, which I can use to do other stuffs ( meaningful and constructive ). It's going to be a year or so. I am thinking without a legal contract guaranteeing the benefits of each member, it can be dangerous to me ( and the other memebrs ), as "coders are expendable". There will be no salary.<p>My best case :
Idea goes live and launches. Profits come in, I get my shares. I learnt how to do business. And promising future.<p>Best case out of bad cases :
Idea goes live and launches. Died soon, I get my shares. I learnt how to do business.<p>Bad case :
Idea dies halfway. Initial projection of time dragged too much. I learnt how to do business, albeit at a cost of time and more.<p>My worst case :
Idea goes live. Initial projection of time dragged. But the organizer plays dishonesty and kicks me / other coders out, taking the whole share.<p>My questions :<p>1. Without the legal contract, how bad will things be if things blow up?<p>2. From past experiences of you, do people really respect verbal agreements?<p>3. Could there be any legal issues on me?<p>4. What could I do without a written agreement witnessed by a lawyer?<p>5. What could I do without an informal written agreement ( no lawyers involved )?<p>I understand there is a risk to take, and I also understand that "getting excited by the future" could be the height of a folly, but then I might be wrong. I also understand that despite the risk, this failing in most cases could teach me a good deal of lesson, too.<p>I appreciate any smart advice from you all experienced people.<p>Thank you very much.<p>[edited linebreaks of questions.]
======
grellas
I have represented founders as a startup lawyer in Silicon Valley since 1984.
I have done a short write-up on this issue focusing on the risks from a
company standpoint of relying on early-stage verbal agreements
(<http://www.grellas.com/faq_business_startup_009.html>).

From your standpoint, without proper documentation: (1) your biggest risk is
getting ripped off for your labor; (2) you would have leverage in that any IP
you would develop would belong to you and not to the company until you
assigned it by formal documentation; (3) if you did get ripped off, you could
bring a legal claim either for breach of a verbal agreement or for fraud; (4)
such claims are difficult and expensive to bring and thus not practical in
most cases; (5) a lawsuit almost always leaves you worse off than does almost
any other alternative; (6) therefore, get some reasonable understanding up
front of what you can expect to get from your efforts and use at least
informal means to document it.

You may or may not learn from this experience, depending on whether the other
founders bring you into their inner circle.

Finally, I have seen this pattern work just fine very often in spite of the
legal risks. In most of the good cases, though, the founders know each other
and have a relationship. The cases where most of the problems arise are ones
in which the founders do not previously know each other (what might be called
opportunistic teaming). From your description, and from the length of time
they want you to do work without documentation, I would say your case falls in
the higher-risk category. Your legal downside would very likely be limited to
losing your labor while getting cheated of any promised equity. The company
has the greater legal downside from failing to document, mostly relating to
its IP.

~~~
log0
Hi grellas.

I have a question I hope you may help answer. Roughly how many percentile in
the number of startup cases do have formal legal documentation?

~~~
grellas
A high percentage when founders believe they have something valuable to
protect. In early formative stages, probably only a small minority.

It is all cost/benefit, though. What does it cost to use lawyers? What is at
stake? In my experience, it is the rare case where founders will sink large
resources into something (significant labor, etc.) without some legal
documentation.

Some do LegalZoom, but this has its own problems (failure to use restricted
stock and to capture IP being the most important). I have written about this
elsewhere.

My general guideline: if a startup has real prospects, it is usually worth
investing in legal resources as soon as practicable, even if it means doing a
deferred-fee deal with the lawyers. The initial setup itself is usually not
that expensive. At the very least, you should go as a team to a qualified
lawyer for an initial meeting to get advice about the process - then you will
have a basis to make a more informed decision.

~~~
log0
Thank you Grellas. It is really insightful and informative advice, and
immensingly helpful for me to think more.

I will incorporate your suggestions and guideline into my decision. Thank you!

------
michael_dorfman
How bad? Bad. Very bad. _Bad, bad, bad._ Did I mention "bad"?

I'm not allowed to talk (much) about it, but the short version is: _been
there, done that,_ to the tune of several million bucks that are currently
missing from my pocket.

So, the answers to your questions (in order):

1) Worse than you can imagine.

2) Some do, but not all. Which means, to be safe, you have to pretend no one
does.

3) Yes, undoubtedly. There's only two ways to find out: a) lawyer up, or b)
roll the dice, and pay the price. I'd _strongly_ recommend the former.

4) Not much. You might get lucky and draft an agreement that is as good as a
lawyer would write. You might also get hit by a meteor made out of twenty-
dollar-bills. I wouldn't count on either.

5) Diddley-squat, if your goal is to protect yourself.

To sum up: _pay the damn lawyer._ View the expense as something like health
insurance-- it's a pain in the ass to pay for it when you don't need it, but
it's a zillion times worse to really need it and not have paid for it.

~~~
log0
It seems it's an overall very negative position to be in, aggregrating all the
replies.

thanks. I think I need to re-consider again very very seriously.

------
anamax
> My worst case : Idea goes live. Initial projection of time dragged. But the
> organizer plays dishonesty and kicks me / other coders out, taking the whole
> share.

More likely - organizer claims that your contribution is worth significantly
less than you think that it is. (Perhaps he'll say something along the lines
of "it was my great idea and organization while anyone could have done what
you did".) You get a pittance and walk away, mad. On the way out, you'll sign
over what you did.

Point out that you own everything that you create until there's a formal
agreement otherwise and that that will make it impossible to get investment.
The organizer will probably then decide that such a formal agreement is
necessary. At that point, you point out that said formal agreement needs to
include "consideration" for you. (It actually doesn't, but ....)

~~~
fatdog789
Not entirely true -- the presumption now is that the company owns the IP for
stuff done on behalf of the company. Of course, this is just a presumption, so
it's easily rebutted, by example, showing that you received no compensation
(no one works for free).

But the legal uncertainty would discourage investment.

~~~
anamax
> Not entirely true -- the presumption now is that the company owns the IP for
> stuff done on behalf of the company.

Where is this presumption?

Copyright and patent law in the US specifically says that folks earn what they
make outside of an explicit agreement otherwise. (And, that agreement can be
for no pay - you can work for free.)

BTW - What company? He said that it was unregistered.

~~~
log0
Right. The point is whether someone would register the company only after
revenue starts pumping in, which looks odd to me now.

~~~
anamax
Note that a "company" can exist without registration (which I took to mean
incorporation or the creation of some other legal entity). A sole
proprietorship, where the "idea guy" personally owns everything, is one such
type of company. Partnerships can be another.

In short, I probably shouldn't have asked what company. Or, I should have been
more paranoid and asked if there's actually a legal entity and it's just not
writing any contracts with the help.

------
pierattt
I've spent upwards of $9k in the last few months on legal fees because I didnt
have a written contract with an old business partner.

At the very very least, get a specific list of deliverables, your profit share
percentage, and his ownership rights to your code on paper, then get him to
sign and date it. Be as explicit about everything as possible. Not being able
to afford a lawyer is no excuse for not getting your general agreement on
paper.

If he resists, remind him that the paperwork protects him as much as it
protects you.

------
log0
Thanks grellas. This is really great advice. I read your article. Really good
one. I am aware legal actions seem to be less practical, and a bad direction
towards and position to be in. And I agree it is a high risk, that so much I
can sensed it.

Thanks keltecp11. I am still thinking.

------
ctb9
Also, not trying to be rude, but is English your first language? If not, and
assuming the venture is located in an English speaking country, I would say
that as a non-native English speaker you are more likely to be treated
unfairly.

~~~
log0
Hi ctb9,

No, I don't take it rude. It's ok. Thanks.

All of the involved people are Chinese in China. I am sure the law differs but
the actual smarts might share common attributes.

------
pj
It's not worth it. Why not just get a contract before the company is
registered? You can draw up a document that says what will happen after
registration.

Otherwise, don't start working until the registration is complete.

------
TallGuyShort
>> How bad is the decision to work as a co-founder without legal contracts?

In my experience? Pretty bad... A better financial decision is to make a bet
with the other coders. $2000 says he doesn't pay up.

------
noodle
if you don't mind the clear and obvious risk, you don't _need_ a contract. the
second you feel like trying to secure yourself from risk or trying to ensure
yourself profit/shares/etc., its time to grab a contract.

------
keltecp11
don't do it. legalzoom.com at the very least.

