
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.<p>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&#x2F;medium term.<p>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.<p>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.<p>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.

~~~
rohamg
Agreed.

OP: the code and intellectual property belongs to you unless you transfer
copyright over or mark as open source. That said, code is hardly the most
valuable asset in an early-stage startup. The best real way to "protect"
yourself (besides getting legal docs papered) is to stay involved in every
important discussion and develop your own relationships with investors. Your
cofounder should welcome this, and should help you develop your non-technical
skills.

If you notice any unease, red flags, shadiness, lack of transparency, BAIL
OUT. Incorporate yourself and transfer the IP into a company owned 100% by
you. Find a new business partner.

~~~
greenyoda
_" the code and intellectual property belongs to you unless you transfer
copyright over or mark as open source"_

The OP said he's working for another company while he's doing this ("I have a
very well compensated job in a local startup"). Depending on the employment
agreement he signed with that company, they may have rights to the code he
wrote (especially if he wrote any part of it using the company's equipment or
on the company's premises, or if the code is related to the company's line of
business). Remember, this is in NY, not in California, so the protections
against unreasonable employment contracts could be weaker. So he really needs
to talk to a lawyer before taking any kind of action.

------
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).

------
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.

------
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.

~~~
justinzollars
This is probably not true.

~~~
tzs
Note to OP: what follows is speculation for entertainment. Get advice from a
lawyer before even considering basing any actions on this.

Note to everyone: OP said his agreements have been made "verbally". I'm going
to assume he meant "orally", because 99% of the time that is what people
actually mean when they talk about verbal legal agreements.

It almost certainly is true. The only ways it would not be his code are if it
were a "work made for hire" or if he has transferred the copyright to someone
else.

There are two ways for something to be a work made for hire.

1\. It is produced by an employee within the scope of his employment, or

2\. It is specially ordered or commissioned and falls into one of several
categories AND the parties expressly agree in a written instrument signed by
them that the work is to be considered a work made for hire.

If all they have are oral agreements, then #2 is out. For #1, "employee" does
not necessarily mean an actual employee under whatever definition your state
uses for that term. It can include relationships where the person creating the
work acts like an employee. A big factor in that is how the work is
supervised, and who provides the equipment and facilities used in creating the
work.

From the OP's description, he did the work on his own. It's hard to see how he
could be seen to be an employee for purposes of copyright law, and so #1 is
also out.

The other way he could no longer own the copyright would be if he transferred
it to someone else. Copyright transfer requires a signed, written instrument.
If all they have are oral agreements, then there could not have been a
transfer.

There's one more possibility to consider. Even thought the OP almost certainly
owns the copyright on the code he has written so far, it is possible that he
has licensed it to his partner. For instance, if they intended to make their
code open source, and the OP included a notice stating that the code was under
GPL, and gave a copy of the code and license to the partner, the partner might
argue that he can continue to use that code and continue to develop it without
the OP's further permission, as long as he follows the GPL.

------
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...](http://thenextweb.com/entrepreneur/2013/07/21/startup-founders-
heres-why-vesting-is-your-best-friend/))

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.

~~~
webwright
If you're incorporating with the purpose of eventually raising money/selling
stock (which means a C corp), it's non-trivial... I assumed that's what they
would do given that the OP was talking about raising $. But yeah, it's quick
and dirty to S-corp it or LLC, depending on what state you're in.

I've seen a lot of side projects (my own and others') peter out for various
reasons, which is why I think front-loading it with incorporation is a bad way
to spend money/time. With a good shared (WRITTEN!) understanding on
vesting/disputes/etc, you can mostly de-risk it... But not in the buttoned-up
way a lawyer could.

------
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.

~~~
jt2190
Does your cofounder know that you don't want to be a part of the company in
the future?

~~~
newbiecofounder
I don't know it myself either. It's an idea I'm contemplating, but the most
probable scenario at this point.

~~~
jt2190
You need to decide this.

Your cofounder will raise money based on the future needs of the company. If
you're not a part of the company going forward, your cofounder will need to
make it clear to investors how he plans to move the company forward without
you. If your role is critical to the company's continued existence, he may
need to find a new technical cofounder, which can take quite some time. If
not, he may need to raise more money so that he can hire employees or pay for
contractors.

If you do decide to leave it's going to be very much like breaking up...

If you've been communicating well with your cofounder he probably won't be
surprised, and is more likely to be mature and understanding, and start
discussing all of the things that will need to be done so that you can leave
without hurting the company.

If you've not been communicating well, your cofounder may be completely
surprised and upset, and may disagree that you leaving is the best thing for
both of you. He may want nothing to do with you moving forward. It's important
that you're prepared for this, and that you are able to show him exactly how
you can leave the company without harming it. In other words, you'll need to
make a very clear exit plan, so that it's clear that you're leaving the
company, not trying to destroy it. If you're lucky he'll let you help execute
the transition plan.

------
danford
Some of the previous threads:

[https://news.ycombinator.com/item?id=7326162](https://news.ycombinator.com/item?id=7326162)

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

~~~
abracar
See the document, it is phrased as "Upon formation of the Start-Up Company,
the entire issued share ownership of the Start-Up Company will be split as
follows..."

~~~
james1071
Yes, can't see any problems there.

------
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.

------
snorkel
Tell your cofounder right now that he either incorporates this week in which
those documents will clearly state what your role and you're ownership stake
is, or you're done working on this.

------
spiritplumber
Do the incorporation stuff yourself and give it to him to sign.

If there are shenanigans, try to cause as much pain as possible without doing
actual damage; a kick in the balls is OK, scratching should be avoided.

------
PakG1
Paging grellas.

