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

4 pointsby log0almost 16 years ago

Thanks for reading.Hi all, this has been biting me a bit.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.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 formal registration of the company ( where names are formally noted, and registered to the government ), which is when revenues start pumping in.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.My best case : Idea goes live and launches. Profits come in, I get my shares. I learnt how to do business. And promising future.Best case out of bad cases : Idea goes live and launches. Died soon, I get my shares. I learnt how to do business.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.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.My questions :1. Without the legal contract, how bad will things be if things blow up?2. From past experiences of you, do people really respect verbal agreements?3. Could there be any legal issues on me?4. What could I do without a written agreement witnessed by a lawyer?5. What could I do without an informal written agreement ( no lawyers involved )?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.I appreciate any smart advice from you all experienced people.Thank you very much.[edited linebreaks of questions.]

10 comments

grellasalmost 16 years ago

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 (<a href="http://www.grellas.com/faq_business_startup_009.html" rel="nofollow">http://www.grellas.com/faq_business_startup_009.html</a>).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.

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michael_dorfmanalmost 16 years ago

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.

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anamaxalmost 16 years ago

> 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 ....)

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pieratttalmost 16 years ago

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.

log0almost 16 years ago

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.

ctb9almost 16 years ago

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.

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pjalmost 16 years ago

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.

TallGuyShortalmost 16 years ago

>> 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.

noodlealmost 16 years ago

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.

keltecp11almost 16 years ago

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