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What are the legal potential issues here?

Do I owe my ex-partner compensation in this particular situation? What are the related legal issues? What should I do?

  • I started with a specific idea for a web business, but lacked the technical skills to start it up. I spent my summer off from college delineating a business plan, creating site mockups, conducting ample research, and meeting with potential technical co-founders. I never found anyone I wanted to work with. School began, and I came in contact with a graduate student who was interested in my idea. I shared everything with him, and we started working together. We meet bi-weekly for a period of 3-4 months where I would instruct him on how to structure the specific functionalities of the site from the user's perspective. He did the programming, while I led the vision, worked on the business plan, and did some css/html work. We split all costs evenly, including a domain name that he purchased with his credit card and I reimbursed him for 50% of the cost.  (I would have purchased the domain name but my computer was not connecting to the internet at the time.) Unfortunately I never made it clear as to what our relationship would be, and we never had any written documents. I intended for him to be a technical cofounder who was jumping on board with me, and who would be entitled to no more than 30% of the company. What we were doing was not considerably technically challenging and would involve a lot of future business work. However, he felt differently. After 4.5 months of work I felt it was time to discuss ownership (this discussion was obviously long overdue). He felt he deserved at least 50%, which was unreasonable from my standpoint because he was not an incredible technologist (he only knew java at the time, didn't know anything about other languages, and knew very little about startups in general). We eventually came to the idea that I would buy him out for his work. We first agreed upon $2000 and 3% of the company. He calls me the next day claiming that he "changed his mind" and also changed the password for our shared godaddy account, essentially blocking my access to the domain name. We then came to the agreement of $5000 and no ownership, and I asked him on the phone, "how do I know you won't change your mind this time?" He claimed he wouldn't. Based on this perceived agreement, I contacted a lawyer and got a contract drafted to enforce our agreement that I would pay him consideration in exchange for the code and no rights to the company, and that he would not be able to work at a competing company. I sent him the contract, and although he expressed overall satisfaction with it, he thought the non-compete clause was excessive, and he claimed that I would need to pay him $12,500 for the code and 5% of any future benefits of the company. Needless to say, this outraged me. I'd also like to clarify the fact that my ex-partner never shared the final codebase for the website with me. He made continual poor excuses for why he could not share it with me (ex. I need to compress the code, so I cannot push it to svn or github.) We had also put up a sign up page, and although my ex-partner had changed the password back, at this point he transferred the domain name out of the account and took down the signup page. Since I was the public business figure contacting prospective users for the site, this negatively impacted me far more than it did him. I felt betrayed, so I threatened legal action for breach of a verbal contract, but decided to first pursue school mediation which is where we currently are now. Between the time that he transferred the domain name out and we commenced mediation, I used my anger to learn Ruby on Rails, html, css, and jquery and have built more than what my ex-partner had built in a shorter amount of time. Therefore, his code is essentially worthless to me, and he provided no ideas to the venture (about 99% of all the ideas were mine). He still feels that he deserves $12500 of compensation and is holding the domain name hostage. I'd like to have the domain name (it's hard to find good .com domain names, and my facebook and twitter account use this name) but I am not opposed to finding a new name. What should I do? And yes, I learned a very valuable lesson: clearly define the nature of your business relationship very early on. Also, does he really have any legal claim to what I am currently pursuing considering all of the ideas and code are now mine? Disclaimer: I have no intention of creating an attorney-client relationship from any advice given to me by any lawyer or legal student who answers this question.

  • Answer:

    Based on the assumption that you two have an oral partnership, one thing I'd explore with a lawyer is petitioning a court for a judicial partnership dissolution.  A judge may have some latitude to craft an equitable solution that fits the circumstances, and this often results in auctioning off either the business as a going concern or its assets (domain name, code, trade secret).  I'll hazard a guess that your former business partner is not going to hire a lawyer and go to court on this in the first place, and in any event you're the only one who will bid at the auction.

Gil Silberman at Quora Visit the source

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I'm not a lawyer or a law student, but I've been in similar situations where things went south between co-founders. If I were in your shoes, what I'd be after is an agreement that basically says he keeps what he has, you keep what you have, there's no continuing business relationship between the two of you, both of you waive rights to any future legal claims against the other, with no non-compete limitations whatsoever. Let him go his way, you go yours. Having to find a new domain name is a small price to pay if that's all you have to do to get out of the situation. I suppose there's an ever so slim chance he'll decide to compete with you directly, but I wouldn't lose any sleep over that. I wouldn't just walk away, however. There's some value in getting an agreement in place such that neither of you will have to be talking to the other through attorneys down the road. Splitting ownership should be off the table, IMHO. The only variable is how much (if any) cash you should give him such that both of you can walk away and never need to deal with the other.

Anonymous

To those who say he owes nothing, if he later seeks third party investment, they are going to want to know about this when they contemplate an investment and unless he has a release would likely walk away.  Gil is onto something which I would like to discuss further.  Since I do both corporate and litigation, I may be able to provide additional insight.  To my clients in a situation like this (and you are not one), I say that corporate deal making is a deal you want to make and litigation is a deal you have to make.  The reality is that in CA, very few civil cases are resolved through jury verdict.  It is something like 0.2%.  I don't know what the figures are if you include bench (judge) trials.  Again, I don't know the stats, but I'm pretty sure settlement is by far the most likely outcome.  When you file and serve a lawsuit, it says to the other party that the matter cannot be avoided and will be resolved.  And, in a case of the size you are talking, it cannot sustain a lot of legal fees.  It will likely settle as a result of what  I call billing fatigue.  Both of you will likely quickly realize that expense will quickly eclipse your upset.  You and your lawyers should hire a mediator, usually a retired judge, and get the matter settled.  I tend not to spend a lot of time with letters back and forth prior to filing because I rarely find it productive.  People sometimes think that if they hire an attorney to write a letter, the letterhead will generate a successful resolution.  I find that it usually does not, so I usually recommend that the first letter include a draft complaint so the other side knows this is serious.  Sound expensive? As you've already acknowledged to some degree, the cheaper way to do this was to have gotten a lawyer up front, gotten incorporated, and gotten proper agreements in place.  Sadly, that is no longer an option

Mike Prozan

I'll play a little devils advocate here as like most "idea generators" have partnered to accomplish a goal at some point in  their evolution. From your story onset where you got on the path of equal partnership is by: Having this guy pay "50%" of all costs, and "time" (ie the meeting times) A 50% investment risk was entered into at the beginning by both of you: you "ideas & money" him "execution & money" This implies 50% ownership. To then change the terms down stream to 30% or any other percentage after you obviously see some traction is what created the situation you are now in & his unwillingness to settle for less than or other. Basically it boils down to him most likely feeling like bait and switch.  Hence his unwillingness to settle for your "offers". Terms should always be discussed before entering into any business/product development or startup relationship.  Ie in this case if you had wanted him to only have 30% equity interest than his costs should have followed accordingly at 30%. So you should have honored your beginning setup of 50/50. Why would anyone in business or personally invest or cover 50% of anything and expect less? The only out would be if he failed to deliver on his duties or pay his 50% share of expenses than you may have had grounds for asking for him to accept a lesser percentage. What are your options now? Move on Hire a contract programmer under a NDA / work for hire to build your idea. If you have the funds to "buy out this guy" or spend on a lawyer you obviously have the ability to pay a programmer. Own & register all assets: You should have held registration for all assets ie "domain registration" the computer not connected is not a viable reason for you not registering the domain as you could have went to any internet cafe, library or even borrowed a computer to do so. If your partnering with anyone have a agreement first that details out ownership, responsibilities and a EXIT or BUYOUT CLAUSE

June Mattiza

With all due respect I'd say you're in the wrong here (ethically, not legally). You led this guy down the garden path and then tried to limit his ability to earn a living once you'd been caught being a tad greedy. Unless your idea is unlimited energy from air, I'd let it go. Do the right thing and compensate him, let him earn a living and try to earn back his friendship (you never know when it may come in handy). You will be amazed at how much a bad rap can hurt you down the road. It's not a lot of money, fix things with him, do the right thing. It will be cheaper than lawyers, trust me...

Ray Nugent

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