Foreclosure On Software
Back Story:
About a year ago I was asked to join a startup company as technical lead and partner. I was to design build and implement the software for this startup I would receive 20% equity in compensation then the remainder on back pay owed to me. I have since taken on the marketing as I was also the most qualified and experienced for that as well. The original partner wanted to continue as the sales lead , and it was a good fit for him, as he owns a company exactly like our target clients. We had a few bumps in the road and a few early adopters stopped using the system. This has caused the original partner to become disheartened, to the point where he won't even call or sell newly generated leads. He now says he doesn't want to sell the software only to use it internally with his other company. Of course I didn't signup to build internal software for his company for free. I requested that the remaining back debt be paid out through equity rather than cash as its clear we won't be makings any sales. Of course he has refused.
Questions:
Is there any legal ramifications if I turn off the site withdraw at least the portion of software I am owed on back pay? Also I have been paying for hosting which he hasn't settled on I am probably going to turn that off as well. Are there any other suggestions to settle this arrangement?
Software Contract Legal Partnerships Dissolution
2 Answers
The bad news is you are in a mess. The good news is YOU ARE IN A MESS. It looks like things between you and your partner have gone south. Your partner sees the value of what you have built only for running his own company (internal software). To you the value is from selling the service you have created.
A lot of your answer comes down to any agreements (written) you have between you and your partner. Beyond that any emails will be important to determine who really might be at fault there.
My advice, after going through a few startups and having a few partnerships crap out is this: 1. make sure that for any new partnership you break down ownership, responsibilites, and worst case exit options on paper as to discourage any suits or disgrunteled employees from goal posts being changed.
1. For this scenario take a look at yourself, your partner and the situation. I dont know what you have built or if it really has any market value. If what you have built has value (Sellable, not sentimental) and you are qualified to take this to next level then I would part ways with your partner. If you dont have agreements, you could argue that everything coded is your intellectual property. If things head towards a law suit, (which can get expensive for everyone) then likely you will end up in some sort of mediation or arbitration where a 3rd party will look at the efforts on both your parts and come to some sort of fair judgement. The reason I would encourage you to pull the plug and go ahead on your own is that it shows your partner that you are serious. You are not his friend, or partner any more. He needs to realize that. It might be a good opportunity to show him you are determined to move forward and might open the door of you buying out any stake he might claim to have or giving him a silent precentage to prevent any future legal claim. But from a poker face standpoint just tell him the partnership is not working and that your code is yours to keep and launch it again under a company solely owned by you. My judgement is when no agreement is there the IP property (code in your case) belongs to the person to wrote it.
PS. consult a business lawyer specially one experienced with IP law. They might be able to take a few hours and save you a world of hurt in the long run by structuring the right exit agreement. This too will show your partner you are serious.
PSS. Dont turn off the site. You cannot take a company hostage because you are owed money. Two wrongs dont make a right. The only way you could do that is if he is paying you for "hosting services" and is behind on his payment. Again without agreements it gets kinda hard.
PSSS. Delete this question and talk to an attorney. You dont want anything that looks like intent or malice that he can somehow use against you.
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+1 The IP section is tricky. The code is yours yes, but who's idea was it? Who brought the knowledge of the product? Did you have prior knowledge or was that all down to the partner? Every else Frank said makes really good business sense. Listen to what he's saying! – Jacques 11 years ago
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Thank you for the great reply. We only have e-mail agreements outlining the initial work for equity and then the remainder work being "on loan" to the company with the expectation of being paid back when it is in profit. So really what I am going to argue is that he can pay me in equity or cash at this point. – Ross Mann 11 years ago
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Also I have been front the hosting fees for 5 months now without compensation or agreement. – Ross Mann 11 years ago
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Just A follow up. After a few e-mails to my partner I realized he was just emotionally upset with the situation. I asked him to meet my at a local coffee shop. I said we worked well together and we had value together, you lost interest which is fine but blowing up the company is not good and just emotional attachment to the idea. Lets not leave this room until we hash out a new working model. After airing our anger (respectfully) we worked out a very reasonable go forward , this company is back on track. – Ross Mann 11 years ago
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That is good news, but let this be a learning lesson. I have learned over the years business and losing a ton of money to conflict that business with family doesnt work for me, and with partners to make sure that everything is on paper (rules, responsibilities, and who owns what), I personally have realized its cheaper to hire than to bring on partners, but am always looking for the right partner to compliment the amount of passion i bring. My point of this is to learn from this about who you are and what is important to you. If you repeat this mistake, next time you might be less lucky. – Frank 11 years ago
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Also forgot to mention, regardless of the past, its time to draft a partnership agreement. Make sure that it goes over who owns what, has arbitration clauses and conflict resolution built right in. Take your time with this, make it as detailed as possible. Break down accounting (how you get paid or re-invest), ownership, responsibilities, etc. If you are 50% / 50%, then you need to appoint a referee for conflicts, but if you find yourself having a lot of conflict (more than its worth), time to buy him out. – Frank 11 years ago
You have a win-win opportunity here, but you have to sell that idea to your partner without being confrontational.
The win-win is for you to buy out your partner, or have him sell his stock back to the company. Rather than focusing on what he "owes" you, focus on what he wants. He wants use of the software, but he doesn't want to invest anymore time or money in the business that owns the software. You as an individual can write him a check for his stock, and it has nothing to do with the company, or the company can write him a check and give him a perpetual license to the software in exchange for his shares.
Since you say you had an agreement with the company for back pay for development, that's deferred compensation and should be listed as a liability on the company's books. Also, unless you agreed to pay the bills in exchange for stock, I'd assume that you are expecting the company to pay you back for expenses you are covering out of personal funds when cash flow permits, also making these payments a loan to the company and a liability on the books. Hopefully, you have all this in writing, if not, then you should get it that way ASAP.
Once you have established that you are the company's sole creditor, liquidating the company (shutting it down) becomes your ally and your partners enemy. The software IP is probably the only corporate asset, and would need to be sold to pay off creditors in liquidation. As the sole creditor, you would likely end up with 100% of the IP after liquidation, so you have the leverage you need to convince your partner to sell.
But rather than being a jerk, and threatening liquidation, I would strongly suggest that you suggest to your partner that the company pay him cash and a perpetual license to the software for his stock (that's the win-win). You'll likely need to put in some more cash to cover the payout (do it as a loan), but in the end, you will both be happy.
If your friendly conversations fail, talk to a competent lawyer (not your wife's brother of cousin), and proceed down the path of liquidation...but don't shut down the company or the courts might view your actions as sabotage, and might force the sale of the IP to a third party where you are all screwed.
