Startup Employment Considerations

A former co-worker of mine has started an LLC that is owned 100% by him. He has asked me to assist him in market research / analysis and sales, based on the theory that I will come on board and be compensated eventually, once accounts are landed and revenue starts coming in. I immediately asked for a share of the business and / or a written agreement of compensation that I will be awarded at the time the company begins landing customers and bringing in sales. His initial comment is that "There is no reason to have that conversation until we know that we have a market." My response is that I run the risk of working for free if the concept fails, if he decides to break off on his own, if he decides to sell the idea, etc. The list goes on...

I feel like I know this business owner well enough to take him on his word and a hand shake, but I don't feel like trust alone is anything to hedge my labor and ideas on. Have others been in this same or similar predicament? What is the best way for me to approach this situation without insinuating mistrust? Also, are there any examples of documents out there that I could have him sign that would legally bind that I get compensated appropriately for my efforts?

There is a chance of me partnering with him on this, which will change the stakes dramatically in my favor with regard to compensation. But, if I don't partner, and I remain as an employee with the expectation of back-compensation down the road, how can I best protect myself?

You need a founders agreement of some kind that details the deal you have if things take off. This is reasonable and rational since you are putting your time and effort into this. Now, your friend may have an issue with this because you might just slack and take a portion of the business. This is also a legitimate concern that needs to be addressed.

My recommendation would be to draft some sort of letter (founders agreement) that details the deal between you, the milestones that need to be achieved (e.g. work product) and what happens when the business takes off. Even though he is your friend, getting it in writing is the only way to ensure it is crystal clear.

Listed below are some of the items that should be in a founders agreement:

• Business Definition: Defining the potential venture is an important piece of any agreement. Describe it in as much detail as necessary.
• Roles and Responsibilities: If there are certain roles and responsibilities that each partner needs to perform, then put those in. It could be as simple as Joe runs the business while Jane is the silent partner. This specific topic can be a real source of conflict since assumptions about control usually turn ugly. Don’t be shy about dealing with this. You are starting a business and roles need to be clearly defined.
• Initial Funds: Usually, some sort of start up funds are required. You should write down who put it in what. Payback preferences should be put in as well. For example, if Jane put $10k in the business then it should be stated how she gets paid back. Another good idea is to put in reimbursement methods for business related expenses.
• Assets Contributed: Any kind of tangle asset that has been contributed or will be contributed should be listed. That way, it is clear who owned what before the venture.
• Ownership Assumptions: Along with who does what there should be some mention of the ownership. Usually, this is a percentage or maybe a certain number of shares in the company.
• Conflict Resolution: In the event things go wrong, how will any conflicts get resolved. This could be as simple as binding arbitration or a neural third party that everyone trusts.
• Milestones: Describe the milestones that need to be met along with the work required to be completed. This way, you know when you are ready for the next step.

I would be wary of doing business with this guy. Why does he not want to formalize things right now? If it ends up not working, it just dies and that's it. If it ends up working, you will have a battle ahead as far as getting compensated.

Let's look at the path of it not working (there's no market, the business is not viable, etc...): If you sign an agreement, it's wasted time and effort to draft the paperwork and so on.

Now let's see the scenario where the business is viable, there's a market, and things look good, so it's a go: He has limited his exposure thus far, for all intents and purposes, you gave your work away for free and you verified that the business has potential. He has a choice: He can get rid of you ("Here's $1000, buy yourself something. See you later.") Or he can keep you on board. He has an incentive for not leaving you on board because you are expensive. You were there from the very beginning, you took the risk as he did (but you did so practically for free) and you therefore would want (and deserve) a bigger piece of the pie. It's better to get rid of you and bring along someone new, someone that does not have claim to a bigger piece of the pie.

Either way, you lose.

Frankly, I would not do business with this guy. He needs to, at the very least, be more professional. If he does not want to spend money drafting paperwork, even a handwritten agreement is binding. The fact that he does not want to do even that, speaks loads of his intentions and priorities.

Just look at the history of Facebook to see what can happen when things are at the very least unclear when it comes to who is exactly the founder (and at the very worst, involve one founder cutting the others out of their fair share).

Stay away from this guy. Let him make his mistakes and try his cons with someone else. There are too many honest people out there with whom you can do straight business; none of this "We'll talk numbers later" BS.

He may not understand the weak position you are in (without the agreement). You can try to help him understand, but probably best just to do the work yourself of making the agreement.

He may just be lazy or too cheap to spend the money on drafting an agreement. If you want to go ahead with this, draw up some agreement yourself and give it to him to sign. If he declines that they he's not serious or not worth being partners with.

I was in a similar situation a while ago. Tim's suggestion is good -- Try to get a feel for exactly why your business "partner" hasn't pro-actively given you a formal role in the LLC. It could be greed; then again it could just be a misunderstanding.

The way you draft agreement can actually help you find out more about your partner's business intentions. Think about whether you want to ask for a piece of company up front or simply want to be considered an independent contractor with a guarantee of compensation. You could even present both types of agreements to him -- if he refuses the former but accepts the latter, then you know he probably wants to cut you off from the large stakes further down the line.