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TL;DR: Worked a year+ on code we still own, founder refuses to raise capital (wants to bootstrap) and is now low-balling us, we're willing to walk away--what would you do?

Long version (detailed and specific to our situation--but potentially useful to others stuck in abusive founder vs. technical staff/co-founder relationships):

Founder has a big rolodex, has big-name advisors, and very interesting idea and bus dev vision for product in a very hot space. We agreed to join and help him develop product given 'revenue' will be rolling in by end of year (yes, last year: by Dec 31st) and he would rev-share that revenue with us.

We have developed code for over a year, 8 months full-time, 5 months half-time (we were full-time from last year Sept-this year April, then took paying work half-time starting May 1st because we couldn't afford to keep working for free, so from May-Sept we've been half-time and less focused due to that).

The 'founder' (who refuses to treat us as 'co-founders') after much wrangling and negotiating, finally proposed a contract--still unsigned--to provide us with 3% equity for work to-date--in "March/April," so for our work through April 1--with ability to earn another 3% equity for our product once it's earned $500k in revenue and an additional 3% equity vesting over 4 years (all equity shared between the two of us). In addition, founder would sign a 'note' for $125,000, of which $50k is straight note and additional $75k could be paid us to 'buy back' the initial 3% equity for the initial "work to-date 3% piece" of equity, within 12 months (presumably exercised if our product doesn't work out, no customers materialize, and his business prospects look good to him otherwise--but we'd still get $125k in that case, instead of only $50k and 3% of 'nothing'). Obviously, if his business never makes a dime, we don't either, so we have plenty of skin/risk in the game.

He has contacts (potential customers), others involved, including some very big names for PR and advice, some very minimal consulting work, and virtually no revenues--though he finally in August got one paying customer contract and offered to give us 30% of it: $3,000. We refused until we'd agreed to and signed a contract (which we haven't done yet). Overall, this product is in a VERY hot space and we have an interesting idea for solving a lot of pain, of which perhaps 20% of said pain is currently solved by our software--it's a complicated space and will require serious engineering to make a dent in the other 80%.

We never signed the "March/April" contract. It was always "at the lawyers" (founder's lawyers--though we insisted our counsel would review it when he got it back to us, which he never did, aside from one draft not approved by his counsel, but filled with legalese). We think the above ($50k+3%+3%+3% or $125k) was a reasonable offer, not great, but reasonable. In the meantime, we have retained rights to all of our code, we have paid out-of-pocket a designer $1,200 to do artwork for the site and we've paid some minimal hosting fees, perhaps another $200-300, so we're out of pocket $1,500 or so and a year of our time (well, perhaps 10 months full-time). The only monies that have changed hands between us was founder reimbursed us for training expenses ($800) to travel out of state and attend a partner training for some related technology, not a part of our product to-date.

Now that it's been a year, we want out, we're done working for 'free'... The 'founder' says since it hasn't "worked out" he wants to 'rent' our software back from us. He's essentially playing hard ball with us with an offer to 'rent' the software we've developed for $500/month plus 30% rev-share, up to a total of $100,000 at which point he owns the software. We'd have to do bug-fixing, etc., but no new features.

This is a totally insulting offer after 10+ months of full-time work (and 1 calendar year+). Especially since we have serious doubts that he can make the business fly, given no revenue to date. OTOH, this is a hot space and the product is somewhat usable now and solves a part of the market need.

We plan on telling him in response that we'll take actual cash now (which he'd have to go raise money for) of about $60k, or else take the original deal we'd negotiated, but not finalized (that is, $125k, or $50k note plus 3%/3%/3%, plus he'd need to cough up our out-of-pocket expenses ($1,500) and/or the $3k he's already offered, in cash, now, say $3-5k) for us walking away, with minimal involvement (no bug fixing, maybe one 2-hr in-person meeting a month, or two 1-hr calls, to advise).

Any thoughts? Is our approach reasonable? We're totally willing to walk away and turn off the software and lose it all, except our wonderful hard-won experience (;-). Just to not have to deal with him would be a relief.

He could probably re-build the software for $30-50k offshore (we are greybeards in software in general, but fairly new devs on this toolset (web/SaaS dev), having recently re-entered full-on software engineering, but are experienced professionals in other areas: software product management, marketing, bus dev, hardware, etc., just not super hot-shit coders--which is why he could probably re-build for less--though his business prospects would crumble while he took the time to re-build--plus he doesn't have the cash to do it and probably couldn't raise cash for it--though he might be able raise cash for "already written" software that's working--that is, ours)...

What would you do?

Thanks in advance for any advice/thoughts: $ amounts to request--different than our thoughts right now--or: other negotiating advice, ways to make it palatable to him, and/or tell us why we're stupid (besides getting into business with him in the first place) or how we're missing something in our attitude or our approach. Btw, according to March/April contract he also 'owes us' (added to $50k note) about another $11k/month for both of us for April, then $5.5k/month for May-Sept, so $38,500 + $50,000 or $88,000 total... which began accruing once the March/April contract was to take effect on April 1st. These add-on amounts are about 35% of our fully-loaded consulting rates. Yes, our other half-time job is paying us about $30k/month FTE ($15k half-time/month for both of us) now.

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The rent sounds like a bad idea. It sounds like you need him to make this software successful. It's hard to sell a new product, and marketing costs money, his contacts and sales connections may be critical. However, it's really weird he won't raise any money and is extremely frugal. Doesn't he know 100% of 0 is 0 ? Seems like he should cut you in for 20% and sell 20% to some investors in his rolodex. And get to selling the software. – Ryan Doom Oct 5 '11 at 13:11
Yes, I agree--the rent is an awful idea! Yes, his connections would be useful. To be honest, I'm sick of the space, not interested really in competing with him (though could probably get a job at competitors quite easily). – HowToUseOurLeverage Oct 5 '11 at 19:09
@RyanDoom Pressed return too soon: Yes--and--Yes. As I say above, to be honest, I'm sick of the space, not interested really in competing with him (though could likely get a job at competitors quite easily). He is doing the classic "fighting the last battle" in wanting to bootstrap. He feels he got screwed by VCs last time, and is 'never going to let that happen again' (though he 'discusses' raising capital, etc.) His view is, the product isn't ready yet (as stated, we agree its only 20% pain solved), but he is only just now willing to try to sell it. Yes: 100% of 0 is 0! Thx 4 ur thoughts. – HowToUseOurLeverage Oct 5 '11 at 19:17

4 Answers

up vote 1 down vote

A business partnership (which is what you're in) is like marriage. It only works if there is mutual trust and appreciation for everyone who is at the core of the venture. Based on your description above, it seems very clear that this business relationship is exceptionally poor from your perspective, so I think that it's time for you to clearly communicate your perception of the situation and the areas where he has not fulfilled his end of the bargain, and to ask him if there are areas that you have not fulfilled your obligations as he understood them. The important thing (if you're going to salvage this) is to try to get each party to understand what the other is seeing and feeling in this situation and the reasoning behind it. Only through clearing the air on this and making sure that you understand each others perspectives are you going to reach a resolution that has any hope of being functional. Practice reflexive listening... I strongly encourage you to do this first before moving on to my follow-up advice, because it has the best chance to preserve what you've worked so hard for up until this point.

If you are unable to make things work, then the next best thing is to negotiate a settlement for all the hard work that you have done which results in the transfer of ownership of the software to the founder. Given that you could not make things work above, it is best to make this settlement as simple and ironclad as possible with a cash payment for the work and equity in the company. If you cannot make things work above, then you need to sever from the founder and get on with the next thing, life is too short to waste time in a situation that is not going to work. In negotiating a settlement, you need to prep for scenario #3 below, since you'll use it to judge what is your best choice.

If you cannot come to a satisfactory settlement, then you need to find another buyer for the code/product. I know you assert that you have retained rights to the code, but if there is any associated intellectual property that belongs to the founder, you will find it hard to convince potential buyers that the work is unencumbered. The more uncertainty there is regarding the freedom for someone to use what you have, the bigger the discount you're going to see on it's value, and unless there is a time-to-market issue, the value of the code will be some multiple of what it would cost to have someone else do the same work (1x - 2x) from scratch. But do not despair entirely, because you may be able to use the code as a way to find your next employer, even if they don't buy the code, your skill set and the demonstration that you've done it once already removes a lot of uncertainty in hiring you, so it may yet pay off in higher salaries, or at least better prospects of being hired. Bottom line: get a lawyer to look over your IP situation and make sure you're free to offer your code and other IP to third parties. The money spent may save you a ton of trouble down the road, and get you a higher price for your hard work by reducing they buyer's perceived risk.

So in your negotiations with the founder, you should have at least one or two potential competitors that you have already spoken to and have expressed an interest in the code/IP. Otherwise you don't really have any alternatives to what the founder has offered you, and you'll never truly be satisfied that you got what your effort was worth. This might be dovetailed with looking for your next career move.

As a final bit of advice, if you do end up selling the code to the founder, any trust or goodwill that one would normally rely upon for future dealings is going to be exhausted. Have a strictly cash basis for further consulting work for code maintenance at an agreed-upon billing rate. If it's more than 1 - 2 hours a week, get a retainer for the work.

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Thanks @ttongue. We've already listened and listened. Founder is emotional. Yes, well, as mentioned above to Ryan, not even sure I care to compete in this space. We will certainly reuse the code in other ways, but likely not to sell it to others who are competitive--though we could. Simply: we are not interested in making him successful for such a small piece, esp. w/him feeling ungrateful on top of it. He is not technical and has no idea what it takes to build software, unfortunately, though he coded 'back in the day' (like the 1970s)! See my future comments to Alain below, too. Thx – HowToUseOurLeverage Oct 5 '11 at 19:24
I also wanted to thank you @ttongue for pointing out the 'encumbered' vs. 'unencumbered' bit, that is useful to consider. Given we're willing to walk away (and not necessarily market this in the same space, though we could), it's perhaps not totally relevant, but it's a good point to consider nonetheless. It can certainly change the equation if/when we decide to re-sell this code elsewhere. (And we'd consult an IP attorney-at-law if we decide to do that.) Thanks! – HowToUseOurLeverage Oct 5 '11 at 20:43
up vote 0 down vote

It seems that you are currently in full control of the situation, since you own all rights to the code. IT also appears that the relationship is bad, which is a major red flag. You need to figure out what you want to do: do you want to stop working on the project and get some money for it, or do you wan to pursue this opportunity by yourself and continue?

3% is not much equity, that's for sure. I'm also very suspicious of the note, it sounds like it will never turn into cash. I could be wrong, but my impression is that even if you signed a revenue share of 50/50, the "founder" would find ways to make most income disappear and pay you very little.

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Yes, in full control, especially since we are willing to walk away with nothing & turn off the software we own. Yes, the relationship isn't good. Cordial would be descriptive... so far! Oh definitely stop working on it (see comments to ttongue above)! We completely concur on your assessment of the worth of the notes and the revenue, however at least 3% if miracle occurs & he makes serious $ would be fine at this point. As we say, there's another long stretch (80% more) to be game changing in this space, so taking our little piece & not having to work for him is our pref. Thx! – HowToUseOurLeverage Oct 5 '11 at 19:30
up vote 0 down vote

I didn't get anywhere in your account whether you have talked to an attorney. Have you? You REALLY need to do this as the next step. You need to find out legally where you are. Since the ownership of a substantial body of work is in dispute that is the only next step conceivable at this point.

A good thought experiment would be to determine what would be the consequences of parting ways unilaterally - separating from this person entirely and taking your investment with you. As stated by others in this thread, you may or may not have an "encumbered" body of work, one whose ownership is clouded.

Could you walk off (in whatever way makes sense) with your code, design and concept? From your standpoint that action makes the most sense. From the discussions you summarized it is clear that whatever the founder is willing and able to offer you will be one or more orders of magnitude less than the value of the effort that you have already invested. The fact that the only actual money he has invested is $800 after the effort level that you described on your own part indicates that he has no real resources, or no resources that he is willing to dedicate.

Given what you have said, you don't trust the "founder", he has contributed no capital and only a tiny expense reimbursement to the entire project, he has contributed only branding an an "idea", and it is highly unlikely that he will be an asset in the future. The only thing to determine now is how to go about disengaging from this person with the least damage and loss to yourselves.

Ideally: you would have full rights to your IP and you would then go about further development and finding markets for this product on your own.

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Yes, we talked to attys early on. I really actually shortened the story immensely above, Founder had a very detailed plan to provide rev-share based on work units (which we also earned some of!), but all attys we talked to--very high-priced ones in Silicon Valley, incl. exec comp specialists & company formation experts--said, "He's anguished & tortured in his contractual ideas, best get straight equity or walk away from this." Long story: there is another visionary involved who freely contributed ideas but is big-wig, now CEO elsewhere--he's really the reason we stayed longer. :-} – HowToUseOurLeverage Oct 5 '11 at 19:35
Above comment was to you, too. I wanted to say that it's a good idea that we talk again to an atty, esp. if this negotiation gets nasty. Thanks for that reminder! – HowToUseOurLeverage Oct 5 '11 at 19:50
up vote 0 down vote

If it were me I would do the following:

  • Stop working on the software and make it unavailable to the founder
  • Identify an amount that your willing to take to cover your time
  • Acquire a attorney and ask him/her to write a letter to the founder informing him that the software will not be available until he pays the amount above.
  • Walk away and do no more work for him in the future. He has already shown you how he will do business
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