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I have been approached by someone, who I'll call "Big Executive", who is recruiting a small number of people for a Startup. My particular role would be 1 of a few to develop a software system. I've done some research (re: Googling) on the said individual and their experience and positions held are impressive.

We have meet twice and exchanged several emails. During our second meeting, the concept for the Startup's cashcow was laid out along with what contacts they already have, what the business model would be, etc.

I know Big Executive is a great talker and could probably convince most people that the sky is green and that gwbasic powered google, but I like the concept and I believe it has a lot of merit. Big Executive supposedly has already had promising joint venture talks with 2 major media companies and has a strong network with influential business people due to the nature of his work.

The startup wouldn't be at a point to make money for 1-2 years, which is understandable and I have no problem with.

The problem I have is that I want to know how to not get used. I know from our discussions that he had previously started work on it with a few other people, but after the other people demonstrated a mock-up, they asked for 60K to completed it, upon with Big Executive and Cohorts cut ties with them.

My question to OnStartups, is what can I do to ensure, should I take Big Executive up on his offer, that I don't get used. I don't want to put myself in the position of having done a lot of work in a years time, only to be dropped from the project before having to be paid for my work.

Also, what should I be looking out for in a deal/contract in terms of my right to the software I develop should the venture turn south?

Additional notes:

This would be done alongside my usual day job.

The proposal I have been approached with is to join the startup as an Equity Partner.

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Just questions to be sure I understand correctly: a) Big Executive already had a deal with someone to develop the software, and cut them off when they said it would cost $60K? b) The offer is that you develop the software, and you're paid with co-ownership and no cash? c) Could you tell us approx how much ownership, and approx how much development time in normal 40-hour work weeks / normal months? – Jesper Mortensen♦ Nov 11 '09 at 11:15
a) I believe so. I'n not sure what sort of 'deal' though. b) That is as I understand it. c) It is unknown at this point at how much ownership. From what I understand of the concept, I would give a high-level gestimate at 4-8 months develop the software with 2-3 resources. – Dan McGrath Nov 11 '09 at 11:23

9 Answers

up vote 6 down vote accepted

First off, legal disclaimer: I am not a lawyer, and this is not legal advice. And you should really see a real lawyer.

what should I be looking out for in a deal/contract in terms of my right to the software

  1. Copyright is so to speak the ownership of software, it is the right from which other rights are derived. Keep the copyright belonging to yourself, and license the software to Big Executive. Write a contract that would ultimately enable you to revoke the license if Big Exec repeatedly fails to uphold his end of the deal.
  2. Create a good, descriptive specification of the software to be created. Preferably with full GUI mockups, technical specifications et cetera. Create a set of unambiguous milestones based on discrete parts of the Spec. Create a contract that pays out ownership to you upon reaching the milestones. If possible, create milestones for Big Execs contributions too. One of the main benefits of this is early warning on Big Execs understanding of his own vision -- does he weave when it comes to describing the features of the product?
  3. See a good lawyer.

Depending on your negotiation position, it could be fair to have a "earn-out" on your exclusivity on the copyright. (Meaning that if Big Exec upholds his end of the deal, then ultimately maybe you should form a company together, and infuse all copyright into this company. This is more practical in many ways, f.x. if you both want to sell the result of your work. How to do this, and which percentages for whom etc, is a whole other kettle of snakes.)

On a personal note, Big Execs position sounds very dubious to me. Without knowing the man I hesitate to call him full of s***, but it's close. If he is so sure of the strength of these important contacts, so sure of the idea; why hasn't he just loaned $60K in the bank and kept full ownership for himself? Right now Big Exec doesn't have any skin in the game, correct...?

2nd note: Be aware that if Big Exec doesn't deliver any customers, and you don't have any expertise in the business area, then it's quite possible that you could end up with zero reward for your work. I.e. you build the software, receive ownership in a company, and the company ultimately goes bankrupt from lack of sales. You retain the copyright, but what can you do with it?

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up vote 2 down vote

I am going to read between the lines here a little. It sounds like you like the concept, but may feel that "Big Executive" is slippery. The basic question you have to ask yourself is do you want to tie yourself to a relationship with this person for the foreseeable future? If are already feeling that you have to protect yourself, that is a clue. Now, this doesn't mean that you shouldn't protect yourself if you really like and trust someone - but if I felt that I needed protection from someone, I would walk away.

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Yes, absolutely. It's difficult enough to maintain a good relationship in hard times if you do trust each other at the start. If this sounds like advise for couples, that's probably no coincidence. A business relationship, too, is between human beings, and human relationships of any kind have some things in common. Lack of trust, for instance, will probably always be harmful. – Hanno Fietz Nov 12 '09 at 11:39
up vote 2 down vote

Like others here, I'm skeptical of Big Executive, but of course we don't have the whole story.

Perhaps the best question is: Do you trust this guy enough to put your future in his hands?

Ways to know:

  • Knowing what the project is, do you agree that $60k is way out of line? If not, you and Big Executive don't agree how much the work is worth, and that will end badly no matter how you are compensated.
  • Talk to other people who have actually worked with Big Executive. What do they say about him? Would they work with him again? Are they disappointed that they haven't been asked to the new startup?
  • Has the Big Executive ever done a fresh startup, or just worked as an "executive" at another company?
  • You say it's OK to not make money for 2 years, but is that really acceptable? Sure you won't be rolling in vast piles of cash, but really nothing? Why so long? Can you afford to wait that long to see whether the company is even viable?
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up vote 2 down vote

So far, you've received a lot of great advice.

I'll add one point when it comes to ownership/stock options. Never be impressed or stop at the number of shares offered. It is a relatively meaningless number unless you know the total amount of shares outstanding. A much better point of negotiation is percentage ownership in the new venture.

Pay particular attention to vesting as well.

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up vote 1 down vote

It would be very useful to track down members of the disbanded (mockup) team and hear their side of the story. Do you have anyway of getting in contact with them?

Consider this part of your due diligence.

(and listen to that little voice in the back of your head that is telling you to tread carefully!)

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up vote 0 down vote

How do you spend your time after your day job? If the answer is nothing special, then may be you should take up the offer (or search for a better one).

The person may be an impressive talker but he may not know how to run a business, execution does matters! Try to find out if he has run a business successfully before. Success attracts success.

If you are not being paid salary for your work, you think of 4 'yes' scenarios -

  1. Founder should contribute to the code/tech.
  2. If not (1), he should involve you in business decisions, like he handles sales/marketing, you handle tech, and both handle money.
  3. If not (2), if dropped from the project can you take the idea to the next level and start on your own??
  4. If not (3), will it add value to your resume?
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up vote 0 down vote

I don't see how you can expect to be an equity partner and not work full time on it. It can be worked out, but I think your expectations are a little off.

The options are (for me) (combination possible too)

  1. get paid hourly rate for the work you do
  2. get paid a one-time fee for the work you do
  3. vest equity at some rate for the work you do

If 1 and 2 are below market rates you need 3, or some expected compensation later.

This is a conversation you should be having with him. Ask him how all parties will be dealt with fairly.

Going in with your eyes open is a good idea. Hiring an attorney might also help you to protect your interests.

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up vote 0 down vote

You think there is 12-24 man-mths for this task? So, 60k sounds like a low figure, since one person working on it would cost more.

If your estimate is off you may be in a bind.

If he doesn't want to pay anyone, then how will you get 1-2 other people to help?

If you decide, after talking with a lawyer, to do this, I would suggest that you keep the source code yourself, so the developers would answer to you, or, what is to stop him from cutting you off, starting a new business later, with what you had done, and leaving you with nothing.

Or, I would run away very fast so as to not get burned. (my best choice)

On big decisions go with your gut. If you feel this is too risky then it probably is.

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up vote 0 down vote

To add to what others have said, if he truly is a big executive will have no problems attracting money, and if he does, will have no problems hiring good talent full-time.

Also the way to make sure you don't get used is to understand the total number of shares outstanding, what % you get and under what conditions those shares become available to you. If they turn out to slimy, they may try to fire you saying you didn't perform. In that case, make sure you can take your software with you by keeping rights to it.

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