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For the past 6 months or so I have been working on a project with 2 partners. Here's the breakdown:

  • Partner 1: Finance, marketing, sales, legal
  • Partner 2: Product dev, design, branding
  • Me: Tech, product dev

Partner 2 and I no longer believe that we can work with partner 1 because he tried to exert complete control over the product dev process. At some point he decided he was going to take control of the process and that we need to just follow him. We both feel that it's leading us down the wrong path. When we brought these concerns up with partner 1 he basically dismissed us, defended his own opinions, and has essentially alienated us. Since then he's all but shut us out of every decision. He's continuing with the marketing efforts. He's even contracted a developer to work on the code to implement the features he feels are best. He's essentially taken the business hostage.

Here's the kicker: while we have formed a C-corp, no documents have been signed (stockholders agreement, no board, etc.). More importantly, neither I nor partner 2 have assigned any IP to the business.

I have a few questions:

  • Being that no IP has been assigned, does he have the right to use (take, really) what we've created? Does the fact that we built this together (the business, not the site) somehow give him a right to use it?
  • Conversely, what's stopping me from just turning off the servers and saying "have a nice life"? If I did that would he have grounds to sue?
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This is a very localized situation. Please consult a local lawyer who would be handling the situation. – dnbrv Apr 13 '12 at 5:22
Meaning it depends on where the company is registered? If so, it's Delaware. – Miles Apr 13 '12 at 5:23
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@dnbrv I disagree that its too localised. Part of the issue is specific legal but this is the sort of issue that many startups have faced previously and will face again. Having a starting point, basis upon which to move forward and things to consider will be valuable to them. In fact even knowing you have to look to a local lawyer is 1 step closer. – Robin Vessey Apr 13 '12 at 6:31

4 Answers

up vote 2 down vote

First up, I'm not a lawyer, you will need to work through the specific IP issues for your country/state.

I think you should try to get to a middle ground, ending up in court is just going to kill all of you.

Both sides take a copy (if he has an external developer already then he has a copy that you will struggle to get back as it is) agree to fork the code at that point and you both walk away and keep going on your own directions. Ensure you have a legal document around this seperation point. Decide who takes the servers (the person who bought them in I would suggest).

In most countries I know, without any other agreement, the issue you have is all the marketing and branding and etcs are owned by him (the creator) as much as the source code is owned by you ... again clarify this with a professional. You will have to invent your own product branding and replicate all of his work.

Turning off the servers would be an issue generally you are malicously impacting his earning capacity, unless you can prove its because he is stealing your code to do so.

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I'm not going to turn off the servers... I'm not petty like that. I brought it up because it's as hostile an act as is wresting control of the business after his product has been built... by me. I'm absolutely fine with him taking the branding/marketing. However, if I have to replicate his work then he should suffer the same setback. – Miles Apr 13 '12 at 21:42
up vote 2 down vote

Here are the questions I'd be asking:

(1) When was the code created and when was the company formed? If the code was created before the company was formed, then it's pretty clearly owned by the developers. If it was created after the company was formed, is there any way that somebody could claim an employment relationship?

(2) Did person 1 have any hand in creating the code? If so, could it qualify as a Joint Work, in which case he would have some rights to it?

In general, US Copyright vests in the author at the moment of creation and can only be transferred in a written agreement. If it's a work made for hire, then the employer is considered the author. If it's a joint work, then all authors have rights.

This is a good time to find an attorney to advise you. It shouldn't take much more than an hour of his/her time, and it's well worth the few hundred bucks (if he even charges you.) Find somebody familiar with software -- don't just go to the neighborhood guy who handles wills and traffic cases.

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To answer your questions: 1) 90% of the code (the core of it) was written before the company was formed. I'm not sure that anyone could claim an employment relationship - nothing was ever signed and I didn't get paid a single penny (in fact, as a founder, I've spent tens of thousands of pennies!). 2) I wrote every single line of the code. Person 1 knows nothing about technology. – Miles Apr 13 '12 at 21:31
Sounds like you have a pretty good claim. How much of a bastard do you want to be? – Chris Fulmer Apr 14 '12 at 1:03
Heh, well, I don't really want to be a bastard. But if I'm going to start over I'm not going to relinquish the code base to someone who will most certainly be a competitor! I'm hoping for an amicable resolution. – Miles Apr 14 '12 at 2:51
up vote 1 down vote

You state "no documents have been signed" and you also state "we have formed a C-corp".

I can virtually guarantee you that one can not form a C-corp without documents. Do you have a copy of the certificate of incorporation? If not, why not? You can get it from the state as a matter of public record.

Before doing anything rash like "shutting off servers", you should gather the facts.

You should understand that in some places an act like "shutting off servers" could be considered sabotage and could lead to arrest and criminal prosecution.

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When he says no documents have been signed, I think he is referring to a document that identifies how much equity each owns, who owns the IP, etc. Articles of Incorporation don't go into that kind of detail, so it's pretty useless in this case. – Zuly Gonzalez♦ Apr 13 '12 at 14:42
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@Zuly - The articles of incorporation should list the incorporators. If the three of them are all truly equal, then presumably all of their names will be on the document. – JonnyBoats Apr 13 '12 at 14:53
I realize that. But that's all it lists. He seems to be interested in IP assignments, which is not documented in the AoI. – Zuly Gonzalez♦ Apr 13 '12 at 18:02
That's correct, @Zuly. He can have the incorporated entity for all I care. – Miles Apr 13 '12 at 21:38
up vote 0 down vote

Are you sure no IP has been assigned, like per action? YOU do not always needa contract in writing to make a valid one.

Regarding servers - NOTHING stops you from shutting them down. Nothning stops you from shooting the president either. YOu are a free man that can do what he wants. BUT: YOu need to be able to live with the consequences. Freedom comes with responsibility. In this case you likely spend the next years in court. Whether you win or not - it will hurt you a LOT, in time and lawyer fees. Look at Facebook and how they have to defend against a guy claiming to own 50% that just does not seem to be willing to stop. In this case it is actually likely they CAN take damage from you then - given that there is a valid operational setup and corporation so there is an agreement in place.

What is the ownership distribution of the corporation?`If it is equal, why do you evn ask - you then ahve 2/3rts of the vote on your side, act accordingly and talk to a lawyer ;)

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I'm not sure what you mean by "per action". The ownership structure is non-existent, however the terms discussed were me: 40%, partner 1: 40%, partner 2: 5% (worked 10 hours a week, but is a founder). From what I understand about copyright law, since I wrote the code, I am the sole owner. Parter 1 didn't write a lick of it. If I blocked him from using the code, but left the servers running and walked away from the business, do you think he'd still be able to sue at some point? – Miles Apr 13 '12 at 5:30
Well, seriously, I CAN SUE YOU FOR HAVING THAT CODE. That does not mean I am right or can win - but everyone can sue anyone for everything in the US, and you still have to spend time and money for defenses. Per action means that all the emails etc. constitute a contract. If you have a corp - who has stuff now? Ownership of an incorporated entity can not be undefined per definition. If you did not define anything, it normally is - everyone equal shares. If you agreed by email on something, then this is what it is. – NetTecture Apr 13 '12 at 11:05
Transferring copyright HAS to be done either in writing or via an employment relationship (in which case it isn't really transferred at all -- it's owned by the employer at creation.) – Chris Fulmer Apr 13 '12 at 13:33

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