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Our startup currently has 5 founders, we're still in the process of seeking seed funding but we have all been working for sweat equity for the past 12 months, some founders have worked longer for sweat equity then others.

I've been working without a salary now for about 5 months and I'm being asked to work another 3-6 months without a salary. I'm responsible for about 70% of all the code that has been written thus far and the company is a software based B2B2C business that involves many business relationships. I'm now being asked to sign a non-compete/non-solicitation agreement in order to receive equity in the company. I currently own the IP to all the code I've written since I haven't signed any agreements. Should I sign a non-compete agreement in order to receive equity even though I'm not receiving a salary now?

If it matters I'm in Ontario, Canada.

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There are 5 founders and you are responsible for 70% of the code?! What are the other 4 people doing? – Zuly Gonzalez♦ Jan 3 at 22:25
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business development, HR, marketing.. 3/5 are developers however one of the developers recently started and I've been working very long hours to produce all that code. – Tom Paris Jan 3 at 22:31
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HR? That seems unusual. It doesn't sound like you have any employees at this time. – Zuly Gonzalez♦ Jan 3 at 22:42
We have someone doing HR coordination part-time, she also does company financials and data analysis, I do agree that we won't need an HR person full time right now. We do have some hourly employees as well. – Tom Paris Jan 3 at 22:45

2 Answers

up vote 2 down vote

There seems to be a few things in play here:

  1. equity assignment
  2. code ownership
  3. non compete agreement

Do you currently have any agreements regarding equity for the time you've already put in? That - and an acceptable distribution amongst the 5 founders - seems to be the first thing. Everyone should have non-competes - not just you.

Code assignment: That's your call. You can grant the company non-exclusive rights - but you need to craft it in a way that doesn't torpedo investment opportunities. Trading a larger equity component to assign exclusive rights is also a strategy.

Unclear if the other 4 are not being paid, but 11+ months without a salary (or agreement) is a bit long. Using this post as a reference, consider negotiating an appropriate rate with repayment after investment.

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thanks for the response, we currently do have an equity agreement, however I'm being told that the equity agreement and non-compete should come hand in hand. I don't want to sign a non compete (Employment agreement) right now since I'm not receiving a salary and we aren't funded by an investor and would like to keep my options open in case it doesn't work out. I've gained a lot of domain knowledge and would like to apply it at another job in the same industry if we don't get funded in the next 3-6 months. – Tom Paris Jan 3 at 22:26
also to add, all 5 founders aren't being paid and I've been told that unless the company owns the IP/code no investor will ever invest in us – Tom Paris Jan 3 at 22:35
Master of the Obvious comment, but the non-compete + equity agreements should have been agreed to from the start. You're 12 months into this effort... what vesting will be applied to that? As for "no code ownership / no funding" - that can be true, but their lack of foresight shouldn't require you to give up / limit your career aspirations without proper consideration. – jimg Jan 3 at 22:36
I guess they decided not to do that in the beginning, I just do development and not HR. They want the vesting period to start 9 months after we all started working. Should I still sign the non compete now? or hold off? – Tom Paris Jan 3 at 22:38
All three are related and should be dealt with together. The code assignment issue is more important than a non-compete. But IANAL, so I would suggest contacting a lawyer and get her / his view. – jimg Jan 3 at 23:25
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up vote 0 down vote

The last thing young entrepreneurs want to do is hand hundreds / thousands of dollars over to an attorney for a start-up. It is an expensive lesson to learn the hard way.

If you are not involved in the formation of this entity, then you can be sure you will be treated as an employee and not as an owner.

I agree with Tom -- you're looking for a percentage of entity ownership and the value of your time -- I would not sign anything nor continue work without getting in front of YOUR attorney first.

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