Before I proceed, it’s critical that I put forward a disclaimer – this post was written solely to inform and educate entrepreneurs about the implications of having a tech co-founder leave the company.
Any resemblance to real persons (living or dead) is purely coincidental. I don’t want anyone to start thinking this is about them. ☺
In this story, there are two friends – A and B. A is a technical guy with years of coding experience and server setup, while B is a businessman whose expertise is in solving problems, workflow management and growing the business.
Both A & B decided after initial market study, that there is an opportunity for their business idea. They register a new company, start off as equal partners with each holding 50:50 equity, both are listed as joint signatories, and each contribute working capital.
Later, A and B came to the conclusion that their business would require a good software platform, so B started writing a number of requirements after doing more research and gathering ideas from resources available online. A, on the other hand, looked at available tech solutions but did not find any that matched the needs of the company.
The two then jointly decided that A should hire a programmer to help code the platform, and that the company would pay for the development costs. B continues to provide design input, while A works with the programmer to roll out the platform.
After a month of blood, sweat and tears, the company managed to roll out its pilot version to its first customers. Revenue started to flow in quickly. A and B worked together to fix bugs, and adjusted workflow as well as the software to meet the needs of the customers.
However, after three months, A suddenly decided to stop working with B for various reasons, including what A called “unfairness”. This came as a surprise to B, especially since they were made equal partners, and B could not have done anything without A first agreeing to it. We’ll exclude other personal issues that might have brought about this “split”.
Nonetheless, seeing that the business has the potential to grow and expand, B decided to buy off A’s shares in the company by paying 2x of what A put in as investment to cover his contributions to the development of the business.
They also negotiated an arrangement which saw A facilitate the transfer of the platform and source code of the software to a new team, which B had to hire in order to manage the new platform. A fulfilled his duties, and B saw that all monies were paid and shares transferred.
B then continued with the new team and brought on new shareholders to build the business.
After eight months, B learnt that A had started a business similar to the one they worked on together. Shocked by this discovery, B conducted his own investigations, and found that A is using the exact same platform that the earlier company is using.
In B’s eyes, A was being unethical by starting a similar business — one that A chose to give up — and using the same platform B contributed time, effort and money for. Furious, and also pressured by the new shareholders, B had no choice but to take legal action against A. B sues A for breach of copyright, since A was using software and a source code that belonged to B’s company.
However, A turns around in defense by saying that since A wrote the software, the copyright belongs to him, and not the earlier company, as he never assigned the company as the owner.
This left B aghast and even more shocked. How could his technical co-founder work on software for a startup, leave the startup (and got his money back too) come back to claim that the startup does not own the software? This very same software that was handed to the company by A is one that B has been offering to customers to use for over a year now.
“What if the both of us had continued on this startup partnership for three years and gained millions of customers? Could A then still claim ownership of the platform and demand more payment for the startup? Was this A’s plan all along? How did I not see this coming?” wondered B.
B thought, “Are all tech co-founders like A? Or is A the odd one out? Maybe he just lacked integrity. Or should all startups make their technical co-founders sign agreements that state that the startup owns the software created? Maybe that would have prevented this problem from happening in the first place.”
In this example, there was no agreement between A and B on the ownership of the platform but B felt that since he had contributed to it, and the company (owned by him) paid for the development work, the software should belong to the firm. But did A sign away his rights when he transferred the platform and source code to B in return for payment? Or do non-tech founders end up being the loser in a startup since they can’t write code?
The above could happen to any startup, and it looks like we need to be a lot more careful when dealing with technical co-founders or for that matter all co-founders. Either choose the right co-founders or make sure that you are protected legally. After all, integrity in business is everything, and integrity means being honest. In this case, A does not seem to be honest. What do you think?