11

A long friendship has ended, and I am looking for an objective, collective third party opinion on this matter.

Summary: five days before a critical deadline, a collaborator has, with no warning, decided to withold his now critical code and demand 7.5% equity in the company for 7-14 days of non specialist, entry level work.

Background: I have spent almost two years on and off working on a startup idea. I am the sole employee, the company does not actually exist yet. I came across an opportunity to demo a prototype to a potential source of funding. Note, I am not offering equity in exchange for this funding. This will be important later.

I have a (formerly) good friend, we will call bob, who has spent the last year or so self-studying to become an entry level programmer. He has no experience, did not go to college, or finish high school. We have in the past floated the idea of having Bob build a UI for the prototype, as a learning experience and portfolio piece - he has in fact asked for such opportunities from others as well, because he is finding it difficult to break into the software industry with no actual coding experience to show for.

With two weeks to deadline, we reached a friendly agreement that he would build this UI - something which I could have easily done myself. In return he would be able to host the code on his github and reference it in interviews. This freed me up to polish up some other parts of the code prior to the demo.

5 or so days before the deadline, Bob messaged me, claiming that he was not being compensated fairly, and that he would not release the mostly complete UI code unless I gave him 7.5% equity in the company. Bob knows that I have not spent this time working on the UI myself, and that I will now have to scramble to build an alternative on a shortened schedule if I do not concede.

In an attempt at objectivity, I will describe his subsequent justification below:

  1. Bob estimates that he has invested ~70 hours of his time, plus two years worth of study.

  2. Bob claims that this UI and the demo may become IP of my client (absolutely false) and he may not be able to host the code publicly as a portfolio piece.

  3. After a heated exchange, Bob also claims that "there is risk of potential future legal action of intellectual property theft should this code be open sourced", and there is a risk that he may be held liable for damages by other parties because his demo UI "code may be used by a large company to make decisions"

Questions:

  1. Is Bob's behavior ethical?
  2. Assuming these demands weren't made retroactively, is 7.5% equity stake for Bob's skills and one time work a reasonable request?
  3. Was our initial agreement, compensation in the form of exposure and portfolio material for 7-14 days of work, unreasonable for Bob?
  4. What should I have done differently, and what can I do in the future to avoid this situation?
  • 29
    You need an attorney. Bob is trying to damage your company, and you may have tort against Bob. Don't break things down here. Go get an attorney. – Wesley Long Sep 25 '18 at 18:49
  • 6
    "Exposure" is not a great deal for Bob, but, given that he is new, is not unreasonable. More to the point, he agreed to it earlier and pulling these last minute shenanigans is completely not okay. – Jim Clay Sep 25 '18 at 19:15
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    Have you been compensating Bob in any other way (did you pay him?) ? Did he agree to those terms before doing the work? Is there a paper trail for any of that? – Seth R Sep 25 '18 at 20:31
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    @user2647513, I agree with WesleyLong that you need a lawyer. Depending on your jurisdiction, using uncompensated work for for-profit purposes, even if he agreed to it, can have shaky legal standing. This could get messy. – Seth R Sep 25 '18 at 20:51
  • 5
    Whatever you decide to do, I wouldn't recommend giving him equity. If you give him equity then you'll have to deal with him for as long as the company exists. If you can find another way to convince him to give you the code, then you can send him on his way and look for more trustworthy employees going forward (I hope his "exposure" didn't include "recommendations.") Even if you can't get his code, you're probably better off delaying the demo and finding another solution. Also, from now on, get everything you discuss with Bob in writing. Everything. – Steve-O Sep 26 '18 at 13:34
22

Is Bob's behavior ethical?

No.

Assuming these demands weren't made retroactively, is 7.5% equity stake for Bob's skills and one time work a reasonable request?

They don't seem reasonable to me. I would be very unlikely to give up 7.5% equity in my (potential) company for a couple of weeks work. But then again I probably wouldn't have had Bob do this work ("which I could have easily done myself") in the first place.

But the only parties that matter here are you and Bob. Clearly Bob is trying to use leverage in order to demand more than originally agreed to. Basically, you get to decide how much this code and deadline are worth to you.

Was our initial agreement, compensation in the form of exposure and portfolio material for 7-14 days of work, unreasonable for Bob?

It doesn't seem like a reasonable tradeoff to me. I probably value my time differently and I may value this particular "exposure and portfolio material" different than you or Bob. I have to wonder how valuable exposure of this work in a non-existent company with no customers really is.

But again, the only important opinions are yours and Bob's. It seems like it was considered reasonable for a while, but no longer.

The fact that this was only a "friendly agreement" and not written into a contract suggests that the reasonableness judgement was left as an informal thought. That was unfortunate for both of you.

Now you get to choose how to proceed. You tried to get work done for free. You took a gamble on a friend. You may have lost that gamble. Try to keep the emotion out of it and treat it as a business decision.

You could acquiesce to Bob's demands and get your UI ready in time for the demo. You could lose some sleep and whip up the UI yourself. You could try to hire someone else to whip up the UI quickly. You could delay the demo date. You could threaten a lawsuit in hopes that Bob would give in. You could offer Bob money instead of equity (as @stannius suggests). And there are lots of other possibilities.

  • 5
    Thank you for your thoughtful response. I am not currently interested in making this into a legal matter, only asking for opinions from heads that are cooler and less involved than mine and Bob's. – user2647513 Sep 25 '18 at 20:47
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    To the list of possible actions you could add: You could offer Bob money instead. – stannius Sep 25 '18 at 20:59
  • i disagree that it was a bad decision on the face of it to give bob the work. much of leading is getting others to do work that is lower cost than what you can provide your company. although it went badly for the OP - mostly because of a lack of a pre-agreed contract on ownership - it wasn't a bad idea. – bharal Sep 25 '18 at 21:58
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    IANAL, but if OP is in the US, it may have been illegal to have Bob do work for him for no pay, even if Bob initially agreed to it. Bob's current demands are unreasonable and unethical, but that does not mean he doesn't have grounds to sue. OP should consult a lawyer regardless. – Seth R Sep 25 '18 at 22:11
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    @SethR Bob wasn't told to work X hours, but to accomplish a task independently for certain nonmonetary compensation.. IANAL, but I don't think minimum wage applies to this. – David Thornley Sep 26 '18 at 21:40
7

Approach this from a Decision Science Perspective

Step one is to pretend Bob doesn't exist. Imagine all you have is the old non-ideal piece of code. Now suppose you walked into a store and could instantaneously upgrade your code to what Bob's code can do for $X. At what price point, X, would you be willing to buy that code to make a good impression at your investor meeting. The fact that you seem to really want the code, and the fact that you don't think you can create it in a few days, suggests that you think it's worth at least several hundred (probably thousand) dollars. Once you have determined the magic number, X, then it's time to meet with Bob.

I think you understand the issues from Bob's perspective, as you provided a very fair assessment of Bob's concerns. If you meet Bob half way and negotiate with him you both will likely be happy in the end. He likely will give you his code if you provide him fair, market value compensation for it.

  • As a starting point, you can offer him $Y/hour for 70 hours work, where Y is the standard rate for an inexperienced coder. Or you can offer him $Z total, where $Z is the typical commission for similar products. The key is, whatever you agree to pay, it should be less than or equal to your magic number X. Otherwise, just let it go, walk away and use your old code. You almost got something for free. I don't blame you for trying, but now that it turned out badly, you have to reassess and approach this like a rational business person. Cast bad feelings aside. It is situations like this where good business people shine. If he counters with the 7% equity for 70hrs work, don't just insult the offer. Explain the logic. You can say, "while I understand you've put in a lot of work, I've actually lived and breathed this company for two years, putting in thousands of hours of work. Your 70 hours was great, but it isn't even 1% of what I've put in. I'm not willing to part with equity." If he brings up the fact that he had to learn new skills, you can say "I appreciate your effort to learn the required skills, but that time was you acquiring new education on your own. I could have hired someone who already had those skills and I would have paid them ___." You could at this point counter back an increase in what you'd pay him based on this logic, as long as its less than X. Remember X is all that should really matter to you.

Additional Remark: Bob claims his UI and demo may become IP of someone else in the future and that he may not be able to share the code publicly as a portfolio - without risking future legal actions against him

  • This is a reasonable concern by Bob. How does he know he will be able to display this code forever. You've just seen how easy it is for someone to go back on their word (he just did it himself). Offer him written reassurance that this won't happen to him. You can write and sign an agreement stating he will always have the right to display this code publically, regardless of what happens to the company or product. Now that you are paying him, and effectively writing a contract, it's probably worth consulting a lawyer and asking if you need to write up a license for the code. The IP is unclear in this situation and you need to clear it up, for the both of you.

In hindsight, Bob probably doesn't see the arrangement as fair. Yes, you both agreed to it, but start your company on the right foot and try to agree on something fair for both sides.

5

I was a software product developer for forty years. In the beginning, software development most closely resembled practical mathematics research. Most code was freely exchanged and all ideas were published for academic credit. Eventually software development came to resemble movie and television production. Code is both copyrighted and kept secret, and ideas are patented.

The following advice is based on my study of many many equity lawsuits involving software copyrights and software patents during this period.

There has been a dispute over your permission to use Bob's code. Bob's code is legally encumbered. Never use legally encumbered code, even after you think the encumbrance has been resolved.

Here's why: even if you somehow arrive at what you think is an ironclad written contract with Bob, you have no reason to believe that he won't try to renege, and e.g. claim that he was duped, or that the contract is unconscionable. He is obviously capable of waiting until the next time you are facing a vital deadline and then bringing a civil equity lawsuit, including an injunction against using the code until the lawsuit is settled. The purpose of such a lawsuit is not to win; it is to throw a monkey wrench into your marketing and force you to reach a settlement before your investors or customers are scared away.

Do not negotiate a new price for Bob's code. Drop the code from your project. If you haven't seen it, don't even look at it. If you have copies of it, erase them.

Drop Bob from your list of approved vendors. Don't discuss your project with him any more. Don't show him your project code. Most importantly, never read any of his code again.

Bob may never become the toxic threat I am warning about. He may lack the brains to pull it off. But he has demonstrated the requisite immorality.

  • 1
    Trying to get something for free is different from accepting something freely offered. The phrase in paragraph 4 "[Bob] has in fact asked for such opportunities from others as well" indicates that the the contract was Bob's idea. The ethical thing to do when you become dissatisfied with a contract that you proposed and you signed is to accept the loss and fulfill the contract. In suddenly withdrawing his proffered work, Bob has behaved immorally and unethically, and has committed a tort against the OP. – A. I. Breveleri Sep 28 '18 at 1:57
  • "contract you proposed and signed"? But thats not the case. There could have been a verbal agreement, which can be a contract, but that's not the same as a signed contract because people have faulty memories and there are misunderstandings. – WetlabStudent Sep 28 '18 at 4:08
3

With two weeks to deadline, we reached a friendly agreement that he would build this UI - something which I could have easily done myself.

I'm not a legal expert and I'm not qualified to provide legal advice ...

But, unless you have some sort of contract with Bob, the chances are that he can do/demand whatever he wants with his work/code. You made a decision to rely on a loose, informal agreement with someone who has turned out not to be trustworthy for something that is critical for your business, and he is choosing to screw you over for his benefit.

Is his behavior ethical? In my personal opinion, probably not, if he said he was going to help you and then changed his mind at the last minute to try to screw you over. But again, unless you have a written agreement, there probably isn't much you can do about it, except attempt to negotiate. For example, what proof do you have of what was agreed to and what the timeline was?

Are his demands and/or your initial agreement reasonable? It's hard to say - really that's something that needs to be negotiated between the two of you, based on the value that you feel he is bringing to your business activities.

It seems like perhaps the best thing you can take out of this experience is the following:

  • Learn who you can trust
  • Nothing comes for free
  • In future, make sure you get it in writing
  • Get a good lawyer, and seek their assistance in matters such as these

Again, go see a lawyer and get professional legal advice, before relying on anything anyone says on here.

  • 2
    Legal advice is for next time. Five days isn't enough to get a legal action resolved. Even an ironclad signed written contract would be useless for practical purposes, if Bob wanted to withhold his code. – David Thornley Sep 25 '18 at 20:31
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    @DavidThornley I see your point; however, legal advice could be obtained within that timeframe and matters such as possible compensation might well extend beyond those 5 days. Regardless of the timeline, if the OP is considering legal action of any kind, they would need to get legal advice first. – Time4Tea Sep 25 '18 at 20:36
3

To address your (4):

Bob is correct to be worried about IP law, and so should you. Bob wrote the code, and it isn't a work-for-hire situation, so Bob has the copyright. In any commercial exercise, you don't want someone else able to yank permission to use part of the code. They might turn out to be like Bob.

What you need is a license to use his code, which should be worldwide, irrevocable, transferable, and probably a few other things I'm missing. The license should specify that Bob has no liability for your use of the code. A BSD-style F/OS license would probably do for this. Bob doesn't have to offer his code to anyone else on those terms, and he keeps the copyright.

Unless you use an established license, you almost certainly want to write a generic license that you'll use for all such supplies, and run it by a lawyer.

You might want to ask the lawyer whether there needs to be any compensation for the license. I don't think so, but IANAL. So far, it seems that he gets to put it on github and talk about it at interviews, which he could do in any case. Legally, you guys may well not have had a valid contract, which would require some sort of valuable consideration for each side

As a business, you can't afford to shortcut the legalities. You need an actual contract for any deliverable you want someone else to do. You absolutely need a valid copyright license for any code you don't have the copyright to. If you ever want to sell the company, the buyer's due diligence will include making sure you have the right to do everything you do. Reasonable lawyer's fees are going to be a whole lot cheaper than having a situation blow up because you don't have the rights you need.

1

To be honest, I'm with Bob.

1) You tried to get Bob to do something for nothing. You promised him "exposure", and by "exposure" you mean "exposure by a company who only has a single employee and no funding, income, or investment". That's not "exposure", that's "unpaid labor". And even if it was "exposure", it's still also "unpaid labor". If you think your idea can make money, you should give some of that money to the people who contributed to it (i.e. Bob).

2) Bob is actually asking for nothing, so it costs you nothing to give it to him. He's asking for 7.5% of a company with no income, no VC, no product, and only a single employee. That's not a company, that's a hack job. What is 7.5% of your company worth? If you're the next Facebook or Google it could be worth a lot. But right now, it's worth nothing.

3) Rather than negotiate this sweet deal with you where you get exclusive rights to Bob's code in your application, this situation could have happened the other way around: You mention to Bob you want to build something, Bob turns around and secretly builds some frontend app, later comes to you and says "hey I built this great frontend app isn't it awesome you should use it", then you use it. Now you don't have rights to Bob's code at all, and maybe it turns out you have to pay him licensing fees later which could be a lot more than 7.5% of what is more or less nothing.

4) Bob's code is obviously worth something to you, otherwise we wouldn't be having this discussion; if Bob's code was truly meaningless, then you would have told Bob to go screw himself and re-done the work on your own, rather than coming here and asking us about it. But you are asking Bob to take nothing in exchange for his efforts, which you both know is worth more than nothing. Simply put, you're screwing Bob and he's calling you on it. To put into perspective what Bob's code is worth to you, let's say you go to your potential investors without Bob's code. How much less do you think they will offer you in funding as opposed to if you had Bob's code? That difference is how much Bob's code is worth, and that's how much you should pay him for it.

5) Even if you could have done Bob's work on your own, you should at least pay Bob for his time. As often happens in these sorts of situations, the reason you have employees is not because you can't do the work yourself, because you usually can. The reason you have employees is because you don't have enough time to do it before you have to meet with VC to get funding. If Jeff Bezos wanted, he could probably build (most of) Amazon's infrastructure singlehandedly, fill all the orders personally, hand-deliver them, etc. But the reason he doesn't is because it will take until next decade for you to get that widget you wanted today. That's the same reason you asked Bob to write your UI for you, and that privilege is what you are paying Bob for.

Please, just pay your employees and treat them with respect. If you are already starting your business with the mindset that your employees' work isn't worth paying them for (even paying them with equity in essentially a pipe dream, which costs you nothing), then you're going to have real problems down the road.

  • Sorry, Bob is not an employee. Bob is a free labor, not an employee. – SmallChess Sep 28 '18 at 14:24
  • Yes, Bob is being treated as free labour. He should be treated as an employee. That's where OP's problem lies, because he's disrespecting Bob. – Ertai87 Sep 28 '18 at 14:32

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