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When Should A Company Be Formed Around an Idea?

Question:

I participated in a company’s “app challenge weekend” (which they described as somewhere between a hackathon and a startup weekend). I am excited to continue working on the product that my team built over the weekend with 2 of the team members (my brother and the guy who pitched the idea).

My preference is to formalize a relationship by forming a company.  My fear is that the guy who pitched the idea will decide in a month or two that he doesn’t need us and tell us we’re not working on it anymore.  He formed a company 2 years ago that he talks about (though from the research I’ve done has no IP or product of any kind) and thinks that this idea fits into that vision, but doesn’t want to include anyone.

Should we form the company now, using fairness and our best sense of who will be doing what work to split shares and come up with a conflict-resolution/decision-making process (I imagine this would be the board) to compensate for the fact that my brother and I just met the guy who pitched the idea a week ago? Or should we continue working on the product and see what happens?

If you have any concerns today, then the last thing you want to do is continue and “see what happens.”  We always tell startups to deal with their issues immediately.  One, they don’t get any easier over time, but more importantly, the issues are easiest to deal with when the company isn’t worth anything / much.  As soon as one of the parties starts seeing dollar signs in their eyes, issues become much harder to deal with.

We’d suggest that you form a company (LLC or S-Corp is fine at this point), divide up the equity and make sure it is subject to vesting.  That way, if someone does decide to leave, they will not leave with all of their equity.  Make sure that there is a strong agreement in place that contributes all the IP that you created during the weekend to the new company.

As for dispute resolution, there are two ways that this can work.  One, the equity owners of the company can vote the issues.  In this case, if you all owned equal amounts of equity, two of the three of you could vote the issue to approval or veto.  Or you can have the board vote, as well.  In general, if you are a three person team and you are already planning on “dispute resolution strategies” it might be time to sit down and make sure that you are all on the same page going forward before you start a business together.  It’s not normal that shareholder and / or board votes are happening very often with companies this small.

June 12th, 2012 by     Categories: Uncategorized    
  • http://erich.mx Erich von Hauske
  • CLG123

    You should absolutely formalize things immediately. Hackathon type of events like to “stay out” of the legal side of things, which is really a shame because they are actually very serious issues — I know a few folks who joined a team at a hackathon, then continued to work “in good faith” on evenings & weekends for several months, after which the person with the idea changed his mind about the “good faith” part and tried to dump them all. Some of them banded together & got a lawyer, so thank goodness they did end up with a sizeable chunk of equity in the company (though who knows, after lawyers’ fees, if that will ever pay off?). If you move to formalize a company and the guy balks, at least you’re getting a sense of the type of douche he is — better to find out NOW vs. later. Also, if he balks, tell him that he can’t use any of your IP from the weekend. You also might want to then ask a lawyer if you & your brother would be able to continue to try to commercialize the idea on your own (the lack of respect for IP can cut both ways)! If he hasn’t tried to patent the idea, etc….then couldn’t it be fair game for you & your bro to start your own version?

    • http://www.blarevideo.com/ Roy Leon

      Even though it’s not patented, it would be hard to run with the idea, if the other person has any type of sample that he’s written it or has it in use.
      Los Angeles Video Production