6 ms·

Ask HN: Co-founding

15 points by zalter 18y ago

I was recently asked by a friend of mine to join him in his startup that he had been developing for some time. In the midst of our increasingly serious conversations a few things have emerged that worry me: The site scrapes statistical sports data from another site to provide part of the core functionality. The founder assured me that he consulted a lawyer regarding this issue and informed me that it is a gray area, but it should be okay. I am told the fee to get this data directly would be $25,000/yr which is currently unaffordable. He says once he can afford it he will pay -- is this illegal? Unethical? Given that the startup does not yet have any formal limited liability structure, the aforementioned gray area seems all the more worrying if I could be held personally accountable. I am told that at most the initial risk would be a cease-and-desist. Lastly, the founder informed me that since he has been working on the site for years he would take the "lion's share" of the equity in the startup, and have the final say on all matters. This did not sit very well with me, and I asked him if he saw me as a consultant/contractor or as a partner/co-founder to which he replied that he saw me as a co-founder and would reasonably consider whatever I had to say and try to come to a compromise in any dispute -- but he would ultimately have final say. Both he and I would like to start working together ASAP. But I feel that despite the time and effort he has already invested, the terms seem harsh. Should I wait for an officially drafted contract? For a corporation to be setup? Even though this is someone that I know and trust it seems a little bit dubious to get involved without a legally binding (and satisfactory) agreement.

tstegart 18y ago
I think the price of obtaining limited liability is so low these days it doesn't make sense not to do it. It also seems obtaining limited liability would go hand in hand with putting your agreement in writing, so I'm failing to see your potential co-founder's reasons for not doing this. Unless you're going on a handshake (which I doubt), you'll decide on how much equity is "the lion's share" and then divide it using some form of agreement or equity division. You can't have equity division without a company to divide, and the company you start will hopefully limit your liability.
cmos 18y ago
Bail. If I can summarize your words: worry, illegal, unethical?, gray area, personally accountable, lions share, 'did not site well with me', final say, dubious. At no point did you say 'exciting' or 'amazing' or anything remotely exciting about it.
- tstegart 18y ago
  He does make a good point.
- zalter 18y ago
  The truth is, that the focus is currently on a very specific niche which doesn't excite me too much. But what does excite me is the future prospect of expanding to a broader user base and do some cool things in an old space. I guess you could say I approach it somewhat naively hoping just the experience of being a co-founder would be worthwhile
  - mechanical_fish 18y ago
    The truth is, that the focus is currently on a very specific niche which doesn't excite me too much. Some people say that co-founding a company is kind of like getting married. And other people say that marrying someone based not on what they are, but on what you imagine they might become, is the height of folly. Anyway, the problem doesn't excite you, and your co-founder's approach doesn't excite you, and your stomach has obviously figured out that this would be a mistake for you even as your brain continues to debate the issue, so it's time to discover a prior engagement and politely decline.
  - robfitz 18y ago
    being a cofounder isn't that exciting in and of itself.. i'm working on something i really love, but the small parts of it that are boring are painful to slog through. i wouldn't recommend being in a startup that was nothing but that. the work is too hard to stay motivated if you aren't super pumped about what you're building each day. as for the stock, rather than comparing your % to his %, figure out what you would need to get an exit you're happy with after 3 years and 60% dilution from investors, and use that as your lower bound.
- swombat 18y ago
  I agree and disagree. Take stock of your own temper. If you're like me, you have two conflicting streams of thought... one of them is telling you that this could be amazing, your dreams come true, etc, and showing you all that it could be. The other is showing you in increasingly accurate detail, the more you think about it, all the ways it could go wrong. Technical guys are especially likely to think of all the potential problems - that's what we're good at! My initial pattern of reaction is always very similar: 1) elation/excitement 2) Oh my god, this could all go very, very wrong 3) Maybe it can work... but only if x, y and z are resolved. You seem to be deep in 2) at the moment. Chill, relax. Realise that anything worth doing, there's always a chance of it going wrong. If you're not failing, you're not trying hard enough. At the same time, make sure you take steps to minimise the downside to you. What if the business gets its pants sued off? You should certainly not be personally liable. You can push the terms in a direction that make it more advantageous to you. If you don't get your minimum satisfactory level to be able to get out of it without losing too many feathers even if it all goes disastrously tits-up, bail. Lastly, the founder informed me that since he has been working on the site for years he would take the "lion's share" of the equity in the startup, and have the final say on all matters. Lion's share is supposed to mean 100%, but I imagine you don't mean that. To get a reasonable percentage, look at the amount of work you're going to put in, and put a price on that. That's the amount of equity capital (in the form of time) you're going to put in. Bear in mind you will always get screwed if you come second and don't put in any money, but that's part of the learning game. You'll do better in the next one. Finally, as a leverage point you can point out that he needs to make your share large enough so that you don't feel that other opportunities are more interesting. You're a smart guy, presumably, and competent... there'll be many distractions. His job as a primary founder is to make sure that you don't get lulled away because he gave you too little equity. Obviously, make that point very subtly.
tstegart 18y ago
On the equity division issue, if its bothering you, then you need to let him know that and negotiate a compromise. If you can't do compromise on that issue, you probably won't be able to compromise on much, and thats a bad recipe for starting a company together. I would also suggest nailing down an exact number, the "lion's share" isn't exactly accurate. As far as majority control, I'm a big fan on someone having majority control to prevent deadlock. But with minority protections built in. You can have one person with majority control, but at the same time require two votes to make certain decisions, like selling, buying another company, changing compensation, changing the operating agreement, etc. That way, even though one partner has more equity, that can't completely screw the other one over.
trevelyan 18y ago
It isn't clear what you bring to the table, which makes it difficult for anyone to give you an answer. What can you do for the company that this guy cannot do for himself.
- zalter 18y ago
  He's more of a design guy (though he did write a lot of the site's current core functionality), but I would be more the hacker.
  - donna 18y ago
    what's the business model?
  - bluelu 18y ago
    If you were working on the site for a few months, and you would ask another person to come in, wouldn't you want to have the final word in important matters? I think it's very reasonable to ask for that, or you pay up for the time he invested plus a little something to cover the risks he made first, and then you are at equal level.
timcederman 18y ago
It is not a grey area, it is illegal and a copyright violation. What is it with all these supposed lawyers offering supposed advice to people that what they're doing isn't wrong?
- burnout1540 18y ago
  Statistics and straight up facts are not covered by copyright. There's a landmark case about this: http://en.wikipedia.org/wiki/Feist_Publications_v._Rural_Telephone_Service http://en.wikipedia.org/wiki/Feist_Publications_v._Rural_Tel... There are some grey areas around the legality of scraping (mostly due to the added load on the servers), but for the most part it is legal. Google is one big giant scraping machine and it's scraping a lot more than non-copyrightable statistics.
  - timcederman 18y ago
    If they derived the statistics themselves, then that indicates enough level of unique effort to make the data copyrighted. I discussed that linked Wikipedia article in the other thread about copyright law... I don't think you can use that as a counterargument for statistics.
  - sethg 18y ago
    If the company hosting these stats is charging $25K per licensee, then either they're really good at bluffing or their lawyers have made sure that their data is protected in spite of Feist. For example, if they use some kind of clickwrap "you must consent to this license before you can see our statistics" page, then the company doing the scraping could be sued for contract violation, even if there's no copyright issue. So the site owner can't hit you for statutory copyright damages and has to settle for actual damages, i.e., the $25K of license fees that you're not paying, plus attorney's fees, plus whatever else their attorney can think to lather on. And your would-be partner hasn't even set up a corporate veil to protect his personal assets from this kind of exposure? That's...insane. And not in a good way.
rubentopo 18y ago
You should be equals, that's what i'd demand, i don't see a partnership where the partners are not equals...but that's my opinion.
edw519 18y ago
He says once he can afford it he will pay Run, don't walk, the other way! Ethics is the bedrock of any relationship or business. It is also binary; you have it or you don't. You don't. I once had a partner who disconnected his speedometer to increase his resale value. No big deal, huh? Next thing you know, he was "compromising" all over the place, with customers, vendors, and eventually, me. Don't make the same mistake. The simple fact that this discussion is here is evidence that you already know the answer.
webwright 18y ago
Hard to tell about the lion's share issue. If the site has traction or good IP, it MIGHT be fair. Probably not. The question to ask is, "how hard would it be to duplicate the effort"? The way to ask HIM is: "How much have you reduced my risk with your headstart?" and "If we take 4 years to build this and win, what percentage of the total effort/work/risk is your headstart?". If he's flailed for several years with limited success, that time is (unfortunately for him) not worth very much. If he wants blanket veto power over all decisions, I'd say bail if you aren't comfortable with it. The legal gray area is up to you-- YouTube certain was in gray territory. Given the risk, asking for a formalized corporation to throw up a little liability screen isn't a bad idea. Regardless of all this DO NOT PROCEED without an agreement in place. It doesn't have to be bulletproof. It can be as simple as an memo of understanding, but there is too much up in the air right now and it'd be easy to be 6-months in and be wondering, "wait, how much equity do I get?".
tptacek 18y ago
Psychology aside --- obviously you're talking yourself out of this gig: * It takes 1-2 days to set up an LLC. Without the LLC, you can't invoice and you can't buy insurance. Unless you get to manage the incorporation on day 1, don't sign on until they incorporate. * The risk with scraping isn't just that you'll get sued, but, more likely, that you're simply going to be locked out. If your business model depends on the data, sneaking it out seems like a bad strategy. * You have to make the call about whether you're ok with a subordinate role in the company. There's nothing inherently wrong with demanding more equity to compensate the work already done.
- mattmaroon 18y ago
  It's pretty trivial to determine if someone is scraping your stats too, just by purposefully putting in erroneous data. I've been told people have been caught this way and sued before.
- tstegart 18y ago
  Last I checked you didn't need to incorporate to invoice or buy insurance. Its good business from a personal liability standpoint, but its not required.
mattmaroon 18y ago
What data is he scraping? Unless he's doing streaming stat updates, it's a lot cheaper than that. And if he's doing live stat updates, it's a lot more expensive than that. Also, I'd tend to disbelieve that there's any gray area there at all, seems flat out illegal to me. Might want to talk to a lawyer yourself about that. I can recommend one who does a lot of work in the area if you need.
- zalter 18y ago
  He's not scraping live updates, sounds like he's crawling pages from reference sites and extracting the stats in that way. I would like to talk to a lawyer who has experience in these matters (my email is in my profile) How does draftmix obtain its stats? And if I may ask, how much does it cost?
  - mattmaroon 18y ago
    I sent you an email.
netcan 18y ago
"He says once he can afford it he will pay" There's a few things that I never could believe: A woman when she weeps A merchant when he swears A thief who says he'll pay - A lawyer when he cares A snake when he is sleeping A drunkard when he prays I don't believe you go to heaven when you're good Everything goes to hell, anyway... (Everything Goes to Hell, Tom Waits, )
ninjaa 18y ago
As someone who has been screwed before: Make a buyout date and clause. Value the IP based on time, calculate your share and set an end date on your agreementpast which you can demand cash from him for your stake. This way he may have final say on all issues, but if you disagree with the general direction after a couple months you can deal him a punishment by demanding a cash out. It is vital to set said date and amount in writing at the outset.
sutro 18y ago
Your prospective partner's positions on both legality and equity seem reasonable to me. A startup is going to be full of risk regardless. I say take the leap of faith and go for it. Even if it all goes to hell, you'll learn a lot.
gojomo 18y ago
Lots of successful and respected startups have begun with questionable reuse of easy-to-collect data from others. Whether it really crosses a dangerous liability line, or is indicative of other ethical stretches, would require more details not in evidence here. You should do the research to assess the risk -- and that means sharing more specifics with people with relevant legal or business expertise. But it's also possible that if these are the kinds of things that especially worry you, this isn't the right startup for you.
gojomo 18y ago
Someone has to have final say -- practically, even if not formally. A perfect 50/50 partnership can deadlock or dally when any decision is better than more discussion. So it's not unreasonable for the person who created the idea and first working version to resist giving up the control they've had so far.
gojomo 18y ago
Right now he owns 100%, even if it's not incorporated. If you ask for 50%, at some level you're implying that [your value going forward] is equal to [his value going forward] plus [the value he's already created]. That might be insulting to him.

Ask HN: Co-founding

15 points by zalter 18y ago

tstegart 18y ago

I think the price of obtaining limited liability is so low these days it doesn't make sense not to do it. It also seems obtaining limited liability would go hand in hand with putting your agreement in writing, so I'm failing to see your potential co-founder's reasons for not doing this. Unless you're going on a handshake (which I doubt), you'll decide on how much equity is "the lion's share" and then divide it using some form of agreement or equity division. You can't have equity division without a company to divide, and the company you start will hopefully limit your liability.

cmos 18y ago

Bail. If I can summarize your words: worry, illegal, unethical?, gray area, personally accountable, lions share, 'did not site well with me', final say, dubious. At no point did you say 'exciting' or 'amazing' or anything remotely exciting about it.

tstegart 18y ago
He does make a good point.
zalter 18y ago
The truth is, that the focus is currently on a very specific niche which doesn't excite me too much. But what does excite me is the future prospect of expanding to a broader user base and do some cool things in an old space. I guess you could say I approach it somewhat naively hoping just the experience of being a co-founder would be worthwhile
- mechanical_fish 18y ago
  The truth is, that the focus is currently on a very specific niche which doesn't excite me too much. Some people say that co-founding a company is kind of like getting married. And other people say that marrying someone based not on what they are, but on what you imagine they might become, is the height of folly. Anyway, the problem doesn't excite you, and your co-founder's approach doesn't excite you, and your stomach has obviously figured out that this would be a mistake for you even as your brain continues to debate the issue, so it's time to discover a prior engagement and politely decline.
- robfitz 18y ago
  being a cofounder isn't that exciting in and of itself.. i'm working on something i really love, but the small parts of it that are boring are painful to slog through. i wouldn't recommend being in a startup that was nothing but that. the work is too hard to stay motivated if you aren't super pumped about what you're building each day. as for the stock, rather than comparing your % to his %, figure out what you would need to get an exit you're happy with after 3 years and 60% dilution from investors, and use that as your lower bound.
swombat 18y ago
I agree and disagree. Take stock of your own temper. If you're like me, you have two conflicting streams of thought... one of them is telling you that this could be amazing, your dreams come true, etc, and showing you all that it could be. The other is showing you in increasingly accurate detail, the more you think about it, all the ways it could go wrong. Technical guys are especially likely to think of all the potential problems - that's what we're good at! My initial pattern of reaction is always very similar: 1) elation/excitement 2) Oh my god, this could all go very, very wrong 3) Maybe it can work... but only if x, y and z are resolved. You seem to be deep in 2) at the moment. Chill, relax. Realise that anything worth doing, there's always a chance of it going wrong. If you're not failing, you're not trying hard enough. At the same time, make sure you take steps to minimise the downside to you. What if the business gets its pants sued off? You should certainly not be personally liable. You can push the terms in a direction that make it more advantageous to you. If you don't get your minimum satisfactory level to be able to get out of it without losing too many feathers even if it all goes disastrously tits-up, bail. Lastly, the founder informed me that since he has been working on the site for years he would take the "lion's share" of the equity in the startup, and have the final say on all matters. Lion's share is supposed to mean 100%, but I imagine you don't mean that. To get a reasonable percentage, look at the amount of work you're going to put in, and put a price on that. That's the amount of equity capital (in the form of time) you're going to put in. Bear in mind you will always get screwed if you come second and don't put in any money, but that's part of the learning game. You'll do better in the next one. Finally, as a leverage point you can point out that he needs to make your share large enough so that you don't feel that other opportunities are more interesting. You're a smart guy, presumably, and competent... there'll be many distractions. His job as a primary founder is to make sure that you don't get lulled away because he gave you too little equity. Obviously, make that point very subtly.

tstegart 18y ago

On the equity division issue, if its bothering you, then you need to let him know that and negotiate a compromise. If you can't do compromise on that issue, you probably won't be able to compromise on much, and thats a bad recipe for starting a company together. I would also suggest nailing down an exact number, the "lion's share" isn't exactly accurate. As far as majority control, I'm a big fan on someone having majority control to prevent deadlock. But with minority protections built in. You can have one person with majority control, but at the same time require two votes to make certain decisions, like selling, buying another company, changing compensation, changing the operating agreement, etc. That way, even though one partner has more equity, that can't completely screw the other one over.

trevelyan 18y ago

It isn't clear what you bring to the table, which makes it difficult for anyone to give you an answer. What can you do for the company that this guy cannot do for himself.

zalter 18y ago
He's more of a design guy (though he did write a lot of the site's current core functionality), but I would be more the hacker.
- donna 18y ago
  what's the business model?
- bluelu 18y ago
  If you were working on the site for a few months, and you would ask another person to come in, wouldn't you want to have the final word in important matters? I think it's very reasonable to ask for that, or you pay up for the time he invested plus a little something to cover the risks he made first, and then you are at equal level.

timcederman 18y ago

It is not a grey area, it is illegal and a copyright violation. What is it with all these supposed lawyers offering supposed advice to people that what they're doing isn't wrong?

burnout1540 18y ago
Statistics and straight up facts are not covered by copyright. There's a landmark case about this: http://en.wikipedia.org/wiki/Feist_Publications_v._Rural_Telephone_Service http://en.wikipedia.org/wiki/Feist_Publications_v._Rural_Tel... There are some grey areas around the legality of scraping (mostly due to the added load on the servers), but for the most part it is legal. Google is one big giant scraping machine and it's scraping a lot more than non-copyrightable statistics.
- timcederman 18y ago
  If they derived the statistics themselves, then that indicates enough level of unique effort to make the data copyrighted. I discussed that linked Wikipedia article in the other thread about copyright law... I don't think you can use that as a counterargument for statistics.
- sethg 18y ago
  If the company hosting these stats is charging $25K per licensee, then either they're really good at bluffing or their lawyers have made sure that their data is protected in spite of Feist. For example, if they use some kind of clickwrap "you must consent to this license before you can see our statistics" page, then the company doing the scraping could be sued for contract violation, even if there's no copyright issue. So the site owner can't hit you for statutory copyright damages and has to settle for actual damages, i.e., the $25K of license fees that you're not paying, plus attorney's fees, plus whatever else their attorney can think to lather on. And your would-be partner hasn't even set up a corporate veil to protect his personal assets from this kind of exposure? That's...insane. And not in a good way.

rubentopo 18y ago

You should be equals, that's what i'd demand, i don't see a partnership where the partners are not equals...but that's my opinion.

edw519 18y ago

He says once he can afford it he will pay Run, don't walk, the other way! Ethics is the bedrock of any relationship or business. It is also binary; you have it or you don't. You don't. I once had a partner who disconnected his speedometer to increase his resale value. No big deal, huh? Next thing you know, he was "compromising" all over the place, with customers, vendors, and eventually, me. Don't make the same mistake. The simple fact that this discussion is here is evidence that you already know the answer.

webwright 18y ago

Hard to tell about the lion's share issue. If the site has traction or good IP, it MIGHT be fair. Probably not. The question to ask is, "how hard would it be to duplicate the effort"? The way to ask HIM is: "How much have you reduced my risk with your headstart?" and "If we take 4 years to build this and win, what percentage of the total effort/work/risk is your headstart?". If he's flailed for several years with limited success, that time is (unfortunately for him) not worth very much. If he wants blanket veto power over all decisions, I'd say bail if you aren't comfortable with it. The legal gray area is up to you-- YouTube certain was in gray territory. Given the risk, asking for a formalized corporation to throw up a little liability screen isn't a bad idea. Regardless of all this DO NOT PROCEED without an agreement in place. It doesn't have to be bulletproof. It can be as simple as an memo of understanding, but there is too much up in the air right now and it'd be easy to be 6-months in and be wondering, "wait, how much equity do I get?".

tptacek 18y ago

Psychology aside --- obviously you're talking yourself out of this gig: * It takes 1-2 days to set up an LLC. Without the LLC, you can't invoice and you can't buy insurance. Unless you get to manage the incorporation on day 1, don't sign on until they incorporate. * The risk with scraping isn't just that you'll get sued, but, more likely, that you're simply going to be locked out. If your business model depends on the data, sneaking it out seems like a bad strategy. * You have to make the call about whether you're ok with a subordinate role in the company. There's nothing inherently wrong with demanding more equity to compensate the work already done.

mattmaroon 18y ago
It's pretty trivial to determine if someone is scraping your stats too, just by purposefully putting in erroneous data. I've been told people have been caught this way and sued before.
tstegart 18y ago
Last I checked you didn't need to incorporate to invoice or buy insurance. Its good business from a personal liability standpoint, but its not required.

mattmaroon 18y ago

What data is he scraping? Unless he's doing streaming stat updates, it's a lot cheaper than that. And if he's doing live stat updates, it's a lot more expensive than that. Also, I'd tend to disbelieve that there's any gray area there at all, seems flat out illegal to me. Might want to talk to a lawyer yourself about that. I can recommend one who does a lot of work in the area if you need.

zalter 18y ago
He's not scraping live updates, sounds like he's crawling pages from reference sites and extracting the stats in that way. I would like to talk to a lawyer who has experience in these matters (my email is in my profile) How does draftmix obtain its stats? And if I may ask, how much does it cost?
- mattmaroon 18y ago
  I sent you an email.

netcan 18y ago

"He says once he can afford it he will pay" There's a few things that I never could believe: A woman when she weeps A merchant when he swears A thief who says he'll pay - A lawyer when he cares A snake when he is sleeping A drunkard when he prays I don't believe you go to heaven when you're good Everything goes to hell, anyway... (Everything Goes to Hell, Tom Waits, )

ninjaa 18y ago

As someone who has been screwed before: Make a buyout date and clause. Value the IP based on time, calculate your share and set an end date on your agreementpast which you can demand cash from him for your stake. This way he may have final say on all issues, but if you disagree with the general direction after a couple months you can deal him a punishment by demanding a cash out. It is vital to set said date and amount in writing at the outset.

sutro 18y ago

Your prospective partner's positions on both legality and equity seem reasonable to me. A startup is going to be full of risk regardless. I say take the leap of faith and go for it. Even if it all goes to hell, you'll learn a lot.

gojomo 18y ago

Lots of successful and respected startups have begun with questionable reuse of easy-to-collect data from others. Whether it really crosses a dangerous liability line, or is indicative of other ethical stretches, would require more details not in evidence here. You should do the research to assess the risk -- and that means sharing more specifics with people with relevant legal or business expertise. But it's also possible that if these are the kinds of things that especially worry you, this isn't the right startup for you.

gojomo 18y ago

Someone has to have final say -- practically, even if not formally. A perfect 50/50 partnership can deadlock or dally when any decision is better than more discussion. So it's not unreasonable for the person who created the idea and first working version to resist giving up the control they've had so far.

gojomo 18y ago

Right now he owns 100%, even if it's not incorporated. If you ask for 50%, at some level you're implying that [your value going forward] is equal to [his value going forward] plus [the value he's already created]. That might be insulting to him.