Questions about partnership and IP agreements for a small startup

Question

I have signed on to work on a project a good friend of mine has started to create an application for the iPhone with, if needed (we hope), matching applications for Mac and Windows desktops. Without getting into particulars, the project is to create a subscription-based, client-server pair that displays interactive materials for a variety of markets.

My friend had a solid idea of what he wanted to do, but as is typical of a project still on the ground floor, after a fit of brainstorming a straightforward iPhone project turned into a broader partnership of ideas. It’s all well and good, we’re both looking forward to working on this together, and the client’s functional spec is well on its way to being completed this week. But we both want to be sure that everyone (him, myself, and the project) has their interests protected in such a way that everyone is compensated accordingly for their work while still remaining flexible enough that we can all just get things done.

There is no money other than development tools we already have on hand, so my compensation is currently based on performance of the product. Essentially, I’m to get a percentage of the net sales, and we’re trying to come up with a fair portion based on project duties. We have sorted out who is doing what, but we were also wondering about non-compete clauses and the like.

For all intents an purposes, I am creating all of the clients wholly. The feature set, client-server communication specs, and new market strategies are being done jointly. He is taking on client and content creation as well as all of the business administrative duties (though I get unfettered access to verify various metrics related to the application’s market performance).

Questions came up, particularly, over ownership and rights to intellectual property. We think all of the code should belong to the project itself so that if anything happens to either one of us, then there is no question what is supposed to happen with all of it. But we, particularly myself, would like to be able to reuse portions of the code for other projects, if need be, without competing with the project as well. We are defining what would be considered a competitive project relative to the v1.0 feature set, but I would hate to have to re-invent the wheel if something else relevent comes up.

Has anyone been in a scenario such as this? How did you handle IP, non-compete vs independent development, etc? Is there a typical agreement framework for something like this? Is a lawyer really necessary here (because neither of us has the cash)?

Answer 1

First of all, don't rely on random people on the internet to give you good legal advice. Have a competent lawyer work out your agreement once you and your friend settle on the general principles.

Having said that, here's some advice from a random guy on the internet:

If you have some code you are bringing into the project, clearly describe it and categorize it as a contribution you are bringing into the project but reserve the right to re-use.

Any code developed during the project should belong to the project. Period. The project can grant you the right to use it in other endeavors on a case-by-case basis. Trying to define up-front that some stuff really isn't your friend's, but just yours, will start things off on the wrong foot.

Agree to an ownership percentage based on your current feelings about who will contribute how much. If you both expect to work about the same hours, make it 50/50. Trying to value one person's work vs. the other's again will get things off on the wrong foot. Anything OTHER than 50/50 have a really good reason that both people understand and agree to.

Always keep in mind it's better to have half a watermelon than a whole grape. Make sure both of your legal interests are protected, but don't spend too much energy debating the small stuff. Focus on the exciting project you are about to undertake.

Answer 2

There are lawyers that will work for equity, and not charge you until your raise a certain amount of money (or possibly reach specific revenue goals).

Regarding IP ownership, you should consider that you'll have a lot more trouble selling the company if the company doesn't have rights to its own technology. The buyer will want to own all the technology, and not be so thrilled if you're going to have a duplicate of what they're buying.

Answer 3

Using a proper qualified lawyer is the best option. However, if you do not think that is either possible or necessary...

Document who has contributed what code, images, etc.. In the first instance copyright belongs to the author. The author can then licence the code to whoever needs to use it.

If you are not using a lawyer to create a formal business entity, simply make a written agreement between the two of you agreeing to licence your respective code to the current joint venture. Do not try to make your agreement "lawyery" because using legal terms you do not understand can completely change the effect of the agreement from what you intend. Instead concentrate on making the agreement as clear and unambiguous as possible (which a good lawyer would try to do anyway).

Once there is some money coming in, you will need to look at setting up a "proper" legal vehicle for your business (if only for tax purposes) and at that time your existing documentation and agreements can be re-written into a formal legal document.