Backstabbing and Betrayal: When Co-Founders Get Nasty
BY Erik Sherman
A big ownership dispute at Snapchat is a good reminder: Friends don't let friends start companies together without getting everything in writing.
The current story about hot tech start-up Snapchat is, if even partly accurate, a tale of woe and alleged back stabbing.
Snapchat is the Web wunderkind social network that lets people share pictures and posts with a limited lifespan. The twist is the impermanence of it: set the time up to 10 seconds and your message disappears. In theory, there's nothing left (absent a screen grab, of course) to haunt your future employment and love life. It's a big deal in Silicon Valley and has pulled in a reported $73 million in funding so far.
According to Jim Edward's report in Business Insider, there's a lawsuit alleging that two company co-founders conspired to cheat a third out of his share of the company. The one claiming to have been iced out by two Stanford frat brothers, Frank "Reggie" Brown IV, has filed a lawsuit for what he says should have been his share of the company, now valued at $800 million, because it was originally his idea.
So far, it sounds like the Winklevoss twins suing Facebook, except there's an additional arm-twist: Brown filed a critical patent application, in the name of all three, which could potentially change the conversation.
It's worth reading the original story to remember how horribly wrong things can go when you build a company with others. But that's for morbid curiosity. More importantly for entrepreneurs is asking whether you've properly taken care of business--literally--so that if problems develop, you have a smooth way of dealing with them. Here are four steps to make big problems less likely and, if they do happen, easier to resolve.
1. Trust but verify.
It's nice that you and your best friend from Camp Lull-a-Bye had a hot idea for a business that will turn your industry inside out and upside down. Neither of you would ever do anything to hurt the other, or so you both tell yourselves. But there is a river of stories, and bitter tears, that start this way. Maybe one of you (not you, of course) has turned from a caterpillar into a snake. Or, more likely, it could be that you will eventually have significant differences over what needs to be done and how to do it. Friendship, no matter how well-aged, is not enough. You need the proper structure to ensure that everyone is treated in an equitable way and that, should problems arise, you have a predetermined way to settle them.
2. Don't put off the paperwork.
You've got an idea you're chasing fast. There's no time to get distracted. Hold up, bucko, because you already have become distracted. Remember trust but verify? The way to do that is with contracts. The real and practical way to think about these documents is not like some legal shield, though they can be that, but as your best attempt to consider all possible outcomes and how you would settle them in a reasonable manner. Clearly contracts don't avoid all problems, but they are a good first start. Until you know how you're organizing ownership, responsibilities, and rewards, keep the actual work to a minimum. Get too deep in and negotiations could suddenly become far more contentious than they need be.
3. Remember the intellectual property.
This is something else that, to the degree you can anticipate it, should never be a second thought. Not only are there big tie-ins to your combined and individual interests, but do this part wrong, like leave the right person's name off the wrong document, and you could leave your work vulnerable to being successfully contested in court by competitors.
4. Everyone lawyers up.
You know you need to do this right, so you get one lawyer. That's a mistake because the lawyer, if hired for the company, has a duty to the corporation and its officers and owners. The more you potentially have competing interests, the more that everyone needs his or her own lawyer, not including the one for the company. Yes, it's more money, but be sure you've taken care of business, lest the business take care of you in the wrong way.