Although TextWorks hasn't even launched yet, Alex and Miles have already found themselves on the verge of a legal battle and quickly learned one of the most important lessons in a venture like this: be careful who you trust.
When the company's preliminary business plan was created for the Boston College Venture Capitalist competition, A&M had another partner (who will be referred to as Jay). From the onset, Jay continuously frustrated the guys because of his "lack of time contribution and low quality work." Soon after the competition, he left the trio to take a job elsewhere.
After securing a lawyer, A&M sent Jay a release for safety precautions, stating that he was no longer part of the company and would have no stake "because of his lack of involvement." Much to their surprise, Jay asserted he deserved 1/3 equity since he helped construct the original business plan, but would settle for 5%. Since the guys had done so much work on the business after Jay left, they felt his demand was absurd. Instead, they offered him $3,000 and no equity. Still, Jay was largely unrelenting and demanded at least $5,000 with 1% equity.
The guys were absolutely shocked - Jay had been a good friend and no equity agreements had ever been established. Even more, they did not believe Jay had contributed core ideas to add value to the business concept before jumping ship.
So, Miles and Alex stood strong and assured Jay he could either accept the $3,000 or expect a formal legal battle. After many negotiations, Jay, Alex, and Miles were able to settle on giving Jay $4,000 in return for signing a release stating that he could not claim any equity now or at any point in the future, and is unable to disclose any company information or compete with Textworks.
Although the ordeal was upsetting, the guys are satisfied with their decision as they are now secure that Jay will be unable to jump in and claim anything in the event the business is a success down the road.
Advice from the guys: Don't trust anyone. It is crucial to take every precaution you can possibly think of -- even the wrong wording of a single sentence in an email can be used against you.
Tuesday, October 30, 2007
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4 comments:
I would have let him have his 5% equity. He was there in the beginning. In any case paying out 4000 now hurts a lot more. If this guy gets 5% down the road it may be unjust, but atleast everyone will be pulling in cashflows. I'm worried that Jay will take the most cash from this operation when its all said and done.
The DotComs are cutthroat and no matter how good an idea or execution is it should be hedged against. TextWorks has all its eggs in one basket and I'm worried about them. I'll be rooting for you guys though. Start pulling in some revenues ASAP and more importantly get some subscribers!
I'm also worried that there hasn't been sufficient marketing. Boston College and Facebook alone will not launch TextWorks to the next level or even level 1 for that matter. Sorry for being such a realist! Good Luck!
Um, so what ever transpired with the October 23 meeting? I'm curious. There was no follow up . . . .
Concerning "Jay", well, I think TextWorks got off rather nicely because Jay did contribute some of the rudimentary groundwork. $4K is an economical price to pay for a valuable lesson, one of many to follow, I'm sure. Such is the path of business - paved (or not) with potholes and obstacles galore.
Anyway, did TextWorks have him sign a nondisclosure agreement? Is there anything to prevent him from competing? What about copyrighting your idea? Is that relevant?
And, yeah, what about additional revenue, as Anonymous mentioned? I was wondering about web advertisers. I don't pretend to understand the complexities of the business, but I am interested!
Glad to know it was sorted out. We had a similar experience but didn't have to go so far.
A classmate from the MBA program saw what we were up to and offered to assist by getting more soca music onto the website.
We had an agreement that he would not receive any pay until the company was generating more revenue and he secured and set number of videos. He agreed.
A few months later, he begins demanding $2000 per month and claims that we had an agreement to pay him (no dollar figure though). Once we stated what our agreement was, he said he was seeking council and did speak to a lawyer.
We spoke to one as well - suffice it to say that because he was never there from day one and only brought some videos while having an agreement, we just split ways with no money changing hands.
People tend to think that you are making tons of money because they see progress or publicity and then their true colors come out.
Well...I'm "Jay". In my defense, I was there at the beginning and thought I was entitled to 5% equity. My partners, Miles and Alex, felt differently.
I think I'm going to have to agree with the last posting from "anonymous" and say that I think my $4000 agreement hurt the company greatly.
Laura Kenkel wrote, saying that wording and agreements are extremely important...DEFINITELY. In our case we never had an equity agreement, it complicated everything.
This really almost was a legal battle. I'm glad we came to an agreement, but still feel like I should have walked away with more (sorry guys...I do). I was there at the onset and resent any suggestion of inferior work quality and ideas.
Everything aside, I wish Miles and Alex success in this venture and am glad to have been a part of the team.
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