Comment by tatsuke95 | Hacker News Reader

Comment by tatsuke95 | Hacker News Reader

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>"Sweat equity, most likely, for which they were rewarded with an ownership stake"

Sweat equity doesn't occur in a vacuum; something is created from that effort. If they wrote code and that code earns money, they are entitled to a portion of those earnings. That's inarguable.

It is my understanding that the original "idea" (I have trouble calling it a company) didn't take hold. If nothing is created and the company never amounts to anything...what are you getting an "ownership stake" in?

Had Zuckerberg and a friend opened a candy store on the Harvard campus in 2002, and it had failed, that friend is not entitled to anything Zuck does with Facebook because he put in labour on the candy store. Now, if Zuck was operating Facebook under the same legal entity as the candy store in which his partner had equity, said partner might have a claim, though it would be hard to establish if the partner produced no work for the new idea. That said, if this is analogous to the situation in the article, what on earth are these guys doing getting bogged down with convoluted equity agreements when they should be working on the product?

I'll repeat: if the other co-founders provided something tangible --be it an idea, code, money, whatever-- to the new project, they deserve "their share". If they can't point to something tangible, they deserve nothing.

> if Zuck was operating Facebook under the same legal entity as the candy store in which his partner had equity, said partner might have a claim, though it would be hard to establish if the partner produced no work for the new idea

Now, IANAL, but to my knowledge this is just patently false and represents a complete mischaracterization of the purpose and legal implications of a corporation.

In this case, Facebook would be owned by the flower shop entity, not Zuck. Regardless of what work his partner put in, Facebook is still owned by the flower shop entity, and each has ownership stakes as contractually or legally established. Neither Zuckerberg nor his partner would have any personal claim to Facebook, only to their equity in the owning entity. Zuck would not suddenly get more equity in the entity because of the work he did.

This is one of the most basic functions of equity and the reason for investing time or dollars in exchange for equity - so that your wealth increases disproportionately from the work of others. If ownership was determined by judges proportioning by sweat equity, those who left Facebook after 2 years and now have $10M+ would be in trouble.

There are numerous legal complications if Zuckerberg claimed that Facebook was NOT under the flower shop entity, however given your statement that he explicitly placed it under the flower shop, the case is quite simple. Zuck would not have been able to extract Facebook without buying out his partner.

I am way over my head in trying to get into this part, but depending on state law, I understand there are de facto partnership agreements in the absence of a written one (generally an equal split) and sometimes ways of getting rid of "dead weight" partnerships. These are not things you want to happen.

This sort of situation occurs all the time in small businesses and often leads to their demise. You are doing a great disservice to anyone who takes your advice.

>"Now, IANAL, but to my knowledge this is just patently false and represents a complete mischaracterization of the purpose and legal implications of a corporation."

So, these guys filed the paperwork and were running a corporation, rather than just a business partnership (you realize there's a difference)? Before they even had a business model? Again, that's ridiculous and a complete waste of resources at an early stage start up.

>"This sort of situation occurs all the time in small businesses and often leads to their demise."

Really? Do you have source for this assertion?

>"You are doing a great disservice to anyone who takes your advice."

Oh, spare me. You realize that these guys essentially followed what you recommend doing, and if it wasn't for the co-operation from minority shareholders would have been stuck with dead weight partners owning part of a business in which they did not participate. Establishing an equity arrangement before they knew what they hell was going on in the business was the cause of this problem. If there was no formal agreement, no partnership and in the end no business, none of this would have happened. The two founders would have moved from Dropcard to Ecquire, and the old co-founders would have no claim on the new product. Just as a reasonable person would expect.

But by all means, have people heed your advice, and form corporations before there's a business model, so that the shareholders have a claim on anything you do in the future. That's spectacular advice.

I am not suggesting people form corporations as a first step, only that they come to a general consensus on equity and commitment as early as possible. Personally, I've had long discussions with potential cofounders who suggest exactly what you say, and when pushed they offer 2% because they are the great idea and execution genius who can pull funding. All those people failed to find competent partners or raise money.

Had these founders not had an agreement, corporation or not, the founders who left would continue to have a very substantive claim on the business as part of the partnership.

You can read here about what happened in one case when this went wrong:

http://www.milwaukee-business-lawyer.com/what-happens-when-o...

Courts hold that a partner who leaves a business lacking an agreement does not lose rights to their portion of the business. If it can be proven that there is absolutely no relationship between the old and new product, perhaps it could be shown that a new partnership was created. This is not a lawsuit you want to deal with.

That is why pretty much anyone giving competent advice instructs partners to decide how they should split equity and on a vesting agreement ASAP. That doesn't mean these agreements can't be changed as commitments and roles evolve, but the existence of an agreement makes those conversations necessary. Without one, fundamental disagreements often lurk.

Over and out.

>"Courts hold that a partner who leaves a business lacking an agreement does not lose rights to their portion of the business."

So what is the big worry?

That is exactly what I have said throughout this thread: you don't need to have a formal agreement to protect your stake in the company. The courts will protect you from being screwed out of something you're entitled to. Which is why I disagree that it is so vital to get an agreement in writing as soon as possible, before you even know what the business is. That's what happened in the original article, and that's what my hangup is, and that's what I've been commenting on.

Yes, I agree, you don't want to be in a lawsuit, but having a formal agreement does not prevent a lawsuit if you have an equity dispute, nor will it supersede reason or rationale in a judgement if you end up in court.

>"Had these founders not had an agreement, corporation or not, the founders who left would continue to have a very substantive claim on the business as part of the partnership."

As they should! If they produced work or contributed money, and the business grew and provided income they have a claim on that income.

>"That is why pretty much anyone giving competent advice instructs partners to decide how they should split equity and on a vesting agreement ASAP."

Well, that's nice. It's also why there are 2 person shops running around the Valley, with someone titled "CEO" (but no board), calling themselves "businesses", taking in investment money but not producing a nickel worth of value, ever: priorities are often out of whack.

Agree to disagree, I guess. I'm not here to offer anyone advice. Nor do I care that while I'm working on solving problems and investing in others that are doing the same, competitors are in-fighting about their equity.

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