Company Co-Founder Disputes and How to Avoid Them

when-cofounders-fight-lerner-openforum-338Co-founder disputes are not uncommon. Founders often start companies on a shoestring and they fail to establish a solid legal foundation in doing so. They do not establish the proper legal framework of who owns what part of the particular company, including intellectual property, before forging full steam ahead.

Recently, these types of disputes have played out on a very grand scale. In 2013, Frank Brown filed a lawsuit against the founders of Snapchat claiming that the two founders, Evan Spiegel and Bobby Murphy, stole his idea for the application that automatically deletes messages after they are sent. Brown claims that he came up with the idea, shook hands with Spiegel in agreement, and would serve as the Chief Marketing Officer of the startup. Brown claims to have come up with the original name for the app (“Picaboo”), the ghost logo that Snapchat still uses, and claims to have drafted a patent application for the technology that was used. However, at the end of the summer of 2011 Brown had a falling out with the other two co-founders. The two co-founders shut Brown out of the joint partnership by changing passwords for computer services, which prevented Brown from doing any further work. The co-founders then cut off all communication with Brown and refused to speak with him. The dispute was eventually settled for an undisclosed sum of money more than a year later—but many insiders claim that it was for far less than one-third of the company’s $10 billion valuation.

The company Square is having its own cofounder dispute woes. In January 2014, Robert Morley, a professor of engineering at the University of Washington, filed a lawsuit against Square cofounders Jack Dorsey and Jim McKelvey. Square is a small device that fits into iPhones and other devices that allows for small businesses to process credit card payments. The dispute began in 2010 when Square filed a lawsuit against Morley’s company, alleging that McKelvey was not included on a patent for the card reader device. Now, Morley is alleging that he solely invented the card reader and therefore should be acknowledged as a cofounder of the company. Square is valued at approximately $5 billion, so there is a lot at stake.

Both of these costly and high-profile disputes could have been resolved if there had been proper documentation of the parties’ agreements. Agreements at the inception of a company should discuss the ownership of intellectual property, the ownership of the company, and any oral agreements between the owners. But those are just a fraction of the agreements that should be worked out at the beginning of a business. Some additional information that should be spelled out in a written agreement are: the legal structure of the business (partnership, corporation, limited liability company, etc.), what the control or vote percentage is for each owner of the company, how much each owner will be contributing in terms of capital or property, how much ownership percentage each owner will have, and what duties or roles each owner will have in the company, among many others. A solid legal foundation setting forth agreements on these issues as well as a myriad of others can prevent lengthy and costly litigation disputes for companies down the road.

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