How Do You Protect Yourself From Your Ex-Cofounder Stealing Your Ideas?
“I was meeting with your ex-partners,” Mike, a VC we were pitching to, said to me. “Their slide deck seemed the exact same as yours. I was waiting for the inverted triangle then, sure enough, there it was.”
Mike was telling me about meeting with “Jim” and “John”. Jim and John were the two original cofounders of my company. Right before we were about to get funded, they quit and stole the company’s IP right down to my slide deck.
Jim and John thought I would just give up. But I persevered and found better cofounders to replace them with.
I started raising money again once I had my new cofounders in place. At the same time Jim and John were raising money too.
It was scary because it felt like only one of us was going to funding, and there was no guarantee that justice would prevail.
I’ll never forget Gill asking me, right before he gave us a term sheet, “I was meeting with Jim from Scale Ventures, and he said he met with a really good Analog team. Was that you?”
Fortunately it was us. And I told Gill about the meeting. We were too early for Jim because he preferred investing in B rounds.
Then Gill said, “I’m ready to give you a term sheet.”
If Jim had met with my ex cofounders, then I don’t think Gill would have invested in us. It was that close.
The biggest chance of someone stealing your ideas will come from within your company.
Over 50% of founder relationships end with one or more cofounders not working out. You need to protect yourself just in case things don’t work out.
Here are eleven conventional and maybe unconventional ideas to protect yourself:
A. Have all your co-founders (and Future Employees) Sign a Proprietary Information And Inventions Agreement.
The PIIA is a standard agreement that most employees sign when they join a new company. Have everyone, including yourself, sign one once they become part of the company.
The PIIA is an insurance policy for you (and a reminder to your ex-employees) that ex-employees are legally bound to not steal information. You can find example PIIA’s on line.
B. Obey the Nine-Month Rule.
Or maybe we should call it the three-month rule. All relationships go through phases. And your cofounder relationships will go through phases too.
You will go through the honeymoon phase for the first three months or so. Don’t launch anything until you are through this phase.
Months three through nine are where the conflicts arise and motivation wanes for some. So…
C. Talk Through the Key Issues Early.
Make sure you and your cofounders are in basic agreement about the strategy, recruiting, and funding needs of the company. This was the mistake I made with Jim and John.
My cofounders, especially Jim, had a different set of beliefs regarding how we should raise money. And Jim had a different thought process on the strategic direction we should pursue.
I assumed these disagreements weren’t that major, and that Jim and John would just follow my lead. They didn’t, and that leads to the next key point…
D. Don’t assume conflicts will resolve themselves.
Many won’t. In fact, the conflicts are likely to get worse. Talk things out between you and your co-founders and see if you can work through the issue(s).
I don’t think talking would have kept Jim and John from leaving, but at least I would have forced myself to be honest about what was going on.
E. Don’t try and stop your cofounder from quitting.
This may seem harsh, but you are better off letting your cofounder leave.
Why? Your cofounder is likely to quit again. It’s painful to lose a key person so early, but you can survive it. And…
F. Remind your cofounder who is quitting they are privy to proprietary information.
They will not like it, but it’s a not so subtle reminder that you are watching. I told John this and he hung up the phone on me. Again, that’s why it’s important to have your cofounders and employees sign a PIAA. And that’s why it’s important to…
G. Make sure your equity agreements have stock vesting over a four year period, preferably with a one-year cliff.
Let’s say you have two cofounders and each of you have 33% ownership of the company. Six months in it’s clear one of your cofounders isn’t working out.
Have a vesting agreement for the stock, so you haven’t just given 33% of the company to someone who has just left. The one year cliff means that no one vests any stock (including you) until 12 months have passed.
Now you haven’t given up any equity in your company when your cofounder leaves. And…
H. Get rid of your bad apples.
Sometimes things don’t work out. It’s normal to have let a cofounder go.
The other employees will be relieved that you took action. Just handle yourself with class and grace when you do. And…
I. Move fast.
Okay, a cofounder quits and starts his own company with your stolen IP. Short term, there’s nothing you can do except move quickly to get yourself to market.
In other words, you should be doing what you are already doing. One more thing…
J. Don’t bother suing because it’s a waste of your time.
It pisses you off that there is someone out there who stole your IP and is attempting to make money with it.
I’ve been there, but suing is just a waste of energy and money because the other side typically has no money and no assets to go after. The best thing you can do is kick their ass in the market place. However…
K. Sue them if they succeed and you don’t.
You have the PIIA agreement and a lot of evidence. And there is a lot more money at stake.
I know what you’re thinking: This sounds like a lot of extra work and possibly money.
Yes it is some extra work. You can find many of the agreements online. The one that I’ve seen burn people time after time is equity:
Equity (including your equity) needs to vest over time!
I am not a lawyer (even though I’ve been accused of being a rather good jailhouse lawyer), but I strongly suggest that you have some agreement stating that the new cofounder or employee’s equity will vest over a four-period. The first 25% will vest after one year, and the remainder will vest on a monthly basis over the next three years. And…
Bonus tip: Have an experienced startup lawyer draw up the agreements.
Seriously. Get a lawyer to help you! I know you may not have a lot of money, but co-founder agreements are one thing you shouldn’t scrimp on.
So get your cofounder agreements done right! You will not regret it.
It doesn’t need to be complicated. Just remember that cofounders leave companies. And you need to be protected just in case one of your cofounder’s leaves.
For more, read: www.brettjfox.com/what-ar...