Contracts

Developer Contract for Prototype Help!

Bob Graham Engineering and Software

June 4th, 2014

Hi Everyone,

I've spent the last 6 months brainstorming my next project. I've finally found one that has an unfair advantage with scalable growth and few competitors. It's something I believe in and am passionate about.

I'm just about to build my MVP. Im trying to retain as much equity as I can until I go to get angel funding. I don't want to give the developer a large amount of equity at this point if I can avoid it, unless I know the developer will be committed to the long term of the project and a true partner. Since all the programmers I know are working on other projects or have other jobs, I've decided to self fund the prototype and bring a programmer on as a salary plus a bit of equity later, once we have some funding and traction. 

So, as a result, I need to pay a developer to help build me an MVP prototype that I can use to pitch. I luckily have enough to self-fund the prototype phase for a couple attempts (getting user feedback, then tweaking etc) to get it ready for pitching. 

What I am concerned about is how to protect the idea. Does anyone have experience with contracts etc for this sort of thing? It seems to me the developer is the one making it, it would be easy for them to just take it etc. 

I am interested in your thoughts, if you have any resources or suggestions for this type of contract. 
Actually, Im interested in hearing your candid thoughts on my whole approach and line of thinking in general since I haven't started yet. 

Thank you. 

Corey Butler Entrepreneur, Consultant, & Web/Data Engineer

June 4th, 2014

As a founder and developer, this concern surfaces a lot in my world.

NDA's and IP can protect you to a degree, but it's usually tough to obtain enough IP protection pre-prototype. The bottom line is if you don't trust the developer, then don't use them. Look for firms instead. A firm is in the business of consulting/contracting. They're not going to pivot into your business... they're already entrenched in their own venture and are prepared to protect their client's IP. 

Here comes Candid...

I'm a serial tech cofounder with recognized work in web/software development. I'm also a consultant. That combo has attracted more non-tech cofounders than I can count. Seriously, I've heard this story hundreds of times. I've taken the approach many VC firms do... show me an NDA/non-compete, and I'll politely yet immediately show you the door. It's a red flag that says "I don't trust you, but I want you to build the core of my business for me while I hedge my own risk". You have to invest something of value in the developer if you want them to invest value in you. Sometimes that investment is trust and a non-stressful working relationship.

If the idea can be created by a developer without you, then it probably isn't as strong of an idea as you think. Someone has to be the subject matter expert and visionary that can build the market/brand/messaging/etc. If the developer had that, they wouldn't talk to you... they'd already be busy making it. 

That said, I have no idea how strong your idea is and I'm not commenting directly about it. Instead, I encourage you to review the barriers of entry someone would have if they tried to do the same thing you're doing. Try to think of the non-tech hurdles... all the stuff you've figured out over the last 6 months.

I hope that helps.

Marcus Matos Software Development & Information Technology Professional

June 4th, 2014

1.) Don't work with a developer you don't trust.
2.) Don't work with a developer you don't trust.
3.) Success is about execution, not the idea.
4.) Most good developers will not sign an NDA just to hear about your idea/project. It's risky, and what if they'd already heard the idea before or were already working on a similar project, etc etc etc?
5.) Don't work with a developer you don't trust.

Rob G

June 4th, 2014

a Work Made for Hire Agreement is not enough, it must include an explicit assignment of IP provision. 

1. don't work with people you don't trust
2. don't rely on an NDA with people you don't trust.
3. be very cautious about disclosing important details of your project without an NDA in place.
4. if a developer (or any other key potential partner/employee/ contractor, etc.) refuses to sign, find the door on your own. 
An NDA should be mutual, in my book, and sets the tone for future discussions.   that tone is you take your IP and your business seriously and they should too.  VCs certainly have their reasons for not signing them and therein lies the subject for another discussion, but investors will also be the first to want to be sure you are diligent in how you protect your IP and how you approach conducting business.  Imagine you are in final due diligence with a company that wants to acquire you and your investors are looking at a nice multiple and the acquirer learns you didn't property protect the IP they are spending big $$ for. Your investors will be not be happy. NDAs and patents are not cure-alls.  they have their place.  The won't prevent competition and they won't prevent people from running with your IP.  they are merely a legal basis to go to court and spend money on attorneys. BUT if you find yourself in that position you and your attorneys and your investors will all be kicking you if you did not put proper protections in place early on. my $0.000002 worth. 

Rachel Ratliff Voki Mobile

June 4th, 2014

I was a corporate lawyer for 15 years, and I'm now in the middle of developing a mobile app as well. It is difficult in the early stages to find a technical person (or any other co-founder type) who buys into your vision enough to take stock rather than cash compensation AND devote the necessary time and energy you think your idea deserves. I gave up fairly quickly on finding that person (at least for now) and engaged a couple of local app design/dev companies to work on my idea. It's a lot more expensive that outsourcing ex-US, but since I didn't have any previous expertise, I didn't feel that i could manage people from afar.  So, I agree with your strategy, but that's because I'm doing the same thing :)

On your question of protecting your idea/intellectual property - From a legal perspective, this is easy to do. If you work with a company of any size, they should have the necessary contractual provisions (confidentiality, non-use, assignment of all IP) in their form contracts which they will send to you to seal the deal. If you're working with someone small who doesn't have such a contract, I'm happy to send you a form of independent contractor agreement which will take include provisions for all of those issues. 

Then there is the question of whether or not to patent, which provides an extra layer of protection if you do have a novel idea. If it's truly novel and fabulous and people are going to kick themselves that they didn't think of it first (doesn't happen very often, really), then a contract won't be enough protection to keep some people from stealing your idea. Practically speaking, they may decide to breach the contract and take the risk that you a) won't find out, or b) will, but don't have the money to take it to court. If you really think this is your case, then you should check with a patent lawyer as to whether it is a patentable idea, and how much it will cost to do so. Patents aren't cheap. Then if you file a patent, your ownership of the idea is clear. You may still have to take legal action (ie spend money) to enforce your rights, but you won't have the more difficult task of  proving that someone breached a confidentiality clause. 

Jim Rand

June 5th, 2014

I can vouch for Nate's suggestion with proto.io, great tool for making a fully clickable / functional prototype, and fairly quick to learn... something like flinto is even easier, but not as capable... take a screen recording /  video of your clickable prototype and include it in your powerpoint presentations, it gets the idea across very well -- i had some trouble describing my idea before doing that, but it became abundantly clear to people when i did

I also second the notion that you don't need to worry much about idea theft. 1) Your developer will be far more likely to stay with you than to steal your idea, if he likes it  2) It will be other people that copy you, after you release, and you can't do much about it but stay ahead/execute better 

Regarding holding onto your equity, read up on repurchase agreements and vesting. You can always offer equity, subject to repurchase by the company -- you'll just have to give them a good enough repurchase price and enough equity to incentivize them... it enables you to offer a decent chunk of equity without worrying about giving up "too much value" if your company does really well and the value jumps... (you could always have the company repurchase them if the value skyrockets -- though if your developer was a big reason for the success, you'd probably let him keep the equity as a "thanks" -- but at least the power is in your hands, which gives you comfort that you're not giving up too much if things go really well... and obviously if things don't go well, then you're essentially getting free work, which is why you have to offer a fair upside to compensate) 

I'm also offering warrants to my devs, allowing them to purchase more shares at a discount -- if they put some cash in, that's more skin in the game which is much better for alignment... e.g. if you decide that your company's shares are worth $0.20 for the sake of valuing their hours, allow them to buy an additional x shares at $0.10, and y shares for $0.15. I also set up a cliff, so no options/shares are issued before 1000 hours of work are done, which they're more than happy with. 

I can show you a spreadsheet I used to calculate all that stuff if you want -- I also shared it with them, so that it's totally transparent how I came up with "you earn x shares per hour of work"... just be honest with them -- you deserve a larger share because it's your idea and you're the only one who's put money in so far -- they'll understand that, especially if you give them the option to buy in for more.  As for the legal agreements, you might set things up  one of two ways (i'm using both)... a really good person who you're super comfortable with, and want as a "cofounder", you'd probably issue shares up front, at the same time you issue shares to yourself... these shares are subject to repurchase (ultimately a vesting schedule)... the second way of setting things up, more for "contractors" you might use options, with a cliff at 500 or 1000 hours, to make sure they get you something useful before you go to the effort of formalizing anything on their behalf -- it commits them psychologically as well. Keep in mind that essentially everybody is a contractor to the company legally, even you... so you will all sign contractor agreements, and should define duties therein

Happy to shoot the shit more, been a while! 


John Anderson

June 4th, 2014

Check out http://www.ti-browser.com.  It's designed specifically to help you get a mobile UI prototype up and running quickly, using 100% native UI components.  i.e., it'll look EXACTLY like the final app will look, but without the time and expense of using a developer.  This can then be used to pitch the idea to investors, but they will be able to see a living breathing prototype right in front of them.

Tim Maliyil

June 4th, 2014

Hi Bob,

It's important that you have the right paperwork in place before hiring anyone to write any code for you.  Normally an employment/contractor agreement where it specifically has a "work for hire" clause should suffice, and you would want the forum for any dispute to be someplace favorable to you.

Of course this is tough to enforce if you're hiring anyone in a foreign country such as Russia, India or China.  You should take the time to consult an attorney to give you such an agreement that meets your needs.  This stuff is fairly boilerplate, and it shouldn't cost you much to get a good agreement.

While we're talking about it, I wouldn't get too caught up on the risk of someone taking your product to compete with you.  Your company is much more than the application you build.  The executing of strategy, the people and sales process are important, and someone simply stealing your source code probably wouldn't be able to compete with you when it comes to execution. 

Good luck!
Tim

Tim Parks VP of Growth at UpCounsel, Inc.

June 5th, 2014

Lots of great comments here that I think can be boiled down into a few things.  

Find somebody you trust to work with and make sure you are protecting yourself and your idea as much as you can within reason.  The law will only go so far as folks on the thread have mentioned, but either way if you're serious about building a VC backed business, engaging with an attorney at the start is usually far cheaper and more efficient than waiting until something becomes a problem.

If you're interested in finding some affordable Silicon Valley attorneys, direct message me and I'll be happy to intro you.

Michael Barnathan

June 4th, 2014

You want an explicit IP assignment clause, but the notion that the IP will never be assigned to you without one isn't true in the USA - the Copyright Act of 1976 sets default "work for hire" provisions which assign certain rights to you on IP created while performing employment duties.

A few caveats about this:

First, it's a US law and you'll have a hard time enforcing it if you use a developer outside.

The rights assigned by the law are usually a smaller set of rights than most contracts will specify. Most contracts will have a laundry list of different types of rights that are being assigned, and will also specify waiver of "moral rights".

Scope out in writing exactly what you're paying the developer to do, so there's no ambiguity if things head south.

You need to pay the developer. Actually, if you don't include some form of "consideration" for the developer in your contact, the whole agreement is unenforceable, IP clause or not. So for example, if you grant only cliffed stock options to the developer and he or she leaves before the cliff period and walks away with nothing, the developer can make a compelling argument for the rights (you granted options, but they had no value). This is even worse with phantom stock. The enforceability of a contract is much clearer when something with tangible value is exchanged.

The definition of "employee" is kind of sloppy, and what you have are probably independent contractors. I don't think this makes much of a difference for the law, though it has differences for taxation.

There are standard confidentiality and IP assignment contract templates floating around on the Internet - find one and modify it to your needs.

Anonymous

June 5th, 2014

I just want to add that a mockup is not the same as a prototype. And this confusion I think is why the term "minimum viable product" (MVP) exists. A prototype would approach, if not be an MVP. This requires real dedication from someone who can execute the technology required. Such work is critically important, and I think it is not rational to expect to get quality results from an engineer if you're not willing to provide equity for this. An idea is worthless without the ability to execute it. The ability to execute is worth as much as the idea and should be respected and compensated accordingly.