The Legal Considerations of Building a Startup at a Hackathon

Posted by Jason Moyse

What fun to ride the wave of hackathon glory and over the course of a weekend find that you really hit a creative groundswell. Even though you may not have known your entire team prior to the Friday night session, you're working so well and the alchemy of your collective talents is clearly magical. After either the fourth or fifth beer, ninth pizza slice, and third “Dudes—we’re crushing this,” fist bump, you all decide to turn your weekend hackathon idea into a real business.

Awesomesauce.

Five months in and you’re getting a little traction but far fewer fist bumps. It’s not that you all hate each other’s guts (just some of you do), but each person from that initial weekend has a different vision for the business and product and you’re all convinced you’re right.

So you go to see an advisor or lawyer and she learns that you never actually set up a business, wrote a shareholder’s agreement, or even took a napkin from Starbucks and scribbled “There are five us and we each own 20% of the company.”

Now what?

Ideally, you'd hack a time machine and go back to that first weekend. Absent that and before you get any further into the weeds, you can sit down and map out a deal that provides that special something that eludes most start-ups and early stage relationships: certainty.

Consider a Founders’ Collaboration Agreement, which would address and protect the business concept and technology you are chewing on, which, if developed, would result in revenue streams.

Um… maybe you should form a company? Incorporating is not that hard and it saves a lot of headache and heartache. The company is a separate legal person (your collective baby!) and each of the founders can assign the rights/title/interest in the technology to the company rather than bickering later for ownership.

But wait:

"I’m a rockstar ninja coder artist with mad mad skillz. Jimmie over there just has in-depth industry knowledge, an extensive network and great personality. All he knows how to do is find customers and get them to buy. How could that be as valuable as what I do? Why should he have the same deal as me?"

In combination with the Founder’s Collaboration Agreement and your incorporation, by setting out a Shareholder’s Agreement, you can most certainly (try to) agree on the split among founders. Maybe one of you has other obligations (like a day job) and can only put in so many hours per week while the others have made this “their full-time gig." You can divide shares based on contribution of time or skill or whatever you choose to be the X variable. Perhaps just a percentage per founder, but not necessarily equal.

You’re working pretty hard on this project, so why not do it like the pro that you are? These steps are not difficult.

And, as is the case with any marriage, you have the option to plan for your divorce upfront. Spelling out the vesting schedule so that if one of the collaborator’s relationship with the company terminates for any reason, the—depending how long they lasted (one year, two years), a portion of their shares can be returned to the company and they can keep a fraction so they don’t walk away empty handed for their talent and effort.

You might hit it big and attract love from third parties who want to buy your awesomesauce company or technology. The above-mentioned agreements can easily be structured so that the founders can require the lone hold out to sell their shares to the others to allow a sale.

But what if you (honestly) try and just can’t agree on who gets what or how you would divide up interests? Then you may have learned a valuable business lesson which doubles as a wonderful tip when dating. If you can’t get along in the early days, then chances are it wasn’t meant to be. Get out early before it gets awkward(er) and emotions override good sense.

Another flavor of hackathon legal considerations involves enterprise-sponsored events. Typically, hackathons are about solving technology or process problems and almost always collaborative, participant-driven and—for good or for ill—casual in spirit. But sponsored events may have more to consider beyond the great experience, cool T-shirts and prizes. Are the prizes really the prizes if the sponsor stands to profit from the output?

As Scott Popma and Scott Allen (the Great Scotts!) query in their 2013 Wired article, “when a third-party, unpaid hackathon participant creates a lucrative new feature for a corporation, who actually owns it?”

It’s possible that the hackathon organizer had you sign their agreement. For example, if you are in the GIANTCOMPANY INC. hackathon, you can expect that they might like to use your submission in their product development. Even if they don’t claim ownership of the material generated at the hackathon (which they might), they may require you to at least waive your rights to sue them if something in their products turns out to be similar or even identical to the material you created. Are you sure you're going to be okay with that moving forward? What if it ends up being worth a metric crap ton of awesomesauce?

And honestly—is it really for you, the individual, to agree to defend, indemnify and hold harmless GIANTCOMPANY INC. from and against any and all claims...arising ...out of intellectual property rights? The answer should be a pretty simple “nope." No one rationally enters a hackathon with the idea that they might have to protect the sponsor from claims against it by other parties. That’s crazysauce.

You might enter a hackathon because its fun and challenging—but don’t forget that you are bringing considerable talent to the table. Protect your gift, and more important, remember that what you produce is valuable in the right context.

This article was coauthored by Aron Solomon.

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Jason Moyse

Jason Moyse

Jason has managed external counsel across Canada and conducted litigation in house as well as in private practice with a primary emphasis on financed lease transactions, asset/debt recovery and insolvency matters. On the solicitor side, he has drafted, reviewed and negotiated commercial agreements related to I.T. hardware and software for rental, lease, sales, marketing and licensing.... more




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