Fraudulent Founder Claims

A former friend is claiming to be a co-founder of my company who had nothing to do with my business or idea. I just told him about the high-level idea once and that was all. Are there things I can do?

Unfortunately, I have come to expect that people will crawl out of the woodwork like cockroaches to feast on an entrepreneur’s success. False claims of others being long-forgotten founders or contributing the key ideas are a pestilence to real innovators. Indeed, I have heard founders advised to reserve money for future litigation claims of ownership once they are successful as just an expected cost of doing business.

Of course, some founder disputes are legitimate and make for great dramas, like the saga of Facebook and Tyler and Cameron Winklevoss in The Social Network, or the less publicized dispute over the founding of Snapchat. Legitimate contributions are erased and the resulting sense of betrayal fuels highly emotional litigation.

Any claim of joint ownership of the intellectual capital or ownership of the company can chill a company’s ability to fundraise and conduct normal business. Investors do not want to invest in litigation claims and want clean title to the assets of the company. Plus, claims of contested ownership are highly emotional distractions for management. Often, this calculated damage is exactly the point. Many making unjustified claims calculate that an accused company will capitulate and offer something to be able to resume business as normal. The legal system therefore facilitates a classic shakedown racket dressed up in the garb of righteousness.

How can you protect yourself? I always counsel pragmatic (but not clinical) paranoia. Most people are honest and decent, yet good deeds are often punished, so you must be prudent.

Even at the inception stage, make sure you have clear agreements with all your advisors, investors, consultants, and others with whom you discuss your ideas in any depth if they are not well known investors or professionals with solid reputations. Each agreement should have an intellectual property assignment provision and confidentiality clause. If you cannot get an agreement from a potential advisor or even friend, do not share any specific ideas that could harm you later. And do not solicit or accept ideas from that person.

Your agreements should also address clearly what will happen when someone is terminated as an advisor, consultant, or employee of the company. How much stock does the person keep? What voting control and economics are retained? What ongoing obligations does the person have toward previously created intellectual property? I extensively cover agreements with founders, employees, and consultants in the classes. Follow best practices unless you want to play Russian Roulette with your company’s future.

If faced with a claim, have it thoroughly investigated, ideally by counsel appointed by the board or investors. Remember that truth is only weakly correlated with outcomes in judicial processes, so all documents, communications, and records must be viewed and analyzed as opposing counsel will distort them.

When you raise funds, you must disclose any claims of contaminated or joint ownership as part of the fundraising process. You should also disclose your conviction of the baselessness of the claims, of course. Investors will often have their counsel speak with investigating counsel to understand the findings, but must in some form satisfy themselves of the correctness of your position.

Finally, in some cases you may need the dispute cleared up definitively. You may therefore be forced to take offensive legal action by seeking a judgment against the party making the claim, often through something called a declaratory relief action. You might also seek a restraining order in some situations, as out of control claims are often associated with out of control behavior. You must seek individualized legal advice here.

I was not part of your one conversation with this former friend, but it is hard to believe that anything could have been shared at a high level sufficient to give him an honest claim of ownership in part of your company. Because the claim is existential, both to your company’s future and your reputation, you will likely need to make an investment in resolving the claim once and for all.

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