Subcontractors Almost Killed a Multi-Million Dollar Deal
I recently consulted with a company that was going through an acquisition, a multi-million dollar deal that was essentially a buyout by a private equity firm. As we delved into the details of the purchase, one of their questions was about proof of ownership of the company's intellectual property (IP). As we worked with their team, the owners of the company were excited and happily shared their proof of ownership. However, the excitement dropped when the acquisition team asked for proof of IP ownership from all the contractors they had hired from the very beginning of the company. The team balked and said they would have to look everything up and get it to them. I knew something bad was happening.
After our meeting, the startup called an emergency meeting with the founding leadership and myself. They asked, "What do they mean proof of ownership with past contractors?"
I told them that it wasn't a big deal; we just needed to give them the contracts from all of their past contractors. Quick and easy, right?
They looked at me and simply said, "What contracts?"
I sat there stunned. I was sitting in a company's headquarters with $50 million in revenue, the five original founders, and they were telling me they never used a single contract with their 1099 contractors (developers, marketing, design, etc.).
This was Going to be a Problem
One of the founders asked if we even remembered who all worked for them and if the acquiring firm would know. I reminded them that the firm had all of the financial records at this point and had clearly seen all of the contractor payments. They knew who they were and were simply wanting to match every payment to each contract. But those contracts did not exist. The biggest issue is that in many states, the contractor jointly owns the IP to the source code or assets they created for the company. This would kill the deal.
For weeks, we had to look through all the contract payments and find the people who worked on their startup 10+ years ago. We then had to send out contracts with an IP assignment clause and try to get them to sign it. There were only 15 people we needed to contract, and for the most part, it went smoothly.
There is Always One...
But of course, there was one holdout. He was skeptical of signing a contract, and it was not in the company's best interest to explain the full situation. We started by saying that the company was being audited (which was true) and needed to put some of these measures in place. The contractor was unsure and had a lawyer look into it, which then led to the company lawyers getting involved. This led to weeks of back-and-forth discussions.
At this point, I assume the lawyer picked up on what was really going on. This all needed to get wrapped up, and with the worker refusing to sign any new agreements on past work, we were dead in the water.
Finally, we had a breakthrough. The CEO of the company simply asked what it would take to sign the new contract. They would do a new work-made-for-hire agreement, and part of the deal is that he would sign his past work IP rights over to the company.
What was the ask? $20,000.
To the founders, this felt like a hostage situation, and they felt the worker was screwing them over. Everyone was pissed off, but there wasn't a lot of time or room for negotiation.
In the end, that developer made $20,000, 4 years after a $9,000 work-made-for-hire agreement was completed. That was the better option than losing the acquisition. And to keep the books clean, the CEO paid them out of pocket instead of through the company finances. This was also disclosed to the private equity firm and delayed the deal by three months while they did their own due diligence.
How You Hire Contractors Matters
We can debate the ethics of the contractor requesting additional payment, and I’m sure there will be people on both sides of the argument. But that really misses the overall point. Founders need to make sure they aren’t cutting corners for speed when it comes to hiring workers.
You must onboard workers with a contract, make sure you both sign it, and be sure to include an IP assignment clause in the agreement. You also need to keep track of your records, make them easy to follow, and always be focused on setting your company up for future success.
This is one of the reasons I founded Qurbie.com. This has always felt like a hassle that should be fully automated. Qurbie helps anyone pay, manage, and onboard contractors easily without subscription-based pricing. Qurbie also provides work-made-for-hire contract templates (with IP assignment!) and makes sure the workers sign them every time.
In the end, it’s not about what software or platform you use. It’s about making sure you do the little things right. Every. Single. Time. Set your future company up for success by taking hiring (W2 or 1099 Workers) seriously and putting the time into knowing what needs to be done.