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Say there is a small company (C1) that gives me 0.1% equity for building their website since they did not want to pay cash.

Now the founders of C1 stop working on C1 , create a new company C2 and use my website for C2. They sell my website for $1 from C1 to C2 to officially indicate that the website belongs to C2.

Since I still hold equity for C1, have I been shortchanged in not being able to realize any true gains from my work on building the website or am I protected from this scenario somehow?

EDIT 1: The equity is 0.1% of the entire company, not just from the revenue generated by the website (clarification in response to some comments and answers)

EDIT 2: I appreciate everyone's concern, but this is a hypothetical scenario I thought of to know what to do (and not to do) in such a situation

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    Answers below are correct that this is fraudulent, but the cost to do something about it is more than any compensation you would receive so you are stuck. I would write it off and not sell your work for equity in the future. Dec 10, 2021 at 15:08
  • Maybe I don't understand what you mean by selling for equity, but does this sale of one piece of software really diminish the value of C1 significantly?
    – Barmar
    Dec 10, 2021 at 15:56
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    Let this be a lesson to you. Every web developer goes trough it at least once. You insist on half the pay before you lift a finger and you don't release any work without full pay.
    – Neil Meyer
    Dec 10, 2021 at 16:50
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    You can always lay a Digital Rights claim with the hosting provider that host the website.
    – Neil Meyer
    Dec 10, 2021 at 16:51
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    @Barmar That is a good point. It's why I say in my answer and comment: "the major part of your loss is not from the website itself being undervalued at $1, but from other intellectual property...walking out the door... The real value of C1 had to be in other things, if OP was willing to accept 0.1% of the company as fair compensation."
    – nanoman
    Dec 11, 2021 at 16:24

7 Answers 7

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It is possible that you could successfully sue the founders of C1 for failing in their fiduciary duty to C1's shareholders (you).

Presumably the major part of your loss is not from the website itself being undervalued at $1, but from other intellectual property (know-how, trade secrets, etc., that make the business worth something) walking out the door with the founders (to be used by C2) without compensation to C1.

You'd need to show that C1 as a company has a claim on valuable IP (presumably much more valuable than just your website, if the website was worth only 0.1% of the company) that the founders are trying to steal. If this isn't the case, then your equity may indeed be worthless.

This aspect is important to look at in advance when considering investing in a company (or accepting equity as payment): You want the company to clearly own something substantial, such via employment contract terms that assign IP to the company. Otherwise key employees can just leave and take the business's value with them (the company can't own people).

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    And the directors of C1 never went to market to find a buyer for more than $1, presumably the person asking the question would have paid $2 for it. Without knowing anything about this site I probably would have paid $5
    – quid
    Dec 10, 2021 at 2:34
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    @quid Yes, but C1 getting $5 for the website would only leave OP with half a cent. The real value of C1 had to be in other things, if OP was willing to accept 0.1% of the company as fair compensation.
    – nanoman
    Dec 10, 2021 at 3:15
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    No, OP wouldn’t have half a cent, OP could have paid the $1 or $2 (with a 100% overbid) and would then have 100% ownership of the website and the half a cent attributable to their shares in C1. The problem here is the assets were apparently sold without seeking competitive bids (OP could have been a bidder) which, depending on the jurisdiction, is likely some sort of fraud.
    – quid
    Dec 10, 2021 at 4:16
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    I'm with quid on this. This is fraud. Dec 10, 2021 at 14:20
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    @rahs Yes, if C1 sold its assets for much less than fair value (especially to a related party where a conflict of interest exists), that would violate the duty to shareholders.
    – nanoman
    Dec 14, 2021 at 19:13
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My guess is they've been doing that "equity" deal with many of their vendors. So the C1 to C2 trick looks an awful lot like an attempt to defraud the creditors. I think courts may be likely to disregard the transition and award you 0.1% equity in C2, (or even 0.3% since the penalty for fraud is treble damages)... though of course you'd have to go to court to fight for it.

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    This court battle will probably not be worth it for a 0,1% share. Try to track down other share holders left hanging with worthless C1 shares. Class action time! Dec 10, 2021 at 10:48
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Yeah, you'd pretty much be out of luck in that scenario, but you'd have a 0.1% claim on the $1 and any other assets C1 had at the time. Working for equity is a pretty risky play.

The only protection I could see is if their contract with you includes specific language that gave you some guarantees.

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    This is missing a very fundamental fact. It would be illegal for C1 to sell to C2 at a loss like this. The board and CEO have fiduciary duties to the shareholders and OP would have legal recourse. (Ok, in practice, OP might still be in a bind, but it's important to call this out)
    – Jeffrey
    Dec 10, 2021 at 14:42
  • Maybe if it is was a publicly traded company, but I question whether this would be illegal for a privately owned company unless it was done to evade taxes.
    – JohnFx
    Dec 11, 2021 at 0:21
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    @johnfx might depend on local law but where I am it would definitely be illegal to this both for tax reasons and due to the fiduciary duty mentioned above.
    – DRF
    Dec 11, 2021 at 12:14
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They sell my website for $1 from C1 to C2 to officially indicate that the website belongs to C2.

It all depends on your contract. C1 may have sold it the website, but the contract they signed with you may say it wasn't transferable. So C2 can't do anything with it.

Of course if they come back to you for upgrades, they should be treated as a potential new client looking for a website. The status requires them to negotiate a new deal for the IP, and support.

To know your options, talk to your lawyer. Ask them to explain what options you have with the deal you signed.

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Where is your equity?

If you've only asked for equity in the website, then you're screwed. And you probably planned this badly too. How do you have equity in just a website?

Your equity should have been as shares in company C1. And since your work constitutes a major part of the company's assets and abilities, by the sound of it, you should have been looking at something a lot higher - at least a double-digit percentage of the company. That's assuming this is a website for online sales, not just a few simple pages about the company.

Shares in the company doesn't mean they can't still screw you by selling the whole company (or its assets) to C2 at less than market value. This could be something you could challenge legally though.

If you lawyer up, the only people who win are the lawyers

Regardless of the rights or wrongs, one inevitable part of any civil law case is that it's going to cost you money. If the amount is small enough, your jurisdiction may have a special court for that. (The UK has a Small Claims Court system designed to settle disputes over smaller amounts with less cost to both sides.) If you're looking for anything more substantial though, you're in a hole. The first suggestion is to stop digging any more; and the second suggestion is to use this as a "hole recognition" learning experience. If a company can't afford you, they don't get your time. You might do deals with friends, and take a stake in the company as a result, but someone you don't know personally? Nope out of there straight away.

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Obtaining legal advice (not necessarily launching a legal battle) would be a sensible next step, although be careful not to spend too much on this.

Where you stand will very much depend upon the contractual details (whether explicit in a verbal/written contract or implied by law) of your website work and the 'sale' for equity in company C1.

It may also depend upon jurisdiction and its protection of minority shareholders' interests re the sale of valuable assets from C1 to C2.

The contractual details of the sale from C1 to C2 may also be relevant.

It could also depend on the rules (e.g. articles of association) of company C1.

I respectfully suggest that this not the best forum for this question.

Good luck.

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Something that the other answers have missed is the question of whether company C1 "owns" the website code.

It is possible that when you wrote the contract in which you got the equity, you only gave company C1 a licence to use the website code, not actually ownership of it with a transfer of copyright.

In general such a contract is not transferable from C1 to C2. If C2 used the website they would be breaking copyright law since you would still own the code and you only gave C1 permission to use it. In such a case you could sue C2 directly, which might be more worthwhile since that is where the main investors are now putting their money.

Obviously for this to be the case you would have had to write the contract as a non-transferable licence. Hopefully you can think of this next time!

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