Legal Question in Business Law in California

Re: Business Formation

This situation involves the intersection, and clash, of two or three legal principles.

The first of these principles is that ideas are basically unprotected legally, even though they may have value, and anyone who discloses an idea without a promise in exchange has lost any rights to the idea which could be enforced in court.

The second principle is that parties can form oral or written contracts regarding the disclosure and use of ideas, and if such a contract were made, it could be enforced. For example, X says to Y, "I have this great idea for a new business we could get into." Y responds, "OK, tell me your idea and I'll deal you in." This may form an enforceable contract, although arguably the promise to "deal you in" is too vague. Anything more concrete in the way of a promise would probably be enforced.

The third principle is that a partnership is formed whenever two or more people go into a for-profit business together with the intent to share profits in some way, whether or not there is an express agreement, written or oral. If there is a partnership, the partners owe fiduciary duties of fairness, candor and loyalty to each other and to the partnership. This might apply to the situation you describe.

If the idea person can claim either that a contract was formed regarding use of his idea, or that there is a partnership, the legal issue may become what is the relative value of the idea in comparison with what you've put in. The idea person might be entitled to 1%, 99%, or anything in between, depending among other things on the relative uniqueness and commercial value of the idea contributed. Of course, if there is no idea contract and no partnership, the idea guy gets 0%.

That's the way I see it, anyway.

Re: Business Formation

"Can I clear it up?" No.

But I could help you do so. Sounds like you've gotten yourself into a dispute over an undocumented oral agreement. I never allow clients to do business without proper agreements and documentation. Now you have to work out an agreement and document it properly after the fact. If you've put up the money and done the work, he doesn't have much claim on you. Remember, if he went to court he would have to 'prove' his claims over your denials and the available evidence. Feel free to contact me for the legal help you'll need in resolving this dispute, and getting the company properly set up to avoid problems in the future. Unless you've incorporated the company, you are personally liable for anything that happens to it.