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Home > News > Learning from Snapchat

Learning from Snapchat

07 October 2014 |

Three fraternity brothers develop the idea for a social networking app during their summer holidays which, a few years later, is valued at billions of dollars. The co-founders fall out and litigation ensues.

In many ways, the dispute between Frank Reggie Brown and the co-founders of ephemeral messaging service, Snapchat, is a sorry Silicon Valley tale of betrayal and bitterness (think Winklevoss/Zuckerberg).

The short version of the story is as follows:

  • Brown alleged that he originated the disappearing message idea which sparked Snapchat’s success and shared this with dorm mate, Snapchat CEO Evan Spiegel;
  • Believing Browns concept to be a million dollar idea, Brown and Spiegel brought Snapchat CTO Bobby Murphy on board;
  • The parties entered into an explicit oral agreement as to their respective interests in the venture, each of them would have one third ownership and profit interests;
  • Clearly inspired by the film The Social Network, the parties move into a house together for the summer to complete development and launch the app in July 2011 under the name Picaboo;
  • Brown submitted a patent application for the technology, naming the three parties as co-inventors;
  • In August 2011, it appears Spiegel and Murphy were no longer interested in sharing Picaboo with Brown and took steps to shut him out, before changing the name to Snapchat;
  • Brown sues Spiegel and Murphy for breaching their agreement with him, breaching their fiduciary duties of care and loyalty towards him, and for unjust enrichment (it transpired that Brown had never actually been issued with his shares in a company which is now valued at $10 billion);
  • Snapchat accuses Brown of disclosing confidential information about the company to the media and file a restraining order against him. In the end, the parties struck a deal for an undisclosed sum, Spiegel commenting: “We acknowledge Reggies contribution to the creation of Snapchat and appreciate his work in getting the application off the ground.”

So what can we learn from Snapchat?

Get it in writing! This means no doubt if matters proceeded to trial, the judge would have had difficulty with the explicit oral agreement between Snapchats co-founders (he said/she said). While you may feel written agreements are unromantic and show distrust, the opposite is true: it is a responsible thing to do and shows good faith between everyone involved.

Any written agreement which expresses the parties intentions and which is signed by each party is better than no agreement at all however it is advisable that shareholders enter into a formal shareholders agreement. A shareholders agreement aims to regulate the relationship between shareholders (because company law does not have a great deal to say on the subject) and deals with matters such as decision-making and how shares should be valued, sold and/or transferred. You are not a shareholder unless you hold a share!

Simply put, housekeeping matters. All companies are required by law to maintain statutory registers or company books showing the current company directors and shareholders. Each shareholder should be given a certificate which shows the number of shares which they hold in the company (technically speaking, you are not really a shareholder unless your ownership of shares is reflected in the company books). Filing a patent application does not make you a shareholder.

We will never know what the courts would have awarded Brown as a co-inventor, even if he was not a shareholder (one third of $10 billion would have been an unusual result). In any case, it appears that the patent application never proceeded to grant (Google Patent Search results only show two Snapchat patents, both held by Spiegel and Murphy).

In the UK, you are not automatically a shareholder just because you are named as a co-inventor on a patent application. However you may be entitled to royalties on the basis that your agreement is required for the invention to be commercialised or, if you are an employee, because your contribution to the patent is of outstanding benefit and it is fair for you to be awarded compensation.

With tech start-ups in particular, it is vitally important to reach agreement on ownership at the earliest possible stage. People change it’s sad but true!

Snapchat is not the first, and it will not be the last, tale of sparring co-founders. We have acted in numerous disputes between shareholders and the stark reality is that nobody walks away from litigation or even a settlement without a sting (or a limp)!

For advice regarding commercial and shareholders agreements contact Ed Boal on 0117 906 9486.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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