Early Startup Employee Dispute
In March, John starts thinking of starting a new company. Shortly after, Mike, who is potentially interested to join John’s company as one of the first employees, starts helping out casually, and as an IT guy, takes on the setup of the hardware. In June, the company is incorporated; but soon after, Mike, considering the situation too risky, decides not to join John’s company and takes another full-time job. He then sends an invoice to John for his work, with a clearly inflated number of hours. Having at heart to be fair, John reviews the hours, and even though the work is subpar, he writes a contract for about two thirds of the hours originally claimed by Mike (John is in a position to prove that the hours were inflated thanks for computer logs and emails), and agrees to the rate of $75/hour that Mike asked (above market rate for the tasks at hand); he sends the contract to Mike. Mike refuses to sign claiming that he never agreed to a consultancy agreement, and demands to be paid under the table, claiming that this was the original agreement (there was, of course, no such agreement in place). He threatens to sue the company if he doesn’t receive payment for the invoice he originally issued (at the rate he determined himself).
What is the best path forward for John? What should John do knowing that paying a large lump sum “under the table” is likely to negatively impact his ability to take on investors?