This is a long story, so bare with me please!
I work for a web development & design agency as a web developer. On my personal time, I conceptualized a product a couple years ago and developed a big part of it. I hired my coworker as a freelancer to work on the logo and designs. She no longer could work on the product on her free time due to a few reasons, but she wanted to continue work on it and said she would love to during work hours. In April 2012, I asked my bosses how much they would charge me if I hired them for designs. They said that if it was something small, they would do it for free and if it's something big, they would charge a minimal rate (non-client rate). They told me to send whatever I have so far over and they would get back to me. As soon as I did, they fell in love with the idea and the designs I had so far and proposed doing the rest of the designs and development for free while still treating it like a real client (among other things) and in exchange, they would become partners with 40%. They were also to buy the $15K domain name and launch the site within 3 months. I hired a lawyer to draft up the operating agreements and sent it to them last November. They repeatedly told me that they reviewed the agreement and that everything looks good and they'll get it signed "next week". In the meantime, the product kept getting placed on the backburner since we had to work on "billable clients". As frustrating and stressful as this was, I had been extremely understanding and patient in this but it has dragged on so long. We would start and stop work on the project which only prolonged it and also raised the hours spent on it. What's worse: I didn't get the designs until July of this year. I even nixed out many features so we could eliminate time spent under work hours (as requested by my bosses). I repeatedly told them about my frustrations and there were constant excuses of needing to work on billable clients, and promises of when we'll get started back on the project and launch it. In the meantime, I spent a lot of my personal time on it. Luckily, about 99% of the product is built out (minus the nixed out features I wanted built - although I do plan to continue building on my personal time). I had my lawyer send my partners the agreement again and after a couple months, they finally took action and sent back their edits - all of which I don't agree with (one of them is that they want to change the Chief Executive Member to one of them!). They also now want to "recoup their investment" of what they are saying is $200K -- the amount of hours spent at the client rate even though it was never treated as a client but instead as "unbillable". Also, there was never any mention of having to pay back. I said no to this. I had my lawyer respond saying I don't agree to that and a few other things. My partners and I are now going to have a meeting on Monday to discuss the agreement.
Needless to say, I have been very unhappy with them as partners. They have continuously failed to execute on their end of the agreement. They are super busy with their own company (which I'm an employee of), and have countless other things like their second baby on the way. So they just don't have the time for it, as proven and don't want to allocate the proper resources to it since they need to keep their company doors open by working on billable products. They had informed me that we'll resume work on it in two weeks, but I won't agree to this until an agreement is signed (I am very well aware of all the mistakes I made during this process - mainly allowing any work on it/ bringing my code in without anything signed first). The product is nowhere in the hands that I want it to be in and my ideal situation is to "buy them out"- which they told me previously that they are not willing to do. They are very well aware of the fact that this is a great idea and can hopefully one day make a lot of money, which is why they are not open to a buy out. But as the founder of this, it's not where I want it to be. Words cannot express my frustrations and stress about this. I wanted this launched last year, wanted it to be many phases down the road rather than a beta that still has not been launched, and they especially don't deserve the 40% with the way this has been treated. I can get a much bigger and more committed investment for that chunk of ownership. They have not followed through and continue not to follow through on their end of things. There have been countless red flags. This is my baby and I just need it in different and better hands. I don't know if I should get the agreement signed and then hopefully buy them out, or not sign the agreement and get an investment now. But I'm not sure if investors get turned off / scared by this sort of thing. I have saved a lot of money and feel that I can pay them what is deserved, should the status change from partner to client. However, my idea of what the payment should be vs theirs ($200K - which is absolutely ridiculous for so many reasons) is different. I would probably pay them $50K, which I saved up to buy a condo but am now placing on hold due to this mess. But if I received an investment, I could raise that number and pay them more.
It's really difficult because I'm in a situation where my bosses are also my partners, and the company they own has spent many hours building our product.
Never get in business with people you want to buy out. Do not sign any agreement to give away such big chunk of your business unless you are 100% convinced they're the best people to work with. From your long description, it doesn't seem you believe they are trustworthy nor that they deliver the work you expect. You seem to say they go back on their words.
By signing this agreement you will put yourself in an even more difficult situation because you will not have enough shares to give to any other serious investors while retaining majority stakes and decision power.
Schedule a call to go through all the possible scenarios, the different options, how to talk to the agency that has done this work for you and plan your next steps.
Interesting conundrum my friend. Lots to comment on. First I can almost certainly guarantee that if you were to go into business with these "partners" it will not be a success for most of the reasons you're already stated.
I can also say from experience as the investor and as one who's had more than one portfolio company have a "founder" agreement issue, that an unclear legal structure is one that most investors will shy away from. So one way or another that needs to be clean if you go out to raise.
Next, I probably
I can tell by the length of the question and the way you framed things that you already know the answer... however, here's my2cents.
1) Yes, legal agreements are VERY important when taking money from any investor. Doing it wrong could mean that you won't be able to actually succeed if there's provisions in there that prohibit certain actions (ex: raising more money, issuing equity, making certain decisions).
2) If you're not happy and don't seem to trust those partners, then don't work with them. It's that simple. I would never suggest you build a business relationship that hinges on the "legals" being the foundation of trust. If you don't trust them, no amount of legal clauses etc is worth it. Save yourself the pain and trouble and move on, find someone else, don't bother.
Hope that helps.