292: Founder Betrayal Stories, The McDonald’s Mistake
How a Legal Loophole and a Handshake Deal Erased the Real Founders of McDonald’s
When does serendipity become stealing? The line between a lucky break and intellectual theft can be razor-thin, especially in the world of ideas, innovation, and entrepreneurship.
This is how it usually begins. You have an idea and want to test it by starting a company. Along the way, you may encounter individuals who present themselves as servant leaders, advisers, or technocrats. In your trusting nature, you welcome them, offering generous compensation, showing kindness, and even granting second chances. However, negative situations can arise as a result of this naivety. This pattern has persisted long before the startup culture became popular. In this space, you’ll find real stories reflecting on common pitfalls that are often overlooked simply because you tend to trust your team. Remember, lessons will continue to repeat until they are learned. There is always someone available to help, someone who has faced similar situations. Please don’t hesitate to reach out and ask for assistance. Let’s begin with the famous story of McDonald’s.
When Richard and Maurice McDonald revolutionized food service in the late 1940s, they had no idea they were creating a business template that would become a global icon, and a founders’ beware cautionary tale. What started as an operational masterpiece turned into one of the most painful founder erasures in history, not because they failed, but because they underestimated what it means to protect a legacy in business.
This is not just a story of innovation. It's a story of legal oversight, power imbalance, and betrayal.
The Innovation That Built McDonald’s
The McDonald brothers’ “Speedee Service System” was a revelation. Inspired by Henry Ford’s assembly line, they streamlined food preparation into a factory-like process: precise, fast, and standardized. They eliminated waitstaff, reduced the menu, and obsessed over timing. Their San Bernardino location wasn’t just popular—it was studied by businesspeople nationwide.
Enter Ray Kroc, a struggling traveling milkshake machine salesman who saw their restaurant and immediately recognized the potential to franchise it at scale. In 1954, he persuaded the brothers to let him lead the expansion effort. A contract was signed, but it left critical terms vague and gave Kroc just enough leverage to begin shaping the future on his terms.
The Legal Weaknesses That Enabled the Betrayal
Kroc didn’t have majority control initially. But over time, through a series of company restructurings and a newly formed corporation (Franchise Realty Corp., which he controlled), he built a separate financial and legal structure that shifted power away from the brothers.
The original agreement limited Kroc to a small percentage of each franchise’s earnings. He wanted more. So he began using Franchise Realty Corp. to buy land and lease it to franchisees, effectively controlling the revenue pipeline while bypassing the McDonald’s. This maneuver—a classic control-through-real-estate strategy—created a parallel business funnel that wasn’t governed by his deal with the brothers.
The brothers retained ownership of the original location and brand name, but not for long.
In 1961, Kroc offered a buyout: $2.7 million in cash, which the brothers agreed to. That deal also included a verbal handshake promise—a 1% royalty in perpetuity, which would have amounted to over $300 million by now.
But the royalty clause was never put into writing. It was legally unenforceable.
And perhaps the cruelest twist: as part of the sale, the brothers relinquished the rights to the “McDonald’s” name, effectively erasing their own identity from their creation. Kroc then opened a competing McDonald’s directly across from their original restaurant. With more capital and brand power, he drove them out of business. The original McDonald’s location was later demolished. Nothing of it remains—not even a plaque.
The Legal Takeaways: How It Happened
No enforceable equity structure: The McDonald brothers retained no shares, options, or contingent upside from future growth after the buyout.
Handshake agreements are legally worthless: The 1% royalty was never honored, and the courts could not enforce a verbal promise.
Trademark and naming rights were unprotected: Their personal and business identity was sold with the brand, and the lack of a carve-out meant they lost even the right to use their own name.
The power of controlling infrastructure: Kroc’s use of a separate real estate entity allowed him to dominate the franchise operation even without owning all the brand rights at first.
Narrative control matters: Legally, Kroc’s name was on the contracts that mattered. Publicly, he became the story’s protagonist.
Lessons For Modern Founders
This situation is more than just a historical anecdote; it reflects a common pattern in startups every year, particularly when there's a power imbalance between visionary creators and growth-focused operators or investors.
Startups typically begin with trust and a shared vision. However, the shift from informal alignment to a formal structure, especially when bringing in investors, is often where conflicts arise. A crooked lawyer with poor ethics can find legal loopholes to enable these betrayals. This happens in real life, so it’s essential to have a personal legal counsel review all documents to ensure your protection. Vague language can be one of the pitfalls that go unnoticed until negative consequences arise.
Many founders often fail to formalize their agreements, which can lead to problems down the line.
Co-founder agreements
Equity splits with vesting schedules
IP ownership and brand rights
Contingent royalties or long-term upside
Narrative ownership (public credits, founding story, PR language)
The McDonald brothers believed that goodwill would persist even once money was involved. However, the business memory tends to be short-lived. Without proper documentation and influence, they became overlooked. Ironically, today McDonald's is one of the largest fast-food restaurant chains in the world, boasting over 40,000 locations internationally as of 2023. In terms of revenue, McDonald’s reported a global total of $25.49 billion for 2023, with a market capitalization projected to reach $197 billion in 2024. The founders' names have become synonymous with the brand, ensuring that no one can forget them!
Case Study Reflections: What Could They Have Done Differently?
If this were happening today, a startup-savvy legal team might have done the following:
Locked in a founders’ equity pool with protection against future dilution
Formalized the royalty as a binding revenue-sharing agreement, enforceable under contract law
Protected trademark usage or at least carved out regional rights for the original brand
Written into the sale a perpetual “founder” credit clause for use in all PR and investor material
Retained board or advisory roles to preserve some influence over company decisions or legacy
In a world of NDAs and cap tables, the McDonald brothers would have missed the financial upside of their innovation, but their legacy endures. Every time a founder learns from their story and applies those lessons, it honors their contribution to entrepreneurship. Embrace their lessons—they might just be the key to your success. Check out the movie, The Founder, on Netflix to get some more inside baseball.