Startup crisis. Dorm room style.

This is a joke compared to drinko's story, but I've really gotten myself into a bit of a bind lately. I'm hoping you guys might help me. I'll start with the background story...

One of my roommates is a film student, and he is taking a class in the film school on Internet media this semester. The class is brand new and has never been offered before. They basically spent the entire semester going over web 2.0 buzzwords (blog, wiki, mash-ups, news feed, beta, social bookmarking, social network, RSS, etc). They were also assigned to come up with a "cool idea for a website" for their final grade, and they are actually expected to develop this site.

My roommate's group quickly found they had no idea where to start. He came to me with some questions, and at first I was glad to help him. I started by walking him through the steps involved in purchasing the domain name and hosting plan. Then he started asking more questions, and I eventually had to tell him that I didn't have time to help him all the time and that the class was just ridiculous.

A week later he tells me that he wants to pay me to work on his project. All I would have to do was make a working prototype. At the time it didn’t sound like a bad idea, and it sounded like fun. I thought I could make some money and help a friend out, and I would be able to copy and paste code from other things I have worked on to cover the majority of the project. So I told him I would charge $20/hr, and I agreed to a cap of $400 since it was coming out of his pocket.

Then a few days later, he comes into my room with a stack of papers. It turns out to be a 17-page contract that his dad, who happens to be a lawyer, wrote up. The contract would give my roommate full ownership of the code, ip, license, etc, and all for only $20/hr with a cap of $400. It also states that I would not be a partner or have any equity. I scan it over and quickly decide that there is no way I am going to sign it (and I still haven’t). Not to mention that I was just scared of a 17-page contract and feeling a little outgunned when his dad is a lawyer.

So a week later, he doesn’t seem to care that I didn’t sign his dad’s contract, and he pays me for the first couple of things he needed to meet in-class deadlines.

Now, the project is looking really good, and I’m starting to think that their idea combined with my awesomeness might actually have potential. What should I do?

I feel like I am too easy to take advantage of, and I wish I knew the rules on the legal side of things much better.