Published on
February 17, 2023
The relationship between co-founders at a startup is often a long-term, close working relationship that benefits the company. However, like any other relationship, sometimes a co-founding partnership doesn’t work out, and one founder decides to leave. While this can be a traumatic experience, it can also be a positive step for the startup.
Perhaps the co-founder is no longer aligned with the company’s current direction, burned out, or wants to pursue other interests. If one of the founders’ hearts aren't fully invested, it's better to know sooner rather than later. Parting ways may be the best thing for the startup’s future. However, just like with any other breakup, there are some steps the company should take to minimize the disruption of the co-founder’s departure.
One of the most important things to keep in mind when handling a co-founder's departure is to do so professionally and respectfully. Here are some key considerations for startups to keep in mind when a founder decides to leave.
Firstly, it's essential to determine if the parting is amicable or if it's a termination. An amicable departure is generally easier to navigate than a termination, but both require planning. When dealing with stock issues created when a co-founder leaves, it's important to know that many founders have a vesting agreement and, if they’ve been with the company long enough, have significant stock. A vesting agreement is critical as it specifies when founders receive their stock and allows those who stay longer to collect more equity than founders who leave earlier. The company will retain any equity that’s not vested, and the departing founder may own a significant amount of stock. In those cases, the board or venture capital firm may offer to purchase some or all of the stock back.
A legal severance agreement is always a good idea to protect the company’s interests as well as those of the departing founder. The severance agreement can outline the compensation terms, including intellectual property (IP) assignments, severance payments (if applicable), and non-disclosure agreements. A final paycheck should be given to the departing co-founder, and they should be paid for any other benefits, like accumulated paid time off (PTO). Failure to do so can open the company up to a lawsuit.
Communication is essential in situations like this. Once you know a co-founder will be leaving your startup, you need to communicate that information to the employees, your investors, and your board of directors. Departures like this can be upsetting, so you should create a plan to carefully communicate this information, both to keep any turmoil to a minimum and build trust and confidence among your stakeholders.
In conclusion, having a co-founder leave can be a loss for a startup, but it's not necessarily a catastrophe. It's important to handle the severance agreement cleanly and hire a good attorney to help with this. Take the high road, end the business relationship using a respectful, legal, fair, and transparent process, and then work on continuing to build a successful startup. By handling a co-founder departure correctly, a startup can move forward and thrive.
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