You and your startup’s co-founder spent months, if not years, building a company. You sacrificed everything to ensure the vision for the company came to life – sleepless nights, foregoing a social life, and time not spent with family. You told yourself these sacrifices would all be worth it and at least you and your co-founder were in it together. Together forever.
Now imagine the implications for your startup (and your sanity) if your co-founder decides to quit. Do you know how to handle a co-founder’s sudden exit? Specifically, what decisions and steps should you take to safeguard the value of the business?
Maintaining focus in the aftermath of a co-founder’s departure may not be easy, but it is essential. Here are five immediate courses of action you should take if your co-founder quits unexpectedly:
1. Have a Plan
2. Seek Legal Advice
What governing documents and agreements does your company have that are pertinent to the departing co-founder? A founder’s agreement should address valuation of shares, buyouts, and management and control rights. Equally importantly, you’ll want to take proactive steps to protect your company’s intellectual property. A technology assignment agreement will ensure that any intellectual property developed by a co-founder becomes an asset of the company. Consult a lawyer who can review your company governing documents and agreements, and make sure you’ve covered all legal issues following your co-founder’s departure.
3. NegotiateEquity ownership and transfer, valuation and intellectual property are some of the major areas you and your departing co-founder need to agree on. The last thing you want is someone without a vested interest in the startup’s success leaving with a good part of the equity and a say in the business. If your founder’s agreement doesn’t have a vesting schedule, if your co-founder is already fully vested, or if you don’t have an agreement, the company should come up with the funds to buy your co-founder out. An attorney can help you figure out the best way to recover the shares from the departing co-founder. Similarly, if your co-founder started working on the product before you formed the company, but didn’t sign a technology assignment agreement, any intellectual property assets that your co-founder created may be his or hers to keep. Is your co-founder willing to give up these assets and at what price? These are all issues for which you should seek the advice of an attorney.
4. Revisit Your Business Plan
A co-founder’s departure, whether planned or unexpected, will likely have a financial and strategic impact on the business. You should revisit your business plan to determine whether and how the business will continue without your co-founder.
5. Move Forward
The continued success of the business depends on your resilience and ability to bounce back from a co-founder’s exit. Furthermore, if your co-founder quit to start a competing business, there’s not much you can do except move quickly to get yourself to market.
A co-founder’s unexpected exit can have a significant impact on your startup company and its trajectory, but it doesn’t mean a death sentence for the business. Ideally, you’ll want to have a contingency plan and key legal documents in place to address this scenario. Part of that plan should include seeking out counsel and guidance from a skilled business attorney.