As a tech-driven lawyer representing entrepreneurs and startup companies, I deal with founders daily. The issue of separation of founders of a startup company manifests in various shades and textures and could result in a devastating blow to the company. Therefore, it is so important to handle the process in an efficient, smart, and amicable manner.
Founders’ separation could happen if the founders do not see eye to eye anymore, if their responsibilities are not clearly defined and borders are being crossed, or when a founder wishes to move on to the next big challenge. It may also occur if a founder is left out of the game or is stepped over. Often, founders disagree in hindsight, on their initial equity allocation because of changes in the business or in their individual roles, contributions, or responsibilities.
There are a few key points founders, especially in startup companies, should keep in mind when going through a separation. It is vital to deal with founders’ separation as soon as possible to ensure the smooth continuance of the company's operation and mitigate potential business loss.
My experience shows that for the founders, the dealing with the separation tends to be quite an emotional process, rather than a rational or even an economically efficient one.
The equity position among the founders and whether there is any reverse vesting or repurchase arrangement in place may effect the negotiation, and should be considered. Further, allowing a leaving founder to participate in future secondary sales may be viewed as a goodwill gesture that would facilitate the separation, while requiring her to sign a proxy (regarding her equity) may be viewed as an aggressive approach even if necessary. In this respect, recent case law demonstrates that courts typically scrutinize and frown upon unilateral actions taken against the leaving founder and which are aimed at (or even result in) minimizing or damaging her equity position (for example, by way of equity repurchase not at a fair market value, equity dilution or other unequal treatment in comparison to the remaining founders).
The title of the leaving founder and how she will be referred to by the company in the future is important (for example, on the website, in publications, etc.), as founders often prefer to be viewed as pivotal to the company and awarded with appropriate recognition even after they have left.
Employment law issues should also be considered. For example, whether a prior notice period is required, and if so, will the founder take a garden leave. In addition, broad covenants of non-compete and non-solicitation are often imposed on the leaving founder and should be carefully addressed to minimize their impact in terms of scope, duration, and her ability to engage in other activities. The leaving founder may find herself subject to rigorous non-disparagement obligations, which should typically encompass only the company itself without being overly broad.
Generally, it is advisable for all parties involved to keep the separation, its existence and terms, confidential and avoid bad press; but making the issue public (or at least part of it) may have its merits, if used wisely.
To sum up, as a trusted advisor handling a case of founders’ separation, one should strive to be attentive, creative, and sensitive, while at the same time professional and creative. It is vital at the outset to map the leaving founder’s needs and review all underlying documents, and it would not hurt to think outside of the box to ultimately reach an optimal resolution.
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