One of the most frequent early-stage blunders made by startup founders is neglecting to finalise the legal business paperwork including forming a founder agreement – early enough. The dirty little secret of company founders is that if you have a partner, you’re bound to disagree.
Experts estimate that 62 percent of all firms fail due to founder disagreements, which makes sense when you think about it. Conflict is unavoidable when you put two or more ambitious individuals from different backgrounds in the same place and under severe strain. After all, the average married couple fights 321 times every year. The first step in preventing co-founder disagreements is to draught a strong founder agreement.
A good co-founder agreement specifies essential company choices such as employment conditions, stock shares, intellectual property ownership, and more.
When times are bad – as they inevitably are for even the most successful start-up – the founder agreement serves as the bond that enables the founders to persevere and survive. Without a founding agreement, every unfavourable experience becomes grist for rage, and a legal fight is the last thing a start-up should spend their limited funds on while attempting to launch a business.
Nonetheless, many businesses are started without the consent of a founder. In reality, it occurs on a regular basis. However, if things go wrong and a breakup is unavoidable, the founder’s agreement is the instrument that sets the conditions of the separation and simplifies things. Without the assent of the founders, the issue is likely to get complicated. Here are some crucial actions to take while saying farewell to a business founder without hating each other.
1. Recognize that the stock is most likely worthless.
Tensions are high after pouring your heart and soul into a dream and witnessing the relationship crumble into a tangle of disappointments, broken emotions, and resentment. If the founders take a step back and look at the big picture, they’ll probably discover that the stock is worth nothing or near to nothing. This may relieve a lot of the burden on the situation and allow the dissolution effort to be focused on other items, such as intellectual property.
2. Suggestion: Negotiate as though you have an agreement.
This is a really effective method that needs the founders to remind themselves that they were previously completely in accord. If they decided to form a firm, they may agree to define a very basic founder’s agreement even if they did not previously have one. Based on such agreement, the dissolution may be arranged.
Begin by drafting a basic founder’s agreement that is tailored to your specific scenario. It doesn’t have to be flawless; it simply needs to be acceptable to both founders so that it may be utilised as the breakup formula.
Who can say? You may uncover the solutions to your company challenges while putting together the founder’s agreement, and you may even be able to continue expanding the firm and prevent the separation. Stranger occurrences have occurred.
3. Make the equity vesting process as simple as possible.
Many founder’s agreements include a vesting timeline with specified cliffs, conditions for accelerating, and other provisions. This is too convoluted for a split, and neither founder wants the other to occupy space and hold down the company’s growth for another six months just to be able to vest.
While there is no’standard’ founder’s agreement on vesting, it is critical to acknowledge each founder’s work, the cash they spent, and their start time in order to make an informed decision. It’s also vital to note that everything each founder developed or constructed while working for the start-up may now belong to the firm.
4. Consider the cash as an owner loan.
If both founders put money in, things might become tricky since, as one would assume, money isn’t free (as opposed to the company stock). The simplest and most equitable approach to handle the cash is to total up who donated what and then regard the leaving founder’s cash amount as a loan to the firm.
The surviving founder may then negotiate the conditions of returning the leaving founder some money – the amount should be agreed upon by the founders.
5. Exchange Handshakes and Walk Away as Friends
It’s probable that the founders were buddies long before the start of your company experience and long before your split (or at least colleagues with a great deal of respect for each other). The way you manage the split will have an impact on your long-term partnership as well as your personal reputation in the profession. It’s critical to recognise that word will spread. The prior co-founder will very certainly be contacted by the angel investor for your next business (yes, this occurs all the time – wouldn’t you want to hear the inside scoop before handing over a check?).
Ideally, the separation was as seamless as fair as possible, and the founders were able to shake hands and walk away as friends, or at the very least as respected colleagues.