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What do you do when a co-founder wants to leave your start-up before you launch?

ex-founder release agreement

Answers

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

Have you incorporated and given out shares? If so the shares should have a vesting so that the co founder will only have the right to his/her ownership based on the vesting that was set up.

In any event you should get a release from the co founder regarding any rights and if there is any IP you should get an assignment to the company.

I would consult with an attorney re these forms as well as any other items that may be necessary

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I agree with Joan on the legal element. Make sure the break does not cause you pain in the future when you are successful. With respect to trying to keep the founder engaged, don't. Let them go. For you to be successful you need people that are completely committed to your direction.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

A pre-start-up advisory, these issues should have been discussed and an agreement reached prior to a) incorporation and b) any work done in earnest.

It is very difficult to reach amity when a co-founder leaves in most instances (think divorce)....

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

This is a frequent situation when founders reach a stage where they differ on the amount of work, time and effort they are prepared to commit to a start-up without prospect of immediate compensation. I hope your financial advisor arranged for your start up to be incorporated, for founder agreements to be drafted for all founders, for all IP and rights to be assigned to the Company in exchange for founders' ownership rights, and for these ownership rights to be subject to suitable vesting, right of first refusal (ROFR) on vested shares, and automatic recovery of all un-vested shares as at the time of departure.

If not, you need to reach a settlement agreement quickly. I hope the departure is amicable, otherwise an unhappy ex founder can stall your business forever by creating uncertainty regarding ownership shares and IP rights that will deter any outside investors from looking at your company. The settlement agreement should cover the number of vested shares to be retained by the ex founder, ROFR rights in the event that the founder wants to sell, agreement to all the restrictions imposed on private company stock including restrictions on transfer, future underwriting lockups, etc, assignment of all IP contributed and developed by the ex founder with agreement to assist in any patent pending applications, non-compete agreement, and waiver of all claims against the Company for any reasons (unpaid compensation, IP rights, sales commissions , etc.

Even with such an agreement, an aggrieved shareholder can be a real pain in dealing with corporate matters, ranging from slow response to refusal or rejection of corporate shareholder resolutions, to interference with management via shareholder communications, etc. Ideally you would want to buy out the ex founder's equity position if you have the liquidity and means, thus relieving the company of his input. Bear in mind that if you settle by giving the ex fully-paid shares, there will be a tax event based on the value of the gift. The tax impact on the ex will require cash payment by the ex, even though the ex only received share certificates. You may be able to use this cash flow disadvantage to persuade the ex to settle for less!

Topic Expert
Marc Faerber
Title: CFO
Company: Amarantus
(CFO, Amarantus) |

Excellent comprehensive comments. As with anything it depends on the facts and circumstances surrounding the founders departure. I have seen some founders leave before an exit event because they want to start-up another (non-competitive) venture. I have seen founders having multiple ventures going at the same time. I would not be so quick to cut off future relationships with the ex-founder. They can still be a helpful resource to the company for a multitude of reasons. They should not be depended on to be an integral part of the team day to day. If the ex-founder has a sizable ownership interest you will want to find away to be sure that his ownership interest votes along with the BOD and management on issues. This could have been done with a voting agreement up front, or possibly prior to their departure. Good luck.

Topic Expert
Dana Price
Title: Vice President, M&A
Company: McGraw Hill Education
(Vice President, M&A, McGraw Hill Education) |

All great advice above. If interested in any additional reading, Fred Wilson wrote a blog post on Monday about asking an employee to leave the company. Here is the link: http://www.avc.com/a_vc/2012/07/mba-mondays-asking-an-employee-to-leave-the-company.html

Tom Bondi
Title: Principal, Emerging Businesses
Company: Berger Lewis
(Principal, Emerging Businesses, Berger Lewis) |

One other item, that the above great comments had not yet commented on, is you will want to review with your legal counsel and CPA the impact and strategies surrounding the IRC 1202 (QSBSC) limitations that this may impose upon your other investors. You may want to delay converting the Convertible Debt into a Preferred round until the outside term lapses in order to provide continued QSBSC benefits to other investors.

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