How to Break Up With Your Co-Founder

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According to Noah Wasserman, an entrepreneurship professor at the University of Southern California Marshall School of Business, 10 percent of co-founders end their relationship within a year of starting a business and an additional 45 percent breakup within four years.

That’s a lot of co-founder divorce, which if not managed correctly, can lead to the separation getting:

  • Mismatched personalities
  • Different work styles
  • Misaligned business visions
  • Unequal distribution of work
  • Unresolved disagreements

1. What does your partnership agreement say?

The first step in separating peacefully is to see what your partnership agreement says, specifically about the following:

Pro Tip: Common law, depending on where you incorporated, may define the separation if there is no founder agreement, but seek legal advice regarding that.

If you do need to discuss buying back a co-founder stock, frame the conversation around fair market value compensation — plus or minus depending on the financial state of the startup. Then structure a buy-out deal with incremental payments over a period of time that everyone can agree to.

2. How much capital did each founder put in?

Unlike equity, capital is cash — and that is worth something.

Treat any initial capital that a founder put in as convertible debt, as you would a pre-seed investment into the startup. If, however, that was not done and it was treated as a loan to the company, this will make things difficult.

3. What does a transfer process look like to you?

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Angel investors have even been known to call previous co-founders to see if they should invest in a startup. So any bad feelings about the separation process can come back to bite you in the ass.

As Venture Capitalist Fed Wilson suggests, being generous and giving additional severance or vesting stock can make the transition process easier for the separating founder. And help the business thrive, too.

Source: Stanford Social Innovation Review

4. Are you willing to dissolve the company?

Sometimes a founder wants to keep the business alive while another one is pushed out or leaves. Or there is an equal willingness to dissolve the company.

5. Do you need lawyers or a neutral third-party?

Lastly, is the situation so bad between you and your co-founder(s) that you need help?

Some last things to think about:

Firing someone from an operating role does not automatically delete them from the cap table, their shares are legally their property and must be addressed separately.

Who am I & why should you listen to me?

I am a mediator that specializes in resolving co-founder disputes.

If you enjoyed this article, offer up some 👏🏾👏🏾👏🏾 s

Have a co-founder dispute that you need some help with?

Schedule a 15-minute discovery call to talk about it below

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Bryant Galindo

Bryant Galindo

I help founders and business leaders negotiate agreements and resolve disputes while improving communication on their team 🤝 More at www.collabshq.com