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I have seen this situation all too many times, and have been on both sides of the conversation myself. Simply put, firing a co-founder or getting fired from a company you helped build totally sucks. It’s a messy situation for the business, and emotionally draining for everyone involved. In this post, I’m going to tackle the best ways to navigate a startup break up. Please note that I am not a lawyer and this post does not constitute legal advice; be sure to enlist a professional to help you navigate your specific situation.
Simply put, firing a co-founder or getting fired from a company you helped build totally sucks. It’s bad for the business and emotionally draining for everyone involved.
The first thing to know when considering a possible co-founder separation is that you and your co-founder’s operating roles (i.e., CEO, CTO, etc.) are separate to your ownership of the company. Firing someone from an operating role is fairly straightforward. If you control the board, or can get majority support from board members, you can fire your co-founder from their operating role within the company. Firing someone from their operating role will not delete them from the cap table, their shares are legally their property and must be addressed separately.
The best thing to do is to plan for what happens to your shares in a separation from day one. “What happens if our partnership doesn’t work out?” should be one of the very first conversations you have and should be documented in writing with the help of the company’s lawyer. In the startup world, this conversation usually results in a vesting agreement, but can result in other agreements depending on the situation and type of business.
Vesting agreements mean that each founder earns their equity over time. Getting a vesting agreement in place is very important – I can’t stress this enough! It’s often the first thing I bring up when I meet with new founders.
Vesting is fairly straightforward once you understand it. A vesting schedule will have four key parts: the amount of equity you will own in total; the length of time you need to stay with the company to earn that equity in full (usually 4 years); the increments of time over which you will earn the equity (usually monthly); and the time until the cliff (usually 1 year – if either of you left before the cliff you’d walk away with no equity at all).
Typical vesting schedules are a four-year term with a one-year cliff, vesting monthly after the cliff. On this vesting schedule, no shares will vest until the end of the first year, at which point all of the first year’s shares will vest. Shares will then vest proportionately on a monthly basis until the end of the 4th year at which point all shares will have vested.
Vesting matters, because a co-founder leaving your team early on with 30% of the company could spell the death of any future funding rounds, or, at a minimum, a very large headache as you try to clean up the “dead weight” on your cap table. Vesting ensures that founders can only walk away with the shares they have ‘earned’ up until that point. If they are fired before the cliff on that vesting schedule, they will be entitled to no shares at all.
If there is no vesting agreement in place, your option for reclaiming the shares of your departing partner are negotiating a buy-out, or, if they have breached the contract in some way, you may have a case to sue them to reclaim their shares.
Ways I’ve seen co-founder firings go bad are manifold. Not having a vesting agreement in place. Misunderstanding the mechanics of your vesting agreement. Trying to fire someone when you don’t in fact have the legal authority to do so. Not having intellectual property rights to the work of your co-founder prior to firing. Wrongful termination. And the list goes on.
Have a vesting agreement in place from the beginning and to know what is legally within your rights in the event of a separation. When beginning the process of firing a co-founder, first be sure you have thought through what impact your co-founder leaving will have on the business – weigh the pros and cons carefully. Talk to a lawyer before pulling the trigger and be very prepared for the conversation with your co-founder. I’d recommend having a legitimate reason for the termination to help keep the conversation professional rather than personal. I encourage you to be upfront and not let founder issues fester; unaddressed co-founder issues generally only get more complicated with time. Once it’s done, be sure to get it in writing and have the exiting party sign a legal separation agreement, which will release their rights to sue the company in the future. Remember Facebook and the Winklevoss twins? A separation agreement can help you avoid a nasty legal battle down the line.
Finally, if you find yourself on the being fired side of the conversation be sure to get your own legal counsel. The company’s lawyer is representing the company’s interests, not yours. Having your own lawyer will ensure you get the best possible outcome out of what is otherwise often a pretty shitty situation.
This is a very unfortunate, but sadly, often witnessed, situation in startup wonderland. Not easy to deal with. Katherine has done a great job explaining how to navigate.
From a VC’s perspective, when it comes time to execute on this, my advice would be to get someone else involved between the founders. It’s a highly emotionally charged situation and has the potential for a real blow up to occur. You want to minimize collateral damage to the company at all costs.
The first conversation should occur between the founders. From there, it’s best to hand off to a “mediator” who can think and act more rationally about the matter. The mediator will interface continually with both sides. It will be impossible to find someone to do this who is completely neutral and doesn’t have a bias – if only for the fact that the mediator has likely been involved, and, will continue to be involved, with the company. However, try to find someone with some position of respect and some sense of objectivity.
You want to minimize collateral damage to the company at all costs.
The company’s lawyer will stickhandle the process and paperwork etc., but trust me, you don’t want to leave this potential tinderbox of a situation to just lawyers.
Potential mediator candidates could be a trusted company advisor who has a lot of operating experience, and, likely, has dealt with these matters in the past. You could also look to the Independent representative on your board. Finally, you could also lean on your VC for help.
Another consideration for founders is around reverse vesting clauses that were put in place by your VC on your last round. These clauses are put in place to cover situations like the one we are discussing here, which result in a founder leaving a company. The full way reverse vesting works is beyond the scope of this post, but in the context of today’s topic, it’s important to know that VCs will almost always demand that a portion of each founder’s individual stock is tied to their future tenure with the company.
As a founder, you need to ensure that there is a “good leaver / bad leaver” clause as part of your reverse vesting terms. In plain English, the situations go as follows: if you get fired for cause, you should lose some of your stock; if you decide to leave the company to go do something else, you also should lose some of your stock; if, as in the situation we are discussing here today, the company decides to fire you, well, you should rightfully keep your portion of stock that has vested to date.
All of these situations and outcomes are just fair play. Without this clause, you can be fired at any time, and the other shareholders (i.e., the remaining founders and VCs, etc.) will reclaim your shares. This is not fair play. When you and your VC are working through your financing terms, negotiate hard to make sure the playing field is fair for everyone.
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