How to Handle a Co-Founder Departure

Your co-founder tells you he or she wants to depart. This is something no one in a startup wants to go through. But, sometimes if one of the partner’s or one of the founder’s hearts aren’t really in it, it’s way better to know earlier rather than later. It is important to try to handle the departure with grace and compassion. And it helps the company move on. So, this article will dive into how to handle a co-founder’s departure. 

Tips on Handling a Co-Founder’s Departure:

  • Amicable vs. Termination Departure
  • Messaging to the company to not discourage others
  • Message to the Board / Investors
  • Work out the equity the co-founder will own
  • Sometimes the Board likes to make an offer to buy back some of the departing founders stock that has vested
  • Make sure you have IP Assignment documents completed so that the company owns the IP the co-founder created. This should have already been done but it’s worth double checking.
  • Pay any vacation and expense reimbursements that are due
  • Negotiate a severance if there is one. If it’s a friendly departure, you can do a consulting agreement as well to make sure that person will answer questions

So, there are two differences. First of all, there’s the amicable. And then there’s the termination where the person needs to leave immediately. 

So when it’s agreeable, it is a lot easier. Ideally, the person in the company will work with you and with the board to make it a smooth transition. 

If it’s a termination, however, then you know you need to move fast. You need to do the typical stuff, like prepare their final paycheck, consult HR, document why they are being terminated, and have the meeting with them. 

In an amicable or maybe a full-fleshed way of talking about this, another thing you want to think about is how you are going to message this to the team. Because everyone that works at the company is committed to building the vision of these co-founders. 

So when there’s a departure, it’s tough for everyone. 

So it is important to make sure you take time and effort to message this correctly to the team. Have an open-door policy where you’ll talk about it with all the team members is also a great idea. 

Also, messaging it to the board is essential. The board, aka the VCs who’ve put money in the company, were sold on the company and on the co-founder’s vision. 

Another thing to do is to let the BOD know that the people who are remaining are still super fired up about the vision, think it can be done, and are excited. 

How to handle equity when a cofounder leaves a startup

Dealing with the equity impact of a cofounder leaving your startup is challenging. Most co-founders are on a four-year vest for the founder’s share. It is very similar to stock options. VCs typically require a four-year vesting period. It usually has a one-year cliff and then vests after that. After the one-year cliff, you vest the first year or first quarter of the founder stock package. And then you start vesting monthly after that. 

So if the founder is leaving and it is still very early in the company’s life, odds are, they probably haven’t eclipsed that one-year vest yet. So you will not have to part with any equity - although it isn’t unusual for a founder who leaves to ask for some equity!

If the founder has been there for a while and has passed that one-year cliff, and has vested monthly, odds are, they own a decent amount of stock. The company is going to retain everything that was not vested. Of course, you should be using a cap table management software that helps you keep track of the vesting schedule! Still, if it is an up-and-coming company, to maintain some of the vested stock, the BOD will offer to repurchase some of or all the stock back. (Note that there are potential tax implications to the company “redeeming” shares from an equity holder, so you should consult with your tax advisor to make sure you don’t do anything that makes you ineligible for QSBS treatment.)

The other thing you want to make sure you do is make sure you have an IP assignment clause, especially when it’s an early-stage company. 

The IP assignment is critical. Because if the company doesn’t own the IP that the co-founder has created, then there could be litigation down the road. Typically, you will do a severance where you will make the landing a little softer for the co-founder who is leaving. 

In exchange for that, you typically ask for non-disclosure agreements and language that says the company cannot be prosecuted in exchange for that cash payment. 

If someone is signing over rights, they need to receive compensation for that to be a contract in the law’s eyes. So paying that severance and getting those signatures on the non-disclosure is helpful.

If you are the person leaving, do it right and be nice about it. Don’t try to burn the place down on your way out. And if you are the co-founder who is staying, treat that person with respect. They were someone that you went on the part of capital-backed the journey with. They deserve your respect. They deserve some compensation. If they vested their stock, they deserve to take some stock with them. Remember the future is always bright for startups. Just don’t lose focus on where you are going and do not let a co-founder departure derail your company. I hope this helps. If you have any questions or suggestions, feel free to reach out to us.