How to Break Up With Your Co-Founder
By: Bryant Galindo
Tags: Startup Lessons, Founder Stories, Startup, Startup Life, Founders

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:

Unless you had a successful valuation, the stock is probably worth nothing.

That makes the last question point the hardest point of the negotiation — especially if the startup still wants to raise money in the near future — because you’ll have to evaluate the potential of the stock.

If you don’t have a founder agreement, or your contract says nothing about any of the bullet points above, you and your co-founders will need to have an open conversation about these points.

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.

Ask yourself the following regarding the capital each founder put in:

To learn more about the difference between convertible debt versus a loan, read this article:

Get clear on how the capital was (or should be) treated. Establish how much it was worth to the startup’s financial trajectory. And negotiate either applying retroactive convertible debt or how the startup will compensate the founder for the loan.

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

Photo Credit: Unsplash

Understanding the legal and contractual obligations of separation is one thing, next you have to plan out what the actual separation looks like.

How you separate will define the relationship and have major consequences for the business — so be patient, kind, and generous here.

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.

Think about the following when it comes to the transfer process:

As you think about the transition process, think of it like cooking a meal — you get to decide what you want to make and the ingredients that go into it, but ultimately the person eating it (i.e., the separating co-founder) decides how good it tasted. So make something that they will rave about.

Part 2 of this two-part series will discuss the separation process more at length since this is where both founders have the same amount of power relative to one another in deciding the next steps.

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.

Whichever situation you find yourself, ask yourself the following:

Read this article to get a better idea of the different IP considerations you should be thinking about, especially toward the end:

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?

Just know that the minute lawyers get involved, things have a way of going from bad to worse. Lawyers always put someone on the defensive, but if there are legal questions that you need answers, please seek legal advice.

Most co-founder disputes occur because the founders have under or miscommunicated. A mediator or a trusted neutral third party advisor can help you separate at the fraction of the cost of an attorney. Make sure the third-party neutral can help you: