Early-stage breakups – a few pointers to keep in mind

Founder breakups can hurt. After spending most of your waking hours together, the decision to leave (or being asked to leave!) can cause emotions to run high. Add to that the business aspects: proper founder breakup requires much more than just the words "we're over!"

Here are a few pointers to keep in mind if you have to navigate this situation as an early-stage startup.

Repurchase of unvested shares

If the departing founder has unvested shares, such unvested shares typically will be subject to a repurchase right by the startup at the price the founder originally paid for the stock. We recommend confirming these terms by reviewing the founder's stock purchase agreement as the repurchase right may expire after a certain period. Consider documenting the repurchase, typically in a notice that includes a check in the full amount required under the departing founder's stock purchase agreement before expiration.

Enter a Separation and Release Agreement?

If things could get contentious between the founders, it may be worthwhile to enter into a separation and release agreement with the co-founder. This will require some additional consideration to make it enforceable. See DLA Piper’s article on such agreements here.

Resignations

In early-stage startups, co-founders often hold officer and/or director positions within the startup. In such case, documenting a resignation letter from a departing founder is best practice. This can be done in the aforementioned separation and release agreement or by a simple letter or e-mail from the co-founder indicating he/she resigns from such role effective as of an agreed to resignation date. If the co-founder will not resign, you could consider having the Board remove him/her.

Intellectual property

We recommend having an executed copy of the departing founder's confidentiality and intellectual property assignment agreement, and any other agreement related to rights the founder may have assigned or licensed to the company. If you don't have the necessary agreements that document the rights in intellectual property that the company believes it obtained from the founder, it may be prudent to consult your attorney right away. You do not want your departing founder to claim that he or she owns your intellectual property or invented your product, or otherwise has the ability to restrict the company's use of its intellectual property. Claims like this are often made at the most inopportune times, such as the eve of the company's financing or acquisition, which could create problems for the deal.

Founder departures can be emotional and deeply personal situations and nothing that a company wants to endure. However, by paying careful attention to some key matters, the departure can be addressed as painlessly as possible for all involved. Rather than being a drama, it can be a launching pad for the company's future.