It royally sucks when a founding team reaches a point where they decide they can no longer work together, especially if many months or longer of hard work has already been contributed. What I refer to as “co-founder funk” is surely one of the most common reasons for startup failure. Startup ventures are already extremely risky and any negative energy or waisted time fighting with each other over every decision can be all it takes to cause the venture to crash and burn.
Hopefully you already followed the advice in my article titled “Avoiding Co-Founder Conflict” to minimize your odds of being in this situation. But if you sense that you’re already in this movie or pointed in that direction, read further. If the likely conclusion is a breakup, there are ways to handle it to reduce the risk of killing your company. But I can’t sugar coat it – the next steps will be emotionally draining and distracting for all involved.
If a co-founder has committed fraud, embezzlement or other related criminal acts, there isn’t much of a need to talk things out or try to patch things up. Immediately consult with law enforcement and your company’s governing body (ie – board of directors). If you have investors, you will need to be extremely calculated in your actions so as to reduce your risk of a lawsuit against the company. Your company’s attorney might not be able to help you because they represent the company and its officers rather than individuals. Until the criminal acts are proven, your attorney’s hands might be tied and you might need to get separate legal representation.
I am of the believe that a co-founder should not be surprised if their employment with the company is terminated. I’m not saying they should be agreeable to the termination but the act of getting terminated should not be a surprise if the other founders do things correctly.
As soon as issues are discovered, they should be communicated. I’m not referring to small disagreements or minor mistakes. Rather, I’m talking about issues of repeated non-performance, genuine culture misfit, aggressive behavior, fundamental strategy misalignment, alcohol or drug abuse, and various HR-related matters (harassment, discrimination, etc). Allowing such issues to continue over time makes the eventual conversation that much more difficult.
For an early stage company without formal processes, this probably just means having a conversation. If there are three or more founders, then it’s probably a group conversation. Read the book titled “Crucial Conversations” to gain some valuable tools for the uncomfortable conversation. Done correctly, the co-founder will be on notice and have a chance to remedy the issue. If they do, great – crisis avoided. If they don’t, you’ll either need to have another, more stern conversation, or you’ll need to move towards separating them from the company.
Parting Ways (aka – Firing Your Co-Founder)
Depending on the severity of the issue(s) involved, there are a variety of approaches that can be taken to part ways. In fact, sometimes a suitable remedy is to allow the co-founder to remain involved, but only as a part-time contributor or advisor. Many other issues are of the type that can only be remedied by a true separation. That means terminating their employment.
Following are some suggestions for separating in such a way that minimizes the negative impact to the company.
Since your problematic co-founder likely has a big chunk of equity and might have some operational authority as the CEO or board director, you’ll need to consult with an attorney to understand the needed procedural steps. There might be one set of actions required to terminate their employment and a different set of actions to remove them from the board of directors. And like mentioned before, your corporate attorney might have a conflict of interest and not be able to advise you.
Prepare to Negotiate
I have advised hundreds of startups and their founding teams. It’s still a little amazing to me how the involved parties can see things so differently – almost black versus white. The co-founder that is getting terminated almost certainly will not agree with your decision to terminate them nor the underlying issues that are causing it.
Be prepared to negotiate various aspects of the separation, including cash and equity compensation, timing, remaining involvement with the company, and more. The best outcome is for both parties to be happy with the final agreement. But since that almost never happens, the second best outcome is for both parties to be slightly unhappy with the final agreement.
I’m using the word “agreement” in a legal context rather than behavioral one. Terminating a company founder or executive should be documented via a formal Separation Agreement that is created by your attorney. Future investors and acquirers will be comforted by its existence.
Engage a Trusted Third Party
If the company has an advisor or board director that is trusted by each of the founders, they can often help reduce some stress by being an intermediary and conversation facilitator. Sometimes just having them in the same room while the founders are discussing, debating, and negotiating the termination can keep everyone’s demeanor in check. Just understand that the process will be stressful for them as well. But if they have a relationship with the company, they will have a vested interest in it surviving the period of co-founder funk.
You don’t want a co-founder that served the company for only 6 months to walk away with their full 30% equity. Hopefully you have already avoided this issue by putting a 4+ year vesting schedule on all founders’ equity from the start. If not, your attorney is going to need to advise you about any possible remedies related to the departing founder.
Intellectual Property (IP) Assignment
You don’t want a terminated co-founder to own the IP they created while working for the company. Hopefully you had all founders (employees, contractors and advisors too) sign agreements that assigned all IP ownership to the company from the start. If not, your attorney is going to need to advise you about any possible remedies related to the departing founder.
Helping Craft a Story
Being terminated from a venture that someone started and put serious energy into is certainly frustrating, but can also be embarrassing. One of the first things the co-founder is going to think about is how to explain their separation to friends, family and others in their network.
There are things you can do to help your departing founder craft a story. The most common scenario I see is to allow them to remain an advisor to the company. If they’re truly going to serve as an advisor providing value, they should probably continue to receive some vesting of equity, but almost certainly not at the original amount they were granted as a founder/executive. If the “advisor” label is truly just to help them save face and they won’t be doing anything for the company, then probably no continued compensation is justified.
If you have employees, customers, business partners, investors, or advisors, at least some of them will need to be notified about the termination. You might need a slightly different message for each constituent and should think about this carefully because the company’s reputation is at stake. With luck, you’ll come up with something that is both truthful and minimally concerning. That often means being succinct, not verbose.
The departing founder will likely seek employment elsewhere and maybe they’ll join up with other entrepreneurs to start a new startup. Either way, you’ll probably get a request for a reference. This can be a tough situation. If the terminated co-founder has good qualities but just wasn’t a fit for your particular venture, then explaining those nuances might not kill their next opportunity. But if they didn’t work very hard, were impossible to work with, or violated HR-related matters, then your genuine reference would be a negative one. You’ll need to decide if the right thing to do is provide the truthful, negative reference or find a way to decline serving as a reference.
The earliest days in a startup venture are like a honeymoon phase, with lots of excitement and conviction and everyone working well together. But after entering the grind phase and potentially getting negative reactions from prospective investors or customers, the founders’ real personalities and work ethics will come out. Hopefully you never experience co-founder funk. But if you do, hopefully this article will help you navigate the needed steps to keep your company alive and thriving.