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Do you have founders leaving the startup? It is an unfortunate truth but very often the team that first embarks on a startup concept is not the same team to finish. \u00a0For a number of reasons one or more founders decide to leave or are pushed out.<\/p>\n
Departing founders can be a large problem down the road. \u00a0The two biggest concerns when a founder departs are ownership and intellectual property (\u201cIP\u201d). \u00a0Again, this just\u00a0emphasizes\u00a0why it is so important to properly form your company. \u00a0See our blog post on\u00a0Founders Agreements\u00a0<\/a>for more insight.<\/p>\n Unfortunately, there are no easy answers. \u00a0The four most common situations faced by startups formed as\u00a0corporations\u00a0are listed below. \u00a0There are similar but different procedures to undertake when you are a LLC which are akin to a partnership dissolution (do not worry, we will get to this!) The potential solutions below revolve around correcting the mistakes made during formation. \u00a0In almost every situation the solution requires some amount of cooperation by the departing founder. \u00a0If that does not exist, however, more legal actions may be necessary \u2013 maybe even folding the company.<\/p>\n This blog post has been prepared at the direction of several employment & corporate attorneys but it is an area that has not been fleshed out well by the legal community. \u00a0We hope to do that here over time.\u00a0You guessed it \u2013 these documents are coming! \u00a0Consult an attorney before making any final decisions.<\/p>\n 1. \u00a0<\/strong>Everything Was Setup Correctly (Vesting & IP Assignment)<\/strong><\/p>\n As it should be, life is easy when things are done right the first time. \u00a0When vesting is put in place and IP assignment is solid then a departing founder should not present much of a problem from a legal standpoint. \u00a0Generally, companies will choose to exercise their repurchase option and purchase the founder\u2019s shares which have not vested \u2013 this is the point of a vesting provision in a founder agreement. \u00a0At a minimum, a company would need to create and execute:<\/p>\n Want to leave the founder with a little something for his efforts (~ 1-2%) if none of their stock has vested? \u00a0A properly written Founder Stock Purchase Agreement allows the company to repurchase \u201call\u201d OR \u201csome\u201d of the total restricted stock from the departing founder. \u00a0You will need to issue the departing founder a new stock certificate with the appropriate legends and make a record in the Board minutes.<\/p>\n 2. \u00a0<\/strong>Company Was Formed, Stock Was Sold But There Was No Vesting Put Into Place<\/strong><\/p>\n The departing founder is under no obligation to sell his stock back to the company when there is no vesting in place. \u00a0Therefore, the ability to get the stock back is circumstantial. \u00a0If you are lucky and the\u00a0departing\u00a0founder is cooperation then, at a minimum, the company will need to create and execute:<\/p>\n Again, if you want to leave a little something for the departing founder then do not repurchase the entire lot. \u00a0You will need to issue them a new stock certificate with the appropriate legends and make a record in the Board minutes.<\/p>\n 3. \u00a0<\/strong>Company Was Formed, Stock Was Sold But No IP Was Assigned<\/strong><\/p>\n Attorney Ryan Roberts talks about the importance of\u00a0locking down IP<\/a>\u00a0at every turn in an early startup. \u00a0Again, most of the time\u00a0the departing founder is under no obligation to assign his IP to the company if some kind of IP assignment agreement was not already put into place.\u00a0\u00a0Therefore, the ability to get the IP into the\u00a0company\u00a0is again circumstantial. \u00a0If the departing founder does not want to play ball then they do not have to.<\/p>\n There is another catch. \u00a0The transaction must have new consideration, which typically translates into having to pay cash for the IP. \u00a0This is all up for negotiation \u2013 it could be $1 or $1000. \u00a0At a minimum, this will require the company to create and execute:<\/p>\n 4. \u00a0<\/strong>Company Was Not Formed Correctly: No Stock Was Sold And No IP Agreement Put Into Place<\/strong><\/p>\n Sometimes, founders do not properly form a company \u2013 neglecting to put in place ownership, management, bylaws, etc. \u00a0The resulting default entity is a simple partnership. \u00a0A departing partner can take whatever they put into the the partnership. \u00a0At this point, the biggest concern is IP if the departing founder possess any IP valuable to the company. \u00a0The method below is just one way of solving this problem.<\/p>\n Some General Thoughts On Release Agreements<\/strong><\/p>\n A release agreement is an agreement between a company and a departing employee which\u00a0relieves\u00a0the\u00a0company\u00a0from a great deal of liability resulting from the employment. \u00a0We hear it mentioned often as a possible remedy for departing founders. \u00a0There is one problem with a release agreement \u2013 it requires separate \u201cadequate\u201d consideration such as a severance package \u2013 not common in most boot-strapped startups. \u00a0Courts have found that release agreements supported by nominal payments are unenforceable. \u00a0One can certainly try to get a release agreement signed, but do not be under any illusions that it is the end-all-be-all \u2013 other more important issues like IP must be handled.<\/p>\n Again, having a founder leave is very difficult because of the intersecting legal issues. \u00a0Consult an attorney before making any final decisions but make sure the attorney has dealt with these matters before and understands the issues.<\/p>\n <\/p>\n DISCLAIMER<\/p>\n The content of this page is not legal advice and is not a substitute for professional legal advice. Under no circumstances does the content contained herein create an attorney-client relationship nor is it a solicitation to offer legal advice. If you ignore this warning and convey confidential information in a private message or comment, there is no duty to keep that information confidential or forego representation adverse to your interests. Seek the advice of a licensed attorney in the proper jurisdiction before taking any action that may affect your rights.<\/em><\/p>\n\n
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