The implosion of the founding team is one of the biggest reasons why a startup can fail. Indeed, the entrepreneurial journey is not always bright, and you can unfortunately find yourself in a situation where you feel that it is impossible to further continue the working relationship with your co-founder. Many situations can lead to this – a founder not being committed, or also a founder who turns down your ideas and basically shuts down your dreams.
Hiring your first employees is very difficult, firing is even harder, but firing your co-founder is ten times harder. It is an emotionally draining process that can ruin your startup. It is to note that it is easier to break up early after 3 weeks than it is after 3 months than it is after 3 years. Therefore, break up early to avoid any further trouble. We have prepared this article to help you go through this situation.
The first thing to do when you are facing a difficult situation is to have a frank conversation about your differences. Is this something you can fix? Are you willing to make an effort to work this out? Our advice is that both of you have a conversation with someone that both of you know, trust and respect. Each one of you should expose the situation and listen to his/her opinion. It is similar to seeking marriage counseling or going to a couples therapy. It will enable you to see the situation from your partner’s perspective and work out a plan to solve your issues. It should be documented (i.e. an email) to ensure that both of you understand the situation. The document should contain a list of the things to be fixed within a specific timeframe. This should be the last chance given to your co-founder.
If after that, you consider those problems cannot be fixed, you should start thinking about whether it makes sense for you to either resign or ask your co-founder to leave. This will most likely also depend on how much equity each founder owns. If you have equal control in terms of equity and board seats, you should think about how to separate your relationship.
Here are 5 potential steps to take if you need your co-founder to step down:
- Come to a consensus with your other co-founders, if any.
Have a frank discussion with your co-founders and expose the situation clearly. Indicate why do you believe that you have reached a no turning point, what do you reproach to your co-founder.
- Get a lawyer.
Discuss the situation with a lawyer to know the best practice to let a founder go. It is better to get the help of a lawyer that already had experience in the startup ecosystem and the separation of the founders. Prepare the legal documentation for the termination before the conversation with your co-founder.
- Discuss the situation with your lead investor.
Getting the help of your leading investor may be invaluable. He/she can help you reach a fair outcome for both parties. It is important to reach out to your leading investor to demonstrate that you are fully committed to the success of your venture that can only be achieved if the co-founder leaves the startup. In case your investors have board seats, you can convince them to fire your co-founder. If your startup has a board, then corporate governance rules apply: the board has the power to appoint/fire the CEO who in turn is responsible to manage well the startup and its human capital, therefore, hiring/promoting/firing its employees.
- Determine the compensation.
Determine how to compensate the co-founder. Would he/she prefer to hold equity or receive cash? Is there a vesting schedule in place? If so, what are the terms?
Would the founder still be valuable as an advisor?
If it is a contentious break up, you may want the co-founder to hold no equity in the startup and to step down of the board position. In this situation, you should compensate him/her with cash.
It is to note that getting a vesting schedule from the launch of your startup is very important. Mark Zuckerberg, the founder of Facebook, said during the Startup School 2013 organized by Y Combinator, that it would have saved him a few billion of dollars when he decided to end his working relationship with his fellow co-founder, Eduardo Saverin.
In any cases, you should consult with a lawyer on all your options and their implications.
- Communicate to various stakeholders.
Determine the story to be shared with your different stakeholders. Is there a common story if the founder agrees to leave? Alternatively, in case of a contentious break up, you should prepare one.
Think about the appropriate communication channel to use to inform your different stakeholders. Emails can be fine for some, but it would be helpful to call or to tell in person to your leading investors.
If your co-founder was the contact person of your main customers and suppliers, you should inform them about this situation, appoint someone new to be the new contact person and provide them with the related contact details.
Think carefully if you need or not to inform the press. Is it important for the public to know that this change has happened?
However, you should communicate wisely to your team as this situation will probably raise employee concerns and give them doubts on the future of the startup. You can establish a communication release with the help of your investor(s) to show that the company is in good hands.
It is, therefore, important to choose your co-founder wisely, but in unavoidable circumstances if something goes south, you can take appropriate actions to fire your co-founder according to the founder’s agreement. Think carefully on the elaboration of the founder’s agreement to avoid any trouble in the future.
What to do if you are the founder asked to leave
If you are the founder who has been asked to leave, you should remain calm and rational. The situation will be emotionally hard, you won’t be happy, but act in a mature way. Get a lawyer to go through this situation and get a fair outcome.
Don’t worry about your reputation. Some great founders (i.e. Steve Jobs from Apple, Sandy Lerner from Cisco Systems, Andrew Mason from Groupon) have gotten fired in the past. Investors deal with founder’s issues all the time and understand that this situation can occur.
We hope that you will never find yourself in this position, however, we believe that it is important to raise awareness on this topic. Last but not least, please note that this article does not constitute a legal recommendation.