Exit terms for Co-founders

Introduction

Early-stage enterprises face the unpleasant reality of co-founders separating from the organization for a variety of reasons, such as disagreements over how to conduct business, problems with the relationship's natural development, or, in some cases, just for personal reasons. When founders separate for negative reasons like incompatibility and an unwillingness to cooperate, the problem in paradise only gets worse.

Given that the leaving founder's terms are heavily dependent on ownership holdings, engagement in finances or intellectual property, and/or other functional, operational, or strategic considerations in the company, doing so could be difficult. The rights of all parties involved, especially those of the firm, must be protected as a result, and separation arrangements must be properly negotiated and arranged. We normally advise creating and signing a written agreement outlining the specific parameters of the split and its resolution. If there is a signed founders' agreement or shareholders agreement in place, signing this document becomes relatively easier.

If hiring a Chief Executive Officer or a Chief Financial Officer or any head be it a sales or a technical team head, the agreement signed should have relaxed clauses or terms for joining an organization and relatively tougher terms for existing. While framing an agreement the following questions should be kept in mind-

1. Amount of equity held by the existing co-founder

Vesting-related terms are typically triggered if a founders' or shareholders' agreement is in place, and this provides a solid starting point for negotiations or discussions on the remaining topics. Equity distribution negotiations may prove to become significant hurdles in the absence of n agreement because emotions are often high on such occasions. While it is true that equity is the most popular form of payment in early-stage businesses, it is also only just to demand what one is entitled to in order to draw in talent and potential co-founders. While continuing founders may seek a total exit, an outgoing co-founder would prefer to receive compensation for their labor, time, and other resources. However, whatever equity that the departing co-founders retain may be viewed as "dead equity" in a young company when investors are more interested in the founders' abilities and business concepts than anything else.

Depending on a number of factors, most notably the value the firm has created up to the time of the exit, there are different ways that the equity of a co-founder who is leaving the company can be returned to the company, the surviving founders, or incoming co-founders.

2. Contribution of the existing co-founder

It is very important for an organization or a company to be the owner of intellectual property as it could be the main stock in trade. Therefore, the presence of an agreement makes the process simpler as the agreement contains terms or clauses regarding the ownership of intellectual property rights for the benefit of the organization. The absence of an agreement may create confusion at the time of separation of any co-founder from the company.

3. Liabilities and indemnities

When separating, it's crucial to keep track of the company's stock in trade, books of accounts, statutory and contractual duties, unresolved legal matters, indemnity commitments under any current contracts, and other financials. The departing co-founder may be held accountable for all statutory and contractual obligations, particularly for any failures on the part of the business during his or her time working there. The retiring co-founder may also be held personally accountable for any harm or loss that was given to the firm in situations like fraud, willful misrepresentation, etc. Therefore, it becomes essential to mention the obligation of the departing co-founder to avoid any legal havoc for the company as a whole.

4. Co-founder also a director?

If the departing co-founder is also a board member, the issues concerning the resignation of the exiting member will be discussed within 30 days with the registrar of companies. In accordance with the requirements of the 2013 Companies Act, the continuing founder must make sure that the company maintains a minimum of two shareholders and two directors even after the separation.

5. Other Considerations

1. Non-disparagement - Usually, there is a mutual nature to this duty. Disparaging remarks can damage everyone involved in the separation and their reputation.
2. Confidentiality- Any departing co-founder should maintain the minimum level of secrecy in relation to the confidential information of the organization and should be bound and restricted by the clauses of the agreement and violation of the term will attract legal action.
3. Branding- The co-founder posts his or her exit from an organization and should not associate himself or herself with the said organization. The company should also make sure that it updates and revises the clauses of any agreement done with other parties where the departing member is a party to the agreement.

Conclusion

Often it is recommended that the exiting clauses for any crucial member of the company should be made difficult so that the exiting member does not harm the reputation or brand value of the company or the organization in any way. Each separation is unique in its way, depending upon the relationship between the parties. Therefore, it becomes necessary to add clauses in an agreement that protects the brand value of an organization and makes the procedure of work easier and more definite for the continuing co-founders.