Startup Breakups Are Hard
What To Do When Time is Up
The Nuclear Option
One of the main reasons startups fail is founder conflict. Often it gets to the point that one person has got to go (either voluntarily or forced, usually somewhere in between). Sometimes it’s not a conflict, just one person gets tired and wants to do something else. So what happens?
The founder leaving says thanks for the memories & the equity. Even if there’s a vesting schedule, they may be leaving with 50% and the founder staying to build it is thinking WTF?!? So they pull the nuclear option: “If you don’t give me your equity I’m not going to keep building, we’re going to shut the whole thing down.”
Game Theory & Relationships
The founder leaving doesn’t want to lose the value they’ve made so far so they have a few options:
1) Just leave and call the bluff. They are legally allowed to keep their equity. Very often the founder that stays won’t actually shut it down, but what it does shut down is the relationship. I’ve seen this end plenty of friendships.
The other problem with this is that the founder who stays will look for any excuse to screw the one that left: issuing new equity to dilute them, taking a massive salary to soak up dividends, etc. This is where “contracts don’t really protect you.”
2) Both parties are cool (and “fair”). Look if the original agreement (spoken or unspoken) was that both founders were going to be there through & beyond an exit, it’s only fair that the one staying to build should get more equity. So maybe 50/50 goes to 70/30 or whatever both people feel is fair.
Fair can be a little complex because being early to startup gives you outsized equity. Its hard to weigh early risk that was taken to the long term value of building.
Some situations can be more complicated and you’ll need more clever solutions. See “Putting your startup eggs in 3 baskets”. But the idea is you try to be fair.
Preparing Ahead
Best way to avoid most of this is to put it all in your bylaws and nutshell agreement up front. Maybe a founder leaving has to give back a portion or the other one can buy at a certain price.
Side note: if it’s an LLC you can put just about anything in your operating agreement but it doesn’t necessarily line up with state laws where you incorporate. Like you could ban your partner from selling to a 3rd party even though it’s legally allowed. I’m not a legal expert so whatever you agree on def run by a lawyer.
But setting expecations upfront causes a lot less conflict in the end and preserve relationships.