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Sacking your co-founder

sackedFor true entrepreneurs, there is nothing more exhilarating and satisfying than launching your own baby into the economy, nurturing it, and watching it flourish with co-founders, friends, employees and supporters along the way.

Satisfying, that is, until your co-founder starts to slack, develop a different vision, or simply become an energy suck that is destroying the business.  Once the honeymoon start-up phase is over, founders either thrive in the get-down-to-business phase, or get itchy for the next creative start up adventure.  Here are some big-picture tips for handling the post-honeymoon phase.

Contracts: Boring contracts

The best time to carve out detailed contracts is when everyone is on the same page, excited to build a venture together.  Drafting separation agreements after the fact is always fraught with hostility, lack of trust and legal fees that could have been avoided with a clear, methodical approach upfront.  Partnership agreements, shareholder agreements and employment agreements with a roadmap for unwinding relationships will save many headaches and dollars down the road.

The roadmap should include topics such as:

  • who gets what if the company completely dissolves;
  • how and when do you value shares if one partner leaves;
  • do employees get more than the minimum set out in the Employment Standards Act; and
  • will owners and co-founders get some sort of termination payment from the company if voted out by the other partners.

These are all issues best discussed when the room is full of optimism and good faith.  Discuss without a lawyer, and then bring in the lawyer to review and help draft the final documents, but start with the parties discussing the terms over a glass of wine to determine a common vision for the company’s relationships.

Ripping off the band-aid

Alas, sometimes a professional divorce becomes necessary.  Whether it’s off-boarding a senior exec that has been your sage and key cheerleader from the beginning, or breaking up with your co-founder, it’s always deeply personal.  If you suspect your co-founder is competing against the company, diverting resources to other ventures, or simply not growing with the company, email your concerns along the way.  Legal surprises rarely work.  While a co-founder may not be entitled to “progressive discipline” like your front line employee would be, it remains much smoother to split if there have been warnings, discussions and attempts to remedy the situation in writing along the way.

If the parties come to an impasse, it is typically more effective to yank off the band-aid, move efficiently to implement the separation/buy-out, and get back to running the business.  Ahead of time, carefully re-read the partnership and shareholder documents you wrote in a flurry during start-up, and know the dates that may impact share values, bonus payments, fiscal year end activities, etc.  If there is an arbitration provision, plot out the timelines.  Gather all email and document evidence in advance if you’re going to allege cause, and pull in your legal and financial advisors to help map out the separation. It will take weeks/months of careful planning, but once the impasse is reached, dragging it out and hoping the other person will read the writing on the wall and quit is almost always futile.

Many tend to romanticize the number of failures an entrepreneur must make before finding true success, but I’ve run across just as many success stories of hard-working people who are both creative and business savvy, and who survive evolutionary phases and co-founder purges of the company with careful planning, strong communication skills, and yes, probably a bit of good entrepreneurial fortune.

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Lisa Stam, Spring Law

Founder of Spring Law, Employment and Labour Lawyer at Spring Law
Lisa Stam is founder of Spring Law, a virtual law firm advising exclusively on workplace legal issues for employers and executives. She practices all aspects of employment, labour, privacy, and human rights law, with a particular interest in legal issues arising from technology in the workplace. Lisa’s practice includes a wide range of entrepreneurs in the tech space, as well as global companies with smaller operations in Canada. In addition to the day to day workplace issues from hiring to firing, Lisa frequently blogs and speaks on both the impact, risks and opportunities of social media and technology issues in (and out of) the workplace, as well as the novel ways in which changing expectations of privacy continues to evolve employment law. Read more here.
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