With any startup, you and your business partner face two possible scenarios in the event of a breakup. In one scenario, the relationship ends on an amicable note, maintaining the business and preserving a hopeful outlook for the future.
The second situation, says technology and VC-focused attorney Jose Ancer, "can bring everything crashing down, ruining months, even years, of hard work, and damaging lives in the process." What happens in a startup's very earliest stages makes all the difference, he adds: "Simple decisions made at the beginning of the relationship dramatically influence which outcome you end up with."
The consequences of a messy breakup include costly legal bills, as well as a significant loss of time and effort. It may also signal the unfortunate end to a relationship that was previously so important to both partners, leaving bad feelings all around.
So what's the best way to avoid an expensive and bitter end to your business partnership?
The overwhelming consensus among startup experts is to create a clear-cut founder's agreement at the outset of your enterprise. "A good co-founder agreement outlines critical business decisions such as the terms of employment, equity shares, ownership of intellectual property, and more," notes Matt Faustman, co-founder and CEO at the legal service UpCounsel. In rough times, Faustman adds, "the founder agreement acts as the bond that allows the founders to continue forward and endure."
This founder's (or partnership) agreement must clearly outline:
- How the startup is to be structured and, in the eventuality of a breakup, the best way to handle disagreements and severance
- A simple description of an exit clause built-in for each partner
- How shares in the business can be transferred and how they are to be valued
With such a contract—not unlike a prenuptial agreement—"no matter how heated things get, both you and your partner are protected and forced to abide by terms upon which you agreed when cooler heads prevailed," says Michael Tolkin of Merchant Exchange.
If a partnership agreement wasn't created when the business first started, things can become more difficult. Rather than attempt to handle the process yourself (especially if you and your partner aren't on speaking terms), each side should consider hiring an attorney to help dissolve the partnership. This brings some badly needed objectivity to the situation and keeps the emotional element at a minimum.
If one partner plans to leave and the other seeks to maintain the business, attorney Ancer suggests delivering a simple letter to the departing founder "spelling out what the post-termination equity holdings will be and delivering the small amount of money needed to repurchase the unvested shares." A "sweetener" (some extra shares, an acceptable amount of cash, etc.) can help ease the way towards signing a full waiver and release of all claims on the exiting founder's part.
Breaking up a partnership is never easy, but it's not inevitable that the process become contentious and inflammatory. How you and your soon-to-be former business partner resolve the situation can affect your longstanding reputation in the industry, either making it more or less attractive for others to consider teaming up with you in the future. That's a compelling reason for drawing up an agreement in advance and ending the relationship with a friendly handshake.