How to Protect Your Company When Co-Founders Split

Co-founder splits are common – but even an amicable split can be legally complex. And the list of factors that make things more complex is long, ranging from funding rounds to the position the founder holds within the company to the emotions that come with the separation.  

But a co-founder split can result in win-win outcomes – especially if you’ve had good legal hygiene along the way. In this article, we outline how founders can protect the company long before anyone leaves. We also provide a detailed checklist you can use to protect the company if a co-founder splits.  

Protecting Your Company Starts Long Before the Co-Founder Split  

The best way to protect your company in the event of a co-founder leaving is to prepare for that eventuality long before it happens. Why? Because strategic conversations are best had in the calm of the present, rather than the urgency (and emotion) of the future. 

Founder’s Agreements 

Founder’s agreements really are foundational in any startup. Unfortunately, we often see co-founders delaying drawing up these agreements – and we get it. It can seem overwhelming, overly legalistic, and unnecessary – after all, you get along well, and your co-founders seem reasonable, right?  

Founder’s Agreements outline what’s expected of founders, detail important items like how and when equity will vest, and what happens if a founder becomes ill, incapacitated, or dies, and how conflicts should be managed. They are also essential for investor confidence and due diligence for future funding or exits.  

More than this, they serve well as a blueprint – designed to prevent future conflicts and to make it clear what happens if unresolvable conflicts do happen. 

We won’t detail all the ‘typical’ terms we include in founder’s agreements here, but some of the broad common inclusions are:  

• How equity is distributed and vesting schedules; 

• Roles, titles, responsibilities, and decision-making authority for each founder;  

• Co-founder exit provisions; 

• Intellectual property assignments;  

• Non-compete, non-solicitation, confidentiality, and non-disparagement agreements;  

• Dispute resolution mechanisms; and  

• Compensation and reimbursement. 

We’ll cover some of these terms in additional detail below, but we wanted to first touch upon some terms that are worth considering within co-founder agreements (but that may not be appropriate in every case).  

Good vs Bad Co-Founder Exits 

Another common misconception when it comes to founder agreements is that it’s designed to protect the company in case a co-founder relationship turns sour. There are plenty of reasons a co-founder would wish to leave that fall into the ‘good’ exit realm. What if the founder becomes burned out, loses their passion – or even becomes seriously ill? What if their role is redundant, or they’d like to leave to pursue another opportunity? It’s likely to be in the best interests of the company for this founder to leave, but it can still be complex legally. Your co-founder agreements should contemplate these possible realities, and what the financial outcome should be for the departing co-founder in this instance.  

The co-founder agreement can also include negative financial consequences in the event of a ‘bad’ exit. This could include consequences for departing founders that disparage the company or who don’t fulfill their responsibilities outlined in the agreement.   

Continuous Service Provisions 

Continuous service provisions tie co-founders’ equity vesting and certain rights to them being actively engaged in working with the company. These provisions are more often included as standard nowadays, especially for any VC-backed startups. 

Intellectual Property Assignments 

Getting your IP assignment right is one of the most critical elements of your early founder’s agreements.  

You can read more about co-founder IP assignments in our earlier piece. It dives into an example showing what can go wrong when IP rights aren’t ironed out in the early stages of a startup. One key takeaway we’d like to highlight – In most circumstances, allowing the co-founder to retain ownership while licensing rights to the company to use and practice the IP is usually a bad idea for core IP. It is simply too easy for the company to become heavily reliant on IP rights that could be readily removed. One alternative is to insist on assignment but offer to increase that co-founder’s equity share. 

Vesting Schedules 

Vesting schedules are so important to ensure founders “earn” their equity through continued service over time. Dead equity is problematic because it can lead to reduced motivation and resentment from active contributors and the dilution of value of the shares. In some cases, particularly in the case of departed founders or very early stage employees who are no longer with the company, it can also result in decision making challenges – if the dead equity holders have significant voting power. We’ve covered dead equity in detail in one of our most popular blog posts.  

Founders Agreements also can contain provisions that allow a company to buy back shares typically unvested. In some cases this can apply to vested shares, but that is less common.  

Finally, the agreement can also contain provisions designed to protect your company in the event it needs to buy out a co-founder. It can outline that co-founders may be bought out using specific mechanisms, like seller notes or equity-to-debt conversions (as opposed to a lump sum buyout). These can be negotiated after a founder elects to leave too, of course, but these terms can be more challenging where a co-founder is leaving on poor terms or being removed. 

Departing Co-Founder Checklist  

Whether your company has a co-founder agreement in place or not, this departing co-founder checklist may be helpful. (However, the process may be smoother if the agreement was in place.)  

It’s designed to address expectations going forward for the departing co-founder, as well as next steps for the company.  

Setting Expectations with a Departing Co-Founder  

Sign a Separation Agreement 

It’s critical to sign a separation agreement that outlines final compensation and either puts in place or reiterates key agreements, including a general release, IP assignment and non-disparagement, confidentiality, non-compete, and non-solicit agreements.  

If you had a co-founder agreement in place, it’s a good time to go over the departing founder’s obligations to the company.  

If you didn’t have a co-founder agreement, it can be very challenging to negotiate these terms if the relationship has soured. However, there are common levers you may use, including:  

• Compensation. This is likely one of your strongest levers, and you can make the compensation agreement contingent upon the departing founder signing the separation agreement.  

• Mutual non-disparagement clauses, plus neutral reference agreements which state you will confirm dates of service and role details but no further information about a departing founder’s time at the company.  

Agree how future work, if any, will be compensated 

There may be instances where your departing co-founder will complete future work for the company after they leave. The scope of work can range from sharing information for patents or other IP protections to working on a continuing basis as a contractor or consultant.  

To cover these situations, it’s helpful to agree on compensation for future work at or around the time the founder is exiting the company. Common arrangements include:  

• Equity vesting extensions, where departing founders can ‘bridge’ the time to a meaningful vesting deadline by acting as a contractor or training a replacement.  

• Hourly rates or monthly retainers, which can be based on their prior salary as a founder.  

• Milestone-based transition bonuses, which tie performance of the co-founder during their handover to a compensation bonus.  

Company Protections When a Co-Founder Departs 

Remove Exiting Founder’s Access to Systems & Company Accounts 

It’s critical that your systems are set up in a manner that allows you to transition access to key systems once a co-founder departs and revoke their access to the remainder. This is why it’s important to have strong cybersecurity hygiene as standard – with no shared passwords and/or password managers in use, as well as multi-factor authentication as standard. It’s also extremely helpful to have complete tech stack lists from each founder, so you know where your company information and assets are stored at all times – including in the event of a founder exit.  

Here’s a list to get you started:  

Audit Admin Privileges: Immediately transition “Super Admin” status for core infrastructure (AWS, Google Workspace, GitHub) to a remaining founder.  

Revoke Financial Authority: Notify your banking institutions to remove the departing founder as a signatory and cancel any associated corporate credit cards. 

Secure Intellectual Property: Ensure all code repositories and project management tools (Jira, Asana) are locked down. If the founder used personal devices, execute a “Remote Wipe” of company-managed apps or have them sign a declaration confirming that all company data has been deleted from their personal hardware. 

Password Management: If you use a shared password manager like 1Password or LastPass, rotate master keys for any accounts that do not support individual user logins.  

Return company equipment: the company should have detailed lists of the company equipment each founder has, and all of that should be returned on their departure (unless otherwise negotiated). If they are keeping their company-owned equipment or they use personal devices for company work, it’s important to ensure all the corporate information is wiped. You can include clauses about this in your separation agreement too, and you may wish to have them sign a statutory declaration stating that they have returned all company property and removed all company information from their devices. 

Create a Communications Plan – & Distribute  

A co-founder leaving may spook employees and investors, so it’s important that you communicate clearly with your team and stakeholders to outline the narrative behind the change.  

The ‘stakeholders’ you want to communicate with include employees, investors, and high-value clients and partners. It’s helpful to offer each stakeholder opportunities to speak directly with business leaders. The goal of these communications is to reiterate the company’s roadmap, and highlight transition planning – not to discuss the circumstances of the founder’s departure.  

Best practices for creating and distributing a communications plan following a founder departure:  

• Before publicly sharing any information, it’s helpful to ensure the remaining founders, leaders and board members are aligned on the communications plan.  

• Be brief, clear, and calm in your communications.  

• Focus less on the reasons behind the founder leaving and more on the roadmap forward.  

• Having the CEO reach out directly to key partners and clients to introduce them to their new point of contact and to reiterate the company’s commitment to them can be valuable. 

Discuss Your Co-Founder Agreements with CGL 

At the end of the day, “legal hygiene” isn’t just about paperwork – it’s about ensuring that the business you’ve poured your life into has the stability to thrive, regardless of who is in the room. 

Whether you’re currently navigating a transition or just want to shore up your foundations before the next big milestone, we’re here to help you get the framework right. 

If you’re interested in discussing your company’s corporate agreements, reach out. Our experienced attorneys are available to assist.  

• Corporate Insights
• Startup Advice