What to do when a relationship with your co-founder ends
Having a founder's agreement in place can reduce the pain of parting ways with a cofounder and help you move on faster.
Co-founder or partnership agreements usually have clauses for an end-plan; these clauses outline how you will handle the end of your business relationship.
Even if you don’t have an end plan, below are some useful tips.
If you don't have an end plan, you can talk with your co-founder to discuss what outcomes you would both like.
And if you are struggling doing this, a mediator can help you and your co-founder start a useful conversation.
A disclaimer like the one below can be included in draft end-plan terms and makes it clear that any terms will not be binding until they are included in a legal document.
Now, if you are not seeing a lawyer for the initial discussions and draft end-plan and DO NOT want the agreement to be binding until you see a lawyer and have a formal agreement drafted, you can use the disclaimer below.
This document does not constitute an offer or agreement of any kind. This document serves only to assist in the finalisation of a formal agreement between all parties. Any reference to currency refers to [insert currency]. It is highly recommended that all parties seek independent legal and financial advice before proceeding with any agreement, contract and/or deed.
Using a mediator with business dispute experience is going to be best for you and your co-founder.
So what happens during mediation ?
Your mediator will listen to the co-founders and guide a structured conversation to about next steps finalise the business relationship.
Unlike a magistrate, a mediator won't make a legally binding ruling about your end-plan. However, they may offer up some useful suggestions for settlement terms.
Once you have agreed how you will part ways, the next step will be to have them included in legally binding terms of settlement.
After seeing a mediator to agree key terms, you can have the terms included in a deed of settlement by a lawyer.
Even if you have opted not to see a mediator, a lawyer can help you prepare a deed of settlement from start to finish.
So what exactly is a deed of settlement ?
A deed of settlement is a legal document that sets how you and your co-founder will end the business relationship and avoid Court.
Below are some items to consider including in your deed.
1. Business structure - will you keep the existing business entity? if it's a company, you'll need to notify ASIC about changes to directors or shareholders. A lawyer or accountant can help you with sorting this.
2. Non compete - if one co-founder sells their interest in the business to the other, then you may want to consider a non-compete clause, this may include restrictions on setting up a competing business within a certain location or soliciting clients or any existing workers.
3. Client and customer lists - you can draft up a list of the existing clients and customer and how you will split/transfer these.
4. Shares - will either co-founder sell shares to the other? tax advice is usually helpful to decide this.
5. Finances - What are the business assets and business liabilities each co-founder contributed ?
6. Lease - there are usually terms in your lease that state you will need to notify the landlord of any changes to directors and shareholders. You will need to comply with those terms so you are not in breach of your lease.
7. Suppliers - if one of you has been dealing with suppliers, you may need their details and contract terms to continue the business.
8. Workers - you can decide how the workers (if any) will be managed - for example, will you pay them out or have them stay on in the business if it continues to trade.
Confidentiality - parties may agree to keep the terms confidential with the exception of financial and legal advice.
Intellectual property - you will need to check any existing agreements to see who will own intellectual property rights.
Mutual release clause - a clause that states neither party will take any legal action against the other.
Financial and legal advice will be helpful for structuring agreements that are legally enforceable and tax effective.
An accountant can help you decide:
A lawyer can help you to:
If you have an accountant and lawyer helping you, your accountant should be giving your lawyer a list of your assets and liabilities to draft your terms and prepare any sale documents.
Here’s what you need to do if you are parting ways with your co-founder: