A useful end plan: what to do when a relationship with your co-founder ends

By Vivian Michael | Startup Contracts

A useful end plan: what to do when a business relationship with your co-founder ends

What to do when a relationship with your co-founder ends

Having an end-plan with your co-founder can reduce the pain of parting ways 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.

If you don’t have an end plan, here are some useful tips. 

What to do if you don't have an end-plan

You can talk with your co-founder to discuss what you would both like to achieve.

If you are struggling, a mediator can help you and your co-founder start a constructive conversation about your end-plan.

A disclaimer like the one below can make it clear that any terms will not be binding until they are included in a legal document.

If you are not seeing a lawyer and want the agreement to be binding, you should not use this disclaimer.

Sample disclaimer

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.

Mediation

A mediator with business dispute experience is best.

Your mediator will listen to you both 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. They may offer up some 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.

Deed 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 decided not to see a mediator, a lawyer can help you prepare a deed of settlement from start to finish.

A deed of settlement is a legal document that set how you and your co-founder will end the business relationship  and avoid Court.

Suggested deed terms

Below are some things to consider including in your deed.

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 with this. 

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.

Client and customer lists -  you can draft up a list of the existing clients and customer and how you will split/transfer these.

Shares - will either co-founder sell shares to the other? tax advice is usually helpful to decide this.

Finances - What are the business assets and business liabilities each co-founder contributed ?

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.

Suppliers - if one of you has been dealing with suppliers, you may need their details and contract terms to continue the business.

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.

Advice

Financial and legal advice will be helpful for structuring agreements that are legally enforceable and tax effective.

An accountant can help you decide:

  • a tax effective way to structure the sale including whether it should be a share sale;
  • how to split assets and liabilities;
  • calculate your initial and ongoing financial contributions; and
  • any sale timing

A lawyer can help you to:

  • review your agreement with your co-founder;
  • draft your terms of settlement; 
  • act as a middle person if its not possible to communicate with your co-founder;
  • draft, review or revise any sale documents.

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.

Key points

Here’s what you need to do if you are parting ways with your co-founder:

  1. Speak to your co-founder about what you would each like;
  2. Summarise the agreement in writing, make sure its non binding if you want a lawyer to help you later;
  3. Get the help of a mediator if you need it;
  4. Check your existing agreements for any clauses that deal with an end plan; and
  5. Get legal and financial advice.

Do you need help from an Australian business lawyer for startups? Contact us today for help on info@michaellawgroup.com.au or 1300 478 278 Australia wide or on +61 2 9151 7233 from overseas. We are always glad to help.





About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to startups that would otherwise DIY, rely on legacy contracts or go without.

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