A useful end plan: what to do when the working relationship with your co-founder ends
Updated: 8 December 2019
Having a founder's agreement in place can reduce the pain of parting ways with a cofounder and help you move on faster.
Why ?
Co-founder or partnership agreements usually have clauses for an end-plan; these clauses outline how you will handle key matters at the end of your business relationship.
Even if you don’t have an end plan, below are some useful tips.
In a hurry? Jump ahead.
What to do if you don't have an end-plan
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.
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.
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
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 all \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.
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 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.
Suggested deed terms
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.
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 for effective tax planning.
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; and
- draft, review or revise any 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:
- Speak to your co-founder about what you would each like;
- Summarise the agreement in writing, make sure its non binding if you want a lawyer to help you later;
- Get the help of a mediator if you need it;
- Check your existing agreements for any clauses that deal with an end plan; and
- Get legal and financial advice.
Got questions or comments about founders agreements or ending a relationship with a cofounder? Be sure to leave them below.
I wish you success in your ventures!