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Exit strategies for startups
Updated: 21 October 2022
Founding a business with others is an exciting time.
There is so much to think about and do that you may not think of a time in the future where you may need an exit strategy.
But an exit strategy is wise because you never know what will happen in the future.
While you may not have an exit strategy now, this article offers legal tips about the steps to take before you see a lawyer if you do not have an exit plan. These can help you sort out your exit strategy so you can move on sooner.
Founders agreement & Shareholder Agreement
When you have an exit plan, it is usually in a founder’s agreement and/or shareholder agreement.
The minimum exit terms usually cover:
- Share treatment on exit such as the sale and/or ability to keep shares
- Notice period
- Confidentiality
- Intellectual property.
If these terms are not in any of your agreements, prepare non-binding terms before seeing your lawyer.
Non-binding terms
Non-binding terms are not legally binding.
These are terms informally agreed to by both parties when one wants to exit the business. These terms become binding when they are in contract form and all parties sign the contract to indicate their agreement.
So if there is no exit plan in place, negotiate your exit terms informally to create non-binding terms before seeing a lawyer. This saves you a lot of money on legal costs.
Make sure you document, at a minimum, the following:
- The party who is to take action.
- Detail what they need to do to complete the action.
- The timeframe to complete that action.
The following is a template to use. It is for a co-founder leaving a company and includes some sample terms.
Non binding exit terms sample
Company/Business Name and ABN
Parties: [insert names]
Subject to both parties obtaining legal advice, below are the draft terms for your/my/our proposed exit. Both parties understand and agree that the terms will not be legally binding until they are formalised in a legal agreement that is prepared by a lawyer and executed by all parties.
The following items are a guide on how to start but they are not exhaustive:
- [shareholder name] is to sell x shares back to [insert company name].
- [director/employee anime] is to provide a handover of x, y, z by ….
- [director name] is to resign from a director’s role by [insert date] and the change is to be recorded with ASIC within 28 days of formalising this agreement.
- [company name/party name] will own intellectual property.
- [director name] is to receive $x for initial capital contribution.
- [director name] is to remain a director of the company.
- Confidentiality: Both parties agree not to disclose the exit terms other than the way described in the exit notice below.
- Mutual release: Both parties agree to mutually release each other from any liability in connection with [insert business/company/project name].
- Exit notice: Both parties agree that notice of [insert co-founder’s name/s] exit will be by [insert name] OR both parties agree not to disclose the exit unless asked by customers and in this case the response will be [insert name] has moved on for another opportunity but it is business as usual here, and [insert name] will now be helping you.
- Social media: [Co-founder name] agrees to provide all social media login access details (if only one of the parties was managing accounts).
Once you document your key exit terms, you lawyer will draft a legal document, a deed of release, with all the relevant details.
Deed of release
A deed of release is the formal legal document used to document exit terms.
Sometimes exit terms may be in an agreement with another name such as terms of settlement or a termination agreement. No matter what it is called, they all cover the same topic.
However, a deed is common and used over an agreement because it has a longer enforcement period if parties breach the terms.
The exit terms of both parties are set out in a deed of release. This provides comfort that no one will take legal action against the other. So it needs to be fair and the exit terms should be mutually agreed upon. Both parties release each other from liability and agree to keep each other’s information confidential among other mutual terms.
For more information about deeds and agreements, I have written several articles on the subject, including:
- Deed or agreement – which one should I use?
- How to sign your deed correctly & some handy samples for your use
- Top 5 deed of settlement tips: how you can protect your business when you are asked to sign a deed of settlement
Limitation periods
Under a contract, whether written, verbal or a hybrid of both, there is a limitation period for making a claim.
While it is 12 years or longer under a deed, it is best to act quickly so you can move forward. There may be a small chance of obtaining an extension in some circumstances, but it is not wise to risk it so act quickly. The following are the limitation periods for each state:
- QLD, New South Wales and the Australian Capital Territory, the Northern Territory or Tasmania - 12 years
- South Australia or Victoria - 15 years; and
- Western Australia - 20 years.
Note: If you do have a deed or agreement in place that covers the other aspects of the working relationship, the normal enforcement period that applies is six years for an agreement and longer for a deed (12 or more years depending on what state you are in). You can read about deeds in our other useful reads here:
Bringing it all together
When a co-founder wants to leave the business, check your legal agreements to see if there is an exit plan.
If there is no exit plan, prepare mutual non-binding terms. Once you have these sorted out, speak to a lawyer to have them accurately documented so they become binding.
Do you have questions or comments ? Be sure to leave them below.