February 6, 2021

Photo by Belinda Fewings on Unsplash

Legal tips for a startup exit strategy and when you don’t have exit plan in your legals or any legals at all

If you're working with your co-founders and you don't have an exit plan in your legals or any legals for that matter, you can take steps to sort out your exit strategy from now. 

And, yes, you can take these steps before you see a lawyer. 

Below are tips to help you with your exit strategy so you can start your brand new chapter sooner.

As always, get advice if you are in doubt.

In a hurry? Jump ahead below. 

Founders agreement & Shareholder Agreement

Usually if there is an exit plan, it can be found in a founder’s agreement and/or shareholder agreement. 

Exit terms usually cover at a minimum: 

  • Share treatment on exit e.g. sale/ability to keep shares
  • Notice period 
  • Confidentiality; and 
  • Intellectual property

If you don’t have these terms in a founder or shareholder agreement or any other agreement, you can prepare non-binding terms like the one below, before you see a lawyer. 

Non-binding terms 

Non binding terms are what parties have informally agreed about  a topic and aren’t legally binding until they are in contract form and executed by both parties. 

The idea with non-binding terms is that you’ll save more legal costs if you can negotiate most exit terms informally with the other parties BEFORE you speak to a lawyer. 

The example below is for a co-founder leaving a company with some sample terms. 

Regardless of whether you use the ideas in the sample below, if action needs to be taken, be sure to document: 

  • The party to take the action
  • What they need to do with sufficient detail; and 
  • The time frame to complete that action 

Now, onto the template. 

Non binding exit terms sample

 Company/Business Name & 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 items below give you some tips on how to start but they aren’t exhaustive. 

  • [shareholder name] to sell x shares back to [insert company name]. 
  • [director/employee anime] to provide a handover of x, y, z by …. 
  • [director name] to resign from director role by [insert date] and change to be recorded within ASIC within 28 days of formalising this agreement.  
  • [company name/party name] will own intellectual property. 
  • [director name] to receive $x for initial capital contribution. 
  • [director name] to remain 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 its 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). 

While the heads of agreement document key exit terms, the detail is found in the the legal document drafted by a lawyer and this brings us to the deed of release.

Deed of release

A deed of release is the formal legal document that’s drafted and used to document exit terms. 

Note that sometimes exit terms may be in found in an agreement which might be called something else, like terms of settlement or a termination agreement.

The title is not too important because 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. 

I’ve written about deeds before, here and here and here and in a few other articles on this website if you want to read more about them. 

A deed of release sets out both parties exit terms and provides comfort to both parties that each party won’t take legal action against the other. 

For this reason, and to be fair, exit terms should be mutual. 

That is, both parties release each other from liability and both parties agree to keep each other’s information confidential amongst other mutual terms.

Now, the key reason for having your exit terms as a deed and not an agreement is because you'll have a longer enforcement period. 

You can read more about the difference between deeds and agreements here

Limitation period 

There’s a limitation period to make a claim under a contract and remember a contract can be written, verbal or a hybrid of both. 

While the limitation period is long, it’s a good idea to act fast while contract terms are fresh and also so you can move on and begin your new chapter. 

In Australia these are the limitation periods by state. While there may be some small scope for an extension in some instances, don’t risk it. 

  • NSW: 6 years based on s. 14 Limitation Act 1969 (NSW)
  • QLD: 6 years based on s. 10 Limitation of Actions 1974 (QLD)
  • VIC: 6 years based on s. 5(1) Limitations of Actions Act 1958 (VIC)
  • WA: 6 years based on s. 13 Limitation Act 2005 (WA)
  • SA: 6 years based on s. 35 Limitation of Actions Act 1936 (SA) 
  • TAS: 6 years based on s. 5(3) Limitation Act 1974 (TAS)

In this article, we’re talking about a specific situation where the parties don’t have an exit strategy in place in existing legals or if they do have any existing legals, they simply don’t cover exit plans. 

Please note that if you do have a deed in place or agreement in place that covers the other aspects of the working relationship then the normal enforcement periods apply: 6 years for an agreement or longer for a deed (12 or more years in Australia depending on what state you are in). 

Bringing it all together 

Check any existing agreements that cover your exit strategy. 

If you don’t have an exit plan covered, prepare non-binding terms then speak to a lawyer to get those terms documented accurately. 

I wish you every success in your new chapter! 

Do you have questions or comments ? Be sure to leave them below.

About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, CPA and owner of a business consultancy, Vivian is well-positioned to advise Australia's top entrepreneurs. Entrepreneurs benefit from Vivian's commercially focussed legal advice, business experience, and commitment to deliver the best quality business legal services to entrepreneurs.

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