Making Co-founder's Exit a Seamless Process It is important to terminate the role of an exiting co-founder with full transparency
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Co-founder relationships are delicate. It may help entrepreneurs share the load, but any unfortunate spat can also hurt the business. According to an article by psychotherapist and author Esther Perel, 65 per cent of startups fail because of interpersonal tensions within the founding team.
Sometimes, a co-founder may also want to quit for various reasons. For instance, in 2018 Zomato co-founder Pankaj Chaddah left the firm to launch Mindhouse, a mental health startup and in 2019 NestAway co-founder Deepak Dhar left the company to launch a fintech startup.
While a co-founder exiting at a mature stage of the startup often means that they are leaving for reasons such as losing interest in the current business or finding new interest in another opportunity, an exit at an early stage could be due to misunderstandings between the founders.
Whatever the reason may be, it is important that the exit is smooth and conflict-free and ensure that investors and consumers do not lose confidence.
Here are some things that co-founders should consider if one of them decides to leave.
Not an End For the Business
"A co-founder is literally like a spouse and becomes an integral part of your life. You end up sharing a lot more time and naturally a lot more of your life--both personal and work-related--with the co-founder. But a time may come when the co-founder has to exit the business for various reasons including personal ones or simply because the co-founder may not be able to relate to the company and its business any longer," said Suresh Rangarajan, founder of Colive.
A co-founder leaving a startup may feel like a big loss, but it certainly does not have to mean an end for the business. "While it may have an initial impact on the company's culture and morale, there are certain measures a company can take on to help make the exit situation easier to deal with," said Rohit Pugalia, a serial entrepreneur and an angel investor.
The exit of a co-founder should not lead to issues about business ownership and rights. A well-drafted shareholder agreement with properly defined exit clauses can play a vital role in making the exit process easy and seamless, said Tarun Gupta, founder, Ultimate Battle, an online esports platform.
He also added that it is important to note that exit is not limited to ownership only and knowledge transfer is also a key element that must not be ignored during an exit of a co-founder.
According to experts, co-founders should ensure an agreement amongst themselves that takes care of the following:
- Anyone who leaves earlier should not walk away with a substantial stake in the company.
People who stay back and work towards building value should be rewarded.
There is enough skin in the game for the senior leadership team.
"To ensure the above, the agreement amongst the founders should incorporate a structure with a vesting schedule for the founders over a 4 to 5 years time frame. There should also be the ability for the founders not leaving the company to buy out the stakes of those leaving at a substantial discount to the fair market price," said Vikram Gupta, founder and managing partner, IvyCap Ventures Advisors.
Communicating With Team and Investors
It is also important that the co-founder is empathetic and avoids any negative connotations about his partner, especially with the larger team. The role of the exiting cofounder should be terminated fairly and with full transparency.
"The co-founders should immediately consult with appropriate professionals to avoid potential legal hassles in the future. Before communicating with the larger team, the founder should have a soft plan of action in place, providing thorough guidance and direction to the employees, and other partners if any," said Pugalia.
During the exit, it is key to discuss openly without getting emotional and not to do post mortem about each other's failures.
"Stakeholders including shareholders and employees have to be kept informed at the appropriate time. Founders should ensure that these people don't hear the news from outsiders. Co-founders have to be in sync to all this and a well-thought-through communication strategy is key to ensure the transition is smooth," said Colive's Rangarajan.
Some founders suggest that it will always be good to pen down on an email the various successes that have come through from the association and then clinically write down why parting ways now will be good for everyone including the organization.