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Founder Departure — Legalities of Painful Goodbyes

Farewells are always unpleasant and one of the hardest thing for an early stage company is the founder departure. Some examples that come to mind in recent years include Twitter and Snapchat. There are many reasons for a founder departure and things can get very messy, very quickly.

Some founders might have only preliminary or oral arrangements regarding the startup or prefer to apply the lean methodology to postpone legal formation. Can it get ugly? Do you need a lawyer to remove a founder? The answer is it depends, but in general to reduce future liability (litigation) of the startup and give the remaining founders peace of mind it is advisable to have your lawyer prepare a separation agreement.

Separation Agreement

The separation agreement spells out various matters that might not be obvious for a non-lawyer. The obvious issues in the separation agreement is the termination of service and resignation from company offices by the departing founder. The agreement should specify the last day of service/consulting by the founder and make sure all financial obligations of the company end on the day of founder departure. The resignation from company offices includes removing any reference by the founder to the company post termination on social media profiles, like AngelList, Linkedin or Facebook. Without explicitly requesting this the departing founder is not obligated to remove such references on social media. Believe it or not this is a problem.

Non-compete

Termination of service and resignation should be also tied into a non-compete provision for an appropriate time period. The scope of the non-compete should be consulted with a lawyer, because various jurisdictions contain different limitations on the scope of the non-compete. Parallel to the resignation from company offices (directorship) the departing founder should waive any claim against the startup for damages and future liabilities.In exchange the company should also waive any claim against the founder. Furthermore, the release should release the startup of all unknown future claims associated with founder departure.

Non-disparagement

The departing and remaining founder should agree that he or she will refrain from making any disparaging negative or uncomplimentary statements in public or private about the remaining founders or the startup. This obligation includes tweets, blog posts or status updates on Facebook. Non-disparagement clauses are usually supplemented by a limited reference clause, which specify what the parties can say about their relationship in the future. For example that the startup and founder can specify to the outside world that the departing founder assisted with the company and left the company on a specified day. This resolves the issue what can be communicated to the outside world post founder departure.

IP

The separation agreement should also specify that the IP belongs to the company. The departing founder in the this provisions also waives any rights to IP and assigns any residual IP rights to the company.

Release and Waiver

Finally and most importantly, the separation agreement should contain an explicit equity release and waiver. In plain English this means that the founder is not entitled to equity, stock, options or shares in the company. If the departing founder received shares, which were not on a vesting schedule, he should return such shares to the company.

Written by

Law firm specializing in startups, series A and US expansion. No legal advice I No attorney client relationship I Attorney advertising

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