They say that the co-founder relationship is like a marriage. Indeed, founders probably spend more of their waking hours together than with their spouses. So, it should come as no surprise, that just as many marriages fail, the same is true of founder relationships.
I have been part of many startups where one or more founders left (or was asked to leave). It was always disruptive when it was happening, but always better in the end.
The Founder Pre-Nup
Given the rate of founder departures it makes sense to set things up on the assumption that you will lose a founder along the way. If you raise VC (beyond seed), you will very likely have to re-vest all or a portion of your shares. Founders are initially resistant to this. But as I have posted before, vesting is a good thing. The last thing you want is for a founder to take off with a big chunk of the company that she owns free and clear.
When it happens…
With or without vesting, if and when you lose a founder, here are some thoughts.
Keep it private: People will know that someone’s gone. But there’s no need to make a big stink about it. No one benefits. Avoid headlines like this:
Governance: If this founder is a large shareholder, she may still be on the board. This can make for some uncomfortable board meetings. At the early stage, when board meetings are less of a thing, I actually encourage companies to not hold formal board meetings until you’ve sorted things out once and for all with the departed founder. You don’t need a formal board meeting in order to talk to your investors or other directors.
What to do with founder shares?
The question that always comes up is what to do with the departed founder’s vested shares – the ones she can keep after she’s gone. She may want the company to buy them back. Most often that’s not the best use of your precious cash. And your investors might not want her to have a liquidity event before them.
On the flipside, if she holds on to them, then you’re working, in part, to make her rich. I have seen a bunch of things happen here.
In the best cases, the departing founder actually gives up part of her shares so that the company can replace her and use that equity to find the best person. Clearly here, the departure is happening on as good terms as possible. And the person realizes that owning a smaller portion of something that has a better chance of working, is better than just holding onto all her shares no matter the impact on the company.
If you don’t have such a productive dynamic, remember, the company – in most cases – holds the cards. There is no market for the founder’s shares. There is no obligation to buy them. You’re free to strike whatever deal you like, including no deal.
As a rule of thumb, if it’s still very early stage then you don’t know whether you have a winner on your hands. The fact is, most startups fail. Meaning the founders see no return or a small one. If you’re still in that stage my counsel would be to let the departed founder go on the ride with you. No sense cashing them out only for you have to get nothing, even though you stayed on.
But, once you’ve hit your stride as a growth stage company. Where the market is clearly happening, you have proven your ability to scale and it’s now down to execution. That’s the time to buy the founder out.
When you hit the growth stage you can raise tons of capital. It’s standard operating procedure to use some of that capital for “secondaries” – buying shares from founder/ and early angels. In fact there are funds such as Millenium Technology Ventures or Mainsail Partners that specialize in this.
That’s my take. Set up founder vesting. Try and keep things as cordial as possible when someone leaves. And don’t cash them out until you’re into the growth stage.