How does a co-founder protect against being terminated and losing unvested equity?


2

If there's a Founder's Agreement in place with a vesting schedule, how does one actually go about firing a co-founder such that he loses his unvested equity?

For a three person startup (split evenly), I'd assume the other two just vote the third out.

But what about two person startups where the equity is split evenly?

How does a co-founder protect himself from being terminated without cause (like a power/equity grab)?

Legal

asked Dec 13 '11 at 05:35
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Helo
11 points

3 Answers


5

50-50 founders who think ahead will build a mediation provision (mediation by a trusted third party or a commercial service) into their shareholder agreement or LLC operating agreement.

For more on this topic, please see Resolving Small-business Disputes: The 50-50 Deadlock.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

answered Dec 13 '11 at 09:44
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Dana Shultz
6,015 points

1

If there is a founder agreement in place, then you need to read it to find the answer to your question.

If the equity is split equally and there is no mechanism to break a tie, you are stuck. That's usually the beginning of the end for a startup when the two founders break apart, which is why I advise against a 50/50 split. Try to figure out who is in charge before it becomes an issue.

answered Dec 13 '11 at 06:32
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Alain Raynaud
10,927 points

0

There is no "ultimate" protection. But, IMO, you can mitigate the majority of your risks by having a good background relationship with the person you are going into business with, having clearly defined goals, tasks, strategies, etc. You can never anticipate everything, but you'd be surprised just how many things can be solved by simple respect, understanding, and clear guidelines. Hell, you can use "rock/paper/scissors" to break ties and make decisions, as long as everyone understands and agrees that is the process.

If you are having these thoughts and concerns before you have really gotten to the serious meat of the business, it may be a good idea to stop and rethink the whole thing...

answered Dec 13 '11 at 08:59
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Brian Karas
3,407 points

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