How to Part Ways with Your Co-Founder (Without Blowing Up Your Startup) – 1984 Ventures - Founders Handbook

Why Founder Departures Happen

The more founders a startup has, the more likely one will depart or be forced out early in the company's life. Founder disagreements arise for various reasons, but they typically fall into three main categories:

• Having the wrong co-founder. A classic example is someone brought onboard as a cofounder because they had the original idea or industry expertise, but who turns out to lack the skills needed to be a startup leader—whether that's functional skills or the startup mindset around pace and risk taking.
• A lack of alignment over strategy or vision. Typically this materializes when the startup is unable to find product market fit—and the founders gravitate to different ideas.
• Inability to scale with the company. If your startup starts to grow exponentially, it will outpace most of its executives. A common example is a CTO who excels at building the initial product and can manage a handful of engineers, but is unable to scale to dozens.

It's important to note that a departing co-founder often finds success elsewhere. Additionally, a co-founder who isn't the right fit for one startup may excel at another.

The Five Steps of Founder Transition

How a CEO handles a co-founder's departure can make the difference between a smooth transition and organizational collapse. Here are the steps you need to follow.

1. Communicate Well Before the Decision

A co-founder should never receive this news as a complete shock. If they do, it indicates your failure as CEO to address ongoing disagreements or dissatisfaction. Before reaching this decision, voice your concerns clearly to your co-founder and give them a fair chance to address them.

2. Get Good Advice

Reach out to your senior investors, advisors, and angels (and board members if you have them). This step serves two purposes: getting advice and informing your stakeholders.

• When talking to your investors, ideally you're asking for their advice on executing on the decision, not asking them to weigh in on the decision.
• If you do have a board, you need to get their buy-in. The board has the power to remove the CEO.
• Finally, consult your lawyer. They will ensure you're properly protected with employment termination, separation agreements, and other legal documentation.

3. Come up With a Comp Package and a Transition Plan

Before getting into the comp package details, it's important to understand what your co-founder needs from the company and what you need from them.

Your co-founder will typically want:

• Respect and prestige: maintain their co-founder title and control over the story/narrative.
• Some equity.
• Some cash compensation based on their financial situation.

What you want from your co-founder:

• A fully signed separation agreement.
• Their future vote in financing and M&A.

In general, most separation package offers a combination of:

• Cash: The range can be anywhere from 2 weeks to a year.
• Equity: Expect to provide a little more equity than they have vested.
• Title (maintain co-founder, stay on as an advisor).

4. Execute on the Transition

How you handle the conversation will impact the outcome. Put yourself in your co-founder's shoes and show appropriate respect. Some specifics:

• Show up: if your co-founder is far away, visit them in person.
• Get straight to the point.
• Own the decision.
• Listen actively.
• Focus the discussion on the terms of the separation.

5. Start the Replacement

If the departing founder owns a crucial function, they will need to be replaced right away to maintain momentum. Start recruiting in stealth as soon as you have made the decision.

Getting Help When Things Go Wrong

Even with careful planning, some transitions can become contentious. If your co-founder becomes uncooperative, stay calm and professional. Here's how to handle it:

• Listen actively to their grievances.
• Engage trusted investors or advisors as mediators.
• Don't let negotiations drag on indefinitely.
• Consider bringing in a professional mediator if internal attempts fail.

While founder departures are challenging moments in a startup's journey, they don't have to be catastrophic. With careful planning, clear communication, and empathy, companies can emerge stronger and more focused.