What needs to be addressed if a founder separates from the company?
If mishandled or not properly documented, a founder separation can be fatal for a startup. We recommend startups consult their attorney for assistance with a founder separation, especially if the circumstances involve anything other than an amicable separation.
The general information below outlines common matters that arise in connection with a founder separation, including (1) repurchase of unvested shares, (2) termination certification and (3) various matters regarding director and officer positions.
Repurchase of Unvested Shares
If a founder was issued shares that remain subject to vesting, the company is typically able to acquire the unvested shares upon the termination of services of the founder by following the terms of the founder’s original stock purchase agreement.
Under the terms of most stock purchase agreements available on Clerky, the company typically delivers a check to the separating founder to buy back their unvested shares at the original purchase price. For example, if a founder was originally issued 1,500,000 shares for $15.00 and then terminates service prior to vesting in any shares, the company will deliver a $15.00 payment to the founder to repurchase all 1,500,000 unvested shares.
To avoid potential ownership disputes, it is important to document and keep clear records of both (1) the stock repurchase and (2) the delivery of the company’s payment to the founder. We don’t have any products for documenting the stock repurchase, but provide the following sample notice for review.
Sample Notice of Forfeiture or Repurchase [COMPANY NAME] (the “Company”) provides this Notice in connection with the termination of services of [SERVICE PROVIDER NAME] (the “Service Provider”) on or about [DATE OF TERMINATION]. This Notice memorializes the forfeiture or repurchase of [NUMBER OF SHARES FORFEITED OR REPURCHASED] shares of the Common Stock of the Company held by the Service Provider (the “Shares”). In accordance with the terms of the agreement between the Company and the Service Provider providing for the forfeiture or Company repurchase of unvested shares, the Company shall be the legal and beneficial owner of the Shares and shall have all rights and interest therein or related thereto, without further action by the Service Provider. Acknowledged and Agreed: [COMPANY NAME] Signature:____________________ Name:____________________ Title:____________________ [SERVICE PROVIDER NAME] Signature:____________________
CIIAA Termination Certification
The Confidential Information and Invention Assignment Agreement (CIIAA) signed by a founder as part of the Post-Incorporation Setup includes a Termination Certification as Exhibit C. It is desirable to obtain the departed founder’s signature on the Termination Certification, which they agreed to do under the terms of the CIIAA when the founder originally signed it.
If the founder is on the board of directors or holds any officer positions, the company should obtain a short written resignation statement from the departed founder to keep in its records. If the founder is unwilling to deliver a resignation statement, it is critical to consult an attorney.
Many companies simply collect the resignation statement by email, but a physical document is also acceptable. The language should be customized for the circumstances of a particular founder’s departure, but, for example, for a founder who resigned on August 1, 2014 as a director and as Secretary of Acme, Inc., the statement might be as simple as:
This confirms that my resignation from Acme, Inc. is effective as of August 1, 2014. This resignation includes all positions held by me with Acme, Inc. including, without limitation, my positions as a director and as Secretary of the company.
The company should fill any vacant officer positions created by the founder’s departure. Clerky has some officer appointment products that you can review to determine if they will work for your circumstances. To request access, email a description of your circumstances to firstname.lastname@example.org.
In some circumstances, vacant director positions may be left vacant. However, in cases where no immediate successor is contemplated, it may be appropriate for the company to reduce the size of its board of directors so that no vacancies exist. Eliminating the vacant seat avoids potential issues where action taken by the remaining director(s) is invalid under the quorum requirements of Delaware law and the company bylaws. It's important to consult an attorney for assistance so that the company's future corporate actions are not deemed invalid, which can create incredibly complicated and expensive legal issues, some of which may be impossible to remedy.