My cofounder is leaving. How should he exit?

Generally two things are most important:

  1. The departing co-founder has limited control, going forward. She’s transitioned to passive shareholder. She has rights as a shareholder. But she’ll be diluted in future rounds. She won’t get additional grants. And ideally, if the price is fair, she shouldn’t be able to block an acquisition.
  2. The go-forward equity structure has to “work”. It may be OK if you are both 50/50, if you add “another” 50, for example, for all the next employees. And maybe another X% for you. There’s no perfect formula here, but ideally, your cofounder exits with a very fair amount of fully-diluted equity. But in the end, it’s unlikely she’ll be able to retain more than 20–25% (if she has 50% now) for it to all to work out.

And, if possible …

  1. Buy her out, at least in part, if you can. After you work on 1. and 2. above, if you can buy at least some of her shares out at a fair price — that will be better all around.

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Published on July 24, 2016

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