When Len Bosack and Sandy Lerner started the company that became networking giant Cisco while working at Stanford University in the mid-1980s, the husband-wife team probably did not anticipate a messy breakup. However, the cofounders of the technological powerhouse had a very public falling out that forced Lerner to leave the company. Their nontraditional partnership illustrates the difficulties in breaking up with a cofounder and how this dissolution can be an unpleasant (and sometimes costly) process.
Many entrepreneurs enter into a partnership because each person brings unique and beneficial expertise. The excitement of starting a business typically pushes any thoughts of a breakup to the background. However, every business partnership has the potential to end, and this possibility needs to be discussed and planned for at the beginning, not the end, of the business relationship. According to Harvard Business Review, most new businesses fail.
First-time entrepreneur Tami Hausman encountered this issue when, after working ten months with the cofounder of their communications firm, she decided to end the partnership. Hausman told the Wall Street Journal that things got “ugly” during the dissolution, and she ended up buying out her partner after a stressful “breakup .” However, there are steps that can be taken ahead of time to ensure a breakup between cofounders is amicable, so that the company, as well as the relationship, might be saved.
Building in an Exit Strategy
There are many reasons an individual may decide to break up with a cofounder, including, as was true in Hausman's case, diverging goals, personal conflicts, health problems, or even the death of one of the cofounders. Although discussing the end of a company is difficult when you are just building a partnership, having an exit strategy in place is imperative so that if the partnership doesn't work out, the business—and the relationship—are not sacrificed.
A partnership is not unlike a marriage. When it begins to fall apart, emotions can run high and communication can become strained as each partner worries about being treated fairly. Having a prediscussed, prewritten exit strategy that was a collaboration of both partners can help keep anxieties from running amok during this sensitive process. Including specific steps in the business plan or operating agreement for how a potential dissolution of the partnership will be handled, and having these steps reviewed by an agreed-upon attorney, can help avoid potential problems going forward. Possible exit strategies might include one of the following:
- Owner buyout: One cofounder can buy out the other if the company is performing well and the cofounders' goals are simply heading in different directions.
- Replacement: If the company is performing well, one cofounder may stipulate the option to bring in a third party to be trained by, and replace, the exiting cofounder.
- Liquidation: If the company is performing poorly, the best option may be liquidation.
- Arbitration: Another option is stipulating a third-party arbitrator who will be brought in to ensure that both cofounders are protected during a breakup.
Be sure to have your written exit strategy notarized, and if a messy breakup seems imminent, obtain key information about the company that could be withheld by your partner in the heat of emotion, such as bank account numbers and Internet passwords.
Consult an Attorney to Be Safe
How your company is formed, such as a limited liability company, corporation, limited liability partnership, or the standard partnership, can also be a factor in removing a cofounder from the company. Consulting an attorney can help prevent any legal issues around the type of business as well as any state-specific laws that may stipulate how a cofounder can end a business relationship.
For those interested in consulting an attorney about ending a business partnership, LegalZoom offers affordable access to legal plan attorneys through its business legal plan.
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