The price is right
The road to a successful exit for a company is long, hard, tenuous, and uncertain.
The definition of success is the outcome that is desired by the founding team. Desired outcomes may change over time.
Desired outcomes must be shared among the founding team.
Only 0.00006% of startups become unicorns. That is less than 1%.
There are a myriad of other successful exits including secondary sales, IPOs and MBOs.
Success may be defined as the team’s desire for organic growth to maintain ownership of the enterprise by the founding team (like Qualtrics).
Success may be defined as growing at all costs, with external investors’ money, to meet milestones with the money allotted to your business, and subsequent dilution earlier on.
Success may be defined selling out early if the price is right.
Along the way, there may be moments that inform the CEO to be ready to divorce the co-founder or the co-founder may ask for a divorce.
This blog post provides some ideas to include in the toolkit of the leaders of a resilient company, drawn from my own personal experience in managing through a divorce.
Hindsight is a wise teacher.
Foresight is an even wiser teacher.
Pre-nuptial agreements are the analogy to a great book “The Slicing Pie Handbook,” authored by Mike Moyer, on how to split equity without bloodshed.
“…. stakeholders could divide equity much more fairly if they followed a simple principle: a person’s share of the rewards should always be equal to that person’s share of what’s put at risk to attain those rewards. This principle is at the heart of an equity-split system I call “Slicing Pie.”
When a person contributes to a start-up company and does not get paid for her contribution, she is putting her contribution at risk with the hopes of getting a future reward,” Mike Moyer says.
In his book Moyer provides a logical framework to allocate business profits and other income to early company participants.
My own experience in an amicable personal divorce may shed some surprisingly wise examples for how to divorce a co-founder in your organization.
Situation: I had two decades of marriage, two adult children, assets (including real estate, stock, savings), joint bank accounts, and children’s savings for a rainy day. We shared no debt, no prenuptial agreement, and our family attorney had been killed recently in an auto accident.
We shared friends, family, and happy and sad memories.
Desired outcome: we wanted to divide 50% of the net worth of family wealth. More liquid assets for me, and more real estate for the father of my children.
Steps in between: I had to practice patience (remaining in the home with one child), navigating having only one lawyer (thrifty, but not the best choice), and planning for certain tax benefits of separation before divorce. We had side documents for handling of children’s assets, partial asset division with buyouts over time, closure of joint bank accounts and attendance of all legal hearings.
No less important, respectful giveaways like the home where our children were raised, were purchased by my ex-husband. He asked for me to leave behind certain telephone numbers for the dry cleaners, rug cleaners, and the insurance policy holders.
Outcome: we parent well, and our children have often thanked us for how we handled the divorce.
If foresight is had, more amicable divorces may be achieved; but this doesn’t seem to be the lay of the land. So, what is one to do if the ship has sailed with no pre-nups?
Follow these steps.
5 Crucial Steps to Divorcing your co-founder
With this brief introduction to the divorce analogy, let us jump into some tools.
- Plan the different outcomes you would be able to live with and the enterprise value is maintained or enhanced.
In my previous blog on Options, we learned what BATNA (best alternative to a negotiated agreement), could mean for the patients; our customers.
This versatile framework is suitable for managing divorce of your cofounder.
Reassess your cap table with the time frame of different rounds and timing for a potential divorce. Have this in your back pocket.
Check on all documentation PIIA, NDAs, Bank accounts, credit cards.
Don’t forget to look at shared access to critical documentation and technology stack.
Taxes and tax implications.
And many other aspects of an eventual divorce. You would be surprised what you share in common.
3. Be honest with yourself (and your life partner)
Now the touchy-feely stuff begins. The goal is to reduce the collateral damage to the company, much like the children in a marriage and the friends and extended family members.
Generate three (3) scenarios. Be cognizant of the level of energy this will require because it is emotional as well as financial.
Plan A-optimistic scenario (what you really want to happen)
Plan B- Base scenario (what will probably happen)
Plan C- Worst case scenario (what will you have to do to remediate)
Generate a ” how does this make you feel” and apply emojis or some code that describes how you feel about a particular outcome.
Emotions are involved. I share with those who ask for my counsel the following thought exercise: “When hypothetically deleting something brings relief, you have honored yourself. “
“What would you be willing to give away to have this person off your cap table?”
4. Employ sound counsel on your dime (not the companies)
Seek the advice of an attorney with experience in commercial law. Ask them to bring in a tax consultant.
Do not use company resources including the accounting firm or cpa that prepares your taxes.
Engage independent advisors – independent from the company.
Walk the attorney through the scenarios you have prepared by going back to Step 1.
Revisit periodically to update the underlying hypotheses and dynamics.
5. This is not FUN; it is, however, good for the enterprise
Keep the enterprise value front and center.
-Keep your ego in check
-Be honest with yourself
-Write a letter of recommendation; a non-compete clause, and ensure there is a clause of non-disparagement.
-Communicate in the company with transparency
There are lessons from Steve Jobs’ own trajectory. He was fired from Apple in 1985. He was later asked to return in 1997. A divorce from a co-founder does not have to be damaging if it is done with foresight and planning.
If you are looking to divorce your co-founder, or are looking for an independent advisor with experience in helping to think through splitting the pie, please book a time on my calendar, and see if my experience can help your team prepare with options.
Brenda A. McCabe