It’s possible the time will come when you and your co-founder part ways. If that time has not yet come, all the better, since it’s best to prepare for the possibility in advance. If the time is already upon you, I extend my sincerest sympathies. Read on for some things to think about in this situation.
Regardless of their role—even if they had no shares and the company never paid them anything—you’ll want to craft a separation agreement. This agreement will identify their official last day with the company and obtain a release from the departing founder. A release is where the departing founder/employee says that if they have any complaints against the company about how they were treated, they promise not to sue you or the company based on those complaints. You can only have them sign a release if you give them something in return (e.g. an agreed payment amount). Otherwise, there’s no “consideration,” and the agreement may not stand up to a challenge.
You should be working with an attorney to craft the separation agreement—he or she will consider legal issues like IP ownership and compliance with your state’s employment laws. Simply put, this isn’t the sort of situation that you can or should handle yourself.
Did he or she have shares? If so, the company may have to repurchase shares from the departing founder.
Let’s back up. When the departing founder joined, did they receive an RSA (Restricted Stock Agreement) clearly spelling out how many shares they owned, and whether or not their shares had vesting? Is there a board consent where the board (even if you are the only person on the board) approved this grant of shares? If not, call your lawyer, and call them NOW. You’ll need to clean this up and get these documents in place ASAP.
Once you have that figured out, you’ll know whether there are shares that need to be repurchased. If so, you will need a Repurchase Agreement, which states how many shares the company is repurchasing, on what date, and for how much money.
The company only has the legal right to repurchase if the shares were unvested. The company can buy the unvested shares back even if the departing founder doesn’t want to sell their shares back. However, if the shares didn’t have vesting, you can attempt to negotiate a share buy-back agreement to repurchase the shares at a fair price. If the departing founder wants to sell their shares, they'll be able to more fully sever ties (since he/she will no longer be a stockholder in the company) and walk away with some cash.
You’ll need to write the departing founder a check for the amount of shares the company is repurchasing. These shares will go back into the company’s reserve of authorized shares and you can grant them to someone else later.
Lastly, you’ll need to cancel the old stock certificate if you’ve repurchased. If you only repurchased a portion of the shares, you’ll need to reissue a stock certificate to the departing founder reflecting how many shares they still own. If you repurchased all of their shares, then that makes it easy—there’s no need to reissue any stock certificates.
Remove Them From Officer Positions
Did he or she hold officer positions? The departing founder should put his or her resignation from the officer position in writing (an email is fine) and you’ll likely have to reassign the officer position. Such reassignment will involve a board consent stating that you’re changing the officers, that the departing founder is resigning (from President, as an example) and the name of the new person that will be replacing the departing founder in that role.
Remove Them From the Board
Did he or she have a board seat? You’ll want them to resign from the board in that case. This will involve the departing founder writing a short letter stating that they’re resigning (again, an email is fine).
Assuming you’re replacing the departing founder’s spot on the board with someone else (and not just leaving the seat empty), you’ll want a board consent and shareholder consent stating that you’re electing Bob as the replacement to the board. The board consent will likely also state that you’re accepting the departing founder’s resignation from the board.
When They Don’t Cooperate
Hopefully you've come to terms with how you and your former co-founder part ways. But if it isn't contention free, you can still separate, even if they’re refusing to sign documents or even speak to you or respond to your calls and emails.
Without their cooperation you won’t be able to have them sign the separation agreement, so there isn’t a valid release, but you can still send them a termination notice stating their last day and what shares they’ve vested as of that date.
Even if they refuse to write the nice resignation letter that a board member usually writes, you can still remove them from the board without any issues. Assuming they don’t control the board, they’ll be removed whether they want to resign or not with a simple board consent. You can still move forward with removing them as an officer with a simple board consent as well.
Regardless of their role, you’ll want to remove their access badge, remove them from software systems, and communicate with the company about what’s happened. You might also have to update external parties (investors, board members, clients) about their departure as well.
It might seem like a huge blow when you experience your first co-founder leaving, but within a week, you’ll have the paperwork done, and you’ll be back to building your amazing company that’s going to change the world.