Table of Contents
In Short
- Identify the specific areas where your co-founder is underperforming to address the root cause effectively.
- Review existing agreements, such as shareholders’ agreements, to understand the procedures for resolving disputes.
- Consider appropriate actions, including mediation or legal steps, while weighing the commercial implications of each option.
Tips for Businesses
Maintain open communication with your co-founder to address performance issues early. Ensure all co-founder agreements clearly outline roles, responsibilities and dispute resolution processes. Seek legal advice to navigate complex situations and protect your business interests.
As a startup founder, you would likely know that managing the relationship between co-founders is essential to navigating your startup’s growth. However, from time to time, unavoidable conflicts can emerge between co-founders. Where you believe a co-founder is underperforming, the co-founders will need to decide what course of action to take to resolve the issue. This article considers some strategies for navigating issues surrounding co-founder underperformance.
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1. Identify the Co-Founder’s Underperformance
The first step is to determine the nature of the other performances and its cause. While the causes of underperformance will largely depend on the circumstances, typical examples include:
- inadequate attention to detail;
- failing to meet performance metrics;
- not spending sufficient working time with the startup; and
- being overextended by other ventures.
Likewise, the cause of a performance may vary. It may be that the co-founder has certain expectations they cannot meet. This may be because they do not have adequate experience or the technical know-how to operate in their role. Alternatively, it may be due to:
- conflicts of interest; or
- disinterest or personality conflicts.
In any event, you must understand the nature of the underperformance before pursuing any action.
2. Review All Co-Founder Agreements
Once you have identified the nature of the underperformance, the next step is to see if any legal documents govern the relationship between the cofounders. If your startup is incorporated as a company, which most are, you may have a shareholders’ agreement in place.
A shareholders’ agreement is a private contract between co-founders separate from the company’s constitution. Most shareholders’ agreements have provisions that detail how cofounders will resolve disputes between themselves.
Where an agreement is in place, all parties must follow its procedures. The exception is, of course, if all the parties agree to wave the effect of an existing agreement. To this end, where provisions are in place, and one or more cofounders ignore them, the aggrieved cofounder will have a claim against the offending cofounders for breach of contract.
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3. Take Appropriate Action Against the Co-Founder
What is appropriate depends on the circumstances. Likewise, if a pre-existing agreement governs your co-founder’s obligations, your options may be pre-determined.
In any event, it is always advisable to consider the commercial implications of any course of action. For instance, there may be a provision that enables all of the co-founders to ouster the offending co-founder. If the underperforming cofounder’s conduct is grievous or poses a commercial threat to the business, the right to remove the underperforming cofounder may be the best course of action.
On the other hand, where the underperformance is slight, or the underperforming cofounder has certain rights that limit what the other co-founders can do, attempting to remove the underperforming co-founder may not be advisable or even possible. In this case, it may be worth referring the dispute to an independent third party to evaluate the course of actions available. Mediators are skilled in identifying ways to resolve disputes, including those related to underperformance.
4. Legal Considerations For Co-Founders
Generally speaking, cofounders owe one another high standards to act in the other cofounders’ best interests. These obligations may be specified in a contract, such as a shareholders’ or partnership agreement. But even without express agreement, the law may imply a duty of good faith in the relationships between you and startup cofounders.
Likewise, preserving evidence and documenting the facts surrounding the dispute as clearly as possible is good. Again, this will help clarify any issues if the matter proceeds to a more formal dispute, such as in court or arbitration.
Key Takeaways
If you have an underperforming co-founder, you should:
- identify the nature and source of underperformance;
- determine if any agreements in place regulate the rights and obligations of co-founders to one another; and
- consider the commercial consequences when exercising rights against the underperforming co-founder.
Ultimately, the commercial consequences may outweigh the advantages of pursuing action against the co-founder.
If you need help with your startup, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Start by identifying specific issues and addressing them through open communication. Review your shareholders’ agreement for guidance on dispute resolution, and consider mediation or legal advice if the situation does not improve.
It depends on your agreements and the company structure. Shareholders’ agreements often outline the process for removing an underperforming co-founder. Legal advice is crucial to ensure compliance and to minimise potential disputes.
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