Most Co-Founder Marriages End in Divorce

(Bacho/Shutterstock)

Sometimes business divorces happen over office locations, sometimes things get tense when your frozen yogurt co-founder gets arrested for assault, and, sometimes co-founders split when one of them wins the lottery, even though most of you say you wouldn’t. It happens enough that co-founder speed-dating is a business.

Imagine this: It’s last call at the local pub, and you’ve spent the past hour talking about this great new business idea with Jolene on the barstool next to you. You keep working at it. The idea no longer fits on a cocktail napkin, but it’s also not ready for prime time. Congratulations — you are now business-married to Jolene for that idea.

The business survival rate is so bad that it makes the divorce rate look good. If you’re thinking of getting business-married to someone (or you read this and realized you already did) then lose the romance. Protect yourself and your company. Business pre-nups are a thing and you should look into it.

But what happens when Jolene just stops showing up to work on the idea? Unless you have other agreements, your newly departed is walking away with half the company — even though you’re still working on it and Jolene has gone fishing… permanently. Let me repeat that — if you have not created an agreement that says differently, Jolene just left with half of your company.

More and more founders are now earning their business equity over time to keep their co-founders working — a concept called vesting. Vesting means that, even though your and your business partner may be 50/50 owners of New Business Inc., you have to stick around awhile before you actually own that equity. “Awhile” should be far enough away that the company is worth something sticking around for. Usually that time period is based on the amount of time put into the business, hitting specific milestones or a combination of the two. Founders frequently choose time-based vesting (it’s easier to know when time has passed than when you hit a milestone) over a few years, sometimes longer. Usually equity is earned in small, equal amounts — every month or every few months is common. The schedules can get more complicated from there with concepts like cliffs, acceleration clauses and triggers. Be aware that there are tax consequences to earning your equity over time, so if you’re speaking with professional help that does not know what an 83(b) election is, walk quickly in the opposite direction.

If you’re looking to avoid turning your early stage business’ one night stand into an unhappy business marriage with a deadbeat partner, protect yourself and start talking using a vesting agreement.

Eamon Gallagher is an attorney with Weber Law and co-organizer of Philly New Technology Meetup. You can reach him on Twitter @PHLStartupLaw.