My startup cofounder ghosted on me. What can I do?

After months of searching for a CTO for your startup, you’ve finally found your luck when you found a CTO candidate that has agreed to join your startup. He loves what you’re trying to solve and agreed to build the MVP needed and help you fundraise too. After back and forth of meetups, you agreed to offer him a ‘co-founder’ title and also accept 25% equity in the company while you own the rest 75% of the equity pie.

You contacted the company secretary and told them to help prepare the shares transfer form so that everyone can sign off the paperwork to transfer the 25% of the business over to the new CTO.

You thought it would be such a hassle to put these terms in writing since you trust the CTO as he seemed like a pretty decent guy to you.

After three months or so, the CTO stopped responding to your calls. No MVP done. He ghosted on you and decided to join another startup. You found out that it is a new startup that promised him more shares and even money, with the same idea you have. 

Equity ownership 101: Equity has NOTHING to do with workload

Let’s say someone contributed 25% of the funds to start the company, he rightfully owns them without any complaint. Therefore, you may own 75% and control the company. It’s just that the 25% ownership doesn’t mean that he needs to work in the company. 

If you expect the cofounder to contribute to the company, you should also sign a service agreement or management agreement between the cofounder and the company in place setting out the terms of duties and services that the cofounder is contributing to the company. For instance, all the work done by the cofounder including intellectual property assets will be assigned and owned by the company. 

What happens if I don’t have any written agreement in place? 

To put it bluntly, if you don’t have any written agreement like a founders agreement or shareholders agreement with the rest of the founding team or any letter agreement on what happens to the shares if a founder decides to ghost on your and decides to go AWOL, you’re pretty much f*cked.

You may hire a lawyer to file a claim in court and argue that you’re entitled to the shares based on the verbal agreement you’ve made that you will be able to get back the shares from the departing cofounder if he leaves the company based on your agreement during your earlier meetups and discussions. In practice, if the cofounder shows up with his own lawyer, it may also be hard to prove in court that there was such an agreement (as there is no such written agreement in place), so the judge may be hard pressed to rule in your favour. Also, you must be ready to pay for legal fees and costs involved in filing a claim in court.

So since there’s no agreement in place like reverse vesting provisions to claw back the shares, the default option for many founders is that you can ask him nicely to buy back their shares, at whatever valuation. If he’s not interested, well, then not. 

Why do you need shareholders’ or founders’ agreement in place

Generally, the companies law that governs companies formation and management only covers the basics stuff that may not be adequate to cover more complex corporate situations. 

Under the law, don’t forget as well that a company is considered a separate entity from the owners i.e. the shareholders of the company. So if there is no agreement in place which allows for the founder’s shares to be forfeited (like agreeing on a set of vesting schedules and vesting provisions), there is nothing that the remaining founder can do to clawback the shares or to incentivise the departing founder from leaving the company (as there is no legal recourse in place to forfeit his shares).

In the agreement, you can agree that if a founder fails to fulfil his/her duties would have to leave the company and surrender his/her shares back to you. No question asked. 

The agreement can also include a confidentiality clause that provides for the founder to agree that anything confidential shared during his course of engagement will remain confidential and any breach may be subject to forfeiture of shares.  This also includes the assignment clause that anything that the person builds like the source code and contents will be legally assigned and owned by the company.

The agreement can also set out various reasons for termination grounds such as gross misconduct, gross negligence, breach of the agreement, fraud or other criminal convictions. In fact, I would even add other more specific reasons like failure to deliver the agreed MVP  or failure to attend board meetings or shareholders meetings more than 3 consecutive times without an acceptable excuse by the other founder. 

A good agreement may also provide that founders terminated for serious causes are required to surrender their shares at a discount or even at a nominal value (like RM1 for all the entire shares). The company secretary may also be instructed to prepare an undated shares transfer form for this reason where you can pre-sign together with the CTO before the CTO joins the company.

Sadly you may have agreed on this bad deal 3 months or even 2 years ago, but now you’ve got no choice but to stick to it. If anybody made a mistake, it’s you for not thinking through it (sorry to be so direct).

Can’t find the article covering the topic that you’re currently finding for your startup? I’m always figuring out new topics to write about on this blog. Feel free to drop me a note using the contact form, so that I know what to write about next time.