“You can’t stop people from leaving – but you can stop them from taking your company down with them.”
 – Matt Glynn

Founders leave startups all the time. Some leave quietly, others leave bitterly – but nearly all departures are disruptive. The real danger? Not the exit itself, but the lack of a plan for what happens next.

If your startup hasn’t prepared for what to do when a founder exits – whether by choice, conflict, or circumstance – then you’re betting your company’s future on good vibes and blind luck.

Legal issues like this are easy to overlook. You're too busy building, selling, hiring, raising – and you just assume “we’ll figure it out if someone leaves.” But when the time comes, and there’s no roadmap, your business can get dragged into legal disputes, operational breakdowns, or investor panic.

In this “start up stage review”, we’re going to flag up some considerations to help you better prepare to tackle this part of your start up journey – before it tackles you.

“Founder exits are inevitable – chaos is optional.”

Managing Founder Departures effectively is an important stage of the start-up journey because:

◼️Business Continuity: it ensures the startup can keep functioning if a founder leaves.

◼️Equity Protection: it avoids inactive founders retaining disproportionate ownership.

◼️IP Ownership: it protects the business from losing access to critical IP created by the departing founder.

◼️Reputation Risk: it prevents public or internal blow-ups that damage brand and culture.

◼️Team Stability: it provides reassurance to employees and co-founders during a leadership change.

◼️Investor Confidence: it demonstrates maturity and governance, reducing deal risk.

◼️Clarity of Obligations: it sets out what a departing founder must or must not do.

◼️Restraint Mechanisms: it can restrict the departing founder from competing or poaching talent.

◼️Asset Transfer: it facilitates a smooth handover of responsibilities, data, and relationships.

◼️Legal Cleanliness: it avoids messy legal disputes that could cripple a funding round or exit.
 

The consequences of not attending to this issue may include the following: 

1. Legal Implications

◼️IP Disputes: a departing founder may claim ownership over core IP if rights weren’t assigned.

◼️Litigation Exposure: vague departure terms can lead to wrongful termination or contract claims.

◼️Breach of Confidentiality: no enforceable NDA means business secrets can walk out the door.

2. Founder Relationship Issues

◼️Acrimonious Exits: lack of clarity creates anger, resentment, and long-term reputational damage.

◼️Equity Grievances: active founders may feel unfairly diluted while an ex-founder profits passively.

◼️Breakdown in Trust: uncertainty around roles, rights, and entitlements erodes team cohesion.

3. Commercial Implications

◼️Investor Panic: investors may pull out if founder instability isn’t handled professionally.

◼️Client Concerns: customers may lose confidence if a key founder departs without explanation.

◼️Exit Failure: M&A deals or partnerships can collapse over unresolved founder disputes.

4. Operational Implications

◼️Leadership Vacuum: no plan for succession causes strategic paralysis.

◼️Knowledge Loss: founder leaves without transferring key knowledge, access, or contacts.

◼️Poaching Risk: ex-founder takes key team members or clients if no restraints exist.

5. Biz Valuation Issues

◼️Cap Table Toxins: inactive or hostile founders retaining equity distort valuation.

◼️Due Diligence Red Flags: poor governance around founder exits alarms acquirers or investors.

◼️Restructuring Costs: buybacks or legal clean-ups post-exit can cost thousands – or worse.

The above lists are indicative issues – the relevance of which will depend on your circumstances, including the nature of business undertaken by your start up.

“Expect people to leave – and build your business so it survives when they do.”

We’ve identified quite a number of potential issues that the start-up needs to consider and below are some examples of the types of steps you might want to consider taking to address these issues considered above. 

1. Include Exit Clauses in Shareholders Agreements and Employment Contracts

◼️Set clear procedures for voluntary and involuntary founder exits.

◼️Define what happens to equity, board seats, and responsibilities.

2. Implement Equity Vesting Structures

◼️Use time-based or milestone-based vesting to ensure only committed founders earn full equity.

◼️Protect the business from “free rider” exits.

3. Assign All IP to the Company

◼️Ensure all founders formally assign IP they create – before any exit happens.

◼️Prevent future ownership disputes or ransom demands.

4. Introduce Post-Exit Restrictions

◼️Use non-compete, non-solicitation, and confidentiality clauses.

◼️Restrict the ability of ex-founders to damage or undermine the business.

5. Design a Structured Handover Plan

◼️Require departing founders to transition knowledge, access, and relationships.

◼️Ensure continuity in operations, finance, and client relationships.

6. Align Departures with Cap Table and Funding Strategies

◼️Plan ahead to deal with equity buybacks or reallocations where appropriate.

◼️Avoid investor friction or deal collapse due to inactive equity holders.

The above suggestions are just a few of the steps you can consider taking.
There are many more things that need to be done to ensure the associated risks are effectively and pragmatically dealt with.

We’re not trying to be alarmists and go so far as to say that some of the legal risks we have flagged may never materialise for your business – but others can hit like a freight train.

The key point is awareness – just have a think about the issue – know that it exists and decide for yourself what you want to do.

Yes, we know you're juggling limited time, money, and human bandwidth. Sometimes ignoring a legal risk might even make sense – providing doing so is not illegal.

However, “Knowledge” has always been your greatest asset and know you have the GLS Knowledge Centre to help fill in details about the start up journey.

Let’s look at how things can go sideways:

Case Study 1: “The Equity Ghost”
 A co-founder left after 12 months. No vesting terms were in place, so they kept 25% of the company. Five years later, the startup was acquired – and the inactive founder walked away with $6m despite contributing nothing for years.

Case Study 2: “The Investor Panic Button”
 A key founder resigned suddenly without a formalised exit plan. No IP assignment was in place, and investors froze a pending $1.5m round over fears that the departing founder owned core tech assets.

Case Study 3: “The Competitive Exit”
 A founder left to launch a competing business, took the lead engineer and sales director with him. The startup had no non-solicit clauses. The business lost $300k in contracts within six months.

As a start-up operator you may not be familiar with legal jargon. As you navigate this stage of your start-up journey – you might encounter the following legal definitions:

◼️Vesting: A mechanism by which founders earn equity over time or upon meeting agreed milestones.

◼️Exit Clause: A provision in an agreement that governs what happens if a founder voluntarily or involuntarily leaves the business.

◼️Restrictive Covenant: A contractual clause limiting what a departing founder can do post-exit (e.g. compete, poach, disclose).

Watch out for the legal jargon and refer to the knowledge hub for an extensive legal dictionary that you can access at any time:
https://www.gls-startuplaw.com/legal-ops-terminology

Founders leave. It’s normal. What’s not normal is leaving it all to chance.

If you haven’t built systems to handle founder exits – legally, commercially, emotionally – then you’re leaving your business exposed to risk, drama, and potentially irreparable damage.

GLS can help you plan for the inevitable so that when it happens, you don’t panic – you just execute.

GLS may well be able to help you navigate the issues associated with the Founder Departures stage.
Few, if any, integrated legal solution providers have made themselves as accessible to the start-up community as we have.

Consider engaging with GLS via any of the following means:

◼️GLS Start Up Centre: visit our world-leading start-up legal support resource – we might have a solution “ready to go” available to you at a fraction of the cost – visit www.gls-startuplaw.com

◼️GLS Knowledge Hub: check out the knowledge hub for more information on this issue to learn more about what you need to do
 https://www.gls-startuplaw.com/blog

◼️GLS Support Plan: consider engaging your own in-house legal team capability with a highly disruptively priced GLS Start Up Support https://www.gls-startuplaw.com/plans

◼️GLS Legal On Call™: trial GLS Legal On Call™ for free – access up to 3 free in-house legal consults and feel the power of your own “on call” legal team https://www.gls-startuplaw.com/product/gls-legal-on-call-free-trial

◼️Book A Consult: book a complimentary one-off 15 min consult via our e-calendar
 https://calendly.com/globallegalsolutions/startup-free-legal-consultation?month=2025-03

◼️GLS Start Up Clinic: join our next pro bono start-up clinic for an in-person free consult – book here.