Every startup story starts with the dream, the plan to grow to 10 million, then 100 million, then a 1 billion, and then to Elon Musk. But, along the way, many of those dreams get curtailed in one way or the other. While many die outright, and everyone simply moves on to the next project, as an investor I've watched far more complicated situations play out.
Here are some of the most common examples of reasons for startup divorce, and successful ways I've seen them dealt with for the least possible acrimony, best possible compromise outcome for all parties:
1) Founder Divorce, Early
Not all founder relationships work out. Sure, you had big dreams together and now he owns 25% of your company and its not working out. What can you do?
This situation is easiest to handle early, when there are no investors, or at least no major professional or institutional investors. It's also easiest if most equity has not been vested, which is usually the case if you used competent legal documentation and its less than a year or two into your company's life cycle. If that's the case, and you have some money (or access to it) and are confident in what you are building, the easiest way is to buy out your co-founder for an agreed upon sum. Usually, if the company hasn't been professionally valued yet and-or does not have major customers, this will only be a modest five figure price tag, six figures if you have any significant IP.
If your co-founder has vested all equity - or you didn't include a vesting structure - and its two expensive, you can work to negotiate an equity buyout - they voluntarily agree to give up some equity, and you protect the rest.
2) Founder Divorce, After Investors
Founder divorces get more complicated once there are professional investors involved, or if the company has been formally valued. On the other hand, this usually means founder equity has been re-organized onto a vesting schedule, and-or an option pool has been created, so its easier to deal with. Oftentimes, if you have a departing or departed founder with a notable holding that is not a large percentage of the company, the easiest plan is to leave it there and then handle it during your Series A or other large capital infusion. If the company isn't looking for new investors, and-or is throwing off significant profits (somewhat unusual for a tech startup, but not that uncommon), you can also arrange a lump-sum, or structured payment buyout. This can be an especially effective strategy if you have anticipated low product cost and forecast expenses.
3) Investor Divorce
Not all founder and investor relationships work out, either, and sometimes you need to divorce. The most common way in a positive company outlook situation, which you could call "the VC arranged divorce" is that a institutional investor comes in and handles problematic early investors. If you don't have an institutional on the horizon but still need a divorce, you can sometimes have new angels bullish on the company buy out old angels who recognize the value of their shares but are tired of dealing with the CEO. Or, you can take a page out off the founder divorce playbook, and put your investors on a payout plan. This is most common with convertible notes but can also be arranged for equity-holding investors.
The biggest lesson I've learned from my investment and entrepreneurial experience is that divorces are a good thing. If you need one, don't wait.