When Buyout Is the Right Path
Not all founder separations require a buyout. Sometimes one founder simply leaves, forfeiting unvested shares. But in many cases—particularly where both founders have made significant contributions—a buyout is appropriate.
Key Elements of a Buyout
Valuation
The most contentious element. Options include:
- Agreed value: Both parties negotiate a number directly
- Formula-based: Using metrics like revenue multiples or book value
- Independent valuation: Engaging a third-party valuator
- Market test: Seeing what outside parties would pay
Each approach has tradeoffs between cost, time, and perceived fairness.
Payment Terms
Few founders can write a single cheque for a buyout. Consider:
- Lump sum: Cleaner but often infeasible
- Installments: Paid over time, often with security
- Earnout: Additional payments tied to future performance
- Vendor financing: The departing founder effectively loans the purchase price
What's Included
Beyond equity, clarify:
- Outstanding loans: Has either founder loaned money to the company?
- Accrued salary: Is any compensation outstanding?
- Intellectual property: Especially relevant for technical founders
- Equipment and assets: Personal items that may have been used for business
Non-Compete Provisions
The departing founder will typically be restricted from competing. Negotiate scope (geography, sector) and duration carefully.
Transition Period
Consider whether the departing founder will have a transition role. If so, define scope, duration, and compensation clearly.
Common Pitfalls
Underestimating Tax Implications
Buyout structures have significant tax consequences for both parties. Get qualified tax advice before agreeing terms.
Ignoring Board and Investor Consent
Depending on your company structure, board or investor approval may be required for significant equity transfers.
Leaving Ambiguity
Every term you don't specify is a potential future dispute. Comprehensive documentation is essential.
Rushing the Process
Buyouts negotiated under time pressure often leave one party feeling unfairly treated. Take the time to do it properly.