Tag Archives: legal startups

CO-FOUNDER LEAVING THE COMPANY? FEW THINGS TO CONSIDER

Co-founders separating is a harsh reality in early-stage companies, due to a plethora of reasons ranging from differences in opinion with regards the conduct of affairs, daily administration and management of the Company, to the relationship not working out organically, or in some instances simply due to personal reasons. The trouble in paradise gets worse when such separation is due to bad reasons such as non-compatibility between the founders and their inability to work with each other.

Structuring exit terms of a co-founder could be quite challenging, given the same is greatly dependant on ownership stakes, involvement in finances/intellectual property and/or other functional/operational/strategic matters in the company. As such, separation terms need to be carefully negotiated and structured to protect the rights of all parties involved and especially that of the company. We typically suggest entering into and executing a written agreement clearly laying down the terms of the separation and settlement thereof. Getting to the signature stage of this document becomes relatively easier if there is any signed founders’ agreement/shareholders’ agreement in place. To refer to our earlier post on founders’ agreement please see here.

There are various points of consideration that should be kept in mind for structuring separation terms, which, many a time, go a long way in either making or breaking a company.

If you are a continuing founder, you may begin by asking yourself the following questions:-

  1. How much equity is the exiting co-founder holding?

Typically, if there is a founders’ agreement/shareholders’ agreement in place, vesting related clauses get triggered and that serve as a good starting point for negotiations/discussions on the rest of the points. In the absence of such agreement, equity distribution discussions may prove to become major roadblocks as emotions run high during such events. While it is true that equity is the most preferred compensation mechanism in early-stage companies and therefore, it is inevitably required for attracting talent and getting future co-founders, it is also only fair to ask for what one deserves. Continuing founders may push for a complete exit, but exiting co-founder would want value for sweat, time, reduced remuneration, etc. Also, any retained equity by the exiting co-founders may be considered as “dead equity” in an early stage company, wherein investors invest in the caliber and business idea of the founders, more than anything else.

There are various means through which equity of an exiting co-founder is given back to the company/remaining founders/incoming co-founders depending on various parameters, and especially the value that the company has generated till the time of such exit.

  1. What is the exiting co-founders’ contribution to the development of the business? Is there any IP involved?

In early-stage companies, intellectual property (IP) could be the main stock in trade and therefore it is essential to establish that the company is the owner of the IP. The presence of an employment agreement or founders’ agreement makes this process simpler, as they typically contain clauses on ownership and assignment of the IP in the favor of the company, by the founders. However, in the absence of a clear contractual assignment, it becomes essential during a separation event, to get all IP assigned in favor of the company.

  1. Is the exiting co-founder also a director in the Company?

If the exiting co-founder is a member of the board of directors of a company also, the separation terms should address the issue of his/her resignation and filing of such resignation within 30 days with the registrar of companies having jurisdiction. The continuing founder shall ensure that there continues to be at least 2 (two) shareholders and 2 (two) directors in the company, even after the separation, in compliance with the provisions of the Companies Act, 2013.

  1. Taking stock of liabilities and indemnities:

During separation, it is important to take note of the stock in trade, books of accounts, statutory and contractual dues, pending litigations, indemnification obligations under any existing agreements and other financials of the Company. The exiting co-founder may be held liable for any and all statutory and contractual dues, especially for any defaults of the company during his/her tenure of association with the company. In instances such as fraud, wilful misrepresentation etc. the exiting co-founder may also be held personally liable for any damage, loss caused to the company (any existing shareholders’ agreement must also be evaluated in this regard).

  1. Other Considerations:-

In addition to above, the other material issues for consideration could be:-

  • Non-disparagement: This obligation is generally mutual in nature. Instances of disparagement may lead to bad name and reputation of all parties involved in the separation.
  • Non-compete, non-solicit: Typically, these flow from employment agreements/founders’ agreement, if executed.
  • Confidentiality: The exiting co-founder should be contractually restricted from disclosing any confidential information obtained by such co-founder during the course of his/her association with the Company. Any such disclosure of confidential information may lead to irreparable harm to the business of the Company.
  • Branding: The exiting co-founder post such exit, should not brand himself/herself as being associated with the company. The company should always intimate other parties working with the company and revise (to the extent practicable) all agreement, commercials, vender contracts and any other such document where the exiting co-founder has been a party in his capacity as a founder.
  • If an exiting co-founder retains equity in the company, post-exit;
  • the duration of non-compete, non-solicit in some instances should be linked to shareholding in the Company.
  • there should be a power of attorney in favor of one or more of the continuing founders, for ease of operational matters.
  • there should be transfer restrictions and provisions for treatment of equity (especially in case of an exit event for the company or a drag situation).

Each separation is unique in its own way and the dynamics vary depending on the relationship between the parties, many times they are just friends, family or ex-colleagues. Arriving and implementing the separation terms is a tricky affair that most importantly requires a neutral perspective and there have been various situations where mediation have come handy to resolve complex situations. To know more about mediation, you may see our posts available here.

[1] Please note that this post is a marker of reference points, only. Each separation requires customized advice and readers are requested to kindly seek professional advice in this regard.

Authors: Ms. Ayushi Singh, associate at NovoJuris Legal and Ms. Sohini Mandal, Junior Partner at NovoJuris Legal.

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Online Consumer Dispute Resolution

In light of Government’s recent moves towards demonetising the economy and in times when the Government is urging citizens of the country to adopt a cashless lifestyle and increase reliance to online transactions, a huge influx of first time online buyers is expected.

The Ministry of Consumer Affairs, Food and Public Distribution and the Government of India are taking initiatives to encourage consumers to go digital and to build a robust system to address their grievances efficiently, such as, launch of a mobile application for consumer helpline, launch of another mobile application called ‘smart consumer’ which is a means to lodge complaints and voice grievances against packaged commodities and to access product information, originating online consumer communities known as ‘Local Circles’ to serve as a platform for presenting views, grievances and suggestions and thereby enabling the Government to know the views of the public, which would eventually help in policy making, launch of a microsite with the theme ‘Digitally Safe Consumer Campaign’ with knowledge support from Google,to help Indians stay safe on internet and to protect consumers from fraud and many more.

The Government of India is also encouraging consumers and companies to opt for online dispute resolution mechanisms to resolve disputes relating to these online transactions. These alternative consumer dispute resolution mechanisms are cost and time effective and these disputes can be solved amicably by such modes, pre-litigation.

To take this forward, an Online Consumer Mediation Centre (“OCMC”) is instituted at the National Law School India University, Bengaluru to provide for a state-of-the-art infrastructure for resolving consumer disputes, both through physical as well as online mediation through the OCMC’s platform. The OCMC is set up to provide innovative technology for consumers and organisations to manage and resolve conflicts and to propel online mediation as a first choice to resolving consumer disputes. It is an affordable tool to access justice, a quick and easy redressal mechanism and at the same time provides opportunity for businesses to maintain good customer relations.

The OCMC is a specialised mediation centre which only addresses consumer complaints concerning e-commerce platforms, with a vision of making consumer grievance available online to anyone who is accustomed with information technology.

If a consumer is unhappy with the product or service of any e-commerce company, he/she can file complaint against that e-commerce platform with the OCMC by just registering and signing-up with the them and by just paying a registration fee of INR 100/- (Rupees Hundred Only) per party/per case. Post registration, the consumer needs to provide the OCMC with transaction details such as the purchase date, receipt date, invoice number, value of goods/service, nature of dispute, description of issue, etc.The OCMC, then, provides the opportunity to the consumer to directly communicate with the e-commerce company and negotiate with them to resolve the case and discover a mutually agreeable solution. In case the matter is not settled through negotiation or the parties are unable to reach any conclusion,the parties may appoint a third-party mediator for mediation.

The process of negotiation consists of three parts: a) make a settlement offer b) request to appoint a mediator and; c) have conversation similar to Instant Messaging/ Chat Box platforms. A time of 7 days is provided to parties after the date of registration to reach a settlement. The parties can directly opt for appointment of mediator instead of negotiating. Only when the appointment of mediator is requested, the OCMC shall appoint the mediator in five working days. In case no attempt to appoint a mediator is made by either party after initiating the negotiation after 7 days, the OCMC shall send a message/email to the parties to make the request. The OCMC shall not appoint a mediator if the request is not received as the process of mediation is voluntary and party centric. If no response is found as for 7 days, as mentioned above, the OCMC shall deem the case to be not settled and shall close the case accordingly. The process once settled cannot be reopened under any circumstance.

Once mediation commences, it shall conclude within 21 days and a one-time extension of 15 days can be taken after the approval of the parties. In case any party is found to be irresponsive for more than 10 days then the case shall be closed as unsettled.The mediation shall be terminated by the signing of a settlement agreement by the parties or by the decision of the mediator if, in the mediator’s judgment, further efforts at mediation are unlikely to lead to a resolution of the dispute or by a written declaration of a party at any time after a first discussion of the parties with the mediator.

The settlement through mediation shall be final after the parties sign the settlement agreement and the agreement shall have the same status as that of a settlement agreement that can be executed under Section 73 of the Arbitration and Conciliation Act, 1996.

The OCMC has published a clear set of Mediation Rules elaborating on the process of mediation, the role of the mediating parties, the role and the rules applicable on the mediators, the manner of appointment of mediators, etc. The OCMC has also set forth minimum principles and standards in the prescribed Code of Conduct for the OCMC and the third-party mediators empanelled with the OCMC to guide the conduct of mediators, to inform the mediating parties and to promote public confidence in mediation as a process to resolving disputes such as accessibility, transparency and fairness, privacy and confidentiality, self-determination, independence and impartiality, etc.

The key aspect of the OCMC is that all the information contained and distributed during the mediation process or through the OCMC shall observe the data protection law and confidential requirements established for the time being in force in India and the OCMC, including the mediators, shall make reasonable efforts to maintain high level of privacy and confidentiality with respect to access to such case files and other data.

Therefore, establishment of the OCMC, the appointment of eminent lawyers and judges in the panel of mediators of the OCMC and the proposed changes in the Consumer Protection Act, 1986 and the Consumer Protection Bill, 2015 are some initiatives taken by the Government of India to promote online transactions, reliance of consumers on advanced technology and to adopt a cashless lifestyle.