What happens when a co-founder leaves, but keeps a substantial amount of equity in the company?
The issue of dead equity is one of the most common, yet often overlooked, challenges facing startups and scaleups. While founder departures are a natural part of the business lifecycle, unresolved equity arrangements can create challenges around governance, decision-making, future fundraising and long-term growth.
We recently hosted a roundtable alongside Roberta Draper, Partner in our Corporate, Commercial & Finance team, bringing together founders and tech leaders to discuss the realities of managing co-founder exits and maintaining a healthy cap table as businesses scale.
What began as a discussion about founder departures quickly evolved into a wider conversation about growth, governance, fundraising and the realities of building a scaling business.
A few key themes emerged:
- Early decisions have long-term consequences. Equity allocations that seem fair on day one can become problematic when circumstances change.
- Dead equity remains a significant issue. Whether caused by founder departures, changing contributions or inactive shareholders, it can create friction around decision-making and deter future investment.
- Investors focus heavily on cap table quality. A clean, well-structured cap table can facilitate funding discussions. A poorly managed one can raise difficult questions.
- Shareholder agreements matter. Well-drafted leaver provisions and clear documentation can help founders navigate difficult situations before they become disputes.
- Commercial reality should drive legal strategy. Founders are rightly focused on growth, customers and revenue. Legal frameworks work best when they support those objectives rather than becoming an afterthought.
One of the most valuable aspects of the session was hearing founders openly share their experiences, challenges and lessons learned. Many of the issues discussed are far more common than founders realise, particularly as businesses move from startup to scaleup and begin preparing for institutional investment.
The discussion reinforced a simple point: addressing equity and governance issues early is almost always easier, cheaper and less disruptive than tackling them in the middle of a financing round or shareholder dispute.
Further information
If you are a founder, board member or investor dealing with founder exits, dead equity, shareholder alignment or cap table challenges, please contact Christopher Perrin in our Corporate, Commercial & Finance team to discuss how we can help.
