What to do if a founder goes rogue?
It may be totally unthinkable when you found a business, but unfortunately relationships between co-founders do sometimes break down. There can be plenty of reasons for this. As a start-up matures and grows, founders’ roles may change. Some founders may be well suited to the early days of a start-up but less able to manage their role as the needs of the business change. Founders may just no longer feel that they can work effectively with their co-founders, or “new” management or investors who have joined the business later on.
A founder may not always leave the business on good terms. They might unilaterally leave the business. They may try to take the business’s IP, customer lists or other confidential information. They may want to immediately found a new business in competition with your business. They may even have committed a fraud on the company, and we often see directors who have used a company as their personal piggy bank. Left unchecked, a rogue founder might end up destroying much of the value in the business, and your years of hard work and dedication will have been wasted. However, there are things you can do to prevent that from happening.
Make sure the business is protected
You need to ensure that there are clear protections in place to prevent a rogue founder from acting unilaterally and damaging the business.
- There should be binding agreements in place (such as a co-founder agreement and/or shareholders’ agreement and/or directors service agreement) which include restrictive covenants and non-compete obligations. These agreements should restrict departing founders from competing with the business for a certain period of time, using confidential information, soliciting the business’s employees or customers, or even from bad mouthing the business after they have left. There will be limits to these restrictions – they may only be in place for a limited time, cover specific markets or products, or only cover a certain geographical area – and they must be reasonable to protect the company’s legitimate business interests.
- If the founders are company directors, they also owe duties to the company. These include obligations to act in the best interests of the business, avoid conflicts of interest and keep confidential information confidential. Some of these obligations also survive the termination of a director’s role with the business.
- There should be robust IP assignments in place in favour of the company.
Understand the potential remedies
Depending on what has happened, and provided the business has adequate protections in place, there are a wide variety of remedies that you could seek if a founder has breached their restrictive covenants or their duties as a director.
- You could seek an injunction. This is a court order that can prevent someone from doing something or require them to do something. This can be used to prevent a departing founder from establishing a business, force them to hand over confidential information or stop contacting customers and staff. These can be obtained on an urgent basis and you can be in front of a judge very quickly to protect the interests of the business. Failure to comply with an injunction is very serious. It is a contempt of court and can result in a fine or prison sentence. If a fraud has been committed, you can bring a claim seeking restoration of the stolen property and could also seek a freezing injunction. This is a type of injunction which prevents the fraudster from dealing with the stolen property and preserves assets so that you can enforce a judgment against them (typically by freezing their bank accounts).
- You can bring a claim seeking damages. If a founder has breached their contractual obligations or their duties to the company, then the company might want to sue them for damages. This is typically a time consuming and costly exercise, but would compensate the company for loss it has suffered as a result of the departing founder’s conduct. It might also be brought in parallel with an injunction, which could be used to protect your interests pending determination of the damages claim.
- You may be able to seek other remedies for a breach of duty by a director. These include an account of profits, requiring the rogue founder to give up all of the profits they have made as a result of their breach of duty, even if the company’s loss is relatively limited. The court may also make an order to recover property and set aside transactions entered into by the founder in breach of duty.
Instruct lawyers and act fast
Instructing lawyers is expensive. However, if a founder has left unilaterally and acted in a way which is damaging to the business, you should definitely take legal advice. Spending money on lawyers might be necessary to prevent the business from suffering serious damage. You also need to act fast. Not only will that potentially limit the damage, but some of the remedies available to you (including injunctions) require you to show that you have acted quickly. You can potentially nip things in the bud, prevent an ongoing fraud or recover stolen property, protecting the business and saving money in the long run.
