Your Cofounder Is Leaving: What to Put in Your Separation Agreement

Almost everything written about cofounder breakups is a story about feelings. The late-night argument, the Slack message that landed wrong, the moment someone realized it was over. Those stories are honest and they are useful, and every single one of them ends at the door. Nobody tells you what went on the paper afterward, because usually nothing did.

A cofounder separation agreement is a short document. Three to six pages, drafted by one lawyer in a few days, somewhere between $1,500 and $4,000 depending on how complicated the equity is. It answers six questions:

1. What happens to their vested and unvested shares, in exact numbers, by an exact date.
2. Confirmation that every piece of IP they touched belongs to the company, including anything made before you incorporated.
3. Every dollar owed in either direction: expenses, deferred salary, loans, personal guarantees.
4. What stays confidential, and what each of you may say about the other.
5. The announcement: who hears it, when, and in what words.
6. A mutual release of claims through the day you both sign.

Get those six right and the exit is done. Get them wrong and it comes back during your Series A diligence, which is exactly when you have no leverage at all.

Can you skip the cofounder separation agreement because the split is friendly?

No, and friendly splits are the ones that most often end up undocumented. The warmer the parting conversation, the more likely you are to shake hands, say "you keep what you've earned, no hard feelings," and never write a word.

Here is how that plays out. Eleven months later you're in diligence on a priced round. The investor's counsel sends the standard checklist, which includes a line asking for copies of separation agreements and IP assignments for all former founders, officers, and employees. You have a Slack thread. Their associate flags it, the item goes on the closing checklist, and now you are calling someone you have not spoken to since spring to ask them to sign something. They are not hostile. They are just curious about why it suddenly matters so much, and whether the number you agreed on was fair given how the company is now valued.

That call goes differently than the one you'd have had in spring.

The reason people skip the document is that producing it feels like an accusation. Asking a friend to sign a release reads as "I don't trust you," and after a hard few months neither of you wants one more difficult conversation. So it drifts.

What actually helps is understanding that the release runs both ways. Without a signed mutual release, the departing founder is exposed too. In California, the limitations period for a claim on a written contract is four years under Code of Civil Procedure § 337. Four years is a long time for a company to be able to come after someone for breach of a founder agreement, and a long time for a founder to sit on an equity claim. A mutual release closes both doors on the same day.

So: mutual general release of all claims arising through the signing date, with narrow carve-outs for indemnification rights, rights under the separation agreement itself, vested equity, and claims that cannot legally be waived. Set a deadline. The agreement should be signed before the last working day, or within two weeks of it. If it turns into a three-month negotiation, something in the equity terms is unresolved and you should go find it rather than keep redlining.

Does a cofounder separation agreement need an IP assignment if they already signed one when you started?

Yes, restate it, and assume the original assignment has a hole in it. The most valuable code, brand, and design work in an early startup is usually created in the weeks before anyone signs anything, which is precisely the period standard onboarding paperwork does not reach.

Say your cofounder built the first working version in the six weeks before you incorporated in Delaware. There was no company yet. That code was created by an individual human being, and copyright vested in that human being the moment it was fixed. Work-for-hire doctrine does not rescue you here: under 17 U.S.C. § 101, work made for hire covers employees acting in the scope of employment and nine specific categories of commissioned work, and "the first version of our SaaS product, written by a guy who wasn't employed yet" is not one of them. Without a signed assignment, it is theirs.

The same gap opens up in dozens of small places. The domain registered on a personal Namecheap account. The trademark application filed in an individual name. The GitHub organization that is technically owned by their personal handle. The Apple developer account with their Apple ID and their credit card. The Figma team, the Canva brand kit, the Google Workspace super-admin, the AWS root account with MFA on a phone that is walking out the door.

What to put in the agreement:

• A present-tense assignment. "Hereby assigns" beats "agrees to assign," because a promise to assign later is a contract claim you have to enforce, while a present assignment transfers title on signature. This distinction has decided real cases, including Stanford v. Roche (Supreme Court, 2011).
• An assignment that reaches back to the earliest work, worded to cover everything created for or relating to the business at any time before the separation date, not just from the incorporation date forward.
• A further-assurances clause. Patent prosecution needs inventor signatures years later, and you want an obligation, plus a power of attorney if your counsel will draft one.
• A written schedule of accounts, credentials, and admin roles to transfer, with a date next to each one. Not "they'll hand over access." A list.
• A prior-inventions schedule. If your cofounder believes something is personally theirs, the side project, the library they wrote in 2019, name it now on a piece of paper. The worst version of this argument is the one that happens for the first time in diligence.

What equity terms belong in the agreement, and how specific do they need to be?

Specific to the share. Write the share counts, the vesting cutoff date, the repurchase price, the closing date for the repurchase, and who signs the stock power, because "you keep what you've earned" is not a term, it is a mood.

The fight that phrase produces is predictable. They think earned means through the day they stopped being a cofounder emotionally, which was in January. You think it means through the last day they did work, which was March. Two months of vesting on a four-year schedule is a real amount of stock, and neither of you is being unreasonable, you just never defined the word.

There is also a deadline hiding in your own documents. Standard restricted stock purchase agreements, including the widely used NVCA and Y Combinator forms, give the company a repurchase right on unvested shares that expires 90 days after service ends. If the board never approves the repurchase and nobody signs the stock power, that right lapses and the unvested shares simply stay on the cap table. Founders lose serious equity to calendar drift.

On the option side, IRS rules under Section 422 require an incentive stock option to be exercised within three months of termination to keep ISO treatment. If your departing cofounder holds ISOs, tell them that in writing, in the agreement, with the date. Letting someone discover it later is how a clean exit turns sour.

Write the terms like this:

• Shares originally issued: 2,000,000
• Vested through the separation date of March 31: 1,041,666
• Additional vesting the board has approved as part of this agreement: 125,000
• Unvested shares repurchased by the company at the original purchase price of $0.0001 per share: 833,334, total $83.33
• Repurchase closes within 10 business days of signing; stock power attached as Exhibit B
• Resignation from the board and from all officer positions effective March 31, resignation letters attached
• Retained shares are subject to the existing voting agreement and drag-along; no information rights, no pro rata rights, no board observer seat

That last line matters more than it looks. A former cofounder holding 18% with information rights and a blocking vote on a preferred financing is a problem you will meet in eighteen months, at the worst possible moment.

One more thing your accountant should see before you sign: extra vesting granted on departure is compensation, and repurchasing shares at a price different from fair market value can create taxable income. Do not discover that in April of next year.

The moment where most exits stall is the gap between a verbal understanding and a document with numbers in it, when both of you agreed in the room and neither wants to be the one who sends the draft. Tools like Servanda give you a structured way to record what you actually agreed and get the other person to confirm it in writing, before the two of you start remembering the conversation differently. Whatever you use, capture the terms the same week you agree them.

Who owes whom? The loans, expenses, and guarantees nobody logged

List every dollar moving in either direction, with an amount and a payment date, including the money your cofounder spent personally and never filed. In a two-person company, the expense policy is usually "put it on your card and we'll sort it out," and it never gets sorted out.

The common items:

• Unreimbursed expenses. Say they carried $18,000 on a personal Amex across AWS bills, a conference booth, and a contractor in Lisbon. In California, Labor Code § 2802 requires an employer to reimburse necessary business expenditures, and that obligation does not evaporate because you were friends.
• Deferred or unpaid founder salary. If they were on payroll and accrued unpaid wages, treat it as wages, not as a contract debt. California Labor Code § 206.5 bars an employer from taking a release of wages that are due unless those wages are actually paid, so a general release does not quietly wipe it out. Pay it, or document a written payment plan your counsel has blessed.
• Founder loans. The $40,000 they wired in month three that everyone calls "the loan" and nobody papered. Convert it, repay it, or forgive it, in writing, with the tax treatment named.
• Personal guarantees. The office lease, the equipment finance, the corporate card program. Removing a personal guarantee usually needs the counterparty's consent and can take 60 days or refuse to happen at all. Write down who is chasing it, by when, and add a company indemnity that covers the departing founder until the name comes off. This is the clause that costs you nothing today and saves the relationship if the landlord says no.
• Access and instruments. Removal as a bank signatory, cancellation of cards, removal from the payroll and accounting systems, updated registered agent and state filings if they were listed.

Why people skip this: itemizing money feels petty next to the size of what just ended. Someone is leaving a company they built and you're asking about a $412 Delta receipt. But unpaid expenses are the single most reliable source of post-exit resentment, because they are small enough to feel beneath mentioning and specific enough to remember forever. Pay them in full, on a named date, and put the number in the agreement.

What do you tell the team, the investors, and LinkedIn?

Write the actual sentence together and put it in the agreement, then agree who hears it in what order. Two people improvising separate explanations of the same departure is how a clean exit becomes a rumor.

Draft two short pieces of text before anyone leaves the room. One for the team, one for external use with investors, customers, and candidates. Something like: "Alex is stepping back from day-to-day at the end of March. Alex remains a shareholder, and the first two years of this company do not exist without them." Both of you sign off on the words. Both of you use those words. Neither of you elaborates, including to close friends, including to the investor who calls "just to get the real story," including at 11pm at a bar with someone from your YC batch.

Then handle the smaller pieces that leak:

• The LinkedIn end date, and the title they will list. Agree it now.
• What the remaining founder says when a candidate asks in an interview why the other founder left. Candidates always ask.
• What the departing founder says when a reference-checker calls the company about them, and who at the company answers that call.
• Whether either of you announces first, or whether you send within the same hour. Same hour is better.

On the legal wording, keep confidentiality and non-disparagement mutual and narrow. Mutual, because a one-way non-disparagement clause is the clearest signal you could send that this was not amicable, and the departing founder's lawyer will strike it anyway. Narrow, because overbroad clauses get struck down: the NLRB's decision in McLaren Macomb (February 2023) held that severance agreements conditioning benefits on sweeping confidentiality and non-disparagement terms can violate the National Labor Relations Act for non-supervisory employees. Carve out truthful statements made in legal proceedings, to regulators, and to investors conducting diligence. You need to be able to answer diligence questions honestly.

And do not spend a week negotiating a non-compete if you are in California. Business and Professions Code § 16600 makes them void, and AB 1076, effective January 1, 2024, makes it unlawful to include one in an employment contract at all. Protect the company with confidentiality obligations, the IP assignment, and trade secret law, which are the things that actually hold.

The fix here is small and it has to happen before the last day: open a shared doc, write the two paragraphs together while you are both still in the same conversation, paste them into the agreement as an exhibit, and send them within the same hour on the day you agreed. After that, when someone asks either of you what happened, you both already know exactly what you're going to say.