Question: What happens if two founders hit a crossroads and they are not able to agree on the strategic direction of the company prior to institutional funding and decide to separate? Is there an easy way to split the company at this point given that there are no hard assets? What rights does each party have to the intellectual property in the company? Is it based on what they contributed or the current equity distribution? If it’s based on the current equity distribution then is it possible to value the intellectual property piece-by-piece?
Our Take: There is no easy answer to your question. Absent an agreement up front about how a divorce affects the IP ownership rights, there is no standard method for determining who owns what. Yes, you both can go out and hire lawyers and they can charge you several hundred dollars per hour to advise you on strategies and arguments of why “you own X and your former partner Y,” but at the end of the day, this will just land you in court and years away from a definitive answer. By the time everything is settled, your opportunity to exploit your IP will most likely have passed.
If you divorce is acrimonious, each of you could claim to own 100% of the IP. Regardless of who actually developed what, or what the ownership of the company is, it’s easy for each of you to say “we both own 100% of the IP,” either severally or jointly.
Bottom line, you have a strong incentive (as does your former partner) to settle this amicably, otherwise, you both are going to be worse off.
Now before the lawyers out there chime in on what could have been done up front (e.g. drafting corporate documents that clearly define who owns what, who has the power to fire whom and take control of the company, etc.) it’s in my experience that few, if any, founders want to rack up legal fees ahead of time to protect against this situation. With 20/20 hindsight, anything is possible, but in reality, I can’t think of any company that has fully thought out this scenario and planned for this contingency when forming the company from the onset.