The Co-Founder Divorce That Cost $12M

Started a specialized manufacturing company with my college roommate. We had complementary skills—I handled operations, he handled sales. No formal agreement beyond a handshake and 50/50 equity split.

For the first 3 years, we grew from $0 to $8M revenue. The partnership worked because we stayed in our lanes. In year 4, we landed a major client that would triple our revenue, but it required us to relocate manufacturing to the Midwest. I wanted to move; he refused, citing family obligations. What started as a business disagreement became personal. We hadn't documented decision-making authority, dispute resolution, or exit terms. Every board meeting became a battle. For 8 months, we were deadlocked on every major decision.

The big client gave us 90 days to commit to the relocation or they'd go with a competitor. We couldn't agree. They went with the competitor. Our growth stalled. My co-founder started a competing company using our playbook (no non-compete agreement). Three of our top engineers left to join him. We spent $400K on lawyers trying to resolve the partnership. Eventually, we sold the company for $5M—far below the $17M valuation from 6 months prior. After legal fees and debt, I walked away with $1.8M instead of the projected $8M+ from the large client deal.

• Create detailed founder agreement BEFORE starting—covering equity vesting, decision authority, dispute resolution, and exit scenarios
• Include mandatory mediation clause with defined escalation path
• Implement 4-year vesting with 1-year cliff for ALL founders including myself
• Define "deadlock breaking" mechanism (third board member, buy-sell, etc.)
• Have "state of the union" quarterly founder meetings with facilitator
• Build non-compete and non-solicit agreements from day one