Why this matters
Cofounder breakdowns are emotionally draining and commercially dangerous. Left unmanaged, they can stall product development, scare investors, and destroy value. The aim of this guide is to give founders a clear roadmap: immediate actions you should take, legal and commercial pathways to resolve the dispute, and practical prevention techniques to reduce the chance it happens again. Getting early guidance from business lawyers can also help founders avoid costly legal missteps during tense situations.
Quick overview of legal options in Australia
- Informal negotiation and structured settlement offers.
- Mediation or other alternative dispute resolution.
- Enforce or rely on contract clauses (shareholders agreement, IP assignment, vesting, restraint clauses).
- Court remedies, including the oppression remedy under section 232 of the Corporations Act.
Step-by-step: what to do right now (first 48–72 hours)
- Stay calm and document. Write a short, objective timeline of what happened and preserve key evidence (emails, Slack, contracts, IP commits). Courts and mediators value contemporaneous records.
- Pause irreversible actions. Don’t remove company funds, transfer IP, change bank signatories, or unilaterally terminate agreements unless advised by a lawyer. Hasty actions create leverage for the other side and may worsen liability.
- Check the paperwork. Pull the shareholders agreement, constitution, any founders agreement, employment contracts, contractor agreements and IP assignment deeds. Identify clauses for dispute resolution, buyouts, vesting, confidentiality and restraints. These documents will often determine the next steps.
- Appoint a single contact. Decide who will correspond with the other founder to avoid mixed messages. Keep communications factual and avoid emotive language or threats — these escalate disputes.
- Seek early legal advice. Even a short call with a lawyer can clarify whether the issue is commercial (restructure, buyout) or legal (breach, misappropriation, oppression).
Step 2: Attempt an internal commercial fix (first 1–2 weeks)
Most founder disputes are settled commercially. Aim for a fast, low-cost result where possible.
Practical options:
- Negotiated buyout: one founder buys the other’s shares. Agree on valuation method (fixed formula, independent expert valuation or multiple of revenue).
- Role reallocation: change responsibilities, reporting lines or equity vesting to reduce friction.
- Sweat equity or amended vesting: pause equity vesting or reassign future equity to reflect contributions.
- Cooling-off agreement: a short term covenant that freezes escalation while parties negotiate.
Tip: document any commercial agreement as a short binding deed or variation to the shareholders agreement so it is enforceable later.
Step 3: Use structured alternative dispute resolution (2–8 weeks)
If a commercial fix fails, ADR is the next sensible step. ADR is usually faster and much cheaper than litigation.
Options and benefits:
- Mediation — a neutral mediator facilitates settlement. It is flexible, private and can produce creative outcomes (split technical ownership, staged buyouts, escrow arrangements). Many commercial mediators follow recognised guidelines and the process is well established in Australia. Australian Disputes Centre+1
- Expert determination — a technical expert gives a binding decision on a defined matter (useful for valuation disputes).
- Arbitration — a private, binding tribunal. More formal and costly than mediation but confidential and quicker than court.
Costs note: private mediator hourly rates vary widely and total costs depend on complexity. Mediators and centres will often provide cost estimates up front. Mediations Australia
Step 4: When formal legal action becomes necessary
If ADR fails or there are urgent legal risks (misappropriation of IP, draining of funds, serious misconduct), formal steps may be required.
Key pathways under Australian law:
- Injunctions — immediate court orders to stop behaviour (for example stopping a founder from removing assets or publishing confidential material). Injunctions require urgency and evidence.
- Breach of contract claims — where a founder breaches written obligations (vesting, IP assignment, confidentiality). A civil claim can seek damages or specific performance.
- Oppression remedy (Corporations Act s232) — if a company’s affairs are being conducted in a way that is oppressive, unfairly prejudicial or unfairly discriminatory to a shareholder, the court can grant broad remedies (including ordering buyouts, regulating the company’s future, or winding up). This is a powerful remedy for minority or squeezed founders.
If considering court action, weigh the commercial cost: time, legal fees, reputational impact and uncertainty. Courts have broad powers but litigation can be unpredictable.
Special-focus issues every founder fight touches on
Intellectual property
Who owns the code, designs, trademarks and know-how matters. In Australia, IP created by employees is generally owned by the employer; IP created by contractors belongs to the contractor unless assigned in writing. Make sure assignments are in place or seek urgent assignment if missing.
Practical pointers:
- If IP is at risk, consider urgent injunctive relief and place critical assets in escrow.
- Run an IP audit and put core IP into the company with clear assignment deeds.
Restraint of trade and confidentiality
Post-departure restraints can protect customers and trade secrets but must be reasonable in scope, duration and geographic area to be enforceable in Australia. Courts will test whether a restraint protects a legitimate business interest.
Practical pointers:
- Use narrowly-tailored restraints and be specific about customers, activities and duration.
- Confidentiality clauses should be robust and cover know-how, customer lists and strategic plans.
Employment vs contractor status
Misclassification can create unexpected liabilities and affect who owns the IP. If a cofounder claims to be a contractor but behaves like an employee, that may complicate IP and entitlement disputes. Get advice early.
Practical documents and templates to have ready
- Short binding settlement deed (buyout or role change)
- Variation to shareholders agreement or deed of release
- IP assignment deed (employee or contractor)
- Confidentiality agreement and short-form NDA for urgent disclosures
- Escrow agreement for source code or IP assets
If you want, I can draft starter templates tailored to Australian law and your company’s structure.
Prevention checklist: minimise the risk of future cofounder disputes
- Clear shareholders agreement with deadlock and exit mechanisms.
- Robust vesting schedules with cliff periods and good leaver/bad leaver definitions.
- IP assignment deeds for all founders, employees and key contractors from day one.
- Defined decision-making thresholds (board vs management, voting rights and casting votes).
- Well drafted dispute resolution clause that requires mediation followed by arbitration or court if needed.
- Regular governance check-ins — quarterly alignment sessions on responsibilities and milestones.
Example: short email to open a calm negotiation
Subject: Request to meet — company matters
Hi [Co-founder name],
I value what we have built and would like to discuss the recent issues so we can find a constructive way forward. Are you available for a 60-minute meeting next week? I suggest we aim to keep the conversation commercial and, if helpful, involve an independent mediator.
Kind regards,
[Your name]
When to call a lawyer
Call a lawyer early if any of the following apply:
- There is alleged theft or misuse of IP or funds.
- A founder has removed assets or changed bank signatories.
- One founder is being locked out of systems or denied information.
- You think the other side might seek an injunction or commence litigation.
Early legal advice reduces risk and preserves options.
Final notes
Cofounder disputes are fixable in many cases if approached early, calmly and commercially. Aim to preserve the business first, then sort legal rights. If you’d like, I can:
- draft an article-length version for your blog with SEO optimisation for the keyword cofounder dispute,
- produce templates (settlement deed, IP assignment, mediation brief) tailored to Australian law, or
- review your shareholders agreement and a recommended short action plan for a specific dispute.
