When Founders Split and the Cap Table Doesn’t: Arbitration Lessons from a Frozen Startup

Startups evolve quickly. But when founders part ways and forget to update the formal agreements- especially shareholding terms, they set themselves up for a legal time bomb.

I recently saw a founder who exiting the business in 2021. No formal separation. No resignation from the board. No assignment of IP or clients. Yet the shareholding cap table remained frozen and reflecting a 50:50 split.

Two years later, they were in arbitration over:

• Who had the right to raise funds?

• Who controlled the IP?

• Who was liable for tax claims?

Key Observations:

1. Silence Is Not Consent

Just because someone has “moved on” doesn’t mean they’ve relinquished their rights.

2. Cap Tables Are Legal Landmines

Most founders don’t know how to update shareholding agreements, much less exit terms. They rely on handshake assumptions until a valuation or investor event forces the truth out.

3. Arbitration as the Only Option

Litigation was out of the question due to confidentiality risks. Arbitration gave us control over timelines, scope, and damage limitation.

4. Why the Outcome Was Salvageable

• Because of a legally structured walkout with staggered payments.

• Because of a re-drafting of board minutes and cap table documentation.

• Because of legally constructing joint communication to resolve stakeholder confusion.

Founder exits must be treated like divorces: negotiated with clarity, not drama. Get the paper trail right or risk reputational and financial hemorrhage later. Arbitration isn’t just for fights. It can be a clean-up tool if used early.