You'd think most founder disputes erupt from ego clashes or equity greed. But in our experience advising both startups and buyers, that's rarely how it starts.
The most volatile disputes we see arise because of mismatched expectations at the wrong time. And in many cases, these expectations were never deliberately misrepresented. They were just never documented, clarified, or revisited when structures evolved.
That's what blindsiding looks like in the legal world. It's not always betrayal. It's friction built up over months or years of assumptions, informal decisions, and fragmented paperwork.
What Blindsiding Actually Looks Like
Here's what we mean when we say "founders get blindsided" and what it looks like across real mandates:
1. The Sweat Equity Mirage
A founder assumes their contribution entitles them to 30% equity. They've built the product, managed teams, closed early clients. But the paperwork (if any) mentions only a consulting agreement and verbal promises of "sweat equity to be finalised at conversion.
The conversion happens. The lead founder gets shares. The sweat founder doesn't. Litigation follows.
2. Cap Table vs Reality
Multiple founders are added in the early days with an "equal split" handshake. One exits quietly, another becomes passive. When a round is being raised or a buyout looms, the active founder realises that dormant names are still on the cap table, and that those people want in. The original 25% promise now feels like a 50% cost.
3. Who Owns What, Actually?
An early product was built with a friend's dev agency. The friend never invoiced. "It was a favour." Now that the company is being acquired, the friend wants formal attribution, advisory equity, or payment. The founders panic when they realise the IP assignment clause was never signed.
4. Exit Strategy Shock
One founder starts exploring acquisition. The other finds out from LinkedIn, not a board update. Worse: that founder isn't aligned on the valuation or future role. The acquirer gets spooked. The deal collapses. Trust breaks. Lawyers are called but not to draft, but to de-escalate.
Why This Happens (and Why Legal Doesn't Always Prevent It)
Most founders don't go into business thinking they'll need to "lawyer up" against each other. They prioritise speed, product, hiring. That's understandable. But here's what gets missed:
A. Unaligned Operating Agreements
Founders often start with a generic agreement or none at all. By the time lawyers are brought in – usually during funding or exit, the business has already moved far beyond what's documented. The gaps between reality and paperwork are legal landmines.
B. Event-Triggered Memory Loss
People remember promises differently, especially during transitions like conversion, funding, or exit. Unless prior agreements are captured clearly, even well-meaning co-founders can come across as opportunistic.
C. Legal Structuring Doesn't Equal Alignment
You can have airtight agreements and still have fractured expectations. Good legal strategy isn't just about drafting. It's about surfacing unspoken expectations and pressure-testing assumptions before they explode.
Where Founders Feel Betrayed (And What It Means Legally)
Blindsiding isn't just emotional. It has legal implications. Here's what typically plays out in practice:
- Shadow Equity Claims
Ex-founders, early advisors, or "idea-stage contributors" come forward claiming entitlement. Sometimes based on verbal promises. Sometimes with old emails. If the equity wasn't explicitly ruled out, courts might allow a deeper probe. - Wrongful Termination and Oppression
Claims
One founder is edged out and files a Section 241 petition (oppression/mismanagement). The basis? Lack of transparency, unfair dilution, or decisions taken without their knowledge. - Injunctions During Strategic Deals
A disgruntled founder seeks a court stay on an ongoing sale, claiming the deal violates their rights or misrepresents their role. Even if the claim is weak, the delay can kill momentum and the deal.
What Can Be Done Differently (Before It's Too Late)
Founders don't need more contracts. They need more clarity conversations, followed by paper that reflects what's actually agreed.
Here's what works:
1. Pre TermSheet Alignment Memos
Before chasing a term sheet, founders should align on:
- Who owns what
- Who's exiting and staying
- What rights vest when
Even an informal alignment note vetted by counsel can prevent disputes later.
2. Cap Table Audits (Not Just Excel Sheets)
Your cap table is not just a spreadsheet. It's a history of promises, roles, relationships. We recommend legal+relational audits to ensure everyone on the table is supposed to be there and knows why.
3. IP and ESOP Housekeeping
Clean up all IP assignments especially from dev agencies, freelancers, or internal founders pre-incorporation. Make sure ESOP plans are documented and reflect real intention.
4. Exit Scenario Simulations
Test your legal documents against hypothetical exit scenarios. What happens if a founder leaves? If an acquisition happens? If someone dies? This pre-mortem exercise can be uncomfortable but deeply clarifying.
What We've Seen in Practice
It is about choices. Legal can be called in 6 days before a buyer's due diligence deadline because a founder forwarded an old email promising 20% equity.
A Section 9 injunction can be filed during an M&A process because a silent partner claimed they were being denied fair valuation on exit.
Each time, legal does these things:
- Reconstructing oral agreements into defendable legal positions
- Running founder alignment workshops
- Documenting fresh understanding with backward consistency
These situations are preventable. But only if legal is brought in not just to draft, but to help diagnose the potential fracture points.
Startups are built on trust. But exits are scrutinised by documentation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
