Breaking Up with Your Co-Founder (Without

Founder breakups are a lot like romantic ones — emotionally charged, often messy, and sometimes for the best. But while a romantic breakup might just lead to sad Spotify playlists and pints of ice cream, a mishandled founder departure can lead to ownership disputes, IP disputes, boardroom tension, and even lawsuits. If you’re navigating a co-founder departure (or suspect one may be brewing) or you are trying to pre-empt the situation before it ever arises, here is a practical guide to help you get through the split with your startup intact.

Equity Cleanup:

· Get the Unvested Shares Back

Most founders receive equity that vests over time — usually on a four-year schedule with a one-year cliff. If a founder leaves before their shares are fully vested, the company typically has the right to repurchase the unvested shares at the original purchase price — often pennies per share. In some cases, the exercise of the repurchase option is exercised automatically unless there is a specific indication by the company that it will not exercise this option. In other cases, there’s may be a limited window to exercise the repurchase right. Be sure to check the stock purchase agreement to confirm the repurchase procedure, deliver any required notice on time, and make sure everything is well documented. Even in automatic repurchase cases, the company will be required to deliver the payment for the repurchased shares in order for the repurchase to be valid. A forgotten repurchase or missing paper trail can cause headaches later — especially in investor due diligence.

· Can you Repurchase Vested Shares?

While the repurchase of unvested shares may be a straightforward process if the documents are properly drafted, repurchase of the vested shares could be a more delicate process. This is because, in the absence of express claw-back provisions which we discuss below, the standard for US startups is for a departing founder to keep all their vested shares. In that case, if the departure happens after the vesting period has elapsed, then the founder gets to keep all of their shares. In such cases, if the company or co-founder has the funds, negotiating a buyback of all or a portion of the vested shares can help clean up the cap table. It also avoids leaving a disengaged (perhaps disgruntled) ex-founder with a long-term stake and a stockholder vote. An inactive founder with a large position in the captable could potentially block the company from funding and taking other major stockholder decisions. In some cases, we see a reset of the captable with the offboarding co-founder being left with 2–3% of the fully diluted capitalization on vesting as an advisor.

· Consider claw-back provisions

In the early stages, it may be beneficial to include ‘good leaver/bad leaver’ provisions in the founders’ equity agreements. The ‘good leaver/bad leaver’ clauses address what happens to a departing founder’s equity depending on the circumstances of their departure — whether they leave on good terms (a ‘good leaver’, such as stepping down amicably or for health reasons) or bad terms (a ‘bad leaver’, such as being fired for cause or breaching fiduciary duties). In the case of a bad leaver, company will reserve the right to repurchase all of the departing founder’s shares (including vested shares) at nominal value. This ensures that company can rid the cap table of a bad leaver’s shareholding interests, without breaking the bank by having to pay market price for the vested shares. The parameters of what constitute bad leaver events should be expressly specified in the equity agreement and the discretion over determining whether such event has occurred should vest in the disinterested members of the Board (i.e. members of the Board other than the departing founder. Keep in mind that legal drafting software such as Atlas Stripe and Clerky do not have these clauses built into the documents and so it is important to retain counsel to review your equity agreements and ensure that such provisions are included where appropriate.

Governance Transitions:

· Board and Officer Resignations — Don’t Leave Ghosts in the Org Chart

Now you may have figured out cleaning up the cap table, but founders usually wear many hats in the company — and that includes board and multiple officer roles. When a founder leaves, it’s critical to ensure they’re formally removed from all executive, administrative and any other roles in the company. In an ideal situation, the founder tenders a resignation from all roles in the company and everyone moves on. But if that’s not the case, the company and its shareholders may need to take action to remove them.

Directors are typically removed by stockholder action (subject to the company’s bylaws and voting agreement (if any) executed during a financing round or applicable charter provisions), while officers are removed by board action in accordance with the company’s bylaws or investors’ rights agreement (if any) executed during a financing round).

Before taking any action, it is crucial to carefully review the company’s governing documents (Charter, bylaws, voting agreement, and investors’ rights agreement, etc.), to understand:

§ Who has the authority to remove a director or officer.

§ What voting thresholds apply (i.e. majority, super-majority or plurality of votes).

§ Whether any specific investor or preferred director consent is required. In cases where an equity financing has occurred, the vote of the preferred stockholders is required to remove a preferred director.

§ Whether service on the board is tied to continuous service of the director as an employee or consultant of the company.

Let’s examine 2 scenarios.

First, a pre-seed startup has 2 founders, each holding 50% of the cap table. One of the founders who is a director and also chief technology officer is being terminated for engaging in competitive activity. The company’s bylaws state that a director may be removed from the board by the vote of a majority of the stockholders entitled to appoint such director and an officer may be removed by the vote of a majority of directors.

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· The problem: In this case, given that both founders each hold 50% of the cap table, there would be a deadlock in the removal of the defaulting founder as neither party holds a majority.

· The solution: In such a situation, parties may need to seek recourse in court to resolve the deadlock, which could be at best a distraction from company’s focus on building and at worst a money and time-consuming endeavor.

· Prevention strategies: This scenario is extreme but quite common, due to the fact that many founders start out as best friends. But as John D. Rockefeller said, “a friendship founded on a business is a good deal better than a business is founded on friendship”. This is why is it is important in situations where there are only 2 founders, to from the outset — either (i) give the lead founder (usually the founder/CEO) a larger voting interest; (ii) give a tie-breaker vote to the lead founder in the event of a deadlock vote; or (iii) vest the decision on a removal of a director/officer in the disinterested shareholder or member of the board or as the case may be.

In another scenario, a seed-stage startup has 2 founders (each holding an equal number of common stock) and 3 preferred stockholders. The 2 founders have the right to appoint 2 common directors, and the 3 preferred stockholders have a right to appoint 1 preferred director. One of the founders who is a common director and chief product officer is being terminated for leaking sensitive information of the company. The voting agreement states that a majority of common stockholders has the right to appoint and remove the common director and the bylaws state that the board has the right to appoint and remove the officers by a majority decision. In this scenario, removal of the founder as CPO is easy as two out of three directors (i.e. one common director and one preferred director) would constitute a majority.

· The problem: However, removal as a director is more complicated because only the founders (as common stockholders) can remove the common director. Given that they have equal stakes, we again are faced with a deadlock.

· Prevention Strategies: Thus, in this case, similar protections as proposed in the first scenario could have prevented the deadlock. Another step that could prevent a deadlock is tying the board seat to a continuous service requirement such that if the founder is removed as an officer, employee or from other service provider roles, then they automatically lose their board seat. However, this is a double-edged sword and should be handled with caution.

There are so many possible scenarios which could arise in removing a founder as a director and officer. It is therefore crucial when drafting company’s organizational documents and shareholder agreements, to examine the company’s specific situation and ensure that the documents properly address the requisite majority for removal, resolution of any deadlock, ability of interested parties to make decisions regarding their removal.

Other Documentation and Security:

· Separation Agreement: The “Clean Break” Document

Even when a founder is walking away on good terms, it’s often a good idea to formalize the goodbye with a separation agreement. This document typically includes a mutual release of claims, a reaffirmation of confidentiality, non-solicit, and non-compete obligations, and a mutual non-disparagement clause — because no one wants a post-exit PR problem.

For a deeper dive into what a founder separation agreement should include, check out our earlier article: Founder Departure: Legalities of Painful Goodbyes. Note, however, that for release of claims to be enforceable in some jurisdictions, the company may be required to give adequate consideration (usually monetary).

· Protecting Company Accounts: Lock the Digital Doors

Departing founders often have access to more than just Slack — think bank accounts, payroll platforms, cap table management tools, code repositories, cloud workspace, and more. If they’re still listed as an authorized signer or admin, they might still have access and control even after they’re gone — intentionally or not.

What should you do? Start with a Board Resolution removing them from any officer position (typically a CEO, CTO, or CFO role), then promptly:

§ Notify the company’s bank to revoke authority and appoint a new authorized person

§ Audit and update all critical accounts and access to critical information

§ Change passwords where applicable